Russia Report: August 19, 2004

The traditional question in Russia of what crisis this autumn will bring was given added urgency this year by the crisis of confidence that rocked the banking sector in the early summer. Despite the overall impression among analysts that there are no objective reasons to expect a wider crisis in the immediate future, the steady stream of bank closures in the ensuing weeks has done little to calm jittery financiers and bank customers. On 13 August, Moscow's Paveletskii Bank became the eighth bank to lose its license and to be put into receivership since the crisis started in May.

Most analysts agree that the crisis this summer was provoked by a combination of overall nervousness in the sector -- preconditioned largely by the Yukos affair and generally insecure property rights in Russia, as well as by the governments oft-stated policy of encouraging "consolidation" in the banking sector -- and the ham-handed actions and statements of the Central Bank and other regulators. Troika Dialog analyst Yevgenii Gavrilenkov summed up the consensus for "Vremya novostei" on 17 August. "To some extent the crisis was initiated by the regulators. It is clear that it is necessary to clean up the banking system, but this must be done professionally, cautiously, taking into consideration the sensitive character of the economy," Gavrilenkov said.

"It was a classic example of how not to act," he continued. "I think this example will be written into textbooks."

Gavrilenkov said that the overall nervousness in the sector is acerbated by "the general intrigue surrounding the course of reform." "This is a country of elevated nervousness," he said. "Any careless statement or action could fundamentally destabilize the situation."

Moscow Interbank Currency Association President Aleksei Mamontov wrote a scathing criticism of the Central Bank in "Vedomosti" on 19 July. He lambasted the government for not recognizing "that the reasons for the banking crisis lie not in the psychological or regulatory sphere, but specifically in the sphere of adhering to the rights of ownership." In order to avoid future crises in the sector, "political decisions are needed that testify to the fact that the authorities consider the protection of property rights to be their priority function," Mamontov concluded.

In an interview published in mid-August in "Moskovskie novosti," No. 30, the head of the Institute for Problems of Globalization and former economic adviser to Prime Minister Mikhail Kasyanov, Mikhail Delyagin, said that the crisis was triggered by the Central Bank's drawn-out conflict with Sodbiznesbank. In the weeks prior to the 13 May revocation of Sodbiznesbank's license on suspicion of money laundering, the bank's management attempted to protect itself by attracting as many individual depositors as possible, Delyagin said, describing the depositors as "a human shield" for the bank. By the time the Central Bank began to act, Sodbiznesbank had accumulated more than 45,000 such accounts, greatly increasing the public resonance of its closure.

Moreover, Delyagin said, Sodbiznesbank was apparently counting on some high-level protection from within the government and did not believe that the Central Bank would actually close it down. "After all, why is money laundered in Russian banks?" Delyagin said. "It isn't because of drug traffickers or Islamist terrorists but because of bribes taken by 'big fish.' So the management of Sodbiznesbank, apparently, simply didn't believe the bank would be closed. And so for two weeks the defense of Sodbiznesbank was waged...."

Delyagin's suspicions that the Sodbiznesbank money laundering revolved around official corruption would seem to be confirmed by the fact that, despite taking the radical action of revoking the bank's license, the Central Bank has revealed almost no details of its suspicions. Mamontov also wrote that the authorities must not be allowed to use the struggle against money laundering as a cover for politically motivated ploys. Current anti-money-laundering legislation "diverts both the authorities and society from solving real problems to seeking out more and more new 'enemies,'" he argued.

Delyagin and Mamontov both criticized the Central Bank's handling of the takeover of Guta Bank by the state-owned Vneshtorgbank. Both analysts said that the bank was wrong to offer Vneshtorgbank a loan to purchase Guta instead of offering Guta a stabilization loan. This decision, which was never thoroughly explained, fuelled speculation that the authorities are seeking to expand the state portion of the banking sector. "We must reject the practice of the nationalization of problem banks by means of providing Central Bank loans for this purpose, and instead credit the banks themselves," Mamontov wrote. Delyagin speculated that the Central Bank was too incompetent or too passive to monitor how Guta Bank would use a stabilization loan and therefore decided it was more convenient merely to absorb it into the state sector.

Although no statistics have yet been released, it would seem likely that the current uncertainty in the banking sector is beneficial to the larger, state-owned banks. Individual and corporate depositors might well be quietly moving their assets to stronger banks as reports of further closures of private banks trickle out.

Delyagin speculated that the Central Banks lapses were not caused by any nefarious intention on the part of Central Bank Chairman Sergei Ignatev. "I have the impression that he does not completely control the Central Bank," Delyagin said. "There are several influence groups there and each of them is trying to pull things in their direction." Moreover, Mamontov argues that competition among regulators, especially between the Central Bank and the Federal Financial Markets Monitoring Service, further aggravate the situation.

Delyagin, like most analysts, stressed that there are no objective reasons why there should be a banking crisis. In fact, the most frightening thing about this summer's events for him is that it happened when everything objectively seemed to be going fine. The overall condition of nervousness -- particularly unassuaged doubts about the government's real intentions -- and the unpredictability of the regulators obviously still characterize the business environment in Russia. So although there is no reason to expect a crisis, many observers nonetheless do. (Robert Coalson)

Russian Prime Minister Mikhail Fradkov cut his Sochi vacation short -- reportedly at the personal insistence of President Vladimir Putin -- to preside over a 12 August cabinet session devoted to the subject of government accountability. Ministers at the meeting were sharply divided over the results of the work of an administrative-reform commission headed by Deputy Prime Minister Aleksandr Zhukov.

According to "Izvestiya" on 13 August, Fradkov and Zhukov both emphasized in their presentations that Putin has been clear in setting the government's tasks: doubling gross domestic product (GDP) and cutting poverty in half. On the basis of these tasks, Zhukov's commission created a list of "objective indicators" by which the performance of each ministry -- and each minister -- may be judged. "Izvestiya" reported that the commission has not yet set indicators for the defense and security agencies, noting that these agencies were also restructured several months after the nondefense ministries were reformed earlier this year. The daily predicted that defense-sector indicators will be forthcoming after the 2005 budget is adopted.

The new indicators will, beginning with the 2006 budget, be tied to each agency's federal funding. An increasingly large portion of the budget will be directly tied to the government's main tasks through targeted programs that are funded across agencies. Those agencies, in turn, will have to justify their access to that funding by citing the indicators for which they are responsible. Newsprom.ru on 16 August cited Fradkov as saying that all government agencies will have adopted and submitted a strategic action plan by the end of the year.

"This in no way is the kind of planning that we had during Soviet times," Fradkov said, defending the initiative. "It in no way will limit the initiative of ministries and agencies in carrying out the tasks they have been set."

Zhukov told RIA-Novosti on 12 August that the new system is an elegant mixture of freedom and control. "In the framework of the reform of budgetary planning, ministers will be given great freedom in managing their budget resources and, at the same time, they will be made more responsible for fulfilling the tasks set for them," Zhukov said. He said that the introduction of the indicators "was done at [the ministers'] own request."

Zhukov added that the president and the government will decide the fate of any ministers who fail to achieve their performance targets.

"Nezavisimaya gazeta" on 13 August provided some details about the contentious discussion the ministers had about the specific indicators. For example, Zhukov's commission has proposed that the Health and Social Development Ministry be responsible with cutting infant mortality from the current 11.7 per 1,000 infants to six by 2012. The Finance Ministry, meanwhile, will be asked to see that stock-market capitalization rises from the current 47 percent of GDP to 70 percent by 2009.

According to "Vedomosti" on 6 August, the plan would hold the Finance Ministry responsible for boosting Russia's Standard & Poor's credit rating to A- by 2007, while the Economic Development and Trade Ministry would be primarily responsible for cutting inflation to an annual rate of 6 percent by 2007. "Vedomosti" reported that there are 58 indicators in all, including several that are shared by more than one agency. For instance, the Health and Social Development Ministry will work together with the Economic Development and Trade Ministry to see that the percentage of the population living below the poverty line is reduced to 12 percent by 2006 and to 10.5 percent by 2007.

Economic Development and Trade Minister German Gref and Finance Minister Aleksei Kudrin reportedly took issue with the indicators assigned to their ministries, arguing that they were not able to control all the factors that contribute to, say, inflation or production. "GDP growth and industrial production involve a huge number of factors, few of which we influence," Deputy Economic Development and Trade Minister Andrei Sharonov told "Vedomosti."

Not surprisingly, presidential economic adviser Andrei Illarionov, who is well known for his unrelenting criticism of several government figures, particularly Gref, endorsed the indicators. "This is a very serious document," Illarionov told "Rossiiskaya gazeta" on 13 August. "The goals, targets, and indicators presented in it seem ambitious and realistic."

While the program will certainly be revised over the next few months, there seems to be little doubt that it will be adopted. Fradkov is widely seen as the guiding spirit behind the initiative, and several media outlets attributed his early return from vacation to his desire to make sure that ministerial infighting over the reform did not get out of hand.

Moreover, Putin met for more than three hours with Zhukov on 11 August, a meeting that was given wide coverage on national television. During that meeting, Putin emphasized the role of the indicators in demonstrating the government's successes to the public. "I believe that [publicizing the indicators] would be eye-opening for our citizens," Putin said.

Putin's emphasis on presenting "objective figures" to the public seems to indicate that the government is concerned with the problem of accountability. At a 13 August press conference devoted to the topic of the first 100 days of Putin's second term, Center for Political Technologies Deputy General Director Boris Makarenko commented that during the president's first term, a new "system of power" was constructed and the second term will demonstrate how it functions. "[The system] works more effectively than the skeptics and pessimists expected," Makarenko said, according to "Moskovskii komsomolets" on 14 August. "But the other side of such a system is that it is beginning to evolve in the direction of increasing isolation from society; it is losing its connection with [society]. And closed systems always become dull, and they try to protect themselves from negative information."

The Zhukov commission's administrative-reform scheme would seem to be an attempt to build some form of accountability into this closed system -- replacing the oversight functions that an independent legislature, judiciary, media, and civil society would otherwise execute -- without, of course, fundamentally altering the system. It remains to be seen whether this system -- under which the government itself sets its targets, generates the indicators by which it is judged, produces the statistics by which the indicators are measured, publicizes or conceals its findings, and decides the fates of officials who miss their targets -- can do anything to stem corruption and to promote efficiency and innovation. Makarenko's "skeptics and pessimists" will argue that such an insular system will likely become another weapon in the intramural struggle for Putin's good graces. (Robert Coalson)

President Vladimir Putin is expected to sign into law a bill converting certain social benefits, such as free public transportation and medicine, to cash payments, and regional leaders are already signaling that they do not plan to implement it vigorously. It's little wonder. The bill has inspired weeks of protests across Russia. Polling data shows the public is pessimistic about how their own economic well-being will be affected. And regional leaders have been set up to take the blame if any hitches occur along the way.

Prior to the bill's adoption, in late July, 10 of the 12 governors who are members of the Far East and Trans Baikal Interregional Association sent a letter to President Putin asking him to suspend the process of monetizing social benefits. The governors charged that the planned reform violates the constitution by altering the social character of the state. At a meeting last week of the Coordination Council of Far East Governors, presidential envoy to the Far East Federal District Konstantin Pulikovskii declared that the letter was a "political mistake" orchestrated by Khabarovsk Governor Viktor Ishaev and Sakha Republic President Vyacheslav Shtyrov, "Rossiiskaya gazeta" reported on 14 August. He accused them of trying to create the impression that the federal center does not care about citizens' welfare. "This is not so," he insisted.

Other regional leaders have adopted a similar stance to the Far Eastern rebels, declaring their intention to protect their electorate from Moscow's arbitrary whims. After the Duma passed the bill on 5 August, Moscow Mayor Yurii Luzhkov said in a press conference on 7 August that his government will preserve all benefits Muscovites currently possess, Interfax-Moscow reported on 8 August. "Our veterans and other persons eligible for social welfare payments, including pensioners, will receive all [their] current benefits, including free passage on city public transportation. We will proceed as I promised earlier: People will not suffer as result of the reform," Luzhkov pledged.

And before the bill had passed even its first reading, Karelia President Sergei Katanandov declared on 3 June that his government will not convert in-kind benefits, such as the installation of phones and free medicine, to monetary payments if the recipients of these benefits do not want such a conversion, RIA-Novosti reported, citing the republican government's press service. "For those [residents] who want to [continue] receiving [such] benefits and not cash, the government will provide this opportunity. Payments for these benefits will come out of the republican budget. There is no reason to be afraid," Katanandov said.

The adoption of the social-welfare-benefits reform takes place against a backdrop of tightening federal control over regional revenues and a reduced share of revenues from the tax on profits and water. This month the State Duma and Federation Council passed amendments to the Budget and Tax Code, which "virtually require the transfer of all budgets of all levels to the federal treasury," "Gazeta" reported on 3 August. The new Budget Code also abolishes grants to the regions to pay state-sector wages or disaster relief. In the future, whenever a region needs funds urgently, it will have to borrow the money from Moscow and pay interest -- a very low rate of interest, but interest nonetheless.

In an address to the Federation Council, Finance Minister Aleksei Kudrin reassured the representatives that the amendments to the budget law will not leave regions without enough revenue, RIA-Novosti reported. He said that a special reserve fund of 30 billion rubles ($1 billion) is being created to ensure that regional budgets are balanced in 2005. However, some regional officials remain "indignant" about the new federal budget policy, according to "Vedomosti" on 12 August. An unidentified official from the Volga Federal District told the daily: "According to the new rules, we cannot compete for federal money, but we don't have enough budget resources. We plan to raise money by other means, for example, to take credits for state securities -- this is quicker and simpler than asking for federal money."

The Sakha Republic is similarly bewildered about how it will pay for social benefits. The republic's Finance Minister Ernst Berezkin said on 11 August that paying cash benefits for the region's 55,000 persons who are eligible to receive social welfare benefits would create an enormous budget deficit in 2005 of 400 million rubles ($14 million), Regnum reported. The basic sources for additional revenue, besides tax receipts, would be the sale of government property. However, the plan for the sale of government property only anticipates the generation of 100 million rubles in the first half of 2005. Natalya Golovanova of the Center for Fiscal Policy noted that "the Finance Ministry [in Moscow] is always saying that the grants will be distributed for the balancing of the budgets according to a formula, but nobody sees this formula."

Further complicating implementation is the fact that gubernatorial and parliamentary elections are coming up in a number of regions. Elections for new governors or presidents will be held in 13 regions before the end of the year. Parliamentary elections will take place in 11 regions. In Volgograd Oblast, where incumbent Governor Nikolai Masyuta is up for reelection in December, the benefits reform has already come up as an issue in the election campaign. Media controlled by Volgograd Mayor Yevgenii Ishchenko criticized Masyuta for proposing on the floor of the State Council a moratorium on introduction of the monetization and accused him of trying to rebel against President Putin, "Nezavisimaya gazeta" reported on 9 August. When this characterization failed to bring Ishchenko any political dividends, Maksyuta was then attacked from the opposition direction as "governor-traitor" not to Putin but "of the region's interests." Maksyuta, who is nominally a communist, is so far taking a wait-and-see approach. He told the daily that around two-thirds of the oblast population is eligible for social welfare benefits to a greater or lesser extent. He said the price of the benefits is estimated at 4.7 billion rubles a year, and it is not yet known what part of this sum will be covered in the oblast budget and what part in the federal budget. "People are talking about only 12 percent of our expenses for this compensation coming from the federal center," he said. "This would be too great a load."

In Saratov Oblast, Governor Dmitrii Ayatskov is not facing reelection but he is facing an ongoing corruption investigation. And perhaps not coincidentally, he seems determined to find a solution to the problems created by the new reform without blaming Moscow. In an interview with "Novaya gazeta," No. 56, Ayatskov said that of the 2.674 million residents in his region, 1.5 million receive some kind of other benefits. "Many of these are unjustified. For example, a mother, who drives around in a Mercedes, gets a child subsidy," he said. He also noted that "if the budget was amended to divide social spending responsibilities equally between Moscow and the regions, we would be able to meet those commitments. But what is being proposed at present -- 64 percent paid by the regions and 36 percent paid by Moscow -- would be difficult for us." In order to raise the necessary funds, he vowed to cut government staff in Saratov beginning with his own.

In an article in "Novaya gazeta," No. 54, Rostislav Turovskii of the Center for Political Technology concluded that the first rebellion by regional leaders to the benefits reform -- the letter from the 10 Far East governors -- "is evidence that the system is experiencing some sort of crisis." Turovskii characterized the situation as one in which "the governors are losing control over regional economics" and are becoming "social workers" who are responsible for the welfare of the budget sector. Moscow is shifting responsibility for social payments -- to state-sector workers, citizens eligible for benefits, and veterans -- onto meager regional budgets. Turovskii asserted that the Kremlin had decided to make governors deal with the worsening situation in the social sphere. However, it may come to rue this decision: "In Russia, the question 'who is to blame?' can split the elite even under the most authoritative regime, for not only the president is concerned about his rating." He continued, "Small wonder that now instead of expressing unanimous approval, the governors are arguing about the hot issue of social reform." (Julie A. Corwin)

Samara Oblast Governor Konstantin Titov finds himself in a curious position: The Russian Supreme Court, along with the local prosecutor's office and oblast court, all believe that his second term ended last month on 2 July, but a new election has not yet been scheduled. The head of the department for monitoring the observance of federal legislation at the Samara Oblast prosecutor's office, Lyudmila Gorozhanina, clarified the situation this way: "We are not confirming that Titov is not governor," she said. "The answer to this question will be given later," "Kommersant Daily v Samare" reported on 17 August.

Odd spots are not unusual for Titov. Four years ago, he resigned his post some eight months before a reelection battle. He claimed that this was in response to the regional electorate's vote of no confidence in him in the 2000 presidential election, but his abrupt departure forced the region to hold elections earlier than planned. And he, as an incumbent although a self-deposed one, was in the better position than his rivals to organize a campaign quickly.

It's so far unclear how Titov will be able to capitalize on this new uncertainty. The current legal snafu occurred because an oblast court ruled on 30 June that the passage of a law in 2000 by the oblast legislature changing Titov's current term in office from four to five years was invalid. It moved up the date for the next gubernatorial election from the summer of 2005 to 19 September. However, the Supreme Court suspended this decision on 22 July and the date of the next election remains unspecified. On 15 September, the Supreme Court is expected to render a final decision on the entire matter, according to "Kommersant v Samare." "Nezavisimaya gazeta" reported on 17 August that it is generally expected that the court will set December as the date for the next election.

Titov's political opponents want him to leave office immediately. Sergei Nikologorskii, a member of the oblast election commission who is loyal to Titov's long-time rival, Samara Mayor Georgii Limanskii, sent a formal inquiry to the prosecutor's office asking about Titov's "misappropriation" of the governor's office. Former Deputy Governor Viktor Kazakov, who is likely to compete in the next election, told "Kommersant v Samare," "I cannot tell the court or prosecutor's office how to act in this situation, but I think that they should respond in accordance with the law." Other likely contenders are State Duma Deputy and member of the Unified Russia faction Vladimir Mokryi and Liberal Democratic Party of Russia member and State Duma Deputy Aleksei Chernyshov, "Novye izvestiya" reported on 17 August. According to the daily, Mokryi is not well-known in the region, although he was elected from a single-mandate district there. In addition, Natalya Bobrova, deputy speaker of the oblast legislature; Viktor Sazonov, speaker of the legislature; and Viktor Tarkhov, also of the oblast legislature, have already declared their intentions to run. Valerii Pavlyukevich, a local political analyst, told RFE/RL on 5 August that Tarkhov, a former top manager at Yukos, has the best chance so far of making it to the second round.

The Kremlin, however, might look askance at a former Yukos official overseeing Samara, where a significant number of Yukos enterprises are located. "Vremya novostei" argued on 26 July that the Kremlin needs a governor in Samara "who is an absolutely reliable and loyal person." And with the Supreme Court's decision delaying the election, it argued, the Kremlin gained time to identify its own candidate. Meanwhile, Unified Russia's Supreme Council decided on 29 July to support Titov in the race, RFE/RL's Samara correspondent reported. Titov, meanwhile, has gone on vacation. It appears to be a kind of odd, working vacation, since, as RFE/RL's Samara correspondent reported, oblast television continues to show Titov taking part in all official functions but now only as an "ordinary Samara citizen." (Julie A. Corwin)

DECEASED: Astrakhan Oblast Governor Anatolii Guzhvin, 59, died suddenly on 17 August of a myocardial infarction, Interfax reported on 18 August, citing the oblast's chief federal inspector, Aleksei Zhilyaev. Guzhvin was serving his third term and had been expected to seek a fourth term in the election scheduled for December.

UP: President Putin reappointed Valerii Loshchinin first deputy foreign minister on 13 August. Loshchinin, who was previously responsible for relations with the CIS, will be Foreign Minister Sergei Lavrov's only first deputy. Putin also approved Aleksandr Alekseev, Sergei Kislyak, Sergei Razov, Aleksandr Saltanov, Vladimir Chizhov, and Yurii Fedotov as Lavrov's deputies. Alekseev, who served previously as Russia's representative to the Organization for Security and Cooperation in Europe, will oversee policy on Asia. He also will lead the Russian delegation in six-way discussions on the nuclear threat posed by North Korea. Kislyak will remain responsible for policy on North and South America, Razov for Europe, Saltanov for Africa, Chizhov for the European Union and NATO, and Fedotov for international organizations.

IN: President Putin appointed on 13 August Ambassador to Tanzania Doku Zavgaev as director-general of the Foreign Ministry, a top administrative post. Zavgaev was the last chairman of the Supreme Soviet of the Checheno-Ingush ASSR in 1990-91 and served in 1995-96 as the pro-Moscow leader of Chechnya during the first Chechen war.

FINED: A court in Rostov Oblast fined popular singer Filipp Kirkorov 60,000 rubles ($2,000) on 11 August for publicly offending Rostov-na-Donu journalist Irina Aroyan at a May press conference (see "RFE/RL Russian Political Weekly," 18 June 2004), newsru.com and other Russian media reported on 12 August.

13-29 August: Russian athletes will participate in the Summer Olympic Games in Athens

20 August: Central Election Commission will discuss preparation for presidential elections in Chechnya

23 August: A Russian government delegation will conduct negotiations in Jedda, Saudi Arabia, with the ministry for organizing the hajj, according to RIA-Novosti

23 August: The trial of the accused murderers of State Duma Deputy Galina Starovoitova will reopen in St. Petersburg

23 August: Government to discuss draft 2005 budget

24 August: Pskov Oblast legislators will set the date for the next gubernatorial election

26 August: Deadline for the government to submit its draft 2005 budget to the State Duma

27-31 August: Swiss parliamentarian Andreas Gross and German Bundestag deputy Rudolf Bindig, two of the three rapporteurs for the Parliamentary Assembly of the Council of Europe on Chechnya, will visit Moscow

27-29 August: First ever Russian "Olympic" games for incarcerated persons to be held in Petrozavodsk

29 August: Presidential elections will be held in Chechnya

September: St. Petersburg's State Hermitage Museum plans to open the Hermitage Center, which will exhibit works from the Hermitage's collection, in the city of Kazan

September: OPEC President and Indonesian Energy Minister Purnomo Yusgiantoro will visit Moscow, according to Interfax

September: President Putin to visit Dushanbe

2 September: Moscow Arbitration Court will hear Yukos's appeal of the seizure of Samaraneftegaz

5 September: Mayoral elections in Orenburg

14 September: British Prince Edward, Earl of Wessex will visit Petrozavodsk

15-18 September: The third International Conference of Mayors of World Cities will be held in Moscow

15 September: Supreme Court will render a final decision on when to hold gubernatorial elections in Samara Oblast

20 September: The State Duma's fall session will begin

October: President Putin will visit China

October: International forum of the Organization of the Islamic Conference will be held in Moscow

1 October: Date by which the government will decide whether to sell a controlling stake in Aeroflot, according to Economic Development and Trade Minister German Gref

7 October: President Putin's birthday

10 October: Mayoral elections scheduled for Magadan

23-26 October: Second anniversary of the Moscow theater hostage crisis

25 October: First anniversary of former Yukos head Mikhail Khodorkovskii's arrest at an airport in Novosibirsk

31 October: Presidential election in Ukraine

November: Gubernatorial election in Pskov and Kurgan oblasts

20 November: Sixth anniversary of the killing of State Duma Deputy Galina Starovoitova

22 November: President Putin to visit Brazil

December: A draft law on toll roads will be submitted to the government, according to the Federal Highways Agency's Construction Department on 6 April

December: Gubernatorial elections in Astrakhan, Bryansk, Kamchatka, Ulyanovsk, Volgograd, and Ivanovo oblasts

December: Presidential elections in Marii-El and Khakasia republics

29 December: State Duma's fall session will come to a close

1 February 2005: Former President Boris Yeltsin's 74th birthday

March 2005: Gubernatorial election in Saratov Oblast.