June 16, 1999    
This Date's Issues: 3343 • 3344 •

Johnson's Russia List
#3344
16 June 1999
davidjohnson@erols.com

[Note from David Johnson:
1. Reuters: Russia risks pariah status if no IMF help-PM.
2. Christian Science Monitor: Thomas Graham, Moscow's tough act likely to 
backfire.
3. Moscow Times: Yulia Latynina, INSIDE RUSSIA: Money Tree's Harvest Not 
For Campaign.
4. Ira Straus: Reverse Pavlovian training for Russia.
5. Milan's Corriere della Sera: Interview with Vladimir Lukin, "It Was NATO 
That Breached UN Arrangements, But There Is Not Just One Boss in World.
6. Moskovskiy Komsomolets: Yelena Yegorova, "'As Slant-Eyed As I Am.' 
Luzhkov Visits Historic Homeland." 
7. Rossiyskaya Gazeta: Yekaterina Borisova and Tatyana Degtyareva:
The Privatization Train Left the Station Along With the Money.
(Shares-for-Loans Deals Viewed)
8. Andrei Liakhov: Legal Revolution in Russia (Re. 3337 Sarah Carey/
Law and the Market Economy)
9. David Filipov: the dump in all of us.
10. Reuters: Russian defence needs cuts - think tank. (SIPRI)] 

*******

#1
Russia risks pariah status if no IMF help-PM
By Julie Tolkacheva

ST PETERSBURG, Russia, June 16 (Reuters) - Prime Minister Sergei Stepashin
said on Tuesday that Russia could become a "world pariah" if parliament
failed to approve new taxes needed to win vital loans from the
International Monetary Fund. 

But Stepashin said that if the Communist-dominated State Duma, the lower
house, adopted his government's revenue-raising measures the IMF money
could arrive next month, averting a disastrous default on debts already
owed to the Fund. 

"Our country could become a world pariah (if we don't pass the
revenue-raising laws)," Interfax news agency quoted Stepashin as telling an
international economic forum in Russia's second biggest city, St Petersburg. 

Speaking after talks with the visiting head of the IMF, Michel Camdessus,
Stepashin said Russia could survive without the Fund's credit but added
that this would greatly hamper the country's efforts to stabilise it
shrinking economy. 

Earlier Stepashin expressed cautious hope that deputies would cooperate
with his month-old cabinet and approve the laws which would allow the Fund
to release $4.5 billion over 18 months. 

The money would repay previous credits to the IMF and also help Moscow to
secure debt restructuring accords with other foreign creditors. 

"If the package of documents which I spoke of is passed, there could be a
rather large IMF tranche in July," he said. 

Stepashin has threatened to call a vote of confidence in his government if
the Duma rejects the revenue-raising measures -- a move which could force
President Boris Yeltsin to either ditch his prime minister or dissolve the
chamber. 

On Thursday deputies are due to consider a proposed levy on petrol
stations, a major plank of the IMF-sought package. 

Deputies, their eyes firmly on a parliamentary election due in December,
have been reluctant to approve a levy which they believe will drive up
petrol prices. 

But in a move likely to calm their fears, more than 50 Russian firms agreed
on Wednesday to impose price controls in key sectors of the economy until
the end of 1999, Interfax said. 

The agency said the deal covered fuel and energy, metals and transport. The
companies involved included natural gas monopoly Gazprom, major oil
companies and the railway ministry. 

Looking beyond his immediate efforts to clinch the IMF loan, Stepashin said
on Wednesday that Russia must try to build up parts of its battered
industrial base and not rely solely on the export of raw materials for its
economic revival. 

"In the recent past Russia's economy has been oriented towards the export
of raw materials but this provides no long-term prospects," he told
reporters. 

Stepashin, a former interior minister and security chief, also signalled
his intention to continue the previous government's policy of running a
tight budget while seeking to direct more help to the poor and to domestic
industry. 

Camdessus, who late on Tuesday took a cruise along St Petersburg's
picturesque canals with Stepashin, gave no clues about fresh credits but
sounded an optimistic note about Russia's longer-term prospects. 

"There is absolutely no reason, given patience and time, why Russia should
not be able to move to an era of hope and prosperity," he told the economic
forum, attended by Russian businessmen and regional governors and foreign
bankers. 

Before a second round of talks with Stepashin, Camdessus also pledged
continued IMF backing for Russian market reforms. 

"As far as the IMF is concerned we do want to support the efforts of the
government to continue reforms...transparency in this country," Camdessus
said. 

*******

#2
Christian Science Monitor
16 June 1999
Moscow's tough act likely to backfire
By Thomas Graham (tgraham@ceip.org)
Thomas Graham is a senior associate at the Carnegie Endowment for 
International Peace and was a US diplomat in Moscow from 1994 to 1998. 

The dash of 200 Russian soldiers to the Pristina airport over the June 12 
weekend wasn't a rogue military operation, but an audacious move to enhance 
Russia's profile in the Kosovo peacekeeping force. President Boris Yeltsin 
authorized the action, although, Russian officials maintain, he left the 
timing up to the military. 

The tactic could work in the short term, but over time it's likely to 
backfire. 

The outlines of a deal are apparent and could be developed when US Secretary 
of Defense William Cohen sits down with his Russian counterpart in Helsinki 
this week. Russia will get a "zone of responsibility," although not a 
separate sector, to patrol, and the Russian commander will not be formally 
under NATO command. That could allow the Kremlin to depict Russia's role as 
worthy of a major power. In any event, the G-7 leaders and Mr. Yeltsin are 
going to work hard to cut a deal June 18-20 in Cologne, Germany, that will at 
least temporarily defuse the confrontation. 

That's the good news. 

The bad news is what this episode says about the state of Russian 
decisionmaking and politics. Disorderly, confused, unreliable, and worrisome 
are adjectives that come to mind. 

The problems begin with Mr. Yeltsin, never a hands-on leader comfortable with 
institutionalized decisionmaking. He has preferred to rely on a small group 
of informal advisers, a broad set of contacts, and finely honed intuition. It 
was never a good way to run the government, but it worked as long as he was 
healthy and politically active. 

But Yeltsin's failing health has limited his contacts, narrowed his sources 
of information, and made decisionmaking increasingly a function of access to 
him. This precludes proper vetting of even critical decisions and allows 
people with access to advance their own agendas. 

It should be astounding - but it is not - that the prime minister, foreign 
minister, Federal Security Service director, and Yeltsin's own special envoy 
to the Balkans were left out of the loop on the Kosovo deployment. Military 
leaders simply got to Yeltsin first with a plan, couched in terms of 
protecting Russia's strategic interests, that could be set in motion before 
civilian leaders could object. 

Moreover, Yeltsin's own domestic political needs make him more attentive to 
military wishes. Because of his physical frailty, his abysmal approval rating 
of about 2 percent, and an intensifying political struggle, Yeltsin sees 
control of the military and security services as critical to his own 
position, as he has during past crises. That concern is reinforced by his 
immediate entourage, known as "the Family" because it includes his daughter 
and her close associates, who depend on Yeltsin's power for political, and in 
some cases physical, survival. 

If, as many observers in Moscow now fear, the Kremlin is considering 
extra-constitutional steps to extend Yeltsin's term beyond its 
constitutionally mandated end next summer, or to ensure the election of a 
loyal successor, it will need the military to stay neutral. Letting the 
military have its way on Kosovo was an easy way for Yeltsin to shore up his 
position with it. 

Yeltsin, however, still has much to do before he can feel confident about the 
military, which has felt humiliated by Russia's role in the Kosovo crisis. 
After years of slashed budgets, starvation rations, and neglect, the military 
has no reason to trust Yeltsin. Like the rest of society, most officers would 
be just as happy to see him go. That doesn't mean that they would actively 
turn against him on their own or in alliance with other opposition forces. 
The military doesn't want to be saddled with responsibility for running the 
country, even if it desperately wants greater resources. It would much rather 
work the system to obtain those resources, and it hopes to exploit the Kosovo 
crisis for just that end. 

Even though he wants the military's support, Yeltsin realizes he can go only 
so far. Russia is in no position to entertain a major confrontation with the 
West, whose money and technology are crucial to its economic recovery. NATO's 
offer - a "zone of responsibility" and indirect chain of command - may be 
sufficient to meet Yeltsin's concern about Russian prestige. 

The military would find it hard to resist - even if it prefers a sector and 
independent command that would put it on par with the NATO powers - because 
it may have backed itself into a corner. The Russians can do little in 
Pristina with 200 soldiers who could become targets of the Kosovo Liberation 
Army. But it has no easy way to augment them: Serbia's neighbors - Hungary, 
Romania, and Bulgaria - have consistently refused Moscow overflight 
permission to fly in reinforcements. As a result, the Kremlin itself could 
soon face a dilemma: either back down or violate these states' airspace and 
thereby shatter its efforts to portray itself as a force for international 
peace and order. 

In the end, the Kremlin will likely find its bold move has backfired. It has 
already raised grave doubts about its reliability and judgment, underscoring 
disarray at the highest levels. It could further sour Yeltsin's relations 
with his military, as it highlights the latter's weakness. A move intended to 
enhance Russia's prestige will ultimately have the opposite effect. 

******

#3
Moscow Times
June 16, 1999 
INSIDE RUSSIA: Money Tree's Harvest Not For Campaign 
By Yulia Latynina 

Watching the outward symptoms of the disease while paying no attention to its 
deeper signs, most observers are interpreting the epidemic of appointments to 
budget and quasi-budget posts as the artillery attack prior to the 
overwhelming electoral offensive. They say that all the billions gathered 
from customs or the State Pension Fund will go toward electoral coffers 
needed to ensure the succession of the ruling "family." 

Is it so? Let's do a little elementary political arithmetic. 

What is the probability that the party of power will unite around one 
candidate put forward by "the family" (as happened in 1996)? Obviously, zero. 

Then what is the likelihood that the candidate supported by "the family" will 
win in 2000? It's like a descendant of former Cuban President Batista hoping 
to win free elections in Cuba. The extent of the country's rejection of "the 
family" has become so great that proximity to President Boris Yeltsin will be 
the favored means of compromising a candidate. We will yet see leaflets 
accusing Communist Party leader Gennady Zyuganov of conducting secret talks 
with Yeltsin's daughter Tatyana Dyachenko. "The family," of course, can forge 
a secret political union with the probable victor - Moscow Mayor Yury 
Luzhkov, let's say, or Krasnoyarsk Governor Alexander Lebed. However, Russian 
politicians have thoroughly mastered Stalin's words that gratitude is a dog's 
malady. The first thing the victor will do is to start persecuting "the 
family," thereby resolving two urgent tasks - to strengthen his image in the 
eyes of the people and to reward his own inner circle with the wealth of its 
predecessor. 

"The family," having used state power to buy castles, companies and allies, 
created a medieval economy, whose emblem is the Wheel of Fortune, and whose 
main law states that if you have money, they are bound to take it away. This 
is distinct from the main law of market economics, which states that if you 
have capital, it will be multiplied. 

"The family" not only has no chances to win in 2000, but has no hope of 
hanging on after the elections. It possibly does not understand this, because 
even rather smart people who have spent time in the upper reaches of power 
tend to be blind to the precarious nature of their situation. But the others 
in the inner circle - be it Roman Abramovich and Nikolai Aksyonenko, or 
second-echelon figures like Mikhail Zurabov or Mikhail Vanin - cannot fail to 
understand this. They also cannot fail to see that their situation strikingly 
differs from that of "the family." Because while it is world practice to 
seize the property of fallen shahs, dictators and quasi-dictators - including 
their property abroad - the expropriation of foreign accounts held by 
little-known drones who worked to replenish high-level coffers is unheard of. 

Thus it makes no sense to "the family" to empty the budget to finance an 
electoral campaign. This, in fact, is harmful: Every scandalous appointment 
is another nail in the coffin of the current power-property structure. But it 
makes plenty of sense to use the budget to replenish the foreign bank 
accounts of those appointed to be the ruling "family's" saviors - that is, 
the Kremlin insiders who are playing skillfully on "the family's" basic 
fears. They are using these fears simply as a profitable investment, 
reasonably assuming: "After us, the default." 

Yulia Latynina is a staff writer for Segodnya. 

******

#4
From: IRASTRAUS@aol.com (Ira Straus)
Date: Wed, 16 Jun 1999 
Subject: Reverse Pavlovian training for Russia

The Object Lesson for Russia in Pristina:
It pays to be nasty
By Ira Straus

Now that Russia is being nasty at the Pristina airport, the West is beginning 
to consider some concessions to it on KFOR. Earlier, when Russia was being 
nice, the West had refused to compromise with it. 

The object lesson is clear: it pays to be nasty. And it doesn't pay to be 
nice. If you are nice the way Chernomyrdin was, the West will just use you 
and leave you hanging out to dry. If you are nasty, the West will start 
paying attention to what you are saying.

This lesson is in fact being drawn by Russians. Indeed, many of them drew 
this lesson years ago; it is one of the reasons why they sent their troops 
into Pristina in the first place.

Ever since the late 1980s, the West has tended to use its friends in Moscow 
without quid pro quo. It got habituated -- as hardliners put it sarcastically 
-- to an "easy" Russia. Expecting to have its own way, the West forgot that 
compromises were still needed, if only to preserve the political viability of 
its friends in Moscow.

The West has walked over Russians in proportion as they have been 
accommodating. It has shown respect to Russians in proportion as they have 
been hostile, obstructive, and threatening -- and willing to carry out their 
threats. 

It has been a kind of reverse behavioral training. A behavioral therapist 
rewards friendly behavior and punishes hostile behavior. The West has been 
doing the exact opposite. 

Such training, repeated time after time in the formative period of the life 
of the new Russia, is having a powerful effect. It is teaching Russians to be 
nasty to the West.

If the West wanted to make an adversary again of Russia, it could not have 
found a better strategy. And in fact, the drift back toward adversarial 
relations has gone a long way.

The belief that nastiness is rewarded and niceness punished by the West has 
become a deeply entrenched assumption in Moscow. Russian media and officials 
are interpreting the events in Kosovo in terms of this assumption. The 
niceness of Chernomyrdin is condemned as having been exploited by the West; 
the nastiness of seizing the airport is applauded as having asserted Russian 
interests and forced the West to start negotiating seriously.

The West has once again punished its friends and rewarded its enemies. 

Earlier, the West gave the same bad treatment to Andrei Kozyrev, the 
pro-Western Foreign Minister in the first years of the Yeltsin presidency. It 
used Kozyrev shamelessly and ruined him politically. It gave far more respect 
to his nastier replacement, Primakov.

This was the main formative experience of the new Russia in foreign affairs. 
It goes far toward explaining why the Russians reacted the way they did to 
NATO's war in Kosovo.

When NATO went to war, Russia went on an anti-Western binge. The West tried 
to buy off Primakov; the IMF director, Camdessus, hurried to Moscow to offer 
him a new loan. But Russian anger continued to mount. Westerners took fright 
as they came face to face with the prospect of Russia once again acting as a 
hostile nuclear superpower. They began to talk about the need for a major 
Russian role in a settlement in Yugoslavia. 

To the West's good fortune, Russians also began to take fright at the slide 
into confrontation. Yeltsin seized upon this fear to begin getting rid of 
Primakov. He put the Yugoslav question in the hands of a moderate, 
Chernomyrdin - someone with whom the West could work. 

A wiser West would have jumped onto the opportunity to reach a compromise 
deal with Chernomyrdin, validating him and Yeltsin politically. This would 
have discredited Primakov and all the hardliners in the Foreign and Defense 
ministries.

Instead, the West simply relaxed about Russia; it became LESS interested in 
compromising with Russia's concerns. In this way, it discredited Chernomyrdin 
and validated the hardliners. Military leaders -- including the ones who 
subsequently sent the troops to the Pristina airport -- accused Chernomyrdin 
of selling out Yugoslavia to the West. The Duma demanded Chernomyrdin's 
dismissal, on the charge that he had let the West use Russia.

And what did the West have to say about this? President Clinton boasted that, 
indeed, NATO was using Russia to impose its conditions on Yugoslavia. This 
made it easy for the Russian nationalists to prove their point. 

It is ironic, but Russians are coming to believe that force or pressure is 
the only language the West understands. Far beyond any damage done on the 
ground in Kosovo, the real damage lies in the lessons that Russians are 
drawing from the experience. The damage is severe.

The author, Dr. Ira Straus, is U.S. Coordinator of the Committee on Eastern 
Europe and Russia in NATO, information on which is available at 
http://www.fas.org/man/nato/ceern He can be reached at 703/521-5759, 
irastraus@aol.com

******

#5
Duma Chairman Lukin: Russian Entry to Kosovo No Error 

Milan's Corriere della Sera in Italian 
13 June 1999
[translation for personal use only]
Interview with Russian Duma Foreign Affairs Committee Chairman 
Vladimir Lukin by Fabrizio Dragosei in Moscow on 12 June: "'It Was NATO 
That Breached UN Arrangements, But There Is Not Just One Boss in World'" 
-- first two paragraphs are Corriere della Sera introduction 

Moscow -- Vladimir Lukin, chairman of the Duma 
Foreign Affairs Committe and a former ambassador to Washington, is 
certainly no "hawk." He is one of the leaders of Yabloko, Grigoriy 
Yavlinskiy's liberal party, which has always shown great levelheadedness 
throughout these months of confrontation between Russia and NATO, taking 
care to eschew nationalist-communist hysterics. 
Today, however, Lukin was in no doubt as to the blame for what was 
happening in Kosovo: "If the other side wants to go about disregarding 
the arrangements signed on the Security Council, Russia cannot but 
disagree," he said in an interview with Corriere della Sera. 
[Dragosei] So the Russian Army's entry into Kosovo is not a case of 
hotheadedness on the part of the military? 
[Lukin] By no means. Fortunately, the military here do not do as they want. 
They obey orders from their commanders, first and foremost the Supreme 
Commander of the Armed Forces, in other words, the President. 
[Dragosei] So the military adhere strictly to political orders? 
[Lukin] Sure. That is the situation, thank God. And if they fail to obey 
orders in some particular detail, they are reprimanded and called to 
order. 
[Dragosei] What has happened has undoubtedly cooled relations with NATO. Had 
there not been a prudent reaction on the other side... 
[Lukin] Pardon me, but this is no more than idle talk, as if there were just 
one boss in the world and everyone else had to jump to it. There is a 
Security Council resolution that states that an international, I repeat, 
international, security force has to be formed in Kosovo. NATO is a large 
part of it, but not the only part. Then a single command has to be 
created. That is written down, and Russia will comply with the agreement, 
but when it is asserted that NATO is the only force to handle planning 
and command, it means the intention is to disregard the resolution. As I 
see it, it means acting contrary to the agreements. 
[Dragosei] But Russia set off on its own. 
[Lukin] The United States, Britain, and other countries said they were 
moving their troops, and Russia did the same. I fail to see any problem. 
Additional talks will now be held, and everything will be cleared up. 
[Dragosei] Will the solution come from the talks in Moscow? 
[Lukin] If not today, tomorrow. Similar situations have always arisen after 
long military conflicts, after World War II as well. We must comply with 
the Security Council resolution and not behave like General Clark, who is 
appointing himself commander in chief and boss of the whole operation. 
[Dragosei] NATO continues to say that NATO must have command. 
[Lukin] Let it say what it likes. There was a poet here who used to claim to 
be lord of the universe, but that was his problem. 
[Dragosei] Is the end of the bombings a victory for Russian diplomacy? 
[Lukin] I would not say so. What matters is that there is a political deal 
that has to be honored. If this happens, we will be able to guarantee the 
refugees a safe return, if that is really what the Americans and the 
others want. However, if what they want is to conquer Kosovo, that is 
quite another kettle of fish. But I do not think so, I still do not think 
so. 
[Dragosei] Can the Bosnian pattern, with a Russian zone forming part of the 
single command, but without Russia being directly under NATO orders, be 
adopted in Kosovo? 
[Lukin] Sure, it is precisely what has to be done. Why should Russia have 
fewer rights and fewer responsibilities than the others? 
[Dragosei] How come Ivanov said last night that a "colossal error" had been 
committed and that the troops would turn back? 
[Lukin] I do not know. I do not regard it as an error. It would not have 
happened if there had been greater cooperation. A small contingent of 
ours went in. So what? I appreciate that some NATO general or other had a 
great desire to appear on television at the head of the troops. Too bad 
for him: Next time, maybe. 
[Dragosei] There was reportedly a pretty tense episode on Friday evening, 
with 
the British ready to occupy Pristina airport before the Russians. 
[Lukin] It was a very odd episode. I fail to imagine the opposite situation, 
with Russian troops ordered to prevent NATO aircraft bringing peace 
forces into Kosovo from landing. 

*****

#6
Kremlin Support 'Huge Minus' for Luzhkov 

Moskovskiy Komsomolets
14 June 1999
[translation for personal use only]
Report by Yelena Yegorova: "'As Slant-Eyed As I Am.' Luzhkov Visits 
Historic Homeland" 

Ufa -- The news that the Moscow City Duma had 
adopted a law changing the term of the Moscow mayor's and vice mayor's 
powers, found Yuriy Luzhkov in Ufa. As Moskovskiy Komsomolets predicted, 
a specific election date is missing from the final version: Deputies 
decided to insure themselves against Yeltsin deciding to dissolve the 
State Duma. Elections of the capital's mayor will henceforth take place 
in conjunction with State Duma elections, which will enable a 
considerable saving, according to the experts. However, Luzhkov himself 
seems to have no interest at all in the ups-and-downs of the election 
hurly-burly. In Ufa he has finally been able to relax. Especially since 
the suggestion that he make himself at home this time was not just a sign 
of hospitality. Luzhkov's mother was born in Bashkortostan, and although 
a visit to the village of Kalpasa did not feature in the visit's schedule 
he has not lost his links with his native land. What is more, the Bashkir 
clearly consider Luzhkov one of their own. President Rakhimov, answering 
journalists' questions about the kind of relationship he has with the 
capital's leadership, admitted with delight: It is an extremely cordial 
relationship since he is as slant-eyed as I am. 

To confirm these words the mayor immediately donned a skull cap and 
asked for some koumiss. Other Bashkir "delicacies" -- oil and honey -- 
gave rise to a fresh flood of nostalgic reminiscences in his heart. "I 
did after all graduate from Moscow's Institute of Oil and Gas," Luzhkov 
reminded participants in the Ninth International Congress "New High 
Technologies in the Oil and Gas Industry," which took place in Ufa 8 
through 12 June, however the knowledge acquired at his alma mater has 
been well and truly forgotten: In his speech the mayor spoke far more 
about bee keeping than oil extraction. So the gift from the congress 
organizers -- an impressive pot of Bashkir honey -- was highly opportune. 
It turned out that Luzhkov's personal farm is growing stronger day by 
day. The number of bee hives has reached 47 and any day now the Medovyye 
Luzhki apiaries will switch to industrial-scale production. However, the 
mayor is already unable to consume the current 50 kg on his own: He has 
to give it to everyone in succession and also send seven large canisters 
to Moscow's kindergartens. New technologies are doing fine. The bee 
keeping mayor has invented a huge bee hive which he threatened to present 
to the public as soon as he sorts things out. 

However, there was nonetheless a fly in the ointment. While in Ufa Luzhkov 
could not help but remember his previous visit in 1996 during Boris 
Yeltsin's election campaign. It is, incidentally, said that the 
photograph for the renowned poster entitled "Muscovites have made their 
choice" was taken in Bashkortostan. The Kremlin has evidently not 
forgotten this either. While the Moscow delegation was inspecting a new 
Ufa mosque, which has been lightheartedly called the Tulip Mosque, Chief 
of the Presidential Staff Voloshin stated that there is no war between 
the Kremlin and Moscow's mayor and the president will back Luzhkov's 
candidacy in the coming election just as he did three years ago. The 
Kremlin has by and large gone for broke. The question is whether Luzhkov 
himself wants this now. It is no secret that in the current situation the 
president's support is a huge minus rather than a plus. Right-wingers and 
left-wingers are shying away from the friendly embrace of the "family," 
rightly being afraid of compromising themselves once and for all in 
voters' eyes. On the other hand, Luzhkov cannot rebuff the hand extended 
from behind the Kremlin wall since this would immediately change the 
emphasis in the political confrontation: Instead of being the injured 
party he becomes the person doing the injuring. 

...Moscow's mayor left Bashkortostan in deep thought not so much for the fate 
of our homeland as for his own fate. There is one good thing: Thanks to 
Independence Day and the days off that coincided with it he has a whole 
three days' grace. In this time just about anything could happen in Moscow. 

******

#7
Shares-for-Loans Deals Viewed 

Rossiyskaya Gazeta 
9 June 1999
[translation for personal use only]
Article by Yekaterina Borisova and Tatyana Degtyareva: "The 
Privatization Train Left the Station Along With the Money" 

Time--Move On! 

If the state wishes to file a protest against the pledge 
auctions that took place on 27 December 1995, the three-year term of 
limitation expires in August. 

At first glance, it is doubtful that the authorities would 
engage in such a procedure at this time, considering its potential 
negative political and economic impact on the country and around the 
world. On the other hand, a number of analysts believe that now is 
the most appropriate time for commencing such a procedure. They 
believe that if such an action is successful, the positive effect (a 
sharp increase in revenues for the country's treasury) could be much 
greater than the negative consequences. 

Law And Order 

The issue of reestablishing state ownership of enterprises 
that have strategic importance for the country's economy has been 
repeatedly discussed by the power circles. For example, in February 
1999 the former first deputy chairman of the government, Yuriy 
Maslyukov, made the statement that there were no violations in 
conducting pledge auctions and the shares of stock in enterprises 
were "under the rightful ownership of others." Only a few months 
later he made another statement: If the new property owners manage 
it poorly, the state could reacquire such property. 

However, no actions followed such statements on a possible 
return of property. Therefore, a number of analysts came to the 
hasty conclusion that the state's legal position on the issue was 
very weak. 

In the meantime, according to experts, only "political will" 
is needed to reevaluate the results of pledge auctions, and the rest 
will fall into place. 

In order to understand the basis for such a position, it is 
necessary to examine the history of pledge auctions. In 1995 the 
government faced a two-fold task: increase budget revenues as a 
result of auctioning state shares of stock in a way that would not 
involve actually selling the shares. Therefore, at that time it was 
believed that in order to receive funds, the state shares of stock 
could be pledged and credits could be obtained using such pledges as 
collateral. The state's hands were free. The pledges could be 
returned if social protests arose. However, even at that time it 
became obvious that there would be no money to repay the 
loans. 

Cast of Characters 

On 30 March 1995, at a meeting of the government, ONEKSIMbank 
President Vladimir Potanin suggested that a bank consortium be 
created to assume management of a considerable portion of the 
state's shares in privatized enterprises, and that such a consortium 
would provide the government with credit in the amount of several 
trillion rubles. Prime-Minister Viktor Chernomyrdin and first Vice- 
Premiers Anatoliy Chubays and Oleg Soskovets approved the 
initiative. The consortium was comprised of the Capital Savings 
Bank, Alfa-bank, Russian Credit, and AvtoVAZbank. A parallel 
consortium headed by Inkombank was also being created. 

It was assumed that upon conducting negotiations with the 
government, the banks would receive shares of stock in the most 
interesting enterprises, and in return would provide a loan on 
preferential terms equal in value to the shares received. In 
addition, the decision was made that a tender would be conducted 
among commercial banks for the right to participate in managing the 
state-owned shares of privatized enterprises. This was the birth of 
pledge auctions... 

On 31 August 1995 the President signed the Edict "On the 
Procedure for Pledging in 1995 Shares of Stock in Federal 
Ownership," and later the State Property Committee published the 
regulations on conducting auctions for the right to enter into loan 
and pledge agreements and agreements on federally owned shares of 
stock and commissions for the purposes of securing revenues for the 
federal budget in 1995 generated from the use of state property. 
Moreover, the government determined a list of enterprises designated 
for pledge auctions. The first auction was the sale of shares of 
stock in the Surgutneftegaz company on 3 November 1995. It was 
followed by Severo-Zapadnoye Parokhodstvo [North-West Shipping Line] 
(joint-stock commercial bank MKF), the Russian joint-stock company 
Norilskiy Nikel [Norilsk Nickel] (ONEKSIMbank), Sidanko (MFK), 
Novolipetskiy Metallurgicheskiy Combinat [Novolipetsk Metallurgical 
Plant] (MFK), Murmanskoye Parokhodstvo [Murmansk Shipping Line] 
(Menatep), Yukos (Menatep), Mechel (Imperial), LUKoil (Imperial), 
and others. 

Profits and Losses 

The government managed to fulfill the majority of budget tasks 
on revenues from privatization and, according to some estimates, 
received $780.455 million. However, some analysts believe that by 
pledging the shares of stock, the government acquired credits of its 
own money. All the aforementioned banks that participated in the 
pledge auctions were to some extent authorized agents of the 
government and handled various accounts of ministries and agencies. 
This means that the banks that handled the budget funds of state 
structures in their accounts used the funds from such accounts to 
acquire the shares of stock. In other words, the money was simply 
reshuffled from one pocket to another. 

In the meantime, beginning in 1995 experts have been warning 
the government that the aforementioned transactions could be legally 
found invalid for a number of reasons. First, the President's edict 
did not stipulate any mechanism for repaying the loans, with the 
exception of selling pledged shares of stock, and did not establish 
a specific timeline for repaying the loans, which was repeatedly 
postponed. However, it was mentioned that the government was given 
the loan for a period of six months. Second, the banks that 
participated in the auctions almost immediately received actual 
ownership rights on the shares of stock, although the Russian law 
stipulated the transfer of ownership rights only after a purchase 
agreement was concluded or upon nonperformance of the pledge 
obligations. Moreover, the same legal persons acted as participants 
in the auctions, resulting in a coordination of their actions and 
the purchasing of shares of stock at a reduced price. However, it 
seems that the most important objection was based on the fact that 
according to the Civil Code, sales of pledged property were possible 
only by court order, and not upon concluding commission agreements, 
as stipulated by the President's edict. The Accounting Chamber and 
General Procuracy also found numerous violations of the law. 

In one of their latest decrees the State Duma deputies 
demanded a revocation of the President's Edicts "On the Procedure 
for Pledging in 1995 Shares of Stock in Federal Ownership" and "On 
the Term of Sale of Federally Owned and Pledged Shares of Stock in 
1995." In the meantime, they proposed that the government initiate 
legal procedures to arrest such property. 

In the Face of External Threat 

The issue of initiating claims on finding pledge auctions 
invalid again became urgent after last year's financial crisis that 
resulted in the insolvency of the banks that owned "pledged" shares 
of stock. 

The first warning of the need to "dump" the shares was voiced 
in November 1998 when the term of limitation expired on the 
moratorium on insurance payments against credits that used pledged 
securities as collateral, on payments against urgent hard-currency 
contracts, and on repaying nonresident loans. As a result, the 
threat became real that foreign creditors would demand the 
restitution of losses using liquid assets of Russian commercial 
banks. 

For example, ONEKSIMbank, Menatep, SBS-Agro, and other banks 
owned shares of stock in enterprises that were strategically 
important to national security. Such enterprises included Norilsk 
Nickel, the Sidanko joint-stock company, the Yukos joint-stock 
company, the Tyumen Oil Company joint-stock company, the Sibneft 
joint-stock company, and others. Foreigners' claims on such assets 
could have resulted in complete control on the part of nonresidents 
over such enterprises. 

The "oligarchs" began "dumping" their assets into so-called 
bridge-banks (that serve as a bridge for moving capital to a safe 
place) established by 1999, leaving empty balances behind, since 
pressure was being applied on them, on the one hand, by Western 
creditors, and on the other hand, by Russian legal and physical 
persons. Menatep and ONEKSIMbank created Rosbank, which already 
owns Norilsk Nickel and Yukos. New signs have been put on the 
branches of Russian Credit and SBS-Agro, where the property of such 
banks is being transferred quickly. 

A large operation is being conducted with the help of bridge- 
banks similar to the era of pledge auctions. Such financial 
operations can only be described as embezzlement, when one bank 
absorbs all the debts, while another legally independent bank 
inherits real liquid property. Such a problem should be resolved 
immediately, as long as the government can apply pressure on such 
banks. We would like to reiterate that if the government wishes to 
protest the results of the pledge auctions, the term of limitation 
expires in August. There are legal precedents, as this has been 
done with commercial pledged shares of stock in the state-owned 
company Purneftegaz, and such an approach can be used again. The 
stakes are high. 

More than 70 percent of state-owned enterprises were 
privatized in the period 1992 through 1998. However, all the sales 
generated only $20 billion, which was immediately transferred to the 
West as debt payments. While at the beginning of privatization, 
when foreign banks were permitted to participate in auctions, the 
500 largest enterprises worth at least $200 billion were sold off 
for only $7 billion. For example, Norilsk Nickel (which is worth 
tens of billions of dollars and recently generated up to $3 billion 
in annual profits) was sold for only $170 million. 

In the meantime, according to experts, the state might not 
have to repay the loans, if law enforcement agencies can prove that 
budget funds were used to purchase the shares of stock. Although 
the procedure for returning pledged shares could be lengthy, it is 
possible to accomplish if there is the will to do so. 

Your correspondents do not advocate changing history and 
nationalizing privatized property. There is no doubt that 
"oligarchs" who are not interested in such turn of events would 
create a commotion in the mass media organizations under their 
control which could easily cause another government crisis. 

One way or another, the authorities have very little time to 
find an answer: Will they wave goodbye to the "departing train" of 
pledge auctions, or will they try to find the strength to put the 
"oligarchs" in their place. If this is accomplished, $6-8 billion 
that is greatly needed by the Central Bank to pay off foreign debts 
would return to Russia. 

*******

#8
Date: Tue, 15 Jun 1999 
From: "Andrei Liakhov" <liakhova@nortonrose.com> 
Subject: Legal Revolution in Russia (Re. 3337 Sarah Carey/Law and the Market 
Economy)

By way of introduction a word about what I do:

I'm currently a senior assistant in the corporate finance department of a
top 5 City of London Law Firms. Obviously because of my background the
majority of work I do is CIS related. I have a doctorship decree in Law from
the Academy of Sciences of the Russian Federation, Honorary Doctorship of
Law from Karlov University in Prague, Honorary Degree from McGill University
in Montreal and a Phd. in Law from Vilnius University in Lithuania. I am
qualified to practice law in Russia, Lithuania, Bulgaria and will sit my Law
Society Exams this August. I hope this is sufficient enough for the JRL
readers to ascertain that I know what I'm talking about without listing all
the deals I've worked on in the last 6 months.

I have read with interest the recent posting on the "legal revolution" which
occured in the Russian Federation since 1991. Before I proceed to comment on
the thesis of this article itself let me point out to certain factual
mistakes of the article:

1. Neither Stalin (!!) nor Kruschev instituted significant legal reforms. If
the author is referring to the 1936 USSR Constitution - it's widely
aknowledged that the document per se was fine but its enforcement was at
best non existant (to argue the contrary may insult the memory of c.3
million innocent people who died in Stalin's camps). As to Kruschev - his
principal thesis (see Materials of the XXI Congress of the CPSU) was that
with the development of socialism the state will gradually die out and the
role of the law will decrease and the law itself will transform into
communist "moral code". In practice this resulted in substantial reduction
of legal training and legal studies until at least mid 70ies.
2. What is referred to as Gorbachev initiatives was in fact the revived
Andropov Plan (see Materials of the July 1983 CPSU CC Plenum) which set the
wheels in motion. 
3. Even before the Joint Venture Regulations (and that was not a Decree but
a Government Regulation) there was a relatively small but quite influential
private sector traditionally concentrated in Siberia (gold mining
cooperatives, fur traders, private diamond cutters, etc.) and the Caspian
(fishing cooperatives) which operated on the basis of the laws which were in
force long before 1987. 
3. The first RSFSR Law On Concessions dates back to 1922 (if my memory's
correct) and companies like Ford, Standard Oil, Oxxidental Petroleum and
others operated substantial "concessions" (called Joint Ventures after 1987)
primarily in the oil and gas and machine building sectors of the economy
roughly until early '30ies and some (Oxxidental's for example) survied even
until early 80ies. Concessionaries were given substantial tax reliefs and
other benefits. As a personal remark - The 1987 Regulation was largely
modelled on the 1922 Law as the drafting group did not have any other
precedents to work from.
4. "Khozraschet" was introduced by the Decision of the Government of the
USSR in 1966 as a part of the Premier Kosugin's reforms and had different
forms (brigadnaya arenda, podriad, etc) and not during Gorbachev period.
5. State control of foreign economic activity was not abolished until the
dissolution of the USSR in 1992.
6. Freedom of contract under 1964 Civil Code was only legally limited in
respect of the state orders and certain types of goods (like weapons or
drugs). 
7. The 1995-1996 Civil Code does not differ that much from its predecessor
as it only reflects the changes related to the switch from centrally planned
to market oriented economy. It would be an overstatement to claim that the
changes it introduced were revolutionary. Both these documents (as well as
much of Continental Europe's private law) are essentially based on Roman
Civil Law principles and the most perfect implementation of these - 1804
Code of Napoleon.

The above are aimed to set the historic bit right. The point I'd like to
make here is very simple - development of Soviet and subsequently Russian
Civil law was not revolutionary - it (i) contained most elements necessary
to make a switch to market economy quite long time ago (albeit in an
embrionic form); (ii) merely followed the development of socio-economic
system; and (iii) was thus evolutionary rather than revolutionary. 

As to the current state of the Russian legal system:

1. I will not repeat the discussion about almost complete lack of minority
shareholders protection mechanism which the majority of JRL readers could
follow some time ago. The 1996 Joint Stock Company Law falls very far short
of granting any effective protection to minority shareholders.
2. Although Civil Code and other Laws are important today in Russia but
every lawyer who at least once was involved in a transaction with Russian
element knows that real law of the land will be found in endless
regulations, instructions, letters, telegrams, orders explanations and other
similar "normative documents" of numerous Ministries, Committes, Departments
and other executive bodies which very often directly contradict these laws.
Furthermore, another very important source of the law of the land are rules
of various regional bodies which also quite often completely disregard
Federal Legislation. The above mentioned groups of rules often make the best
intended provisions of Federal Laws completely irrelevant. In addition the
"Parade of Sovereignities" of the late 80ies - early 90ies have generally
created in the regions circumstances in which breaches of federal laws are
considered normal. 
3. Russian IP (Intellectual Property) legislation conforms to the
international standards at least since early 70ies (when the USSR joined
International IP Conventions) and the ability to protect Russian trademark
has nothing to do with the "legal revolution".
4. Creation of the system of laws however perfect per se (see 1936 USSR
Constitution which contained a much better protection of human rights than
any US law - but it does not mean that that was the case!!) does not mean
that all proper legal conditions for business development are in place. No
law is worth paper it is written on unless there is an enforcement mechanism
behind it. And such mechanism is almost non existent in Russia at the
moment. Endless experimentation with the court system, bailiff service,
other enforcement mechanisms, wide spread corruption and protectionism (or
"blat"), atavisms of legal nihilism of the late 60ies, have caused the
Russian Court System to become ineffective and unworkable. Swift changes in
socio-economic system made judges uncomfortable trying disputes the nature
of which very often they do not understand. 
5. International aid programms to reform the judiciary are largely self
centered (i.e. fail to understand the nature of Russian judicial system)
over burecratised and as a rule fail to produce any coherent results. 

The point I'm trying to make here is that although an immense amount of work
has been done since 1992 both the system of laws and the enforcement
mechanisms are still contradictory, ineffective and require a major overhaul
and it would be much too early to talk about "revolution" of the Russian
Legal Sytem or creation "of legal edifice to ensure a free market economy". 

Notwithstanding all the above Russia is a facinating place for lawyers at
the moment - so many things are being done for the first time and we are
actually setting the precedents!!!

Apologies for taking so much JRL's space 

*******

#9
From: dfilipov@glasnet.ru (David Filipov)
Date: Wed, 16 Jun 199
Subject: the dump in all of us

My mom came to Moscow to visit Lena, Alex and me a couple of years ago. 
She said, "Son, you live in a dump."
I said, "No mom, I do not." 
Little did I know then that one day, we would be having this conversation
on Johnson's Russia List.

*******

#10
Russian defence needs cuts - think tank
By Abigail Schmelz

STOCKHOLM, June 16 (Reuters) - Russia's military should sacrifice quantity
for quality and orient itself towards short regional conflicts instead of
large-scale war, a defence research group said on Wednesday. 

In its 1999 yearbook, the Stockholm International Peace Research institute
(SIPRI) said these measures were part of a much needed overhaul of Russia's
defence made more pressing by the country's financial problems. 

Better equipment, improved standards of living and training as well as more
efficient maintenance, command and information gathering should be procured
at the expense of slashing numbers, a report on Russian military reform in
the yearbook said. 

It also said strategic planning should be redirected to the Transcaucasus
and Central Asian regions and the Far East, away from traditional global or
Western European theatres. The highest priority should be given to the
country's nuclear arms. 

Reform was needed for national security, but also to avoid a dangerous
domestic situation and to establish civilian control over the armed forces
and the country's defence policy. 

Russian armed forces would probably not need to fight a major war in the
near future but the principal threats in the next 5-10 years were local
conflicts, the report said. 

Afghanistan, Pakistan, Turkey and to a lesser extent Iran could present a
security problem either separately or in some combination during the next
10-20 years, although any confrontation was unlikely to be in united or
direct. 

A threat might materialise through their support of regimes, movements or
policies in the Transcaucasus and Central Asia directed against Russia or
by encouraging ethnic and religious separatism in the Russian northern
Caucasus. 

"Here, too, Russia feels much less certain than it did. Iran and Turkey
combined have armed forces numerically equal to Russia's and together with
Pakistan 50 percent more," it said. 

Money allocated for national defence, planned at $5 billion for 1999, was
probably not enough. 

"Maintaining the existing armed forces of 1.2 million men with huge
stockpiles of arms and equipment while radically reforming, reducing and
reorganising them -- all for $5 billion per year -- is an unprecendented
challenge," it said. 

******