October 31, 2000   

This Date's Issues:   4610 • 4611

Johnson's Russia List
#4611
31 October 2000
davidjohnson@erols.com

[Note from David Johnson:
1. The Guardian (UK): Amelia Gentleman, Putin throws literary elite with judo book.
2. Time Europe: Andrew Meier, Arctic Riches. Oil-drilling opportunities in Sakhalin are attracting the largest foreign investment projects in Russia.
3. Wallace Kaufman: The missing tiger link/4609.
4. gazeta.ru: Kremlin Faces Fresh Allegations of Fixing Elections.
5. strana.ru: Gennady Nikiforov, Federation Council Speaker suggests law delineate powers of presidential envoys. The latter object.
6. BBC Monitoring: Regional leaders forming own news channels to counter Kremlin.
7. Moscow Times: Anna Raff, Big Lenders. (re World Bank projects in Russia)
8. Financial Times (UK): Andrew Jack, Russian shareholders pin their hopes on a different ballgame: At last there are some small signs of a change in attitude towards corporate governance.
9. Christian Science Monitor editorial: Reviving Religion in Russia.]

*******


#1
The Guardian (UK)
31 October 2000
Putin throws literary elite with judo book
Amelia Gentleman in Moscow


In their idle hours, Russia's leaders have always devoted themselves to
literature, and Vladimir Putin has demonstrated that he too is eager to
bequeath the nation a permanent written legacy - one that will survive when
he leaves the fickle world of politics.


While Vladimir Lenin was fond of dashing off works on dialectical
materialism, Josef Stalin wrote historical analyses of the Communist party,
Leonid Brezhnev tackled the second world war and Mikhail Gorbachev mused on
the meaning of perestroika (rebuilding), Mr Putin has chosen a different
path.


Eschewing abstract political theory, Russia's president has published a
more practical tome: Judo: History, Theory, Practice.


Readers searching for a new understanding of Mr Putin's governmental
initiatives will be disappointed. For although Moscow's Kremlin watchers
have scoured the text of the book in search of secret combat tactics that
may have been used by Mr Putin against political enemies such as the
country's regional governors or the media magnate Vladimir Gusinsky, they
have done so with little success.


Even the section headed Why Does an Opponent Fall? fails to provide any
insight into how Mr Putin saw off his two main presidential rivals earlier
this year. The answer, like the rest of the text, is disappointingly banal:
"A person falls if he loses his balance."


The book ends with a passionate call to arms. "Put on your kimono," the
president (a pan-USSR judo finalist) writes. "Fasten your belt. The
mysterious world of judo awaits you." It is a call that has already
elicited a response. The general secretary of Russia's judo federation,
Vladimir Lobintsev, said the organisation had noted a sudden rise in the
number of judo enthusiasts since Mr Putin came to power.
*******


#2
TIME EUROPE
November 6, 2000
Arctic Riches
Oil-drilling opportunities in Sakhalin are attracting the largest foreign
investment projects in Russia
By ANDREW MEIER Yuzhno-Sakhalinsk


The American oilman's toast, at an intimate gathering of his Russian and
foreign partners, was jubilant. "I've been on Sakhalin Island for five years
now, and although Anton Chekhov made it famous for its prison colony, I'm
living proof you can survive here. Sure, we've hit some rough spots, but the
boom's going to come to this island and we're gonna make it happen. I believe
in Sakhalin and in its oil."


Since the Soviet collapse, Sakhalin Island, off Russia's far eastern edge,
has seen more than its share of ebullient executives from Western oil giants.
But not many have remained so hopeful for long. Many have endured tedious,
frustrating years waiting for their deals to be signed, as bureaucracy,
xenophobia and corruption combined to thwart their dreams of black gold. Some
have even left in frustration. But in recent weeks, Sakhalin's oilmen have
turned almost giddy — buoyed in equal measure by the continued high price
of
crude and a new public pledge by President Vladimir Putin to build a legal
foundation for their multibillion-dollar bet on Russia.


Russia is awash in petroleum. With proven reserves of nearly 49 billion
barrels and production hitting 6.3 million barrels per day, the country is
the Saudi Arabia of the north. The problem is getting it out of the ground
and then on to market. Years of Soviet mismanagement and underinvestment have
taken their toll. Most of the country's fields — some of which were
discovered a century ago — are in dire need of rehabilitation; Siberia is
littered with rusting derricks ringed by porous labyrinths of well-worn
pipelines.


Before Russia's 1998 economic crisis, local oil moguls were certain of their
ability to lure Western companies into developing long-neglected oil fields.
Many foreign companies have tried, few have succeeded. "Everyone here knows
it makes the most sense to invest in new fields, rather than dumping millions
more into existing sinkholes," says Glenn Waller, director of the Petroleum
Advisory Forum, an association of the Western energy majors invested in
Russia.


Since the 1998 crisis, and in the ensuing years of political instability, the
Russian oil and gas market saw its foreign capital pools drain as prospectors
turned to more welcoming political and economic climates elsewhere. Waller
reports that oil production in Russia has fallen from 11.8 million barrels
per day in 1987 to a projected total for this year of 6.3 million barrels per
day, of which 2.2 million barrels (35%) are exported. "Russia has learned its
lesson," says Waller. "It can't rely on old fields, it needs to develop new
ones. And to do that it needs capital and expertise."


Sakhalin is set to show the way to the market. Once a notorious Czarist penal
colony, then little more than a Soviet airbase the size of Ireland, Sakhalin
is now home to the largest foreign investment projects in Russia. These
deals, totaling some $26 billion, are long-term oil and gas Production
Sharing Agreements — PSAs, in the argot of the oilmen.


The leading PSA, known as Sakhalin 2, is run by Sakhalin Energy, a consortium
led by Europe's largest oil company,


Royal Dutch/Shell, with a 37.5% stake. At a reported investment of $10
billion, it is Russia's largest single foreign investment project. It is also
the market's first and only success story to date, Russia's first PSA and the
first to draw oil. "After years and more than 1,000 permits signed, we did
it," boasts Sakhalin Energy's Scottish president, Alan Grant. The Molikpaq,
the rig Sakhalin Energy dragged from the Canadian Arctic to Sakhalin's
northeast coast, is pumping more than 80,000 barrels a day.


The success of Sakhalin's psas has not been lost on the new men now running
Russia's finances. After all, taxes on oil and natural gas provide more than
half of the government's revenue. In early September, Putin made a stopover
in Sakhalin on his way to Japan. In a star appearance at a conference on the
future of psas in Russia — with Bill Richardson, the U.S. Secretary of
Energy, in attendance — Putin celebrated the island's oil projects and
vowed
to smooth the way for the dozens more psas still in limbo. He even instructed
his Economics and Trade Minister, German Gref, to take charge of the state's
role in developing and administering psas.


Later that month Russian Prime Minister Mikhail Kasyanov followed up on
Putin's promise, taking the State's PSA sales pitch to London in hopes of
luring more Western energy companies into the market. After all, Russia's
hopes for survival rest not only on the high price of crude, but on
developing a generation of such partnerships. Economic growth is predicted to
run as high as 7% this year, but the state will continue to depend heavily on
oil revenues. In the Duma, the lower house of parliament, elected
representatives still complain that the West only wants to pillage the
country's riches. But Putin and his economic aides seem genuinely interested
in finally answering the one question that has stymied overseas investors:
When will Russia find a legal, dependable and profitable way for foreign
companies to help Russia extract and export its petrochemicals?


But lest anyone think that happy days are just around the corner, there is an
all too familiar Russian twist to the Sakhalin oil tale. Aside from the
environmental impact, few on Sakhalin, where blackouts remain frequent and
hot water scarce, have felt any trickle-down effect. It turns out, as one
Alaskan rigger put it, that "there's tons of oil and gas on this island, just
none for the folks who live here." The only existing pipelines take oil and
gas straight off Sakhalin to mainland Russia — bypassing the local
population
of hunter-gatherers, who are forced to pay the highest prices for gasoline in
Russia.


*******


#3
From: "Wallace Kaufman" <taconia@mindspring.com>
Subject: The missing tiger link/4609
Date: Mon, 30 Oct 2000


Missing from Gennadii Viktorovich Kononin's article on the threat of Amur
tiger extinction is what's missing in most environmental preservation
programs in the former USSR and many other places: what are the incentives
for protecting the tiger and its habitat? The economic incentives for poor
rural people and government officials to engage poaching or aid poachers is
very high, as Kononin points out. The 'public good' and the overall
benefits of biodiversity are no more effective as incentives than 'building
communism' was. With apologies to idealists, people, especially poor
people, need real economic benefits if they are to cooperate with
biodiversity efforts. People do not sacrifice their families or their
families' food supply for the sake of science or Western environmentalists.
They will destroy or help others destroy tigers before they will watch their
family starve or grow sick.


Ecotourism revenues in this case has limited utility (and has been overrated
in many areas and successful in others). The potential for tourism in Russia
as a whole and in remote regions especially is kept minimal by many factors,
including unreliable transportation, lack of attractive accommodations,
corruption, crime, and visa red tape.


The most immediate incentive for preservation would be privatizing the
income potential from tiger habitat under guidelines that require
preservation of the tiger and other wildlife. Well managed elk and deer
hunting might provide some income incentives. Privatized hunting rights
have been instituted successfully on tens of thousands of acres in America's
western states, leading ranchers to improve habitat and maintain
biodiversity from year to year.


Russia, however, lags far behind the developed world in providing secure
property rights and then protecting them, an essential function of any
government.


What other incentives might work to save the Amur tiger? That should be the
subject for immediate research. In this case as well as many others, we can
expect incentives to produce a much faster change than punishment and
regulations. In fact, the entire history of Soviet and post Soviet times
shows that without incentives, real economic incentives, regulation and
punishment do very little to preserve environmental assets.


*******


#4
gazeta.ru
October 30, 2000
Kremlin Faces Fresh Allegations of Fixing Elections
Fresh evidence has come to light in Russia that the Presidential
Administration has begun a campaign of direct intervention in regional
elections to assist the election of regional leaders obedient to the
Kremlin. The compromising evidence comes as no surprise and most Russian
media outlets have opted to ignore the fresh scandal.
It is no secret that the Kremlin administration is pursuing various
policies in order to strengthen Moscow’s power over the regions. Indeed the
aim of the power reforms is apparently popular amongst many Russians,
frustrated by the arbitrariness of regional leaders, many of whom rule
their regions with scant respect to federal laws and the orders of the
national government.


The Kremlin has already introduced measures to gain more control over
regional budgets and ordered the regional leaders to bring all regional
legislation into line with federal law. In addition, legislation has been
passed to limit the regional leaders’ influence upon the federal centre:
The regional leaders are to relinquish their seats in the upper house of
the Russian parliament, the Federal Council, to representatives elected by
the regional legislative assemblies. 7 so-called federal districts have
been created and seven envoys appointed by the president to oversee the
regions within the districts. However, the effect of the 7 presidential
envoys has so far proved to be negligible.


The latest initiative in Putin’s quest to establish a system of ‘vertical
power’ is the active support of pro-Kremlin candidates in the many
elections taking place in Russia’s regions for new regional heads. The
majority of the Kremlin’s candidates are from the secret services.


However, judging by evidence published in Monday’s edition of the Russian
weekly paper. Novaya Gazeta, it appears that the Kremlin’s ‘active support’
for its candidates involves literally getting rid of undesirable opposition.


The documents published by Novaya Gazeta include a letter addressed to
Alexander Voloshin, the head of the Presidential Administration, reportedly
written by his deputy A. Abramov, who is responsible for regional policy.
The letter reads, “In response to your order for the results of the
temporary working group (established) to analyze and provide a prognosis
for elections…I (Abramov) am sending you (Voloshin) materials about the
conflict situations… in the Central Federal District.”


The following five sheets of “information” are in fact lists of undesirable
candidates including a timetable and ‘legal’ grounds for their removal from
the list of candidates.


On the first sheet appear the Kursk regional elections. On the evening of
Saturday October 21st, the Kursk district court ruled that the serving
governor of the Kursk Region, Alexander Rutskoi be removed from the list of
candidates. The ruling was handed down with about 12 hours left before the
polls opened, obviously not enough time for Rutskoi to lodge an appeal.


The timing of the court case and the grounds for his exclusion were exactly
as written on the list allegedly drawn up by the presidential
administration. Two complaints against Rutskoi’s candidacy were filed, one
by the pro-Kremlin candidate V. Surzhikov and by another candidate S.
Maltsev. Rutskoi was excluded on the basis of two breaches of election
regulations; firstly, his using his official position during electoral
campaign and, secondly, failure to provide accurate information about
personal property. The two complaints were filed on October 19 and 20
respectively.


The ‘Kremlin List’, published by Novaya Gazeta lists the complaints, the
date for lodging the complaints to the court and the date of the court
ruling all exactly as happened in the Kursk gubernatorial elections.


To judge the list’s authenticity upon the subsequent removal of candidates
as outlined on the ‘Kremlin List’ may not be effective. If the list is
genuine, the Presidential Administration may choose to modify some details
in order to avoid any inconvenience from the unruly sections of the Russian
media.
******


#5
strana.ru
October 30, 2000
Federation Council Speaker suggests law delineate powers of presidential
envoys. The latter object
By Gennady Nikiforov

Do presidential envoys to the seven territorial
districts need their functions formalized in a legislative act? Federation
Council Speaker Yegor Stroyev believes they do. Presidential envoy to the
Far-Eastern District Konstantin Pulikovsky disagrees: he maintains that all
the necessary functions have been outlined by President Putin in his decree
relating to the seven districts. Besides, he says the job of presidential
envoys is so wide-ranging that no single legislative act can possibly
expected to reflect all its aspects.


It is safe to assume that other presidential envoys
too share this view although they do not seem to be quite aware of what they
are supposed to do in the provinces. For example, Viktor Kazantsev of the
Southern District believes his task is to inform the President of the state
of affairs in the region and tackle economic matters. Viktor Cherkesov, the
man who represents the President in St. Petersburg and a vast outlying area,
wants presidential envoys to pay more attention to the political process. He
argues that affairs of national importance are not tackled in an effective
way because federal structures are too dependent on local administrations.
For his part, Sergei Kiriyenko thinks presidential envoys should make "an
inventory of the country" through the formation of a single legal and
economic space. And in the view of Deputy Prime Minister Viktor Khristenko,
"life itself will determine their functions."


Khristenko is probably right: the fact of the matter
is that a decree signed by the President on May 2000 this year gives
presidential envoys such extensive powers that nothing short of "life itself"
could possibly delineate them. Indeed, there are nearly no areas of activity
by local administrations that are not noticed by the watchful eye of
presidential envoys. It is obvious that any federal law would only curtain
their powers, something that would run counter to the Kremlin's plans to
restructure the system of government across the country. This means that
Yegor Stroyev is not quite in tune with its objectives. But then the question
is whether governors themselves whose interests Stroyev appears to be
championing need such legislation


It is a fact that some regional leaders are in
opposition to presidential envoys although they prefer not to say as much in
public. If they press for a legislative framework for presidential envoys as
an institution, - after all, the nation's Fundamental Law does not provide
for the seven districts instituted by presidential decree - this will
inevitably call for amendments to the Constitution. And any attempt to tamper
with the Constitution might mean the end of Putin's reforms. That is what the
gubernatorial opposition is apparently hoping for, but there is no doubt that
Moscow will not agree to make such concessions.


All attempts by regional administrations to avoid
revising their Charters and Constitutions have ended in failure: Moscow is
relentless in its insistence that regional legislation should be brought in
line with federal legislation. Therefore, both houses of Bashkortostan's
State Assembly have thought it necessary to approve a draft bill amending the
republic's Constitution.


The draft provides for more than a hundred
amendments but most of them are of a purely cosmetic nature. Bashkortostan's
authorities feel the amendments will not change the spirit of the
Constitution. And there are some grounds for this assumption. One of the
articles of the republic's Constitution dealing with the delineation of
powers between Moscow and Bashkortostan has been skillfully "corrected" in
accordance with both the Constitution of the Russian Federation and a 1994
treaty giving the republic additional sovereign rights. The treaty itself has
been incorporated into the draft of the amended Constitution.


*******


#6
BBC Monitoring
Russia: Regional leaders forming own news channels to counter Kremlin
Source: 'Nezavisimaya Gazeta', Moscow, in Russian 27 Oct 00


That no reforms in the country will succeed unless the authority putting
these reforms into practice has an opportunity to constantly and intelligibly
explain to society the essence of the transformations is an absolutely
obvious fact. This is why in reinforcing the vertical integration of power
and changing the correlation of forces in favour of the federal centre the
Kremlin is actively building into this vertical integration the information
component. Because without serious ideological support, the present reforms
also will be doomed to fail.


Television, of course, is to play first fiddle in the propaganda of
[President Vladimir] Putin's ideas today. It would be naive to imagine that
the regional leaders would relinquish to the state without a fight the so
tasty ideological morsel that television represents. Especially since the
division of the federal space into districts and the gradual transfer of all
significant levers of power from the governors to the authorized
representatives signifies the slow political death of many regional leaders
long accustomed to the Kremlin merely declaring something or other, but not
implementing it, and merely talking about some reforms, but being unable to
pursue them. Because, despite the presidential republic that has been
proclaimed in Russia, despite the "autocratic" Yeltsin constitution, real
power has always resided in the hands of the heads of the administrations,
not the head of state.


Viktor Cherkesov, authorized representative of the president in the Northwest
District, said in July that he wanted to create a district television channel
because "there is no one single news feed either in the region or in Russia."
Not just Cherkesov but all seven authorized representatives were by that time
concerned to this extent or the other to resolve the information problem. The
corresponding concept of the creation of a single information space was
worked up in the Security Council, and at the end of September Vladimir Putin
gave the instruction that the directors of the GTRK [state television and
radio companies] (subsidiary enterprises of the VGTRK [All-Russia State
Television and Radio Company]) be appointed not at the suggestions of the
governors, as was the case earlier, but on the recommendations of his
authorized representatives.


Now let us see how this presidential edict is being implemented locally, and
let us take as an example Orel Oblast, which is directed, as we all know, not
simply by Yegor Stroyev the governor but by Yegor Stroyev the head of the
Federation Council, and his example could perfectly well be an example to
others in this respect. On 20th August 1999 Stroyev, head of the
administration of Orel Oblast, issued a decree on the creation of the Oblast
Television and Radio Broadcasting Channel public corporation with Orel Oblast
contributing 100 per cent of the authorized capital of the OAO [public
corporation]. The law "State Management and Support of the VGTRK," according
to which the assets of this publicly-owned unitary enterprise are federal
property and not subject to privatization, was clearly ignored even then. All
other forms of expropriation of the property of the VGTRK are to be effected
only by the management of the holding company itself "with the consent of the
government of the Russian Federation in the person of the duly authorized
federal executive institution for the administration of state property."
Stroyev's decree, however, said that the founder of the OAO was the oblast's
Committee for the Administration of State Property (director, Pavel Merkulov,
the person closest to the governor, who, according to Nezavisimaya Gazeta's
information, is called his possible successor), and its general manager,
Vladimir Babin, who, incidentally, already directs the Orel GTRK as a
subsidiary of the VGTRK. The document also deals with the transfer of the
building belonging to the Russian television company to the authorized
capital of the OAO and of the market valuation of the assets.


Nothing was heard about the Oblast Television and Radio Broadcasting Channel
OAO for some time since this new formation was not registered as a news
medium. It is possible that the Orel governor was simply laying up his news
medium "for a rainy day". Now, it seems, this day has come: on 18th July 2000
the Ministry of Press Central Russia Territorial Office successfully
registered the OAO, which will, it is hoped, "disseminate topical, objective
and full information on the life of Orel Oblast" (this registration
certificate says, incidentally, that the founders of the news medium are the
oblast administration, the OAO itself, and the VGRK Federal State Unitary
Enterprise. The certificate on the public registration of the Oblast
Television and Radio Channel OAO legal entity, though, records just one
founder - the Orel Oblast Committee for the Administration of State
Property).


One way or another, Georgiy Poltavchenko, authorized representative in the
Central Federal District, may now be looking for other channels for
propaganda support of the Krremlin reforms because this place in Orel is
already taken. True, there could be questions for Yegor Stroyev not only from
Poltavchenko but also from VGTRK Chairman Oleg Dobrodeyev, who, it seems,
does not yet suspect that his subordinate Vladimir Babin, who holds the
position of director of the Orel branch of the VGTRK, has on a pluralist
basis for more than a year now been the director of the Oblast Television and
Radio Broadcasting Channel corporation. He is hardly likely to know either
that the assets of the VGTRK, specifically, the building at 43, 7 Noyabrya
Street, no longer, in fact, belongs to the Russian television company and
that it is by local law being administered by the administration of Orel
Oblast.


It is possible that a similar operation to transfer television channels from
state to regional management in line with the Stroyev example has been
undertaken by other governors also. At least, quiet resistance to the Kremlin
innovations, of which no particular show is being made, is being observed in
many regions. And the time of the governors' unconcealed public opposition to
the centre has already passed, by all accounts. The recent session of the
Federation Council was a clear example of this. It is far more effective and
thus far safer to maintain one's own "order" in the regions that to fight
federal reforms via, for example, the Constitutional Court.


******


#7
Moscow Times
Tuesday, October 31, 2000
Big Lenders
By Anna Raff


The World Bank funds 33 projects in Russia, at a total of $10.4 billion in
loans. Anna Raff takes a closer look to see how that money is spent and what
some ongoing Bank projects are doing to the local and national economy.


Last week, the World Bank announced that talks about a new $800 million loan
program with Russia broke down. Even if the money never surfaces f as the
draft budget anticipated it would f this doesn't mean that World Bank loans
will stop flowing into Russia.


To observers, the announcement that the talks had fizzled came as no
surprise. Russian officials have already reaffirmed their refusal to take on
more loans in 2001.


In addition to the 33 World Bank projects already operating, at a total of
$10.4 billion in loans, nine are also in the works. With themes ranging from
municipal heating to treasury modernization, the new loans would lend an
estimated $912.1 million.


According to the World Bank's strategy for 2000 and 2001, there is an
"increased emphasis on the reform of systematic policies and institutions
intended to improve the performance of public sector institutions that are
critical for public administration and for the development of an environment
attractive to investors and conducive to efficient private sector
development."


These plans f all of which the Russian government initiated f are big. And
they have big budgets. But where does this money go? What is it for? What
does it do?


The assessments of upcoming World Bank missions, or groups of experts sent to
evaluate the way World Bank money is spent, will determine the fate of future
loan disbursements to Russia.


A Little Background


"Long-term financial aid must be made available also to promote sound
industry and increase industrial and agricultural production in nations whose
economic potentialities have not yet been developed," said U.S. Treasury
Secretary Henry Morgenthau in his closing address to the Bretton Woods
Conference in 1944.


"The International Bank for Reconstruction and Development is designed to
meet this need."


At the Bretton Woods Conference, representatives from 45 nations agreed to
the creation of the International Monetary Fund and the International Bank
for Reconstruction and Development, later to be called the World Bank.


Since then, the World Bank has acquired a reputation marked by controversy.


Critics stepped up their accusations that the World Bank and its filial
organizations were bringing more harm than good to the nations they were
trying to help after Russia joined the international institutions in 1992.


Russia's newfound membership opened the path to tens of billions of dollars
of Western aid meant to pad the transition to a market economy.


Instead, World Bank policies and loan conditions sometimes made the
transition path a bumpier one. An especially noteworthy example is the Bank's
acquiescence to the loans-for-shares deal that concentrated the country's
natural resources in the hands of a few so-called "oligarchs."


"Especially early on, these loans didn't work toward real reforms," said
Yevgeny Volk, a political analyst with the Heritage Foundation. "In fact, a
lot of the times, they put the brakes on reform."


The Russian people understand this, Volk said. But those in power continue to
support World Bank programs because they see it as an opportunity for
"personal enrichment."


According to Michael Carter, the World Bank's Russia representative, the Bank
has learned from its past mistakes, and its approach to Russian has changed.


"A fundamental feature has changed in the past few years," Carter said. "The
Moscow office has begun to play an increasing role. They [office staff] have
taken on more responsibilities for oversight of projects.


"A lot of it used to be done from Washington."


About a year ago, the World Bank and the Russian government agreed to
measures that would safeguard the use of loan money, according to the Bank's
strategy document.


The government agreed to provide annual budget audits to the Bank and also
resolved to give "real-time" updates, which are set by events rather than
arbitrary time periods, on the money flow within the budget. In addition, the
Finance Ministry promised to show that Bank disbursements targeted to
priority areas f social expenditures and coal sector reform f are accompanied
by money from the federal budget.


"It's easy for them to say this now," Volk said, adding that Russia doesn't
need any loans because oil prices are high. "The real time of judgment will
come when Russia falls into another crisis, and huge loans once again begin
to flow from the Bank."


To put a concrete face on World Bank activities, which are often described in
terms of paradigms and increased efficiency, we take a closer look at three
ongoing projects.


Capital Markets


The World Bank's investment loans took a beating after the 1998 financial
crisis.


The Capital Market Development Project f 67.3 percent, or $89 million, of
which was to be financed by World Bank loans f has only been lent $15 million
by the Bank.


In an anticipated maneuver, the Bank and the government agreed Monday to
reduce the capital markets development program to $55 million, Itar-Tass
reported.


A comparison of the original project blueprint with today's reality testifies
to the unpredictability of Russia's capital markets and the economy as a
whole.


In a technical document issued just before board approval in May 1996, a few
sentences foreshadow the 1998 August crisis: "Although no municipal issuer
has yet defaulted on its obligations, the weak budget management and the
revenue-raising skills of municipal officials give cause for concern. A
municipal default would be a serious event because of its potential to
destroy the confidence of retail investors in what has so far been a less
distrusted segment of the securities market."


In 1996, Novosibirsk defaulted on $859,500 of its short-term municipal bonds
for a couple of days. In October 1999, Nizhny Novgorod slipped into technical
default on its Eurobond issue.


The report goes on to say that the ill-fated GKOs f federal bonds that went
into default after the crisis f were one of the most attractive sectors of
Russia's fixed-income market.


"In retrospect, that was optimistic," said James Fenkner, equity strategist
with Troika Dialog. "In 1996, yields on those bonds were fantastic. It wasn't
until 1997 that it became clear that the debt buildup was going to be a
problem for Russia. There was a lot of naivete back then. It wasn't just the
World Bank, it was almost everybody."


Also a little too optimistically, the report predicted that, "by the turn of
the century, market capitalization could be in the order of $100 [billion] to
$120 billion and annual turnover could reach $50 [billion] to $70 billion."


This month, market capitalization has been holding at about $48 billion, and
annual turnover is estimated at $5 billion to $6 billion.


Repeated telephone calls to the Center for Capital Markets Development f the
foundation responsible for steering World Bank funds f were not returned.


The loan was meant to help build a comprehensive legal and policy framework
for Russia's capital markets as well as improve efficiency and transparency
of the exchange system. Another goal was to ensure the systematic issuance
and registration of government bonds.


This part of the project, of course, is no longer viable.


"On a personal level, we were very disappointed," Carter said. "But we are a
bank, and it was our portfolio. We had to make some decisions as to how we
were going to proceed."


A working group of World Bank experts is examining and discussing, among
other things, the progress of this capital markets loan.


Any decisions on their findings will be made available in several weeks.


A lot of the money was allotted to basic regulatory infrastructure: $14.5
million to $14.2 billion of the World Bank loans was earmarked for computer
hardware and office equipment to be used by the Federal Securities
Commission. The intent was to modernize the way the commission regulates the
market.


With this project, the World Bank also intended to limit the incidence of
fraud, misinformation and manipulation in the securities market.


To what extent reductions in these roadblocks can be attributed to the World
Bank is unclear, but Fenkner said Igor Kostikov, head of the Federal
Securities Commission, is moving the agency in the right direction.


"He's cleaning up the brokerage business and following through with what has
been done in the past," Fenkner said.


Much is left to be done, though, he said. For example, there are still no
fines set for companies found guilty of insider trading. This is a crime that
carries prison terms in the United States, because it destroys the
credibility of the market.


Coal


Controversy has also overshadowed the World Bank's involvement in the coal
sector.


Critics have charged that too much money was being spent on the actual
privatization process, while not enough went toward worker compensation,
safety and retraining.


An internal memorandum obtained from Reformugol, an agency that coordinates
government reform initiatives with the World Bank, corroborates this earlier
criticism, but said many problems are being resolved.


Of the $800 million approved in December 1997 for the second Coal Sector
Adjustment Loan, $150 million still has to be provided. The remaining money
is split into two sections: one so-called social tranche of $50 million and a
so-called privatization tranche of $100 million.


A mission is scheduled to arrive in November to decide on the privatization
tranche.


However, a mission that was expected to arrive in the middle of October to
approve the release of the social tranche has been delayed, Reuters reported
late last week.


"At this point we are not quite sure what the schedule would be, but we hope
it will be a short delay," Carter said.


In 1996, the World Bank authorized the first Coal Sector Adjustment Loan,
worth $500 million.


In contrast to their investment loans, the World Bank's structural adjustment
loans come out in installments, called tranches, which are disbursed after
visiting missions confirm that the set conditions are being fulfilled.


In the case of the Coal Sector Adjustment Loan, the conditions were tied to
sector restructuring, such as closing unprofitable mines and privatizing
others, as well as to macroeconomic indicators, such as the size of the
budget deficit and budget revenues.


Domestic coal production is concentrated in the Kuzbass, the Krasnoyarsk
region and the Far East.


"The government has already put money into the [restructuring] program,"
Carter said. "They have already proven themselves to us."


Contrary to popular belief, money from structural adjustment loans are not
tied to any one sector, in this case coal. Within certain limits, the federal
government has leeway in spending its loans. Some of the $500 million coal
loan was used to pay pension arrears.


However, this money cannot be used for warplanes, missiles and other military
expenditures.


Some critics say, however, that World Bank funds indirectly finance the
ongoing war in Chechnya by freeing up other government monies for military
use.


Others don't see a link. If there was no money readily available from the
Bank, the government would not have changed the way it spent money, said
Roland Nash, an economist with Renaissance Capital brokerage house.


"Even without the World Bank, the Russian government would have made really
bad allocation decisions within the budget," Nash said.


Coal reform began back in 1993 within the federal government after a wave of
strikes and political protests by miners, a well-organized group. At that
time, more than 70 percent of the industry's operating costs were funded by
subsidies, ranking second only to agriculture.


According to an unpublished Reformugol report put together this year, 80
percent of subsidies were directed toward mines that were operating at a
loss.


Mines were always opening and closing during Soviet times, said Natalya
Trifonova, spokeswoman for Reformugol. During perestroika, however, there
came a point where the government stopped shutting them down. In the early
1990s, about 360 mines were operating.


Since the government began restructuring in 1993, work has stopped in 159
mines, even though not all of these mines have been completely liquidated.


About 230 mines are still extracting coal. It is not yet clear how many mines
will be closed in the future, because no concrete plans have been confirmed.


Worker layoffs are even more dramatic in their numbers. In 1993, there were
841,000 people employed in the industry. By 1999, this figure was down to
366,000 and is set to decrease even more in the coming years.


By the end of this year, 760 million rubles ($27.3 million) will be spent on
the restoration of mining regions and villages that have suffered from mine
closures.


Fewer mines means fewer workers. It also means less coal.


This became a point of contention in 1996, when Yury Malyshev, head of the
state coal enterprise Rosugol, did not agree with World Bank suggestions to
trim annual output by about 100 million metric tons. He and other industry
officials blamed the World Bank for the fall in coal output.


But Trifonova of Reformugol said he doubts the sector's trauma could have
been avoided. "It was going to happen anyway," he said. "That's clear to
everyone now. Without these loans, it just would have been more painful."


In the early days of the reform program, money had to be routed through
several banks and several layers of government before laid-off miners
received their worker's compensation.


Often, it was lost or misdirected in the process.


Now, officials have set up a system where money is wired directly from the
federal treasury to miners' bank accounts.


"Coal money is not mixed up with other money in the federal budget," said
Sergei Klimov, deputy head of the Coal Committee, on RTR television last
summer. "Money that is earmarked for coal has its own special place in the
budget, and it is from this fund that money is sent to coal companies and
regions."


Under the loan agreement, in order to continue to receive loan tranches, the
government is obligated to keep mining regions from becoming ghost towns.


This isn't happening in the Tula region, where tens of former mining villages
have emptied out, the newspaper Vremya MN reported in June.


About 800 families had been living and waiting in emergency shelters since
the mines closed a couple of years ago. By June, only a third were left.


In the last four years, 29,000 workers have lost their jobs as a result of
streamlining Tula's energy sector. Of these, 2,230 found other jobs, and
another thousand are receiving unemployment benefits.


No one knows for certain what has happened to the rest.


Social Protection


Dressed in a black turtleneck, a jean jacket hanging from his chair, Vladimir
Trubin f one of the architects of Russia's social reform program f takes a
puff of a cigarette while explaining what makes his job easy.


"There are some very smart people who work in the government apparatus," said
Trubin, a former Labor Ministry official. "And they make my job easy because
they understand everything.


"And then there are very many stupid people f very many. They also make our
work easy because they don't understand anything."


Trubin said a lot is left to be accomplished in making pension, child,
unemployment and need-based f as opposed to status-based f benefits more
effective in reaching the segments of the population that need it most.


Trubin is deputy director of the Russian Foundation for Social Reform, a
World Bank-funded, nongovernmental organization that coordinates changes in
the country's multibillion-dollar social benefit system.


Based on continually positive World Bank assessments and miniscule press
coverage, social reform can be counted as one of the more successful measures
funded by World Bank loans.


"We don't seek out press coverage," Trubin said. "But we are willing to give
out any documents requested. Everything in our office is open."


As a part of its work for "a world without poverty," the World Bank approved
a $800 million social protection adjustment loan in 1997. Just like the coal
loan, it was disbursed in tranches once the World Bank was satisfied with the
progress the federal government was making in reforming its social programs.
And government was given some breathing room on how this money was applied to
the budget.


Later that year, a different kind of social assistance project was approved.
This one was smaller f $28.6 million f and primarily offered technical
support for the fulfillment of the social adjustment loan conditions.


Now that the $800 million loan has been completely paid out, the Russian
Foundation for Social Reform has embarked on other projects using the smaller
loan.


One of the most prominent will be the launch of an ongoing survey by the
State Statistics Committee at the end of this year. Throughout the next year,
30,000 households across Russia will be asked questions about their incomes
and overall financial situation. This survey will be the first of its kind on
this scale.


There is also talk of a second social protection adjustment loan, he said. A
mission is scheduled to come in November to mull over this possibility.


And the fact that another big loan will only add to Russia's debt burden?


That doesn't concern Trubin very much, because a World Bank loan has much
lower interest rates than domestic banks.


"How big these loans are don't worry me," he said. "They help Russia a lot if
they are used appropriately. If this money is wasted, then it will only bring
harm."


*******


#8
Financial Times (UK)
31 October 2000
Russian shareholders pin their hopes on a
different ballgame: At last there are some small signs of a change in
attitude towards corporate governance, writes Andrew Jack:


When financial analysts met executives of Norilsk Nickel, the Russian
commodities company, this month, they did so in a rather unusual location: a
Moscow bowling alley.


Such a gathering might have seemed banal elsewhere, but it generated
considerable surprise in a country where awareness of corporate governance
remains low.


Against a long history of accounting opacity, minority shareholder abuse and
asset transfers, Norilsk's gathering was a modest sign of positive change in
the relations with shareholders that have been visible in Russia over the
past few months.


David Herne, portfolio manager with Brunswick Capital Management, says: "Ten
years ago, there was simply no understanding of share ownership. Now
managements are interested in buying up shares, whereas before they didn't
even see the need. That shows a growing appreciation that shareholders own
the company."


Mr Herne is one of several foreign investor representatives elected to
Russian company boards recently, including that of the national airline
Aeroflot. After an initial wave of appointments last year, the number - and
the prominence of the companies to which they have been admitted - has grown
considerably.


There have been other changes too. The Federal Securities Commission, under
its new chairman, Igor Kostikov, has promised a corporate governance code in
the coming months. Dmitri Vasiliyev, his predecessor, has formed an
investors' association that has started to make its voice heard.


Meanwhile, the Organisation of Economic Co-operation and Development (OECD)
has launched a series of seminars on corporate governance, which have
generated considerable interest.


Oil companies such as Sibneft and Yukos were the most high-profile targets of
criticism in the late 1990s for their abuse of minorities, attempting to
squeeze investors out of partially-owned subsidiaries on unfavourable terms
in order to acquire full control. They exploited weaknesses in share
registration systems and the rules concerning annual general meetings.


But in spite of the seeming changes in attitude towards corporate governance,
it remains to be seen whether the shift is skin deep rather than
fully-fledged.


UES, the electricity utility, and Norilsk Nickel, controlled by Vladimir
Potanin, the influential "oligarch", announced restructuring plans this year,
which provoked considerable concern over asset dilution.


Taken aback by the negative reaction, both companies at least partially
backtracked, hired western advisers, and became more open to investors.


However, some observers remain far from optimistic that things are changing
for the better. A culture of short-termism, which pays little heed to the
importance of establishing long-term relationships of trust, partly reflects
the feeling by many managers that they should act now to asset strip while
they still have the chance.


Oleg Babinov, of the Risk Advisory Group, a business intelligence firm, says:
"Operations are becoming more sophisticated. But my feeling is that the level
of abuse by Russian companies remains the same as in the past."


Alongside transfer pricing and asset transfers that have allowed many
companies to shift cash outside Russia - away from minority shareholders as
well as tax inspectors - he highlights the growing use of the bankruptcy and
arbitration courts, which are poorly funded and open to widespread suspicion
of partiality.


Mr Babinov points out that the incentives for managers to strip out assets
from their companies have existed at least since the former Soviet leader
Mikhail Gorbachev changed the rules for state enterprises in 1987. That
removed the five or more entities, ranging from the Communist Party to the
state planning committee, to whom directors were accountable.


Others suggest it goes back further. Nick Malyshev of the OECD in Paris says
that at least since the early 1970s, the incentives given to company
directors fostered a class of rent seekers rather than profit maximisers.


If government support for many Russian companies has helped prevent a change
in behaviour, so too has that from many foreign institutions, which lent
money or invested up until the August 1998 crisis. By turning a blind eye to
abuses and supporting companies with poor disclosure and shareholder-hostile
executives, they helped prop up a system that has since turned against them.


They also took a bet on companies that traded at a large discount to their
asset values - and those of their counterparts in many other countries -
principally because the political and corporate governance risks in investing
in Russian business were reflected in the share price.


But with the rules of the game now changing, investors and policy-makers
alike are increasingly turning their hopes towards improved corporate
governance, particularly through better implementation of legislation.


The problem is that the low salaries of judges and a chronically underfunded
legal administration has created huge potential for manipulation.


******


#9
Christian Science Monitor
October 31, 2000
Editorial
Reviving Religion in Russia


President Clinton will have occasion to aid the development of human rights
and democracy in Russia when he meets next month with Vladimir Putin at the
Asia-Pacific Economic Cooperation summit. He can put religious freedom
squarely on the table.


Religious groups in Russia have until the end of the year to register with
the government, or be dissolved. Just a little more than half of the 17,000
religious groups in Russia have been able to get through the registration
process. A lot of red tape, along with old repressive tendencies, has
resurfaced.


At the breakup of the Soviet Union, religious groups benefited from a
remarkably progressive law allowing freer expression of religious beliefs.
However, 1997 saw a step backward with restrictions of the rights of smaller
or newer religious groups. At the same time, special status was given to
Russia's more "traditional" religions.


Last week, the US Commission on International Religious Freedom wrote to Mr.
Clinton, urging him to intervene to speed up the registration process and
postpone the year-end deadline.


When Clinton talked with China's President Jiang Zemin in September,
religious freedom in China and Tibet was on the agenda. He now has an
opportunity to again show Mr. Putin how important that freedom is for the
future of US-Russian relations.


*****


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