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Johnson's Russia List


March 17, 2000    
This Date's Issues: 4173 4174 4175 4176


Johnson's Russia List
17 March 2000

[Note from David Johnson:
1. Reuters: Pollster Says Liberals To Back Putin. (Igor Klyamkin)
2. AP: Six Charged in Russia Bombings.
3. Launching of Transition 99 report in Russian. (United Nations Development Programme)
4. Abe Brumberg: message for correspondents.
5. Murray Feshbach: Re 4170-Population Decreases.
6. Ray Thomas: RE: 4170-Putin berating officials.
7. Robert Bruce Ware: Response to Peter Heinlein  JRL # 4170.
8. New book: Transition Economies and the World Trading System: Risks, Opportunities and Obligations.
9. Summary of articles in March-April Foreign Affairs.
10. Foreign Affairs: Lee Wolosky, Putin's Plutocrat Problem.]


Pollster Says Liberals To Back Putin

MOSCOW, Mar 16, 2000 -- (Reuters) Voters planning to back Acting President 
Vladimir Putin in the March 26 presidential election expect him to conduct a 
liberal, democratic course after his likely victory, a top Russian pollster 
said on Thursday.

"There is one remarkable thing about the expectations of Putin's electorate," 
said Igor Klyamkin, who heads the Independent Institute of Sociological 
Analysis. "Putin is mostly backed by pro-Western voters who want Russia to be 
a democracy, (have) proper human rights, high living standards and private 

Klyamkin told Reuters 58 percent of people interviewed in his latest opinion 
poll said they were ready to vote for Putin if he openly committed himself to 
such a course.

"More than 75 percent of potential voters expect Putin to strengthen ties 
with the West," he added.

Putin, former head of the FSB domestic security service, was plucked from 
political obscurity last August by then President Boris Yeltsin who made him 
prime minister and named him as his preferred successor. Yeltsin resigned on 
New Year's Eve.

Putin owes his commanding lead in the polls to his tough conduct of the 
military campaign in rebel Chechnya and to his pledge to restore order in 
Russia after years of stop-go reforms, rampant corruption and tumbling living 


Leading Russian pollsters have noted that Putin's popularity has proved 
surprisingly stable, unaffected even by rising casualties in the Chechen war. 
According to a poll conducted by the respected VTsIOM agency on March 11-13, 
Putin's support stood at 58 percent compared with 21 percent for his nearest 
rival Gennady Zyuganov. The other 10 candidates had less than five percent 
support each.

However, another leading pollster, ROMIR, showed a sharp dive in Putin's 
popularity to 50 percent on March 11-12 from 60 percent a week ago.

Klyamkin attributed this to a change in polling technique rather than to any 
real change in the voters' mood. He said the figure of 50 percent was 
probably closer to reality. Klyamkin said the VTsIOM poll and earlier ROMIR 
surveys were conducted among people who had definitely decided to vote, while 
the latest ROMIR poll questioned all potential voters. VTsIOM's deputy 
director, Alexei Grazhdankin, gave a similar explanation for the discrepancy 
at a news conference on Wednesday.

Klyamkin said only a low turnout in the election could threaten Putin's 

Putin has vowed to boost economic reforms and uphold liberal freedoms but he 
has revealed few details so far. Some liberals fear the former KGB spy is 
only paying lip-service to democratic values and that he plans to tighten 
control over the media.

Putin's camp, for its part, is keen to avoid Putin becoming too closely 
identified with any one group, liberal or conservative, so that he appeals to 
the widest range of voters.


Klyamkin said Putin, 47, could win extra votes if he spelled out his liberal 
economic and political credo more clearly.

"Some of his current electorate, say around 10 percent, would leave him," 
Klyamkin said. "But another 20 percent, who now support other liberal 
candidates, would join him."

"If Putin stopped maneuvering as he does now and proclaimed a definite 
pro-Western course his electorate would increase by 8-10 percent and become 
better shaped," Klyamkin said.

But the pollster believes that even with his current support Putin had a good 
chance of winning a simple majority of votes in the first round, as required 
for an outright victory. "Putin is 100-percent sure to win in the first round 
if nothing outrageous happens," he said, adding that only a low turnout of 
below 55 percent could threaten his victory.

The Communists are believed to benefit most from low turnout polls because 
their mostly older voters were more disciplined.

Klyamkin said he believed democratic sentiment in Russian society had changed 
little since the late 1980s when the population backed Yeltsin's struggle 
against Communism.

"It is wrong to assume that the romantic period is over," he said. "It may 
have gone for the political elite, but society still expects Putin to do what 
Yeltsin has failed to."


Six Charged in Russia Bombings
March 16, 2000

MOSCOW (AP) - Six suspects have been charged in connection with deadly 
apartment building bombings in Moscow and two other Russian cities this fall, 
officials with Russia's Federal Security Service said Thursday. 

The explosions, which killed some 300 people and shocked Russia, have been 
blamed on rebels from breakaway Chechnya. They helped trigger the Russian 
military offensive in the republic. 

High-ranking Federal Security Service officials did not identify five of the 
six suspects Thursday. But they reiterated their claim that the bombings have 
been traced to Chechnya. 

The explosives used in the blasts were produced in the Chechen city of 
Urus-Martan, Nikolai Sapozhkov, deputy chief of the agency's investigations 
division, told a news conference. He said a cache of the same type of 
explosives was discovered after the city fell under Russia control during the 
current Chechnya war. 

Five of the six suspects have been charged in absentia, Sapozhkov was quoted 
as saying by Russian news reports. The sixth suspect, identified as Ruslan 
Magayayev, is being held in Moscow's Lefortovo prison, he said. 

Another senior FSB official, Alexander Shagako, told the news conference that 
the secret service had prevented at least six other major terrorist attacks 
in Moscow, the ITAR-Tass news agency reported. 

Some Russian media have speculated that the bombings were arranged by the FSB 
itself to ensure public support for the Chechnya war. Russia's acting 
President, Vladimir Putin, dismissed the allegations as ``delirious 
nonsense'' in an interview last week. 

Putin is widely popular because of his tough handling of the Chechnya 
offensive and is seen as a shoo-in in Russia's March 26 presidential 


Date: Wed, 15 Mar 2000 
From: "Juliette El Hage" <>
Subject: Launching of Transition 99 report in Russian 

Robert McIntyre suggested that I give you this piece of information:

The United Nations Development Programme is launching tomorrow its
regional report on the Human Cost of transition, "Transition 99" at the
CIS inter-parliamentarian meeting taking place in St. Petersburg (16-18
March 2000). The meeting organised jointly by UNDP and the Department
for Economic and Social Affairs of the UN is one of the gatherings
bringing together policy makers, researchers and donors to follow-up on
the declaration reached at the World Summit for Social Development in
Copenhagen in 1995.

Although the report has been launched already in August 1999, this is
the first time that it will be launched in Russia in the Russian
language and for the CIS audience. At the same meeting, another UNDP
report entitled "The Shrinking State" will be also distributed in
Russian and discussed. Although the Shrinking State report was
prepared in 1997, its messages are still relevant. The report
specifically argues that an efficient, legitimate market economy
requires a strong government, which must have accountable institutions
and procedures, as well as a network of regulations that balance the
concern for economic efficiency and social equity.

I am attaching the summary of the Transition 99 report for those
interested, together with some press releases which were used during the
launching of the English version of the report for those who are
interested to know more about the report. [DJ: not reproduced here.]

Information and requests for copies of the reports can be directed to
UNDP office in Bratislava to the attention of: Juliette Hage or Robert
McIntyre at their respective emails:
or to the UNDP office in Moscow, attention Ms.

Many thanks and best regards,
Juliette Hage


Date: Thu, 16 Mar 2000
From: abe brumberg <>
Subject: message for correspondents

To my correspondents. A number of people have written to me in response to
my review "A More Humane Mikado." I replied to some of the letters, but
uhappily my computor was struck by a virus that wiped out the entire file.
(Some may see God's hand in this...) May I ask those of you who haven't
heard from me to write again, so I can acknowledge your letter? Thank
you--A. Brumberg


Date: Thu, 16 Mar 2000 
From: "Murray FESHBACH" <> 
Subject: 4170-Population Decreases

Two typos in Population item: First line, says 2115, should read "2015" as
clear later in item; the other is the figure for "145.5" is for 1 January
2000 not 1 January 1999.

Sokolin is using the medium projection, but the "worst case scenario"
already is optimistic given latest information on total fertility rates for
last several years. Likely even 130 is thereby too high--without repeating
my point made in earlier comments. His forecast for the whole year 2000,
as not promising, shall we say, would only reinforce this expectation.


From: (Ray Thomas)
Subject: RE: 4170-Putin berating officials.
Date: Thu, 16 Mar 2000 

You report that Putin berated officials over the failure to pay out millions
of dollars in aid to Chechnya designed to ensure farmers can plant crops
this spring.

This must seem a strange occurence to many Western observers. It seems
difficult to imagine that a US President would publicise his failure to
control his own governmental machine. In Britain the doctrine of
ministerial responsibility dominated for many decades. A minister was
responsible for what happened in his or her department. If there was a
failure by the deparment then a minister should resign. 

Pultin is both prime minister and president. So how should Putin's
confession of administrative failure be interpreted? Is it a public
relations exercise designed to show that Putin is doing his best to restore
the havoc he has wrought in Chechnya, but is surrounded by incompetents?

Or is it the beginnings of the adoption by Putin of the role of Tsar? Does
it indicate that if elected as President that he Putin continue in the
Yeltsin tradition of firing prime ministers every six months or so, blaming
the continued impoverishment of the Russian people on other people in
government and denying any personal responsibility??


Date: Wed, 15 Mar 2000
From: "Robert Bruce Ware" <> 
Subject: Response to Peter Heinlein  JRL # 4170 

Robert Bruce Ware
Department of Philosophical Studies
Southern Illinois University Edwardsville
I'd simply like to ask Mr. Heinlein, with all due respect, exactly how much
time he spent in Dagestan between the time when things began to get really
dangerous in 1997 and the time when Russian troops made the Republic safer for
all concerned at the beginning of August 1999?.   I'd like to ask him how much
time he has spent talking to Dagestanis during this period.  I'd like to ask
him exactly how many interviews he has done with Dagestanis who have been held
hostage in Chechnya?  With exactly how many members of their families has he
spoken?  And what, exactly, did the VOA do directly on the ground in Dagestan
between 1997 and August 1999?
I hope that Mr. Heinlein will respond promptly and that he will do so in these
pages.  And I hope that his response will reveal that he has had considerable
direct, on the ground, experience in Dagestan.  When Ira Straus and I wrote
commentary concerning "Media Bias on Chechnya" (Christian Science Monitor,
March 15, 2000) we were hoping to encourage journalists, such as Mr. Heinlein,
to do some work in Dagestan.  If Mr. Heinlein truthfully can report that he
been doing that work, then I will be the first to congratulate him.
But I have to confess that, as I await Mr. Heinlein's reply, I'm a bit
concerned about the fact that his response to our commentary appears to
vivid illustration of precisely that journalistic incompetence that our
commentary addresses (and that Ira considers in the JRL contribution
immediately preceding Mr. Heinlein's).
For example, Mr. Heinlein rehearses some common misconceptions about
Dagestanis.  People that know just a little bit about Dagestan are generally
impressed that there are 34 ( more than 30, Mr. Heinlein) ethno-linguistic
groups and yield to the assumption that there is neither an overarching
Dagestani identity nor numerous general views that cut across ethnic
divisions.  The falsehood of this assumption is obvious to anyone who has
much time in Dagestan.  Dagestanis have a nested idenity: family, tuhum,
djamaat (a villlage or a historically connected group of villages), and ethnic
group.  For some Dagestanis, the Dagestani identity precedes ethnicity in its
significance, for others it follows ethnicity.  But all Dagestanis identify
strongly with the rich multicultural traditions that embrace them all.  
And, Mr. Heinlein, there are indeed many views that are held so widely by the
people of Dagestan as to be virtually universal.  Among such views are the
bitter anti-Chechenism that has overtaken Dagestan during the last three years
and the widespread support for federal troops in their current campaign in
Chechnya.  Anyone, who recently has spent much time in Dagestan would be aware
of this.
Mr. Heinliein indulges in a strawman argument when he falsely asserts that we
blame the Chechen gangs for all the problems of the region.  Unfortunately,
however, the Christian Science Monitor did not have space for nearly all of
blame that they deserve.  That is why we were hoping that Mr. Heinlein and
of his colleagues would begin to consider the matter more deeply in their own
Nor do we question the intentions of human rights organizations.  We do
question the objectivity of their methodology and their results.  If we're
wrong about this, Mr. Heinlein, then just tell me, promptly and in these
about the human rights organizations that have interviewed the 32,000
Dagestanis who were displaced by the invasions of August and September, and
tell me exactly how many of their reports have been carried by your colleagues
at VOA?   Please tell me how many human rights organizations have interviewed
any of the many Dagestani hostages who were held under brutal captivity in
Chechnya during the last three years?   Exactly how many of those reports did
VOA carry?
Mr. Heinlein's remarks concerning the invasion of Dagestan indicate that he
have missed my lengthy analysis of these events that was carried in JRL #4092,
February 6,  2000 ("Was There a Kremlin Conspiracy in the Caucasus").  Perhaps
he also missed Ira's analysis of the same events in JRL #4084, February 2,
("Real Conspiracies and Wild Conspiracy Theories").  With the hope that Mr.
Heinlein missed these analyses because he was busy in Dagestan at the time, I
will send a copies to him directly, and will look forward to his response. 
Finally, I am grateful to Mr. Heinlein for permitting me an opportunity to
address a fallacious personal attack
that was directed against me once before in these pages (11/11/99): 
Abosolutely none of my information regarding the Northeast Caucasus is based
upon anything that comes either from official Russian sources or from the
Russian news media.  One hundred percent of my information on Dagestan comes
from my personal experience on the ground in Dagestan and from my constant
communication with many Dagestanis in Dagestan.  In particular, none of my
analysis of the invasion of Dagestan is based upon anything from any official
Russian source or from any Russian news agency.  My analysis of the
invasion of
Dagestan is based entirely upon my conversations with Dagestanis, some of them
well-placed, who were on the ground in Dagestan during the invasions of of
August and September 1999.  The views that I have expressed during recent
months in these pages have been mercifully independent of both official
sources and the Western media.  But I, for one, am prepared to lend greater
credence to VOA reports following Mr. Heinlein's account of his extensive
personal experience in Dagestan.   

Date: Wed, 15 Mar 2000 
From: Martina Buchalova <> 
Subject: Transition Economies and the World Trading System

If anybody would be interested to assist with or provide advice on the
publication of the book described below, please, contact me at I will be happy to provide more information about
the authors, texts, etc. upon request. Thank you.

Martina Buchalova
Project Manager
CIS and Eastern Europe
Centre for Trade Policy and Law CTPL), Ottawa, Canada

"Transition Economies and the World Trading System: Risks, Opportunities
and Obligations"

The book is multi-authored. The authors are primarily Canadian
professionals and academics in the field of international trade law and

Almost all transition economies have considered membership in the World
Trade Organization (WTO) an important step toward integration into the
international economic system. The book provides a primer on the structure,
operation and basic obligations resulting from WTO membership. More
importantly, however, it provides a comprehensive and accessible analysis
of key issues of international trade law and policy for transition
economies, both those which have already become WTO members and are in the
process implementing their trade obligations and that larger group,
including China and Russia, which are seeking to become members. The book
will be of interest to a broad range of readers including foreign
governments, private organizations, universities, and international agencies.

It provides an accessible overview of WTO obligations in key areas such as
the international trade in goods, trade in services, and intellectual
property rights. It specifically identifies both challenges and
opportunities for transition economies related to their increasing
participation in the international trading system and it can serve as an
invaluable education tool. The book draws on the varied experience of key
transition economies in Europe and Asia to identify issues common to
transition economies. The book is an essential resource for transition
economies seeking membership in the international trading system and a
necessary guide to countries in the process of implementing their
international trade obligations. 

The most notable competing texts are as follows:

World Bank: "WTO Accession for Countries in Transition" by Constantine
Michalopoulos (June 1998)

World Trade Organization: "The Stability of Trade Policy in the Countries
in Transition and their Integration into the Multilateral Trading System"
by Zdenek Drabek (May 1997)

World Trade Organization: "Financial Services and the WTO: Liberalization
in the Developing and Transition Economies" by Aaditya Mattoo (March 1998)


See Foreign Affairs
Summary of articles in March-April 2000 issue

Putin's Plutocrat Problem 
By Lee S. Wolosky 
Russia's popular new president is better positioned than his predecessor was 
to enact needed reforms. But all of Vladimir Putin's efforts will come to 
nought unless he can do what Boris Yeltsin never did: rein in Russia's 
plutocrats. These ruthless oligarchs have fleeced Russia of staggering sums, 
seizing control of its oil industry -- one of the world's largest -- in the 
process. Through payoffs and intimidation, they have insinuated themselves 
into electoral politics and virtually immunized themselves from prosecution. 
None of Russia's problems -- neither its crippled economy, nor its emaciated 
infrastructure, nor its wheezing democracy -- will be solved while the robber 
barons retain their power. America cannot afford to sit on the sidelines any 

RUSSIA'S RUINOUS CHECHEN WAR Rajan Menon and Graham E. Fuller
The Russian Federation is unraveling, and its war against Chechnya shows why. 
Moscow blames Islamist terrorists for the trouble there. But in doing so, it 
ignores Russia's deeper afflictions. Russia has forced disparate ethnic 
groups to live together for decades but has proven inept at governing its 
wobbly empire. Now the fighting in Chechnya is leading dissatisfied 
nationalities to rethink their options -- and their dependence on Russia. 
Chechnya was the first to rebel. It will not be the last. 
Press Release 

Only one of Russia's 89 provinces has bolted -- so far. But the West must 
face a disturbing new dynamic: the Kremlin's weakening grasp on the entire 
Russian Federation. More and more, Russia's restless regions are asserting 
themselves in domestic and international affairs, whether Moscow lets them or 
not. The center will probably hold. But America and its allies must learn to 
contend with a larger cast of actors who are both unfamiliar and unruly. 

Book Review
Frances FitzGerald's new book demolishes the myth that Ronald Reagan's 
beloved Star Wars program was the straw that broke the Soviet camel's back. 


Foreign Affairs 
March/April 2000
Putin's Plutocrat Problem
By Lee S. Wolosky
[for personal use only]
Lee S. Wolosky is International Affairs Fellow at the Council on Foreign 
Relations and Deputy Director of the Council's Economic Task Force on Russia. 


When Russian President Boris Yeltsin resigned on December 31 of last year, he 
thrust Vladimir Putin, a relative unknown, into the limelight. Today, just a 
few months later, it is still too early to determine the extent of the former 
KGB agent's commitment to democracy and free markets. But if Putin decides to 
match words with deeds, he will enjoy an encouraging alignment of the 
political stars. Unlike Yeltsin, Putin can count on the support of the public 
and of the Duma, Russia's lower house of parliament. He has also built 
bridges with rival political leaders. For a limited time at least, he can use 
this support to press ahead with difficult reforms. 

To do so, however, he must first rein in a dangerous posse of plutocrats 
riding roughshod over the country. This is something his predecessor could 
not, or would not, achieve. On the contrary, these oligarchs -- Boris 
Berezovsky, Mikhail Khodorkovsky, Roman Abramovich, Mikhail Fridman, and 
others -- largely co-opted Yeltsin's governments, silencing most opposition 
to their conduct. As a consequence, they now threaten Russia's transition to 
democracy and free markets. They also threaten vital U.S. interests, because 
America's long-term security is best assured by the success of Russia's 

The oligarchs dominate Russian public life through massive fraud and 
misappropriation, particularly in the oil sector. Oil is of overwhelming 
importance to Russia and the oligarchs. Prior to its collapse, the Soviet 
Union was the world's largest oil producer. Oil companies account for nearly 
60 percent of the market capitalization of the Russian stock market, and oil 
receipts amount to about 22 percent of the government's budget revenues. 
Whoever controls this massive industry controls much of the world's oil 
supply -- and today it is the oligarchs. 

The August 1998 financial crisis practically wiped out the plutocrats' 
financial assets. But those who suggest it undermined their influence are 
dead wrong. Oil revenues sustained the tycoons' economic and political power, 
and the oil oligarchs are once again awash with cash, thanks to the ruble 
devaluation of 1998 (which lowered costs) and the steep climb in oil prices 
in 1999 (which boosted revenues). Because they remain among the strongest 
political and economic actors in Russia -- a major nuclear power whose future 
is crucial to America -- the plutocrats merit close scrutiny. 


In 1995, a businessman named Vladimir Potanin concocted a brilliantly 
self-serving scheme: the financially strapped Russian government would 
mortgage the state's most valuable industrial assets to a few politically 
connected insiders for far less than fair value. 

The story of how the Russian government relinquished control of its largest 
enterprises (almost all of them oil companies) through a rigged 
"loans-for-shares" program has been described elsewhere.1 In short, 
government shares in large enterprises were placed under trust management 
with oligarch-affiliated banks and financial institutions in exchange for 
loans to the state. When the government defaulted on these loans -- as was 
all but assured -- the creditor-trustees acquired the right to auction the 
collateral stakes. Almost invariably, the auction winners turned out to be 
affiliates of the banks, who paid only a nominal amount above auction 
starting prices. And so the oligarchs gained control of the state's most 
valuable assets at knock-down prices. 

To fund at least part of their winning bids, the oligarchs appear to have 
used the government's own money. In the early and mid-1990s, "authorized" 
banks controlled by the plutocrats misappropriated billions of dollars from 
the government, either directly or through sweetheart deals involving the 
custody of public funds. For instance, $512 million entrusted by the Russian 
government to affiliates of Potanin's Uneximbank reportedly disappeared. 
According to a government audit, billions of dollars in federal funds 
entrusted to oligarch-affiliated banks for the reconstruction of Chechnya 
also vanished. Even when government funds held by the oligarchs' banks were 
paid to their intended beneficiaries, they came late and without the 
substantial interest earned from interim investments in short-term government 
debt. The enormous yield on those investments was pocketed by the banks, an 
arrangement presumably facilitated by kickbacks to bureaucrats or by their 
lack of appreciation for the time value of money. 

The industrial assets bought at auction by the oligarchs were considerable 
and the prices paid a relative pittance. Affiliates of Khodorkovsky's 
Rosprom-Menatep group acquired control of the Yukos oil company for $159 
million. Yukos is one of the largest oil companies in the world: last year it 
produced 44.5 million tons of crude oil worth approximately $8 billion at 
current market prices. Its proven reserves amount to 11.5 billion barrels, 
comparable to those of British Petroleum prior to its merger with Amoco. 
Meanwhile, affiliates of Berezovsky and Abramovich acquired control of 
Sibneft for only $100.3 million. In recent years, Sibneft has produced oil 
worth $3 billion annually, and its proven reserves rival Texaco's. Potanin's 
Interros-Neft acquired control of Sidanko, a comparably sized company, for 
$130 million. He later sold ten percent of it to British Petroleum for $571 

The oligarchs' oil assets are actually holding companies with no operating 
businesses of their own. Their value lies in their ownership of stakes in 
vast oil production companies that employ tens of thousands of people. Rather 
than investing in and restructuring these production companies, the oligarchs 
looted them -- thereby defrauding a wide range of stakeholders, including 
workers, pensioners, suppliers, minority shareholders, creditors, strategic 
partners, and local, regional, and federal governments that depend on the 
companies for tax revenues. 

Just how does this pillage occur? Transfer pricing is one of the oligarchs' 
most reliable methods. The tycoons force Russia's oil production companies to 
sell oil to parent companies at below-market prices. A portion of that oil is 
then resold on world markets at the prevailing price. The oligarchs thus 
systematically strip value from operating companies and their stakeholders. 
For example, in the first nine months of 1999, Yukos forced its three 
partially owned subsidiaries to sell it some 240 million barrels of oil at 
approximately $1.70 per barrel -- at a time when the average market price was 
about $15. Yukos then exported nearly a quarter of that oil to world markets. 
And so Khodorkovsky's Yukos managed to siphon off some $800 million during a 
span of approximately 36 weeks. 

Despite the fact that these practices are illegal under Russian law, 
virtually all of Russia's oil oligarchs engage in them -- with predictable 
results. Whole regions of Russia are being impoverished. By mid-1998, 
regional and local tax arrears in Nefteyugansk, where Yukos' main production 
company (and little else) is located, exceeded $200 million. According to 
Nefteyugansk's mayor, these shortfalls brought the region to "the verge of 
disintegration." In addition, wage arrears and drastic pay cuts for oil 
workers led to a "socially explosive situation." Investors, of course, are 
also defrauded. Minority shareholders in Yukos-controlled oil production 
companies include U.S. and international investors, as well as thousands of 
individual Russians; Yukos-controlled Tomskneft, for example, has more than 
13,000 individual Russian shareholders, many of whom are workers and 
pensioners in the Tomsk region and each of whom holds only a handful of 

The massive dilution of capital has been another method of pillage. In 
September 1997, Sibneft (controlled by Berezovsky and Abramovich) engineered 
the issuance of more than 44 million new shares of its principal production 
company, Noyabrskneftegaz, at a below-market price. Those shares were sold to 
affiliates of Sibneft, who then transferred them to the parent company 
itself. The transaction diluted the equity of existing Noyabrsk stockholders 
by 75 percent. Because the stock was sold below market price, the transaction 
also resulted in the transfer of over $400 million in value. And Berezovsky 
and Abramovich later used their new supermajority voting power to merge 
Noyabrsk out of existence. 

Not to be outdone, last year Khodorkovsky tried to defraud both creditors and 
minority shareholders through shady offshore transactions. After three 
international banks acquired approximately 30 percent of Yukos following a 
default on a loan to an affiliated bank, Khodorkovsky sought to turn Yukos 
into an empty shell. He forced it to convey its most significant asset -- its 
controlling position in oil production subsidiaries -- to unknown offshore 
entities. At the same time, he attempted the mother of all share dilutions: 
by transferring a massive number of new shares to offshore entities he is 
believed to control, Khodorkovsky sought to water down shareholder stakes in 
Yukos' oil production companies by as much as 240 percent. And despite 
injunctions in places ranging from the British Virgin Islands to the Isle of 
Man, Khodorkovsky is still moving forward with the transactions. 

But the pillage does not stop there. The oligarchs loot their companies even 
more directly -- by stealing valuable assets, including wells, equipment, and 
anything else that can be found on an oil field. Over the past two years, 
Yukos has forced its subsidiaries to transfer substantial assets to new 
companies -- notwithstanding a conflicting February 1998 order by the Russian 
Federal Securities Commission. In fact, from 1997 to 1998, Yukos made the oil 
production companies it controls part with assets having a book value of some 
$3.5 billion. 

The victims have not been limited to bit players; asset-stripping has also 
victimized major international oil companies. In a highly publicized case, 
Fridman's Tyumen Oil Company (TNK) allegedly stole Sidanko's most valuable 
assets by manipulatinig the bankruptcy process. According to defrauded 
Sidanko shareholders (who include BP Amoco), the theft was carried out 
through the corrupt appointment of a TNK-friendly receiver, the unlawful 
reduction of the claims of major creditors such as the European Bank for 
Reconstruction and Development (in which the United States holds shares), and 
a rigged bankruptcy "auction" in which only TNK-affiliated companies could 

This was not BP Amoco's first run-in with the oligarchs. In 1993, Amoco, in a 
joint venture with Yuganskneftegaz, won an international tender for half of 
the massive Priobskoye oil field -- the largest undeveloped field in Russia. 
After Khodorkovsky gained control of Yuganskneftegaz in 1995, he offered 
Amoco new terms: more money for a smaller stake. When Amoco referred to the 
signed contract in protest, Khodorkovsky reportedly only smirked -- and then 
kicked Amoco out of the Priobskoye project altogether, notwithstanding four 
years of work and an investment of at least $100 million. 


Putin's support for the early ratification of START II and for other arms 
control initiatives is commendable. But absent unilateral Russian 
disarmament, America's security would best be assured by Russia's transition 
to a democratic, market-oriented, and law-based state. To the extent that the 
oligarchs jeopardize that transition, they threaten more than the triumph of 
American values. They threaten the vital American interest in assuring 
dependable stewardship of Russia's vast nuclear arsenal. The oligarchs also 
threaten the security of the West's oil supply. The dangers they pose have 
economic, political, and strategic dimensions -- and so too must the American 

The oligarchs' malfeasance has deprived Russia of the private investment it 
needs to complete its economic transition. Russia needs capital -- far more 
than is available from public sources. According to Anatoly Chubais, the 
principal architect of Russia's privatization program, Russia needs hundreds 
of billions of dollars for industrial restructuring and modernization. Yet 
private investors have abandoned the country because, among other things, 
their legal and economic rights are abused there with consistency and 

Investor fear has a ripple effect not limited to the oligarchs' own 
enterprises. Widely publicized misconduct involving Russia's largest 
companies and most prominent business leaders scares away international 
investors from all Russian companies -- including those with no intention of 
defrauding anyone. The problem is compounded by staggering capital flight, 
which removes further funds from the cash pool available for investment in 
Russian industry. In recent years, Russia has received less direct investment 
than has Peru. At the beginning of 1999, daily trading volumes on the Russian 
stock market were less than $1 million and have since risen to only $15-20 
million. The total market capitalization of all companies listed on the 
Russian stock exchange is approximately $36 billion. By contrast, the market 
capitalization of Yahoo alone exceeds $90 billion. Russia's economy will 
never evolve into anything resembling a normal market economy at such levels 
of investment. 

The effect of the oligarchs' conduct on private investment also raises 
fundamental questions about international lending programs to Russia. Few 
would dispute that support from international financial institutions should 
not be extended to any country indefinitely. Instead, public moneys should be 
provided to overcome short-term liquidity crises -- but only until they can 
be supplanted by more significant private capital. Yet Russia, thanks in 
large part to the oligarchs, is not a likely candidate for the early return 
of private capital -- from either Russian or international sources. 

To account for this reality, Western leaders should rethink the conditions 
they attach to credits given to Russia by institutions such as the 
International Monetary Fund or the World Bank. Contrary to the proposals of 
certain European leaders and U.S. presidential candidates, conditions should 
not be narrowly tied to events in Chechnya, where the United States lacks 
vital interests, but to developments in Russia as a whole, where America has 
a range of such interests. Second, conditions should be designed to help 
create the kind of environment necessary for the return of private capital. 
Although current and potential investors in Russia value macroeconomic 
stability and responsible fiscal policies, they frequently have more basic 
concerns, such as how to protect their investments from outright theft. 
Public lending should be conditioned on building the institutions of 
government necessary to prevent such larceny. Deep structural and 
institutional reform will be strongly resisted by the oligarchs, but it is 
necessary nonetheless. Without it, public moneys will be wasted, and Russia 
will become a permanent beneficiary of international welfare. 


The recent unwillingness or inability of Russia's senior leadership to 
curtail the oligarchs' predation raises serious questions not only about the 
prospects for the development of free markets and the rule of law, but about 
Russian democracy itself. After the last presidential election, in 1996, the 
oligarchs captured Yeltsin, his successive governments, and the political 
process. Regrettably, few signs so far point to significant changes under 

In October 1999 -- after Putin had already become prime minister -- Russia's 
chief market regulator, the reformer Dmitri Vasiliev, resigned in protest 
over his inability to stop Yukos' fraudulent offshore share transactions. 
Vasiliev had earlier requested a criminal investigation of the deals, the 
third inquiry into Yukos requested or begun by Vasiliev's Federal Securities 
Commission since February 1998. Uncooperative government agencies and a 
corrupt Russian judiciary, however, thwarted Vasiliev's efforts. An 
interagency investigation initiated by Vice Premier Vladimir Bulgak in March 
1999 met a similar fate. 

These failures are hardly surprising. The oligarchs enjoy enormous political 
power, derived from their money, media control, and direct and indirect 
participation in decision-making at many levels of government. Russia's 
energy oligarchs have invested wisely; they provided Yeltsin's 1996 
presidential campaign with unlimited financial support, which enabled him to 
wrest victory from Communist Party leader Gennady Zyuganov. And the oligarchs 
were amply rewarded for their generosity. Both Potanin and Berezovsky served 
in high government office, Potanin as first deputy prime minister and 
Berezovsky as deputy secretary of the National Security Council and then as 
secretary of the Commonwealth of Independent States. Fellow energy baron and 
former Gazprom head Viktor Chernomyrdin led the government as prime minister 
from 1992 through 1998. (Gazprom, the huge gas monopoly, is Russia's largest 
company.) Chernomyrdin is widely rumored to be one of Gazprom's largest 
shareholders and Russia's richest citizens. 

Even after Chernomyrdin's ouster, the oil oligarchs' privileged access to 
power continued. Berezovsky and Abramovich allegedly handled Yeltsin family 
finances. Khodorkovsky routinely traveled with the prime minister -- whoever 
that happened to be. He was reportedly aboard Yevgeny Primakov's plane to 
Washington in March 1999 when it reversed course in midair to protest the 
NATO bombing of Kosovo. And in September 1999, he accompanied then-Prime 
Minister Putin to New Zealand for an economic summit. 

When not serving personally as high government officials or whispering in the 
ears of those who are, the oil oligarchs protect their interests through 
highly placed proxies. Khodorkovsky's man, former Yukos senior official 
Sergei Generalov, served as minister of fuel and energy from 1998 to 1999. 
Berezovsky's agent, Nikolai Aksenenko, was until recently the first deputy 
prime minister. Another Berezovsky proxy, Alexander Voloshin, is head of the 
presidential administration. And Voloshin's top deputies include two men from 
the financial interests controlling TNK. 

The loyalty of lesser officials is routinely secured through bribes, 
kickbacks, and "charitable contributions." A favorite scheme involves buying 
the allegiance of law-enforcement officers by donating motor vehicles. An 
investigation of Yukos in Moscow, for example, was complicated after Yukos 
promised to buy cars for the Federal Security Service. Similarly, Sibneft has 
reportedly donated 50 Land Rovers to the Omsk police. 

Sometimes payoffs are even more direct. In Moscow, $50,000 can stall a 
criminal investigation. The Russian judiciary faces similar temptations. In 
cases involving the oligarchs, trial and appellate court judges are routinely 
bribed. Failing that, judges who evince a dangerous predisposition to 
impartiality are reassigned without explanation by superiors who are 
presumably on the take. 

The pervasive political influence of Russia's oil oligarchs shows no 
likelihood of rapid abatement. Putin has not swept house at the Kremlin. On 
the contrary, one of his first official acts was to reappoint Voloshin head 
of the presidential administration. Voloshin, in cahoots with Berezovsky, has 
been accused by former Soviet President Mikhail Gorbachev of helping 
orchestrate Yeltsin's removal. 

Oligarch money has infused all of Russia's major political movements, even 
the relatively incorruptible, pro-Western, reformist Yabloko bloc. In 
addition to funding Russia's major political parties, the oil oligarchs 
offered their own hand-selected candidates during the recent parliamentary 
elections. Some even stood for election themselves. Yukos' Generalov secured 
a Duma seat. Berezovsky, who is widely credited with helping mastermind the 
meteoric rise of the pro-Kremlin Unity Party, won a seat representing a 
district in Karachay-Cherkessia, and Abramovitch was elected for the remote 
Chukotski Peninsula. 

To be sure, big business interests infuse the political systems of many 
countries, including the United States. But in Russia, the political 
influence of the oligarchs is largely the fruit of criminal activity. It is 
also amplified by several factors unique to that country. One, as Russia 
scholar Michael McFaul has noted, is the weak party system. Russia lacks true 
political parties. What it has instead are loose, poorly organized coalitions 
centered around one or two strong personalities. This lack of a real party 
system inhibits conflict resolution among competing interest groups. 
Compounding matters, civil society is woefully underdeveloped. Institutions 
and interest groups that could potentially countervail the influence of the 
oligarchs are weak. Labor is disorganized; small business is virtually 
nonexistent; civic organizations are confused and dispirited. 

Significantly, Russia also lacks a free press -- not because of government 
censorship but because of oligarch control of the most meaningful media 
outlets. Berezovsky controls the ort television station; TV-6; the newspapers 
Nezavisimaya Gazeta, Novaya Izvestiya, and Kommersant; and Ogonek magazine. 
Potanin controls the newspapers Izvestiya, Komsomolets, and Russki Telegraf 
and Ekspert magazine. Until recently, a Khodorkovsky lackey even served as 
deputy head of ITAR-TASS, the state news agency. 

That Russia lacks independent institutions, interest groups, or news media to 
counter the oligarchs is hardly surprising. The tycoons' predation has sucked 
up the country's wealth and impoverished broad swaths of Russian society. A 
basic gauge of income inequality, the Gini coefficient, has doubled in recent 
years. Financial theft has deprived ordinary people and governments at 
several levels of their fair share of the fruits of Russian industrial 
activity. All this prevents the diffusion of social, political, and economic 
power within Russia and runs counter to vital U.S. interests in promoting 
Russian democratization. 

The financial power of the oligarchs is changing political dynamics in Russia 
in other, less obvious ways. For one, it is hastening centrifugal tendencies 
within the country. As in communist days, economic value continues to be 
siphoned from Russia's regions to the center and returned to the regions in 
the form of various transfer payments. Now, however, the recipients of 
Russia's wealth and the distributors of largesse are increasingly 
Moscow-based financial elites, not the Kremlin. This marginalizes the 
Kremlin's political influence in Russia's restless regions. 

The oligarchs' control over local purse strings manifests itself in their 
patronage of social infrastructure and haphazard tax payments to local and 
regional authorities. The infrastructure attached to an oligarch-controlled 
enterprise may include schools, hospitals, and recreation facilities; such 
"social assets," a relic of communism, still play an important role in many 
communities built around industrial enterprises. Support for social 
infrastructure buys the oil barons considerable local influence. 

More significant, local and regional tax payments are no longer based on 
objective criteria. Instead, they are negotiated between plutocrat and 
governor, many of whom lack the power to discipline recalcitrant oligarchs. 

A similar situation exists at the federal level. The fact that tax payments 
by Russia's energy tycoons, when made at all, are negotiated affairs is 
testimony to the oligarchs' power and the weakness of the state. These 
arrangements threaten more than the development of Russian democracy. They 
undermine the very integrity of the Russian Federation. 


Even accounting for a precipitous drop of almost 50 percent in the past ten 
years, Russia still produces more oil than any country in the world except 
the United States and Saudi Arabia. Yet control over Russian production now 
lies firmly in the hands of rogues, plutocrats with greater productive assets 
than the largest Latin American drug cartels. The largest Russian oil 
companies today are little more than semicriminal groups that defy 
international standards of lawful conduct. Certain oil oligarchs or their 
close associates are currently under investigation by U.S. and European 
law-enforcement officials for money laundering, corruption, and fraud. 

The oligarchs' criminality therefore threatens more than the security of the 
world's energy supplies; to the extent that it leaks out of Russia, it also 
challenges the West's commitment to the international rule of law. 

At issue are not simply cases of financial impropriety. The oil oligarchs are 
extremely ruthless. People who get in their way -- even ministers of the 
Russian Federation -- are routinely threatened. A senior TNK official 
involved in the Sidanko-BP Amoco dispute allegedly waved a pistol in the face 
of the mayor of Nizhnevartovsk. A local judge who had made a decision adverse 
to TNK was reportedly beaten in the street. In June 1998, the mayor of 
Nefteyugansk was murdered. That spring, he had led a very public crusade and 
hunger strike against Yukos, protesting the enormous wage and tax arrears 
that he claimed were impoverishing the region. A rowdy public protest was 
held outside a shareholders' meeting, trapping Yukos' president inside for 
several hours. The mayor had previously sent a secret cable to Prime Minister 
Sergei Kiriyenko requesting his assistance in the showdown. But the mayor was 
found dead before Kiriyenko could answer. 

Elsewhere, in March 1999, the car of a Russian oil executive allied with 
Western investors against Yukos was attacked in a military-style ambush. The 
executive was not in the car at the time of this attempt on his life -- the 
second such attack. His bodyguards and driver were not as fortunate, however: 
one was killed in the assault, the others badly wounded. A similar fate 
awaited the general director of the Omsk oil refinery, the largest in Russia. 
The month before Sibneft came into existence, he was found floating in a 
river. He was said to have opposed the planned handover of his refinery to 
Sibneft. In September 1995, the man who handled most of Noyabrysk's crude 
exports was luckier. He was thrown in jail and released months later without 
being formally charged. 

In the face of such venality, what is the West to do? Apart from changing its 
approach to public-sector lending, it must get personal. Russia's oil 
oligarchs should be treated like pariahs. They should be denied access to 
international capital for the companies they control. They must get no 
support from federal agencies such as the U.S. Export-Import Bank. To contain 
Russian crime and corruption, U.S. and Western law enforcement agencies 
should vigorously prosecute cases in their jurisdiction. That will help 
ensure that money misappropriated from Russia is returned to Russia. It will 
also prevent the West from becoming a safe haven for overseas criminality and 
will uphold America's commitment to the rule of law. Not only should 
Washington, Wall Street, and London refuse the oligarchs the respectful 
receptions and prestigious platforms they crave for self-legitimization, but 
certain of the oligarchs should be denied visas to visit the West for any 

Pariah status should continue until the oligarchs modify their behavior -- or 
until Putin renationalizes that country's rogue oil companies. Given the 
extraordinary circumstances and the considerable stakes, the United States 
and multilateral organizations should actively encourage and support 
renationalization and reprivatization on a case-by-case basis. In the battle 
against the oligarchs, Moscow and the West must rely on every weapon 
available. If they do not, the oligarchs will. 

1 See, for example, Ira W. Lieberman and Rogi Veimetra, "The Rush for State 
Shares in the 'Klondyke' of Wild East Capitalism: Loans-for-Shares 
Transactions in Russia," George Washington Journal of International Law and 
Economics, vol. 29, no. 3, 1996, p. 773. 


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