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CDI Library > Johnson's Russia List

Johnson's Russia List
 

 

June 11, 1999    
This Date's Issues: 3335 33363337


Johnson's Russia List
#3337
11 June 1999
davidjohnson@erols.com

[Note from David Johnson:
1. Reuters: Russia still prickly over Kosovo.
2. Boston Globe: Bernard Trainor, The winners and losers in the Balkan war .
3. Itar-Tass: Moscow City Duma Amends Law on MAYOR'S Term in Office.
4. Interfax: Poll: 57% of Russians Would Oppose Banning of CPRF.
5. Reuters: Russia Says Its Forces in Catastrophic State.
6. The Guardian (UK): Tom Whitehouse, Absent Yeltsin fuels Russian
disarray. Deployment: Moscow may have to scrap its demand for a separate zone. 

7. Washington Post: Jim Hoagland, Yeltsin's Bill.
8. Financial Times: John Thornhill, MIR: Russian astronaut launches fund.
9. Andrei Liakhov: RE: 3323-Fritz Ermarth/Seeing Russia Plain.
10. Sarah Carey: Law and the Market Economy In Russia: Past Reforms; Future 
Challenges.

11. Itar-Tass: Voters to Name Successor to Yeltsin-Chief of Staff.] 

********

#1
Russia still prickly over Kosovo
By Peter Graff

MOSCOW, June 11 (Reuters) - President Boris Yeltsin claimed diplomatic
victory for Russia on Friday in helping to end the war in Yugoslavia but
Moscow said that it, not NATO, should police Serb-populated parts of Kosovo. 

Yugoslav media reported that Russian troops had already entered Serbia for
eventual deployment as peacekeepers in Kosovo, even though talks in Moscow
aimed at incorporating Russians into a NATO-led force were in deadlock. 

Russia's Defence Ministry declined to confirm the report, by Yugoslavia's
Beta news agency, that Russians from a peacekeeping force in Bosnia had
entered Yugoslavia with the logo of the KFOR Kosovo peace force emblazoned
on the sides of their vehicles. 

But NATO military sources in Macedonia said a token force of fewer than 100
Russian troops had headed from Bosnia to Kosovo ``to get their feet on the
ground first.'' 

General Leonid Ivashov, Russia's chief negotiator at the Moscow talks, said
Russia wanted control over Serb-populated parts of northern Kosovo, with or
without NATO's blessing. 

The talks with U.S. and Finnish generals were suspended after the Americans
called for a time-out for further consultations, Ivashov said. 

U.S. Deputy Secretary of State Strobe Talbott, also in Moscow, said there
would be only one peace force in Kosovo and NATO would be in charge of all
sectors. 

Yeltsin, who faced criticism at home for what his opponents called a weak
stance over Kosovo, said the end of the war was a triumph for Russian
diplomacy. 

``Russia has always been strong in spirit. Now the situation in the Balkans
has shown that Russia is strong not only in spirit, but also in its
diplomacy,'' he said. 

Appearing on television with Foreign Minister Igor Ivanov and a Russian
general, he said: ``We have done all we needed to.'' 

But, setting his face in an angry scowl, Yeltsin said it was not yet time
to thaw ties with the West. 

``Relations with NATO are still frozen. As for the future, we'll see,'' he
growled. 

Russia has consistently and vocally opposed NATO's campaign of air strikes
against Yugoslavia, although it played a key role in the diplomatic
initiative that ended the war. 

Western leaders have portrayed Moscow's participation in diplomacy as a
sign that Russia was joining the West in opposing Yugoslav President
Slobodan Milosevic. But Russian officials continue to maintain that NATO
was the aggressor all along and must not be given exclusive command of
peacekeepers in Kosovo. 

``We will not beg, give us this little piece,'' Ivashov said, adding that
Moscow was prepared to negotiate a sector directly with Belgrade if
necessary. 

``If this agreement is not reached... we shall announce a sector that will
be agreed upon with the Yugoslav side and will meet our interests,'' he said. 

But Talbott put NATO's view strongly. 

``How the map of Kosovo is going to be drawn up is one of the things we are
still working on...But it is going to be one operation. There's going to be
one enterprise known as KFOR,'' he said after a meeting with Ivanov. 

``Part of the concept of NATO at the core means that it will be necessary
and, I think, desirable for the effectiveness of the force, for NATO to be
present in each of the sectors. But NATO could partner with other countries
including non-NATO countries,'' he said. 

Talbott said Kosovo had put Russia's relations with the West under strain
but added: ``U.S.-Russian relations and NATO-Russian relations have passed
the test.'' 

********

#2
Excerpt
Boston Globe 
11 June 1999
[for personal use only]
The winners and losers in the Balkan war 
By Bernard E. Trainor
Bernard E. Trainor is a retired Marine general and senior fellow at the
Council on Foreign Relations.

Who are the winners and losers in the Kosovo conflict?

A clear winner is Russia, whose envoy, Viktor Chernomyrdin, adroitly played
the role of friend of the Slavs, honest broker, and finally endorser of
NATO. In this last role, he sealed Serbian fate when he withdrew Russian
support from Belgrade and joined Finnish President Martti Ahtisaari in
presenting what amounted to NATO's ultimatum for peace. Slobodan Milosevic
then realized he had lost his only supporter, that he was totally isolated,
with his country in ruins, so he caved in. Despite the pathetic domestic
and economic situation at home, Russia showed that it still could be a
major player on the international scene. In the process, Russia's prestige
was enhanced as well as its likelihood for further Western aid. At the same
time, Russia embarrassed its old foe NATO by being the indispensable
element in the peace process....

The apparent big winner, may turn out to be the biggest loser, the United
States. President Clinton masterminded the victory so he gets the lion's
share of the credit, but in the long run, he and the United States may
suffer from unintended consequences. Few will argue that the decision to
threaten force and then bomb to bring Milosevic to heel was a major
miscalculation that led to destruction and loss of life, in Kosovo and
Serbia. The president gets the blame for that. As the bombing progressed,
civilians began to die and the Chinese Embassy was bombed. Confidence in
Washington eroded within NATO and criticism mounted around the world.

Clinton was already under fire for his bombing policy in Iraq and the
ill-conceived missile attacks on Sudan and Afghanistan, as well for some of
his economic policies. A ground swell of anti-Americanism is now growing.
America is being viewed as a bully who brags of being ''the world's only
remaining superpower.'' Relations with Russia and China have suffered a
severe setback.

The cumulative effect of resentment and loss of confidence in the United
States means a serious loss of prestige and influence. The United States
can expect coalitions to form opposing American foreign policy objectives
and means. Europeans are already loosening their dependence upon the
American-dominated NATO alliance and looking inward. Last Thursday, leaders
of the 15 European Union countries agreed to create their own military
force and invited Javier Solana, the secretary general of NATO, to be its
security and foreign policy minister when he steps down from his post.

Domestically, neo-isolationism is on the rise. The public has grown weary
of the indecisive moral crusades that have led us into Somalia, Haiti,
Bosnia, and Kosovo. The age of what can be described as American
humanitarian imperialism is coming to a close. It will be replaced with
hard-nosed realpolitik. Hereafter, the American people, who have never
fully understood or supported our interventions around the world, will
demand that military deployments be tied to concrete and narrowly defined
national interests.

Well intentioned as he may be, Clinton's inept policies have been a blow to
internationalists and could be a victory for those who would turn their
backs on the world.

********

#3
Moscow City Duma Amends Law on MAYOR'S Term in Office.

MOSCOW, June 11 (Itar-Tass) - A law "On ending the term in office of the
city mayor and vice-mayor elected on June 16, 1996" has been passed by the
Moscow Duma in the main on Friday. 

The amended law envisages that the date of the elections of the city mayor
and vice-mayor coincides with the elections of State Duma deputies. In
general, the attitude of different branches of power to the changed dates
of the elections of the city mayor, earlier scheduled for July, 2000 to
coincide with the elections of the Russian president, is positive. 

The decision to change the date of the elections of the city mayor does not
contravene the law guaranteeing franchise to citizens, said Duma Speaker
Gennady Seleznyov. "This is a political decision related neither to
economy, nor anything else in Moscow," Seleznyov told journalists. This
decision guarantees Moscow Mayor Yuri Luzhkov the possibility to remain the
Moscow city mayor if he is defeated at the presidential elections,
Seleznyov noted. 

The attitude of the Kremlin to the changed date of the elections of the
city mayor has been clearly formulated by presidential chief of staff
Alexander Voloshin. "Anything done in the framework of the law should be
welcomed, otherwise counter-measurers are needed," Voloshin said.
Commenting on the decision to change the dates of the mayor's elections,
Voloshin said that "as a rule, economic and other arguments are given in
support of the decision, such as that it would be more convenient for
voters in winter, rather than in summer, while in fact, this is a way of
resolving political tasks faced by this or that candidate," Voloshin said. 

The post of the city mayor has been claimed by leader of the "Novaya Sila"
bloc, ex-prime minister Sergei Kiriyenko, who declared on June 5 that he
would run for city mayor. 

*******

#4
Poll: 57% of Russians Would Oppose Banning of CPRF 

MOSCOW, June 9 (Interfax) - If Russian President 
Boris Yeltsin banned the Communist Party of Russia (KPRF) now, 57% of 
Russians would oppose the move, according to an opinion poll of 1,836 
Russians conducted by the Center for the Study of Public Opinion on June 
5 and 6. At least 29% of Russians would welcome a ban of the party, and 
14% were undecided. The pollsters received similar results when they 
asked about the possibility of Yeltsin dissolving the State Duma. Some 
58% of Russians would oppose Duma dissolution, 28% would support it and 
14% could not say. 

********

#5
Focus-Russia Says Its Forces in Catastrophic State

MOSCOW, June 10 (Reuters) - Prime Minister Sergei Stepashin, in one of the 
blackest assessments of Russia's armed forces yet, said on Thursday the army 
and defence sector were in a "catastrophic" state. 

He told a cabinet meeting the armed forces would need more funding in next 
year's budget and extra cash to help cover the costs of participating in a 
Kosovo peacekeeping force. 

"The armed forces are in a catastrophic state. The military industrial 
complex and the army are barely able to survive," the prime minister said. 
"We should take this factor into account when planning next year's budget." 

Stepashin's comments were a clear pitch at the State Duma lower house of 
parliament, where many opposition deputies openly lament the shrinking of the 
vast Soviet-era military machine into a demoralised, underfunded force of 
some 1.2 million men. 

Stepashin, a former interior minister whose father served in the Soviet navy, 
needs Duma support for a package of laws that would unlock fresh loans from 
the International Monetary Fund to help Russia's battered economy. He has 
threatened to call a vote of confidence if the Duma rejects the laws. 

The prime minister's remarks also came as U.S. and Russian military officials 
were discussing Russia's participation in a peacekeeping force for Kosovo. 

Russia, which is prepared to send around 2,500 men, wants the peacekeeping 
operation in the Yugoslav province to be firmly under a United Nations rather 
than NATO umbrella for political reasons but also because this would mean 
U.N. funding. 

But either way Moscow would still need to stump up millions of dollars 
itself, and it is apparent to all -- inside and outside the military -- that 
the funds are simply not there. 

"We have to take into account this situation (army funding) when sending our 
troops to Yugoslavia," Stepashin said. 

On Wednesday, Defence Minister Igor Sergeyev briefed the Federation Council 
upper chamber on military reforms. 

"They discussed financial and economic aspects," the armed forces daily 
Krasnaya Zvezda said of the closed-door meeting but gave no further details. 

Stepashin has already promised even stronger backing for the military than 
his predecessor, Yevgeny Primakov, and introduced a new post of deputy prime 
minister in charge of the military-industrial complex, as the defence 
industry is called. 

Last week he promised the government would hammer out extra funds to supply 
the armed forces with more modern weapons and allow arms producers to pay for 
new technologies and wider scientific research. Again, it is unclear where 
the money will come from. 

In a sign of how bad conditions are in the armed forces, the newspaper 
Izvestia reported that last Sunday 45 soldiers fled from their unit in the 
Russian Far East to protest against bullying and "a lack of normal living 
conditions." 

It said police intercepted the soldiers and then took them to a nearby 
children's holiday camp where doctors checked them over and treated injuries. 
They were then sent back to the unit. 

********

#6
The Guardian (UK)
11 June 1999
[for personal use only]
Absent Yeltsin fuels Russian disarray 
Deployment: Moscow may have to scrap its demand for a separate zone 
Tom Whitehouse in Moscow

Splits and confusion re-emerged in Russia's leadership yesterday over its 
Balkan policy, threatening to pose a challenge to Nato's plans for 
peacekeeping in Kosovo. 

While the ministry of defence insisted on an exclusive zone for its 
peacekeepers, outside Nato's control, the prime minister, Sergei Stepashin, 
warned that there was little money to support a large peacekeeping battalion, 
whatever its remit. The only man who can clarify Russia's position, President 
Boris Yeltsin, was silent in his country dacha. 

Before beginning talks with United States representatives on Russia's role, 
the ministry of defence negotiator, General Leonid Ivashov, set out an 
uncompromising stance. 

"Non-subordination to Nato is of crucial importance. We intend to seek our 
sector of responsibility," he said. "We will correct the negative aspects 
that previously occurred in the Kosovo settlement." 

But Mr Stepashin was in a more realistic mood. Pleading with parliament to 
fulfil International Monetary Fund conditions for further loans and increase 
taxes, he warned that the state of Russia's armed forces was "catastrophic". 
Unless more money could be raised, the coveted peacekeeping role in Kosovo 
would be jeopardised. 

"We have to take this situation into account when sending our troops to 
Yugoslavia," Mr Stepashin said. 

The US deputy secretary of state, Strobe Talbott, who held talks in Moscow 
yesterday with Mr Stepashin and Mr Yeltsin's special Yugoslav envoy, Viktor 
Chernomyrdin, categorically ruled out the possibility of a special Russian 
zone because it implied Kosovo's possible partition. 

Asked whether a Russian zone was possible, he replied: "The short answer is 
no. We feel very strongly, and I think our Russian colleagues agree, unity of 
command is very important, and unity of command means all of Kosovo will be 
under one command arrangement." 

"There will be specific arrangement for division of labour within that, but 
nothing that would bear any resemblance to partitioning or dividing Kosovo 
into different national sectors." 

Apparently chastened, Gen Ivashov then backtracked on his demand for a 
Russian sector. "We are not calling it our own sector, that is a loaded 
term," he said. Asked how many troops Russia might deploy, he said: "That is 
a decision for the president and the federation council. We are saying it 
will be a significant and effective force." 

Disagreements over whether or not Russia has its own sector are unsurprising, 
bearing in mind the depths to which Russian-US relations have sunk since the 
war began. At the start of a meeting with the American delegation, Mr 
Stepashin made his distaste clear by alluding to the stains on the walls of 
the American embassy left by ink bombs hurled by anti-war protesters. "You 
have to clean up the building, it's all covered in ink," he said sharply. 

With Mr Yeltsin performing his trademark disappearing act yet again, the 
composition and size of Russia's peacekeeping force is unknown. Four possible 
options have been presented to the president, ranging from 2,500 soldiers to 
10,000. 

Russia's defence ministry said it had received a "preliminary order" to 
prepare a brigade of roughly 2,500 paratroops to join the international 
force, but has not said how it will be financed. 

Though Russia could play a spoiling role by using its veto on the United 
Nations security council, its room for diplomatic manoeuvre is getting 
smaller. Kosovo is increasingly a domestic political issue, as the 
nationalist and leftist press ask: "Who lost Yugoslavia?" Mr Chernomyrdin, 
who last month accepted Nato's main demands for an end to hostilities after 
originally objecting, is being blamed most. 

The Russian parliament yesterday approved a non-binding resolution urging Mr 
Yeltsin to sack him. "The defeat of a strategic ally of Russia in the Balkans 
has sharply worsened Russia's geopolitical position and created a serious 
threat to its national security," said the resolution. 

In thanking Mr Chernomyrdin for his support yesterday, Mr Talbott has exposed 
him to further domestic criticism. 

While the opposition are doing their best to make political capital out of 
Russia's hurt pride, ahead of December's parliamentary elections, the 
government is angling for western compensation. 

Previous Russian acceptance of US demands over Nato's eastwards expansion and 
the status of Russian troops in Bosnia have been followed by generous IMF 
loans. 

The parliament is currently unwilling to pass an IMF austerity package in 
return for a new £2.8bn loan. Few will be surprised to see the IMF relax its 
loan conditions in the coming months. 

********

#7
Washington Post
10 June 1999
[for personal use only]
Yeltsin's Bill
By Jim Hoagland

President Clinton turned to Russia's Boris Yeltsin this week to seal a
shaky deal with Serbia on a cease-fire in Kosovo. This is not a cost-free
transaction for the United States. Yeltsin's bill is already in the mail
and is likely to run high.

Russia's political future is in play as the Kosovo settlement takes final
shape. The signals from Moscow are unambiguous: The severely ailing Yeltsin
is trading unpopular intervention on Kosovo to maintain U.S. support for
his embattled regime now and in the future for the successor Yeltsin has
finally selected: Sergei V. Stepashin.

Clinton and Deputy Secretary of State Strobe Talbott, the president's chief
adviser on Russia and Serbia, have made a down payment to Yeltsin by
extravagantly praising the role Russia has played in the Kosovo
negotiations thus far. In fact the Russian contribution to cornering
Slobodan Milosevic has been largely grudging and mixed in its effectiveness.

Payment in the form of background briefings is rhetoric easily spent by
Clinton, who has made a career of dodging bullets but now seems to be
dodging a radioactive comet that was hurtling at him a week ago.

Clinton was still avoiding making an immediate decision on ground troops
when word reached him at a Cabinet meeting on June 3 that Milosevic had
unexpectedly accepted the terms taken to Belgrade by Russian envoy Viktor
Chernomyrdin and Finnish President Martii Ahtasaari. As a look of happy
relief spread across his face, Clinton told his Cabinet: "Don't gloat."

That was prudent advice. The settlement was immediately called into doubt
by Milosevic's efforts to create new loopholes in cease-fire terms Talbott
had virtually dictated to Chernomyrdin and Ahtasaari in talks in Bonn.
Foreign ministers of the Group of Seven had to renegotiate with Russia and
fill in blanks that remained in the Talbott terms at a contentious two-day
meeting in Cologne, Germany, this week.

Russian Foreign Minister Igor Ivanov was no more constructive in that
meeting than he had been in the Bonn talks, where he intervened several
times to keep a frequently wavering Chernomyrdin from going wobbly on
Milosevic. In Cologne, Ivanov informed the G-7 diplomats that the terms
they sought exceeded his instructions and he could not agree to anything.

That triggered two phone calls by Clinton to Yeltsin, who once again pulled
back Ivanov -- after the foreign minister secured some word and timing
changes that give the Serbs new wiggle room.

Moscow observers are unsure why Ivanov, originally appointed by ousted
Prime Minister Yevgeny Primakov, has taken such a hard line. Ivanov may
hope to preserve his political viability for future governments by flowing
with the rising tide of criticism in Moscow of the deal and the Russian
role in it. Or he may hope to protect the foreign ministry against
retaliation from the Milosevic-friendly Duma.

Russian resistance has been glossed over by Clinton, Talbott and other U.S.
officials who highlight Stepashin's friendliness. A major clue to his
importance and to Yeltsin's newly flagging health came on May 31, when
Yeltsin placed a call to Clinton and then was "unavailable" when the
president called back. Instead it was Stepashin who conducted the 30-minute
call with Clinton, who before has let Vice President Gore deal with
Yeltsin's revolving-door prime ministers.

The Russian president preemptorily installed Stepashin as his prime
minister last month in the fourth abrupt change of Russia's government in
the past 18 months. He fired the faithful Chernomyrdin in March 1998
without warning and repeated this pattern with Sergei Kiriyenko and Yevgeny
Primakov when they seemed unable or unwilling to protect Yeltsin, his
family or close associates against corruption investigations.

Stepashin is an ultimate Yeltsin loyalist whose background is in internal
security. He has surprised Moscow analysts by getting control over the
unwieldy, heterogenous cabinet Yeltsin picked for him. But he is seen at
home primarily as Yeltsin's protector and enforcer, not a statesman.

Momentarily building up Stepashin and continuing to turn a blind eye to the
instability that Yeltsin's smash-and-rule governing tactics foster in
Moscow would seem to be cheap payment by the Clinton administration for
help with a Kosovo settlement.

But Russia's fate is at stake in the internal drama leading toward
presidential elections next year. Getting too deeply and visibly involved
in Russian domestic politics in return for gains in Kosovo now could be a
bad bargain with the future. Wariness, about Russian intentions on Kosovo
and about Russian politics, is the wise attitude right now. 

********

#8
Financial Times
10 June 1999
[for personal use only]
MIR: Russian astronaut launches fund 
By John Thornhill in Moscow

One of Russia's most famous cosmonauts, Vitaly Sevastyanov, yesterday
appealed to his compatriots to dip into their pockets to help keep the
legendary Mir space station aloft.

Mr Sevastyanov said the station was still in excellent working condition
and could operate for another five years. "To wreck the orbiting complex
would be a crime before our descendants," said Mr Sevastyanov, who made two
space flights in the 1970s and is now a Communist MP.

The Russian space agency warned last week that the Mir station, which has
endured some terrifying glitches and a collision with a supply ship during
its 13 years in orbit, would be abandoned this year unless more funds were
forthcoming. But so far this "cash or crash" ultimatum has not wrested more
money from the hard-pressed Russian government prompting the agency to
resort to more unorthodox financing methods.

The former cosmonaut urged his fellow Russians to contribute Rbs10 ($0.40)
apiece to a charitable fund set up to support the Mir station or to buy a
ticket in a special space lottery. If every Russian contributed that
amount, Rbs1.5bn could be raised, sufficient to cover Mir's annual
operating expenses of about Rbs1.2bn.

Mr Sevastyanov said donors could hand over their money to any branch of
Sberbank, the state savings bank. Instructions would be posted at all the
bank's 34,000 outlets. Several Russian companies and some businessmen from
Libya and Iraq had already vowed to contribute, he said.

The fund would appear to have little chance of attracting the necessary
cash in a country suspicious of the integrity of many charities and the
trustworthiness of its banks. However, Mir is also the most visible symbol
of the Russians' love of defying seemingly insurmountable odds.

********

#9
Date: Thu, 10 Jun 1999 
From: "Andrei Liakhov" <liakhova@nortonrose.com>
Subject: RE: 3323-Fritz Ermarth/Seeing Russia Plain: The Russian Crisis
and American Intelligence 

I could not and would not argue with the jist of Fritz's article but would
like to clarify a couple of pints:
1. The process of siphoning funds abroad has started in mid 70ies under
Brezhnev and was initialled by people loosely referred to as "the caviar
Mafia" with direct ties to the very top of Soviet nomenklatura. It was
relatively modest (Soviet Genprokuratura's estimate was c.US$100 between '72
and '78 but sufficient to sentence a couple of major figures (including
Deputy Fisheries Minister) to death and cause premature retirement of
several prominent figures from the Central Committee).
2. The idea of legitimate cover business was pioneered by the CIA in mid
50ies (Air America, etc.....) and borrowed by the KGB in mid 60ies when
various "exports" (Promexport, Avtoexport, etc) muhroomed in the USSR all
with foreign representative offices of course and huge bureacratic
apparatus. The process Fritz presumably referres to commenced roughly in
around '88 when reports from various Soviet special services about the
danger of collapse of the USSR were largely ignored by Gorbachev (who was at
that time on the very top of his dilusion (not without help of the NSA and
the CIA) about the real situation in the country and such services acting in
concert with the Central Committee commenced preparations of the so called
"contingency plans". Simultaneously "wise men" of Gorbachev administration
decided to build the "Potemkin capitalism" by way of using Party/Komsomol
and state funds to create a couple of trustworthy "commercial structures"
(including banks..... here I can only refer you back to my comments on the
"Komsomol" bank you kindly published in the JRL) which would seve as
evidence of the success of Gorbachev reforms. The combination of these two
processes created two things:
a. unprecedented opportunities for fraud and crimilisation of the society;
and
b. legal and semi legal (the Filshin case is a good example) ways of
getting money out of the country without any control. 
As both these processes originated at the very top it is no surprise that
after the demise of the USSR the nomenklatura comprised the bulk of the "New
Russians". It would be naive to think that these guys admired the US for its
democratic values. 
Unfortunately I have to go but would be delighted to continue that
discussion in particular about the capital flight and why the reforms
failed.

******

#10
From: scarey@steptoe.com (Sarah Carey) 
Subject: Law and the Market Economy In Russia
Date: Thu, 10 Jun 1999 

Law and the Market Economy In Russia: Past Reforms; Future Challenges
Sarah Carey - Steptoe & Johnson
(May 1999)

The topic that I will cover is the revolution that has occurred in the
Russian Federation since the collapse of the Soviet Union in December 1991,
in regard to the creation of the legal infrastructure for an open, market
based economy. I hope to show you that, piece by piece, an avalanche of
laws has been enacted that, taken together, make possible virtually every
kind of private economic activity. For the most part, these laws, although
imperfect, and not fully harmonized, approximate international legal
standards. A truly Herculean effort has been successfully concluded. The
next challenge is to insure effective, transparent and fair enforcement
procedures as well as to develop respect for law and convention. As a
Russian colleague put it, “Respect for the constitution and the legal
system must be genetically coded.”

By way of introduction, a word about what I do. I chair the CIS practice
of a large Washington DC law firm, overseeing the work of more than two
dozen bi-lingual (Russian and Western) attorneys working in Washington DC,
Russia and Kazakhstan, assisting foreigners to invest in local CIS
economies and representing local (Russian and Kazakh) companies in their
commercial relations with Westerners. Last week I was in Moscow. Among
the projects on which I worked were:

consultation with a multi-billion dollar West European packaging company
regarding its plans to acquire or create two-dozen companies in the CIS to
produce a range of packaging products;

advice to a large minerals trading company regarding various forms of trade
finance related to trades in Russian minerals as well as regarding the
creation of a holding company in Smolensk;

litigation on behalf of Western shareholders of Rostelekom stock whose
stock was wrongfully transferred to another party as a result of criminal
actions taken by the share registrar; and 

legal advice regarding the most tax efficient structure for the growing
business of Russia's leading fashion designer. This consultation included
advice regarding protection of the fashion designs, trademarks and other
intellectual property of the designer in Russia as well as in Europe.

All of these matters required complex legal analysis and documentation.
None of them would have been possible in their current forms eight years
ago before the legal revolution.

In evaluating the progress that has been made in reforming Russian
commercial law, we need to ask: 

Are the laws adequate?
Do people operating in the economy respect them?
Do the courts adequately enforce contracts and other rights when breakdowns
in commercial relations occur? But first, let’s look at how the
post-Soviet law reform evolved.

The Starting Point: When Mikhail Gorbachev arrived on the Moscow stage in
the mid 80's, contrary to popular belief, Russia had a legal system, based
on civil law traditions and a series of codes or Fundamentals largely
adopted from Western Europe. The Soviet Union lacked the rich traditions
of the Anglo-American legal systems that guarantee the rights of the
citizen vis-a-vis the state and sanctify the rights of property. Real
commitment to the law and the development of legal scholarship had not
occurred until the time of Alexander II. Most of the gains achieved from
that period to the 1917 revolution were undermined by the Bolsheviks who
believed in the supremacy of the revolution above the law and who argued
that once class equality was achieved, laws, like the state, would wither
away. Stalin, and later Khrushev, instituted significant legal reforms
that appeared to reflect European standards, but the Communist party
remained superior to the law and to the courts. And, because the state
controlled and administered the economy, there was almost no private
commercial activity. In fact, most such activity was prohibited. 

The Gorbachev Initiatives: Gorbachev’s address to the 19th Party
Conference in 1988 made the creation of a law-based state a top priority.
Starting in 1986, Gorbachev initiated a series of reforms that began the
legal revolution. For foreign investors, a first step was the Joint
Venture decree of 1987 which, for the first time since the Revolution,
permitted foreigners to own an equity position in a Russian company. Only
four pages long, this law created an island of corporate independence --
the joint venture -- in an economic sea still governed by various state
agencies, such as Gosplan, Goskomtrud, Goskomtsena, etc. A joint venture
was self-governing, free to establish its own prices and terms of trade,
responsible for its debts and obligations, free to export or import, etc.

Although at first it seemed impossible that a privately run company could
operate in a state administered economy, the principles established for
joint ventures were soon expanded to the rest of the economy. In the next
few years laws and decrees were enacted that directed state enterprises,
collective farms and other commercial entities to balance their books
(khozraschet) (a goal not often realized), that abolished the state
monopolies on foreign and domestic trade and permitted virtually all
entities to engage directly in such trade, that overnight abolished many of
the other ministries responsible for the command economy, that freed most
prices, and that created a tax system to fund public spending (replacing
the state as the treasurer, banker and allocator of all revenues owned by
its enterprises ). Most importantly, laws and decrees were promulgated
that encouraged the creation and growth of private businesses. These
included the law on cooperatives in 1987 and the Joint Stock Company decree
in 1990, among others. New private companies -- assuming these business
forms -- sprang up across the country offering goods and services to the
public. Further, Russian jurisprudence regarding contracting was turned on
its head. Freedom of contracting replaced a regime where private contracts
were permitted only in regard to specifically authorized activities.

The Russian Legal Revolution: With the collapse of the Soviet Union, the
abolition of the Communist Party and the emergence of an independent Russia
in December 1991, the legal revolution continued. Laws protecting foreign
investment, supporting property rights and regulating monopolies and unfair
trade practices were enacted in 1991, as was the first major privatization
law. 1992 brought laws regulating currency transactions as wel1 as the
banking sector and the law on consumer protection. 1993 saw an overhaul of
the laws protecting intellectual property and, most importantly, the
approval of a new Russian constitution that, as noted below, includes
provisions of inestimable importance to a market economy. Subsequent years
saw enactment of further privatization laws, a securities regulatory
regime, and laws defining the governing rules for specific sectors of the
economy such as the telecommunications and energy sectors. In addition,
continuous modifications were enacted in regard to previously passed laws
intended to reduce contradictions and ambiguities in these laws. For
corporate investors, major building blocks were put into place with the
enactment of the Civil Code (Part I enacted 1994, effective January 1995;
Part II enacted January 1996, effective March 1996) the Law on the
securities market of April 1996, the Law on Joint Stock Companies enacted
in 1995, the Law on Limited Liability Companies of 1998. This historic
effort to put in place a broad range of the laws necessary to support a
private economy occurred against the backdrop of a crumbling national
government, continuous decentralization of state power, massive
privatization, and a dramatic retreat of the defense ministry from industry.

All of these laws (and others not mentioned) are of great importance, but
the enactment of the 1993 constitution, the privatization laws and the
enactment of the Civil Code and company laws were of unique importance to
the creation of the legal infrastructure required for private economic
activity.

The Constitution: the Russian Constitution guarantees private commercial
activity, stating that “Each person shall have the right to freely use his
abilities and property for entrepreneurial or any other economic activity
not prohibited by law." It further provides that "No economic activities
aimed at monopolization or unfair competition shall be allowed," and
insures against the retroactive application of laws that create new
obligations. Compensation is assured for damage inflicted by the action or
inaction of government agencies or their officials. The federal government
is made responsible for establishing the legal principles for a single
market (interstate commerce clause) and federal law is preeminent within
its area of responsibility. Regional and local governments are assured
strong roles in the federal system. Finally, international treaties and
"universally acknowledged principles and standards of international law"
are recognized as an integral part of the Russian legal system. The former
are given precedence over laws enacted by the Russian legislature and
today's foreign investor is protected by a range of bilateral and
multilateral treaties that protect his business activities in Russia. Each
of the constitutional provisions mentioned above extends important
protections to both domestic and foreign participants in the Russian market.

The Privatization Process: At the beginning of the decade, most players in
the Russian economy were state owned. By 1998, 70% of the economy was
privatized. The new private sector was composed of both a massive number
of new start-up companies created under the private business-enabling laws
and the companies and assets that had been sold off to private owners by
the state. The latter process, which has been much criticized, included
many non-controversial elements, such as the sale of the assets of small
state owned entities (e.g., trucking companies), and the corporatization
and transfer of shares of thousands of medium sized companies to their
managers and workers, and a small percentage of outside investors. The
privatization process, with the exception of certain large state assets, is
mostly complete and the necessary infrastructure has been put in place to
facilitate the verification of ownership and title to recertify privatized
properties. This, by itself, is a significant catalyst for private market
activity.

In addition to the generic privatization laws that applied to all
industries, certain industry specific privatization laws or decrees were
enacted, such as those for the energy sector. A massive restructuring of
the Russian oil industry occurred pursuant to these laws, resulting in the
creation of the 75% privately owned oil giant, Lukoil, Yukos and others.
And the electric power sector was reorganized into a new company, RAO UES
(which is 47.5% privately owned) that controls the national power grid and
owns 49% of the stock of most regional power production companies. Many of
the latter have become relatively successful private companies, recognized
by both the Russian and international financial markets.

The privatization process generally proceeded in accordance with the new
laws enacted to define the privatization process, a fact that has been
overshadowed by the smoke, mirrors and tricky financing relied upon by the
RF government to complete the “loans for shares” privatization transactions
before year end 1995. In fact, post-August 1997 developments in regard to
many of the “loans for shares” assets demonstrate the strength of the new
Russian legal order as private shareholders successfully assert their
rights in regard to the restructuring of these near bankrupt companies.
Despite residual state ownership in some of these companies, the private
market will be the major determinant of their fate and that market now
plays by relatively well-defined legal rules.

The Civil Code and the Company Laws (Joint Stock Company Law and Limited
Liability Law): Taken together these laws provide a solid underpinning for
private commercial activity. They define business forms, the rights of
participants in these forms, the rules governing different types of
economic activity, and the elements of contract law and of conduct
generally covered by tort law in the US legal system and they define the
remedies available to those whose rights, under these laws, have been
infringed. In creating a new company, investing in or governing an
existing company, exercising shareholder rights, defining property rights
and seeking redress for breach of contract, guidance can be found in these
laws. They are the basic building blocks for today's market economy in
Russia. Although the businessman operating in Russia must also take into
consideration a host of other laws, including tax, currency, banking,
anti-monopoly and other laws, the starting point is the Civil Code and the
Company Laws. Both sets of laws are noteworthy for the protection they
accord shareholders, particularly minority shareholders. Additional
significant protections are provided by the Securities Law and various
regulations issued by the Federal Securities Commission.

The four examples, based on my legal practice mentioned at the beginning of
this paper, would not exist had the reforms discussed above not occurred.
They all demonstrate the openness of the Russian economy to investment and
the diversity of private economic activity. The packaging company can
engage in asset acquisitions or corporate buy-outs because the rules of
such transactions are now clear; in particular, thanks to the privatization
laws, the company can determine with certainty title to the assets it seeks
to acquire. The minerals company in Smolensk has a range of corporate
structures available to it in creating a holding company, including those
provided by the Joint Stock Company Law, the Civil Code and the Law on
Financial Industrial Groups. The litigator seeking to recover his
Rostelekom stock suffers the most: at the time his shares were stolen, the
regulatory regime for the securities market had major gaps, including the
weakness of the Federal Securities Commission as an enforcer and inadequate
regulation of share registries. Although these deficiencies are being
corrected by legal and systemic developments since the time the claim
arose, the litigator has suffered from the deficiencies of the Russian
court system. Finally, the Russian fashion designer, seeking to access
world markets, is in a position to fully protect his intellectual
property-designs, logo, trademarks, etc., both in Russia and overseas. He
will, however, have to face Russian banking and currency regulatory hurdles
which are designed to prevent capital flight but frequently end up
deterring legitimate overseas investments.

Evaluation of the Legal Reforms: Returning to our initial questions, it is
safe to say that the legal infrastructure created in Russia over the past
decade is adequate to support a free market economy. Investors have major
policy disagreements with those laws in certain areas, such as taxation or
currency and banking regulation, but the laws are conceptually sound. If
the political scene were more stable in Russia and if both government and
private players honored the law, there would be few complaints in this arena.

The new legal regime has defined the field of play and provided formal
rules for the commercial game. In our experience, the overwhelming
majority of companies operate, and most contracts are completed, in
accordance with the laws. However, a significant number of Russian
companies either subvert or ignore key laws. Russian business culture
sometimes reflects a startling lack of business ethics. This is in part
due to the lack of effective well-funded law enforcement mechanisms
(whether environmental, tax compliance, anti-corruption or other laws) and
in part due to assimilation. As a Russian commentator wrote at the
beginning of the century:

“It might be said that the Russian people set out very late on their
historical path and that we have no need to develop the ideas of individual
freedom and personal rights, the rule of law, and constitutional government
on our own, because all these ideas have long since been proclaimed,
elaborated in detail, and implemented; therefore, we need only borrow them.
But even if this were the case, we would still have to live with these
ideas . . . However old an idea may be, it is always new for the person
experiencing it for the first time.” 

Bogdan Kistiakovskii Vekhi, 1909.

The weakest link in the Russian legal system is the enforcement system.
With notable exceptions, the judiciary is weak, underpaid, undertrained,
and subject to political manipulation or bribery, especially at the
regional level. The support system for the judiciary, including bailiffs,
clerks, legal research materials, etc., is also inadequate and underfunded
and the rules of civil procedure require a significant rewrite. In
addition, litigators operating in the system are often undertrained and
unregulated (for instance, disbarment procedures should be available for
use against those lawyers who engage in corrupt practices) and the
unbridled discretion of the procurator’s office makes it a wild card in the
litigation of various economic rights (this has been particularly true in
regard to challenges to past privatizations which are intended to undermine
current transactions). Although a growing number of good judges are making
good law and those decisions are being enforced, the weaknesses in the rest
of the system seriously undermine confidence in the judiciary and belief
that commercial rights, no matter how well defined, will be enforced.

Conclusion: The legal edifice is in place in Russia to insure a free market
economy and, to a large extent, such an economy is in place. That the
economy is currently enduring a "time of troubles" and has not brought the
hoped for gains is due to a failure of political leadership and a lack of
managerial talent, not to deficiencies in the laws. Serious inadequacies
do exist in the judicial system but they can be addressed by instilling
broad respect for the law in the population, by upgrading the judiciary and
the litigators who appear before them and by successfully litigating the
thousands of cases that are required to define the real meaning of the new
market economy laws. Progress in this regard is being made, albeit slowly,
via international assistance programs that offer professional training,
exchange programs, assistance in drafting regulations and in creating
professional organizations and self-regulating bodies (that include
enforcement and disciplinary authority). Finally, the legislatures at all
levels of government must complete the unfinished business of
privatization, definition of rights to real property, rationalizing the tax
system, strengthening creditors’ and guarantors’ rights, creating a real
banking sector, etc. However, these remaining challenges should in no way
diminish the remarkable progress that has been achieved to date.

*********

#11
Voters to Name Successor to Yeltsin-Chief of Staff.

MOSCOW, June 11 (Itar-Tass) - The Russian president's chief of staff
Alexander Voloshin in his interview published by Vek daily on Friday have
spoken of a "successor" to President Boris Yeltsin in the next presidential
elections due in June of 2000. "There will be a successor to Boris
Nikolayevich Yeltsin by all means. Only he will be named by Russian
voters," Voloshin said. 

As for Prime Minister Sergei Stepashin and the likelihood of his running in
the future presidential elections, Voloshin said the president and his
administration are going to do all they can for Stepashin to "succeed in
the best posible way in fulfilling his arch-complex task of bringing order
to the country". 

"If by the presidential elections he achieves substantial results and
decides to struggle for the presidential chair, this is his right,"
Voloshin said. 

He said Stepashin as prime minister "knows far more better than most of
other claimants what it takes to run the state and solve state tasks of
scale," he said. 

*******


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