Russia Report: September 16, 2004

By Robert Coalson

President Vladimir Putin appeared in a carefully staged, televised meeting with Prime Minister Mikhail Fradkov and Gazprom CEO Aleksei Miller at his residence outside of Moscow on 14 September. The president listened intently as Fradkov presented "his" idea for solving several problems at once, the most important of which he said was the problem of the dual stock system at the gas giant caused by the formal ban on foreign ownership of Gazprom stock. For years, foreign investors have complained that the ban is unfair and is hindering investment in Gazprom and in Russia generally, while the government has been unwilling to drop the ban because it does not have a majority stake in the strategically important company.

"Fradkov's" idea was to allow Gazprom to privatize state-controlled Rosneft, paying for Russia's last state-held oil company with a 10-15 percent block of its own shares. This would give the government a majority share of Gazprom, theoretically leaving it free to drop the ban on the sale of company shares to foreigners. At the same time, the plan has the beauty of keeping Rosneft under state control even as it is "privatized." The announcement that Rosneft President Sergei Bogdanchikov will continue to head the new company, to be called Gazpromneft, and widespread speculation that deputy presidential administration head Igor Sechin, who was named chairman of Rosneft's board in July, will become chairman of the new company left no doubt that continued state domination of Rosneft is a key part of the new plan. Presidential administration head Dmitrii Medvedev is chairman of Gazprom.

Despite the stage-managed meeting with Putin, no one seriously believes that this initiative sprang from Fradkov's office or the government. Such decisions are made within the presidential administration, and rumors of a move of this sort have been circulating actively for months. About a year ago, Defense Minister and Putin confidant Sergei Ivanov told "Kommersant-Daily" that the state must "retake the commanding heights" of the economy, paying particular attention to the oil sector. When Sechin took over Rosneft's board in July, the daily commented that the appointment is the first step in the creation of a state energy company that "in the future will define the rules of the game for Russia's most important market."

Kremlin-connected political analyst Stanislav Belkovskii told "Kommersant-Daily" in July that the Kremlin intends to create "a large energy-holding company based on Rosneft and Gazprom." He further predicted that the new company will eventually acquire up to one-half of the production assets of embattled oil giant Yukos (see "RFE/RL Russian Political Weekly," 15 July 2004). "Izvestiya" in July even speculated that the new company might be called Nefteprom.

During the staged meeting between Fradkov and Putin, the problem of eliminating Gazprom's two-tiered share system was presented as the driving motive behind the Rosneft deal. "I am convinced that the dual system should be ended as quickly as possible," Putin said, according to "The Moscow Times" on 15 September. "The sooner it is done, the better." The move was interpreted as an attempt to assuage investors who are understandably jittery in the wake of the Yukos affair and this summer's mysterious banking crisis. Industry and Energy Minister Viktor Khristenko on 15 September actually began throwing cold water on expectations that foreign investors would get a level playing field. Liberalization of the Gazprom share policy will "not mean the complete removal of all restrictions for residents and nonresidents," Khristenko said, according to newsru.com.

However, the real driving force behind the rush might well be the fact that the production subsidiaries of embattled Yukos are expected to come up for sale before the end of the year. A decision on the tender for the most lucrative of these assets, Yuganskneftegaz, is expected some time this month. Miller told Interfax on 15 September that Gazprom is not considering the purchase of any Yukos assets, but that assurance did not seem convincing, given statements by administration officials that the government should control at least 20 percent of the country's oil market. "The Moscow Times" noted that 16 percent of Gazprom's shares are controlled by Gazprom subsidiaries, and that this stake would be used to purchase Rosneft. If the company gives up around 10-12 percent for Rosneft, the paper speculated, enough would remain to allow it to put in a credible offer for Yuganskneftegaz, especially if it was known among market players that the Kremlin wants such a bid to succeed.

The day after the Gazprom news broke, Natural Resources Minister Yurii Tretnev gave a press conference in which he noted that 23 percent of current energy-resource-development licenses are inactive. He warned that the state will initiate proceedings to revoke and redistribute those inactive licenses, saying that it is important for the country to increase efficiency in the sector. Tretnev paid particular attention to the Salym group of deposits in Khanty-Mansiisk Autonomous Okrug, which is controlled by a subsidiary of Royal Dutch/Shell. The redistribution of development licenses could become an efficient mechanism for quickly boosting Gazpromneft's share of the sector to the desired level.

On 16 September, "Vedomosti" reported that the merger of Rosneft and Gazprom might not be quite as easy as Putin's meeting with Fradkov made it seem. Lawyer and sector analyst Viktor Topadze told the daily that Gazprom could be facing a profit-tax bill of about $1 billion if it tries to transfer shares controlled by subsidiaries to the government. "When the issue of swallowing up Rosneft was discussed, no one thought seriously about the tax issues," an unnamed source told the daily. The daily also said that Rosneft creditors, including ABN AMRO bank, might be unwilling to have their debts transferred to Gazprom. Such creditors would have the right to demand immediately repayment before the merger could take place. Analysts will watch with interest how the government handles these issues in order to push the deal through quickly.

The expanded Gazprom will certainly play a major role in the Russian economy, but experts are not entirely convinced that it would be able to cope with the responsibility. Institute of Globalization head Mikhail Delyagin, who was economics adviser to former Prime Minister Mikhail Kasyanov, told Radio Mayak on 14 September that Gazprom is already an unwieldy structure whose management has aroused considerable controversy for years. He said that a political decision has been made to create "a major state-owned oil company" that "in my view will include, in addition to the shreds of Yukos, some of Slavneft's assets and perhaps some other oil assets belonging to some oligarchs."

Delyagin added that "the problem is that in the Russian state of today, there is no hope that this state company will be run efficiently." "The bringing of part of the Russian oil industry under state control could be interpreted as a sign of a return to normality," he said. "However, the low quality of management in Russia today obliterates this positive aspect."

It seems certain that the future management of Gazpromneft will have fully internalized the lessons of the Yukos affair: Political reliability is a greater indicator of future success in Putin's Russia than management efficiency.

By Julie A. Corwin

While the average Russian citizen might not be able to see an immediate connection between the Beslan hostage tragedy and regional elections, President Vladimir Putin apparently can; and that is why he has chosen this week to announce another overhaul of Russia's election system.

Addressing a cabinet session attended by the heads of Russia's regions on 13 September, Putin argued that in the aftermath of Beslan, "it is necessary to strengthen government structures, [increase citizens'] faith in authorities, and create an effective system for internal [state] security." He suggested that it is "in the interest of unifying state power and further developing federalism that regional leaders should be elected by regional parliaments on the basis of nominees provided by the head of the federal government."

The majority of Russia's regional governors have publicly embraced Putin's proposal, just as they have praised all of his previous initiatives to diminish their power. For example, St. Petersburg Governor Valentina Matvienko said she supports the new system because she believes it will "improve the controllability of the state." She noted that today "a casual person can come to power and there is no mechanism to recall him" if the voters erred in having misjudged the situation and succumbed to populism. Ryazan Governor Georgii Shpak's aide, Anatolii Igumnov, called Putin's initiative "absolutely correct," saying that currently "many photogenic" individuals can become governor, regions.ru reported on 15 September. "They can speak well, but they cannot do anything," he said. Yaroslavl Oblast Governor Anatolii Lisitsyn noted that under the current electoral system, heads of executive bodies can be "pushed around" by voters during decision-making, according to ITAR-TASS.

While governors might privately voice reservations about government initiatives, they have to calculate the likely benefit of expressing opposition against the possible cost. And with upper and lower legislative chambers subservient to the Kremlin and public opinion solidly behind the president, they might often decide in favor of withholding any criticism. But in the case of the cancellation of gubernatorial elections, the governors' enthusiasm might in fact be genuine. In an article in the "Russian Regional Report" (http://www.isn.ethz.ch/infoservice/secwatch/rrr/) in March 2001, former presidential adviser Leonid Smirnyagin explained why governors might prefer to be appointed rather than elected. According to Smirnyagin, one unidentified Federation Council member told him that "it is much easier to lick one boot than to clean 400,000." Smirnyagin continued that Russia's regional elite has always been "adroit in the ways of the tsar's court" and that it is no accident that Communist Party Obkom secretaries often held their jobs for 15 years or longer at a time.

While governors might find it easier getting reappointed than reelected, they might also be hoping to recreate with Putin the kind of access that they once had with Boris Yeltsin. Since Putin has made his proposal to appoint governors, three of the strongest remaining Yeltsin-era leaders -- Sverdlovsk Oblast Governor Eduard Rossel, Tatarstan President Mintimer Shaimiev, and Saratov Oblast Governor Dmitrii Ayatskov -- have all stated that the system of seven presidential envoys, which Putin created, should now be dismantled. According to uralpolit.ru on 15 September, Rossel said he believes that governors will now become essentially the president's envoys to the regions. And, therefore, continuance of the current system of presidential envoys will not be understandable. According to Rossel, Tatar President Shaimiev suggested to Putin during the 13 September meeting that all layers of federal bureaucracy between the governors and the president should be eliminated. Speaking on 15 September, Saratov Oblast Governor Dmitrii Ayatskov agreed, noting, "If the president recommends the governor, why [would] presidential envoys be needed, who duplicate their functions?"

While governors might be willing to risk not getting appointed in order to save themselves the headache and expense of running in an election that they can never be 100 percent sure that they will win, Yeltsin-era governors like Ayatskov might run a better chance with the electorate. In an interview with RFE/RL, Nikolai Petrov of the Carnegie Moscow Center suggested that the recent wave of criminal investigations against governors is simply a continuation of a previous Kremlin effort to replace regional-level officials, particularly those from the Yeltsin-era, who are used to ruling their regions with a free hand. Ayatskov's wife, for example, is currently the subject of a criminal investigation. According to Petrov, "these criminal investigations are used just like blackmail to make it understandable to Ayatskov, for example, that it isn't necessary for him to participate in the next elections."

In an interview before Putin's announcement of the proposed changes to Russia's electoral system, Petrov suggested that the Kremlin has been fighting on two battlefronts, one with the governors and the regional elites and one with social unrest as a result of poorly planned reforms "And now a third battlefront fight has opened up with terrorists," he continued. Petrov suggested that the wisest move for the Kremlin would be to decide on its priorities and not try to fight on three battlefronts but rather to concentrate its efforts and solve these problems step by step." Apparently, the Kremlin agrees.

By Liz Fuller and Julie Corwin

Addressing members of the government and the heads of the 89 Russian federation subjects on 13 September, President Vladimir Putin admitted that the Kremlin's North Caucasus policy requires "radical modernization," Interfax reported. To that end, Putin decreed the creation of a new government commission, to be headed by presidential administration head Dmitrii Kozak, who will serve simultaneously as presidential envoy to the South Russia Federal District.

The new commission will be tasked with ameliorating what Putin termed the "desolate" economic situation in the region and eliminating unemployment and other adverse social conditions conducive to the spread of radical Islam.

Putin's belated diagnosis of the ills that beset the North Caucasus is not new; nor is the idea of creating a government commission to improve the situation. In December 1998, Putin's predecessor Boris Yeltsin issued a decree on the creation of precisely such a commission that would implement a unified policy to improve socioeconomic conditions in the region. Like Putin, Yeltsin named to head that commission a man with absolutely no experience of the North Caucasus, First Deputy Prime Minister Vadim Gustov. Yeltsin did, however, name two experts as Gustov's deputies: former Nationalities Ministers Ramazan Abdulatipov (an ethnic Avar from Daghestan), and Vyacheslav Mikhailov, whose focus on interethnic relations dated back to the 1980s when he served as a functionary of the relevant department of the CPSU Central Committee.

As it turned out, the Gustov commission accomplished very little: most crucially, it proved unable to anticipate and powerless to avert the erosion of authority in Chechnya in the first six months of 1999 that paved the way for radical field commander Shamil Basaev's August incursion into Daghestan which, in turn, served as the catalyst for the second Chechen war.

This is not to deny that numerous senior Russian political figures had long been aware of the threat of a new Chechen crisis. Commenting in September 1997 in an interview with then Russan Security Council Secretary Ivan Rybkin published in "Granitsa Rossii," Igor Rotar concluded that Moscow still had not reached a decision on how to resolve low-level conflicts in the North Caucasus. Ethnographer Valerii Tishkov (a third former nationalities minister) wrote in "Nezavisimaya gazeta" on 22 January 1998 that "Russia has no adequate, thought-through scientific policy in the region, only a desire to suppress, finagle or ignore the problems that are ripe [for solution]."

Addressing the Russian State Duma in January 1999, Abdulatipov blamed the deteriorating situation in the North Caucasus on the governments of Sergei Kirienko and Yevgenii Primakov, alleging that "no one took any interest in the Caucasus between May and October 1998," and that as a result, the "considerable efforts" undertaken in late 1997 and early 1998 to implement specific development programs for the region came to nothing. Former Perm Oblast legislature Chairman Yevgenii Sapiro, a non-specialist, headed the Ministry for Nationality Affairs and Federal Relations from May-July 1998.

One factor that may have hindered the drafting and systematic implementation of either a long-term comprehensive North Caucasus policy or, for that matter, a Russia-wide nationalities policy, has been the frequent changes in status of the ministry responsible for nationalities policy. The Ministry of Nationality and Regional Policy was created in 1994, its status upgraded from that of a State Committee, and former Krasnodar Krai Governor Nikolai Yegorov was appointed minister.

Yegorov was succeeded in July 1995 by Vyacheslav Mikhailov. In 1996, the ministry was renamed the Ministry for Nationality Affairs and Federal Relations. Two years later, in May 1998, Sapiro replaced Mikhailov as minister. Then in September 1998, the ministry was split into two components, the Ministry for Nationality Policy (headed by Abdulatipov) and the Ministry for Regional Policy (headed by Valerii Kirpichnikov, formerly the president on the Union of Russian Cities). Less than a year later, in July 1999, the move was reversed and the two ministries were again amalgamated; Mikhailov was reappointed as minister, but was dismissed in January 2000 and replaced by former Russian Ambassador to Azerbaijan Aleksandr Blokhin.

In July 2000, the Federal Migration Agency was abolished, and its functions subsumed into a new combined Ministry for Federation Affairs, Nationality and Migration Policy. Finally, in October 2001, Putin abolished that megaministry but named Vladimir Zorin as minister without portfolio responsible for nationalities affairs. On 13 September 2004, Putin announced the creation of a new Ministry for Nationalities Policy, which is to be headed by yet another non-specialist, former St. Petersburg Governor Vladimir Yakovlev, who since March of this year has served as presidential envoy to the South Russia Federal District.

It is not clear whether, and if so to what extent, Putin intended the institution of the seven envoys to the federal districts to substitute for or complement the work of the federal Nationalities Ministry. In an interview published in "Nezavisimaya gazeta" on 20 October 2000, presidential envoy to the South Russia Federal District Viktor Kazantsev, a former Russian military commander in the North Caucasus who subsequently wrote his academic dissertation on regional conflicts and how they should be resolved, focussed primarily on the need to strengthen economic cooperation between the North Caucasus republics and other regions of Russia. At the same time, he stressed that faced with a specific problem "we ask the center not for money, but to take concrete action," given that so much cash transferred to the regions is embezzled.

Commenting in October 2001 on the demise of the Ministry for Federation Affairs, Nationality and Migration Policy, "Vremya MN" suggested the rationale for that decision was to enhance the Kremlin's control over regional policy. According to the daily, "The liquidation of the ministry is explained by the fact that with the appearance of the institute of the [presidential envoys to the federal districts] and the beginning of the verticalization of federal power, all problems of federal construction fall in the sphere of competence of the presidential administration."

1991-2: The State Committee for Nationality Affairs was created.

February 1992: Valerii Tishkov, director of the Institute for Ethnology, is named the committee's director.

December 1992: Deputy Prime Minister Sergei Shakhrai is named chairman of the committee.

1994: The state committee is transformed into the Ministry for Nationality and Regional Policies.

16 May 1994: Former Krasnodar Krai Governor Nikolai Yegorov is named to head the ministry.

July 1995: Vyacheslav Mikhailov is named to head the ministry.

1996: The ministry is renamed the Ministry for Nationality Affairs and Federal Relations.

11 May 1998: Former speaker of Perm Oblast's legislature Yevgenii Sapiro is named to head the ministry.

25 September 1998: The ministry is divided into two parts, the Ministry for Nationality Policy and the Ministry for Regional Policy. Ramazan Abdulatipov is named to run the former, and former President of the Union of Russian Cities Valerii Kirpichnikov, the latter.

25 May 1999: The ministry is again reunited and renamed the Ministry for Regional and Nationality Policy. Vyacheslav Mikhailov, former head of the united ministry, is named to head it.

7 January 2000: Aleksandr Blokhin, former Russian ambassador to Azerbaijan, is named to head the ministry.

July 2000: The Federal Migration Service is dissolved as a separate entity and its functions transferred to the newly renamed Ministry for Federation Affairs, Nationality, and Migration Policy

17 October 2001: President Putin abolishes the ministry with one decree and in another calls for the appointment of an unnamed minister to coordinate the implementation of nationalities policies by federal agencies

6 December 2001: Vladimir Zorin is appointed minister without portfolio in charge of coordinating government institutions on nationality issues

24 February 2004: Minister without portfolio Zorin is dismissed along with rest of the cabinet and is not reappointed later

13 September 2004: President Putin announces the formation of a ministry for regional nationality policies and proposes former presidential envoy for the Southern Federal District Vladimir Yakovlev

Sources: "Vremya novostei" 18 October 2001, "RFE/RL Newsline," kremlin.ru

IN: Putin announced on 13 August the creation of a special Federal Commission on the North Caucasus, headed by former government apparatus head Dmitrii Kozak. Putin also appointed Kozak as his new envoy to the Southern Federal District, while the previous envoy, Vladimir Yakovlev, is to become minister of a reinstituted ministry for regional and nationality policies. Sergei Naryshkin, who was named deputy head of the government apparatus in March after serving as deputy director of the presidential administration's economics department, replaces Kozak as head of the government apparatus.

OUT: Prosecutor-General Vladimir Ustinov announced on 16 September that his deputy, Vladimir Kolesnikov, will replace Deputy Prosecutor-General for the Southern Federal District Sergei Fridinskii, who is being transferred back to Moscow, RTR and RIA-Novosti reported.

OUT: President Putin on 9 September signed a decree dismissing Leonid Drachevskii from his post as presidential envoy to the Siberian Federal District and naming former Chief of the General Staff General Anatolii Kvashnin to succeed him, "Izvestiya" and other Russian media reported on 10 September. At the same time, Putin discharged Kvashnin from the military. Krasnoyarsk Krai Governor Aleksandr Khloponin told Interfax that Drachevskii, 62, asked to be removed because of his age and said that it was regrettable because under Drachevskii "the region had become stable."

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

20-23 September: South Korean President Roh Moo Hyun to visit Russia

21 September: U.S. pianist Van Cliburn will perform a concert in Moscow in memory of the victims of the Beslan tragedy

26 September: State Duma will consider draft 2005 budget in its first reading

29 September: Auction for the government's stake in LUKoil will be held

October: President Putin will visit China

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

1 October: Deadline for population to select a management company to handle their pension-fund contributions, according to "Kommersant-Daily" on 3 September

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 52nd 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

14 November: Mayoral election will take place in Blagoveshchensk

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 Vladimir, Bryansk, Kamchatka, Ulyanovsk, and Volgograd oblasts; Khabarovsk Krai; and Ust-Ordynskii Autonomous Okrug

December: Presidential elections in Marii-El and Khakasia republics

5 December: By-elections for State Duma seats will be held in two single-mandate districts in Ulyanovsk and Moscow

5 December: Gubernatorial election will be held in Astrakhan Oblast

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.