Johnson's Russia List #6149 22 March 2002 davidjohnson@erols.com A CDI Project www.cdi.org [Note from David Johnson: 1. UPI: NATO calls Russia 20th member. 2. Reuters: Russia accuses Georgia of arming militants. 3. Luba Schartzman: ORT Review. 4. gazeta.ru: Centrists Seek to Unseat Red Speaker. 5. Reuters: Vietnam Says Handover of Russian Base Underway. 6. Reuters: US, Russia may revise Iraq embargo rules. 7. Interfax: Russia will not permit formation of tribunal on Chechnya similar to ICTY - Kremlin aide. 8. Bloomberg: Vladimir Todres, Russia Aims to Boost Growth by Luring More Foreign Investors. 9. HedgeWorld.com: Pete Gallo, Hermitage’s Browder Says Being An Activist Investor Pays in Russia. 10. Yegor Gaidar's Conference Economic on Post-Communist Economic Growth. 11. Carnegie Endowment for International Peace meeting report: William Browder, Gazprom and Itera: A Case Study in Russian Corporate Misgovernance.] ******* #1 NATO calls Russia 20th member PRAGUE, Czech Republic, March 21 (UPI) -- NATO Secretary General George Robertson on Thursday referred to Russia as the 20th member of the 19-member alliance and said he is "optimistic" about ongoing talks with Moscow. "Until now, our relationship with Russia has been conducted at '19 plus one,' " Robertson said. "Now, however, on a range of key issues, Russia will sit alongside the 19 allies as an equal partner. "This forum for cooperation 'at 20' should be ready well before" the Prague summit in November, he said. Robertson did not name the "key issues" or describe the current negotiations between NATO and Russia, which began in December and include a format for giving the Kremlin some kind of voting power on the NATO council. Currently Russia is one of 46 NATO "partner" countries, but the Putin government clearly signaled a desire for closer relations after mutual East-West interests emerged following Sept. 11 attack on New York and Washington. Indeed, Putin lifted his country's longtime opposition to NATO enlargement in East Europe and expressed an interest in joining the alliance after he held discussed the fight against with President Bush in October. Since then, anti-West hardliners in Moscow have faded from the picture while key Russian parliament and military leaders -- including Defense Minister Sergei Ivanov -- echoed Putin's resolve. Nevertheless, the cooperative pact is still taking shape. Questioned by a reporter from the Prague newspaper Pravda -- a left-wing daily and former communist propaganda sheet before the Iron Curtain fell in 1989 -- Robertson said negotiators are still hammering out a plan for assimilating Russia into NATO. "We've not yet reached a final conclusion, either on the institution itself nor on the substance," he said. "But negotiations are ongoing, I remain optimistic, and I believe that there is genuine political will on both sides to make this happen." Russia and the NATO council are not complete strangers, as representatives from the two sides have been meeting since 1997. But Robertson said during the 1990s the two sides "danced nervously around each other" as the alliance's hopes for eastward enlargement became "a major bone of contention," with Russia viewing it as a "sinister geopolitical plot." Even with a closer relationship as a "20th" member, Robertson said, Russia and other NATO allies do not expect to agree on every matter. He mentioned the breakaway Russian republic of Chechnya, the scene of continuing civil conflict, as an issue of disagreement for the West and Moscow. "All this does not mean that I harbor romantic expectations about NATO's relationship with Russia," Robertson said. "I do not expect Moscow to enthusiastically welcome NATO enlargement" which could add up to nine East Europe countries, from the Baltic to the Balkans, after the November summit. But harsh distrust is being replaced with cooperation, Robertson said. "September 11 has created an entirely new context for NATO-Russia relations," he said. The NATO chief told the 300 students at a university lecture hall that Putin's state visit last year to Poland -- which joined NATO in 1999 -- was a snapshot of the changing times. The Russian president then told Warsaw leaders that their relationship with his government mirrored his view toward NATO: Skeptical, perhaps, but willing to work things out. The Warsaw meeting was an about-face from the "resentment" felt by former Russian President Boris Yeltsin toward Poland's NATO entry a few years earlier, Robertson said. "It was resentment, but it was eventually accepted," he said. Now, the NATO-Russian initiative "gives us the chance to transform the strategic landscape, to finally get the kind of practical, pragmatic NATO-Russia relationship we should have achieved a long time ago." Though his exact role remains uncertain, Putin is expected to join ministers from the NATO countries at the Prague conference. His scheduled appearance is one reason Robertson is calling the gathering a "transformation summit." ******* #2 Russia accuses Georgia of arming militants By Peter Graff MOSCOW, March 21 (Reuters) - Russia unleashed its most aggressive rhetoric yet at its tiny neighbour Georgia on Thursday, accusing it of arming nationalist militants, helping Chechen rebels and plotting a new war against separatists. Moscow did not mention Washington in the broadside, but the foreign ministry's accusations also amounted to a warning shot across the bows of the United States, which is sending military instructors to help train and arm the Georgian army. The statement was prompted by the brief kidnapping and release on Tuesday of four Russian peacekeepers from the unstable border area that divides Georgia's breakaway Abkhazia region from the rest of the country. The Russian soldiers were exchanged for Georgians held prisoner by separatists. Russia's comments on Abkhazia -- among the most tense of the unresolved ethnic conflicts simmering on the ex-Soviet Union's fringes -- have grown ever more alarmist in the weeks since Washington promised Georgia military aid. Abkhaz separatists, who drove Georgian forces and some 250,000 ethnic Georgian civilians out of their Black Sea province in a 1992-93 war, fear a U.S. trained and equipped Georgian army may be turned against them. "Georgia has clearly taken the course of seeking to prepare its own and world public opinion for new attempts to resolve the Abkhazia issue by force," the Russian ministry statement said. It accused Georgia of arming the "White Legions" and "Forest Brotherhood" nationalist militia, which have clashed with Russian peacekeepers and Abkhaz forces and which Moscow said were behind this week's kidnapping. "(The militia) don't find their weapons in the forest," the Russian statement said. "The office doors of top Georgian officials are open for them." It also said Georgian officials had helped Chechen guerrilla leader Ruslan Gelayev launch a raid on Abkhazia last year, and said Tbilisi had turned a blind eye to "Chechen terrorists" who shot down a U.N. helicopter, killing nine people. "Such hypocrisy on the part of Tbilisi makes one doubt its sincerity, not only in the fight against terrorism, but also on the issue of a political settlement in Abkhazia," it said. "Tbilisi must be held to full account for the consequences of such provocations and irresponsible actions." ABKHAZ SEPARATIST VISITS MOSCOW Russia tacitly backed the Abkhaz in the war and now maintains 1,500 peacekeepers in the Abkhaz border zone. In past weeks the separatist leadership has asked for Russian support and enjoyed considerable backing among Russian politicians. Anri Dzhergeniya, the prime minister of the unrecognised Abkhaz separatist government, flew to Moscow on Thursday. RIA news agency quoted him as saying Georgia was carrying out "an unofficial, secret mobilisation." Russia's political elite, which shrugged off the deployment of thousands of U.S. troops in other ex-Soviet states as part of the post-September 11 war in Afghanistan, initially responded with fury at news a few dozen Americans were going to Georgia. Some Russian politicians even suggested establishing formal links with Abkhazia, a move that risked breaking the ultimate post-Soviet taboo of redrawing frontiers. President Vladimir Putin eventually said the American mission in Georgia was "no tragedy" for Russia and reconfirmed Moscow's support for Georgia's borders. But many saw his remarks as a reluctant acceptance of something he was powerless to stop. ****** #3 ORT Review www.ortv.ru Compiled by Luba Schwartzman (luba7@bu.edu) Research fellow at the Institute for the Study of Conflict, Ideology and Policy at Boston University HEADLINES, Thursday, March 21, 2002 - Russian customs officers detained a man who was trying to smuggle 33 objects of value including icons and a dagger out of Russia. In total, Russian customs officers seized more than $158,000 in undeclared money, valuables and vehicles over the past 24 hours; 7 criminal cases and 162 cases on customs violations have been initiated. - Russia's Media-Union continues preparations for the competition for the best Russia-language radio station. Winners in 19 categories will be announced on May 7, National Radio Day. - The city of Norilsk will be Russian President Putin's first stop on his 2-day tour of Krasnoyarsk Krai. Putin will visit one of Russia's largest metallurgic enterprises, Norilsk Nickel. - Security Council Chairman Vladimir Rushailo announced that the presence of American military advisors in Georgia and Central Asia is justified in the context of the fight against international terrorism. - The Russian Foreign Ministry published an official statement this morning accusing Georgia of taking unrealistic steps in the fight against terrorism and of preparing to use force to solve the conflict with Abkhazia. - Chairman of the State Duma Committee on International Affairs Dmitry Rogozin declared that the kidnapping of the Russian peacekeepers was "yet another attempt to draw Russia into a conflict on the territory of another state." - Russian Prime Minister Mikhail Kasyanov promised that the Russian Cabinet will monitor child health and healthcare. Over the past 10 years, the frequency of childhood illness has increased by 25 percent. - The Russian government reviewed the ten-year Concept for the development of the domestic automotive industry. The Concept provides about 500 billion Rubles ($16 billion) for making Russian cars competitive with imports. Prime Minister Kasyanov stated that it's possible that taxes on imported cars will be raised to 25% for new cars, 35% for cars 5-7 years old and 25% for cars more than 7 years old. - New Central Bank Chairman Sergei Ignatiev gave an interview to the Vremya news show. He said that his main goals will be to continue the Central Bank's monetary-credit and exchange policy of the last few years, to prevent deviations in the exchange rate and, above all, to gradually decrease inflation. - President Putin sent a congratulatory telegram to Aleksei Yagudin, who received a gold medal in the men's free skate event at the World Figure Skating Championships in Naganoto. Yagudin is now a four-time World Champion. - Russian Foreign Minister Igor Ivanov discussed bilateral relations and international security issues, including the situation in the Middle East, with German Chancellor Joschka Fischer. - Accounting Chamber Chairman Sergei Stepanov summed up the preliminary results of an investigation of federal budget spending in Chechnya at an away meeting in Grozny. After the meeting he told journalists that there have been cases of fraudulent construction deals with the private sector. - Flood management exercises were held in the Volgograd oblast. - Moscow Mayor Yuri Luzhkov declared that the rejection of Leonid Grach's registration for the Ukrainian parliamentary election was politically motivated. - Georgian Justice Ministry's special service officers were attacked with chemicals when they tried to evict 17 families of Kodor Gorge refugees from a chemistry building at the Tbilisi Scientific Research Institute. The refugees then set fire to the building. - President Putin discussed the development of sports in Russia with hockey star Vyacheslav Fetisov. - A major drug ring was busted in Ulyanovsk. - Two assassination attempts were made today in the North Caucasus. Ingush Justice Minister Mavlat-Girei Dzagiev was shot in the leg. A bomb exploded by the house of Makhachkala's Sovetsky Region Prosecutor Magomed Urudjae, but the blast was small and no one was injured. - Deputy Prime Minister Valentina Matvienko arrived in Pskov on a one-day visit for the celebration of the city's 1100th anniversary. ******* #4 gazeta.ru March 21, 2002 Centrists Seek to Unseat Red Speaker By Svetlana Nesterova, Natalia Nemtseva Pro-Kremlin centrist majority in the Russian lower house has launched a large-scale ruthless campaign in an attempt to oust the State Duma speaker of many years Gennady Seleznyov. After 245 lawmakers voted in favour of stripping the chairman of his deciding vote on the house governing body – the Duma Council – it suddenly occurred to the centrist leaders that their effort to unseat him would not fail. The State Duma voted on Wednesday, March 20, to deprive its speaker Gennady Seleznyov of his deciding vote in the Duma Council. The resolution was supported by 245 deputies, which was more than the necessary 226, with 159 voting against it and two members of the lower house abstaining. Duma Council is the chamber’s governing body, comprising all faction leaders and the house chairman. The Council defines plenary sessions’ agendas and reviews all draft bills before they are discussed in the parliament. The pro-Kremlin majority has long since been unhappy that the Communists actually have the advantage in the Council. Two seats in that body belong to the Communists – Seleznyov and Zyuganov, notwithstanding the fact that their faction no longer prevails. Media described what had happened in the lower house on Wednesday as a minor palace coup. Gennady Seleznyov did not stay till the end of the session whereat his fate was being decided. He had to leave for a scheduled trip to Spain. Addressing the house before leaving the conference-hall Gennady Seleznyov said the Duma decision violated Article 101 of Russian Constitution, which provides that the Duma’s chairman is in charge of chamber’s internal procedures. He also pointed out to the fact that throughout his career as a speaker he had used his deciding vote only twice. Sergei Ivanenko, a deputy of the liberal Yabloko faction, agreed with the speaker. He criticized the move as being "devoid of any practical sense" because 90 percent of the council's decisions are made by consensus without voting. He also said the campaign was the "third stage of an offensive by the centrist deputies intended to destroy the package agreement reached two years ago on distributing leading posts in the chamber." Indeed, the initiative to strip Seleznyov of deciding vote on the Duma Council belongs to the pro-Kremlin centrist majority, primarily the freshly formed union of Unity and Fatherland All Russia. “We believe that the majority of the Duma will support our initiative. The balance of forces in the Duma Council must correspond with the balance of political forces in the Duma itself. If the centrists dominate the Duma, they should also dominate the Council,” chairman of the Duma committee for house regulations Oleg Kovalyov, one of the authors of the initiative, explained before the voting. After the speaker left the lawmakers put forward another daring initiative and suggested that a special resolution be drawn on dismissal of Seleznyov from his post. The initiative received approval of 247 centrists. 127 voted against and 1 abstained. In this connection, it is noteworthy that Gennady Seleznyov has always had strong support of the Communists and their allies – the Agrarian party, yet, on Wednesday namely a careless emotional appeal of a leftist lawmaker played a dirty trick on the speaker. In the heat of the squabble that began in the house after the deputies robbed the speaker of his deciding vote the indignant leader of the Agrarian group Nikolai Kharitonov bitterly suggested that the house call for a vote of confidence to the speaker. Of course, Kharitonov did not seriously mean what he offered, but his attempt to carry the discussion to the point of absurdity failed: some of the lawmakers enthusiastically backed the proposal, including the flamboyant “liberal-democrat” Vladimir Zhirinovsky, the SPS deputy Boris Nadezhdin and the chairman of the committee for house regulations Oleg Kovalyov. LDPR leader, known for his straightforwardness, openly offered Seleznyov to leave the speaker’s post without hesitation. “Speaker must represent the majority, which means he must represent the centrists!” claimed Zhirinovsky who quite often has many things on his tongue that the Kremlin has in mind. Oleg Kovalyov praised Zhirinovsky for a “sensible suggestion”. During a break the two deputies prepared an order instructing the regulations committee to draft a resolution on Seleznyov’s dismissal. The resolution received approval of the majority. In the opinion of the Duma deputy speaker Lyubov Sliska, Kharitonov’s initiative on calling for a vote of no confidence to the speaker is somewhat premature. In an interview to the Ekho Moskvy radio station she also reminded that Seleznyov was allowed to keep the speaker’s after the 1999 parliamentary elections in accordance with the above mentioned package agreement between the Communists and the Unity. Under that agreement Seleznyov retained his post, whereas the posts in the key house committees were distributed among Unity and the Communists. That agreement was a mistake and, probably, the time has come to correct it, holds the vice speaker. However, according to Lyubov Sliska, as yet Seleznyov’s opponents have failed to present any serious charges on the basis of which he could be dismissed from his post. Members of the Union of the Rightist Forces (SPS) consider the speaker’s fate pre-determined and conjecture about the new candidacy. For instance, the SPS deputy Boris Nadezhdin assumes that in theory the post may be occupied by any sane and reasonable person. “It does not take a genius to push buttons on time and give floor to deputies,” the lawmaker told Gazeta.Ru correspondent. “Owing to political reasons the speaker must not be a Communist,” holds Nadezhdin. According to the deputy, to ensure normal functioning of the house persons like Zhirinovsky should not hold the seat either. Given the strong pro-Kremlin majority in the State Duma it will not be very difficult to oust the speaker. Under the Article 8 of the Duma regulations the decision to relieve the house chairman of his duties must be approved by the majority – 226 votes. Now, the committee for house regulations is to draw the resolution on relieving Gennady Seleznyov of his post of the Duma chairman. At first the draft is to be reviewed by the Duma council, whereupon it will be discussed in the house. This is not likely to happen before March 30. Gennady Seleznyov is expected to return from Spain on March 23. ******* #5 Vietnam Says Handover of Russian Base Underway March 21, 2002 HANOI (Reuters) - Vietnam said on Thursday that Russia's handover of the strategic naval base of Cam Ranh Bay was underway but the two countries were still negotiating as to when it would be completed. "The two sides are carrying out hand-over procedures at the port as mutually agreed," Foreign Ministry spokeswoman Phan Thuy Thanh told a news briefing. Thanh was speaking a week before Russian Prime Minister Mikhail Kasyanov was due to visit Vietnam, although he is not due to go to the port. She said Vietnam and Russia were negotiating to finalize legal procedures as part of the termination of a 1979 treaty allowing Russia to use the base. The lease, which runs until 2004, allowed Russia rent free use of the port. Vietnam's Defense Minister, Pham Van Tra, told Reuters last week the Russian withdrawal would be completed in May. But Russian navy commander-in-chief Vladimir Kuroyedov was quoted as saying earlier this week the base would be closed before the year-end and not in May as time was needed to pull out equipment. The base, in the southern province of Khanh Hoa, is considered one of Asia's finest deepwater anchorages, offering strategic access to the sea lanes of the South China Sea. Tra reiterated Vietnam did not intend to lease the base to any other country in future, but could offer its use for rescue missions and some services, including ship repairs. The United States has suggested an open port arrangement once the Russians leave, which would allow warships of all nations to call. But analysts say the prospect of U.S. ships visiting the base would not please China. Jane's Intelligence Review said Cam Ranh was Moscow's biggest overseas base outside the Warsaw Pact in 1984, but it was substantially scaled back as superpower tensions eased. After the collapse of the Soviet Union in the early 1990s, Moscow eventually limited its presence to a signal intelligence facility. Vietnam Airlines said earlier this month it was interested in using Cam Ranh Bay to help serve the tourism industry. Its general director Nguyen Xuan Hien said the U.S.-built airfield had potential as it was convenient for the tourist city of Nha Trang, which has only a small airport. ******* #6 US, Russia may revise Iraq embargo rules By Evelyn Leopold UNITED NATIONS, March 21 (Reuters) - The United States and Russia hope to reach agreement soon on a revision of sanctions regulations for Iraq and have scheduled another meeting in Moscow next week. At issue are negotiations over the "goods review list" of supplies to Iraq that U.N. Security Council members have to review separately. Items not on the list can go to Iraq without council scrutiny after approval from U.N. officials. Currently most imports are evaluated separately by a Security Council sanctions committee, any one of whose members can block a contract. The United States has stopped some $5 billion worth of goods to the dismay of the other council members. But some may be released after the list is completed. Gennady Gatilov, a senior diplomat in Russia's U.N. mission said the talks were going well but a number of outstanding issues still had to be resolved. But he said negotiators for both sides, who meet in Moscow on March 27-28, were "in a constructive mood." A U.S. official agreed, saying "the talks were going smoothly." The hope, diplomats said, was to have an agreement by the May 23-26 summit in Moscow and St. Petersburg between Presidents George W. Bush and Vladimir Putin. The summit is only days before the U.N. Security Council is due to renew the so-called "oil-for-food" humanitarian program, under which the goods review list falls. Iraq has been under Security Council sanctions since shortly after it invaded Kuwait in August 1990. To ease the impact on civilians, the oil-for-food program, an exception to the embargoes, allows Iraq to sell oil and buy food, medicine and a host of other goods. But the oil revenues go into a U.N. account, which pays the suppliers, depriving Baghdad of cash. The new goods review list will not change those procedures. The list originally was part of a package of "smart" sanctions proposed by the United States and British to ease the flow of civilian supplies to Iraq while stopping military goods. That plan, however, is now all but abandoned. The renewal of the oil-for-food program is separate from Iraq's refusal to admit U.N. weapons inspectors, a key condition for suspending the sanctions. If Russia, Baghdad's closest ally on the Security Council, and the United States come to an agreement, few expect a diplomatic crisis at the end of May over the humanitarian program or anticipate Baghdad will protest by shutting off oil flows as it has done for brief times in the past. ******* #7 Russia will not permit formation of tribunal on Chechnya similar to ICTY - Kremlin aide MOSCOW. March 21 (Interfax) - Russian presidential aide Sergei Yastrzhembsky believes that Lord Judd, the Parliamentary Assembly of the Council of Europe (PACE) spokesman on Chechnya, has an inadequate evaluation of reality. That was his comment in a Thursday interview with Interfax on the statement of Lord Judd, who said the PACE spring session should consider how to guarantee prosecution of persons responsible for the violation of human rights in Chechnya. "Either Lord Judd does not formulate his idea accurately enough, or this is an attempt to lead matters to the formation of a certain international tribunal for Chechnya, similar to the international criminal tribunal for the former Yugoslavia. If the latter is true, I have to disappoint the lord and those whose ideas he is expressing. Chechnya is not Bosnia or Kosovo, and Russia is not the former Yugoslavia, no matter how someone would like it to be so," Yastrzhembsky said. In Chechnya, "Russia is fighting international terrorism, the way the United States and other partners of Moscow are fighting it in Afghanistan," the Kremlin aide said. "The very idea of an international trial, the same as mediation in Chechnya, is senseless and hopeless," he said. "PACE deputies may raise the question of Russian justice investigating some one or other incident in Chechnya, including individual illegal actions of federal troops," he said. "We will only thank them for that, because it meets our own interests," Yastrzhembsky said. "However, neither Lord Judd nor [ICTY prosecutor] Carla del Ponte, who evidently interprets her mandate quite arbitrarily and a few days ago met with emissaries of [Chechen separatist leader Aslan] Maskhadov, nor anyone else will be allowed to intimidate Moscow with the consequences of resisting terrorism in Chechnya," he said. ******* #8 Russia Aims to Boost Growth by Luring More Foreign Investors By Vladimir Todres Moscow, March 21 (Bloomberg) -- Until the end of last year, it looked as if Russia would skirt the slowdown that pushed the economies of the U.S., Japan and Germany into recession. The ruble's 70 percent plunge during the second half of 1998 -- after Russia defaulted on $40 billion in domestic Treasury bills -- had slashed costs for exporters and made imports prohibitively expensive. That spurred Russia's 144 million consumers to flock to local manufacturers for everything from cars to yogurt. In 1999, oil, which makes up one-quarter of Russia's $103 billion in exports, doubled in price to $24.39 a barrel. Copper and aluminum soared. The result: Russia's gross domestic product climbed a record 9 percent in 2000, turning Russia into Europe's fastest-growing economy. The boom didn't last. By the end of 2001, waning global demand for natural resources caught up with Russia. Oil purchases by the U.S. and the European Union fell to the slowest pace since 1984, knocking down prices 18 percent. Inside Russia, 18 percent inflation eroded the price advantage that domestic producers had enjoyed. This year, the government expects GDP to expand 3-4 percent, a drop from 5 percent last year. Investors say Russia needs more than a rebound in oil to avoid a further slowdown. They say the government must reduce the red tape that's discouraged new businesses and foreign investment. Accounting Changes They want accounting changes that benefit shareholders. And they want Russians to keep spending so the country can trim its dependence on natural resource exports. ``While strong demand from domestic consumers and current oil prices will ensure growth this year, long-term prospects depend on deep structural reforms,'' says Dimitri Chatzoudis, who manages $200 million in East European stocks at ABN Amro Asset Management in Amsterdam. ``Russians have a long way to go.'' President Vladimir Putin is pledging to lessen investors' risks. He's forcing companies to treat minority shareholders better by, for example, paying a bigger share of profit in dividends and paying them on time. He's reforming the country's judicial system to safeguard property rights. The government set up separate courts for business disputes and is pushing a bill through the legislature to make it tougher to force a competitor into bankruptcy. Cutting Taxes Since he replaced Boris Yeltsin in 2000, Putin has eliminated some barriers: He's reduced the tax a company pays on its profit to 24 percent from 35 percent. He's introduced a 13 percent flat income tax, abolishing the 25 and 35 percent brackets. And Russia now permits the sale of land that isn't used for farming and has whittled to about 100 from more than 1,000 the business activities that require government licenses. Foreign investors are responding. On Feb. 1, Heineken NV agreed to pay as much as $400 million for the Bravo brewery in St. Petersburg. On Feb. 14, Scottish & Newcastle Plc said it would buy Finnish beer company Hartwall Oyj for $1.7 billion to target Russia and Eastern Europe. A week earlier, Wimm-Bill-Dann Foods OJSC, the country's top juice and dairy producer, became the fifth Russian company to sell shares in New York. As of March 20, the stock had gained 20 percent. Targeting Consumers All three transactions targeted consumers, as investors hunted for companies making goods for the domestic market rather than those pumping oil or shipping steel slabs. ``Russian companies remain undervalued,'' says Alexander Branis, who oversees $160 million in Russian assets at Prosperity Capital Management, which had the best- performing offshore investment fund last year, according to Standard & Poor's. Branis is investing in RAO Unified Energy System, the national power utility, and OAO Central Telecommunications Co., a phone service provider, among others. Putin's reforms haven't wiped out all of the roadblocks. Businesses complain about a complicated tax system and corrupt officials. Last year, Putin dismissed Natural Resources Minister Boris Yatskevich. Yatskevich had granted to a small oil producer owned by a former deputy finance minister the rights to an oil field, even though Russia's top oil companies had submitted higher bids. `Long Way to Go' ``There's a long way to go, but what has been done is a breakthrough,'' says Anatoly Chubais, former deputy prime minister and Kremlin chief of staff, who's now chief executive of Unified Energy System. Foreign companies already doing business in Russia are benefiting from consumers' growing incomes -- up some 20 percent last year -- and a narrowing price gap between domestic and imported goods. The shrinking price difference allows more Russians to opt for quality products from the West. ``Among all our shops, the one in Moscow is the second- best performing, after the one in London,'' says Ermenegildo Zegna, CEO of his namesake Italian haute couture company. In December, Zegna opened his second shop in the Russian capital, after Gucci, Chopard and De Grisogono did the same in the previous month. Luxury Brands To be sure, luxury brands are out of reach for many consumers in a country in which the average monthly wage is $139. Most Russians limit spending to such essential items as cars. Many are choosing more-expensive imports. A Volkswagen Golf costs about $13,000 in Moscow -- four times as much as a Lada, the top-selling brand of Russia's biggest carmaker, OAO Avtovaz. Even so, Russia imported 78,000 new foreign-made cars last year, up 70 percent from a year earlier. Volkswagen sold 7,300 of the total. Ford Motor Co., the world's No. 2 automaker, plans to start producing vehicles near St. Petersburg this spring. ``Our business is going much better than we could hope,'' says Henrik Nenzen, head of Ford's Russian operations. He says sales in dollars quadrupled last year, though he declines to disclose the amount. ``There has been an obvious shift in Russians' buying power.'' Tapping the Russian market hasn't been easy. Ford is gearing up its plant after five years of talks. Swedish retailer Ikea spent four years arguing with government officials about customs duties and building permits before opening its Moscow store. 5 Million Customers A spokeswoman says more than 5 million customers visited the shop last year, the most of all of its outlets. Russian factories may not fare as well. A February Organization for Economic Cooperation and Development report found that proceeds from oil and gas have accounted for more than two-fifths of the fixed capital investment in Russia since 2000. Without rising oil revenue, funds to modernize plants may be in jeopardy. ``If oil crashes, investment will dry out,'' says Natalia Gurushina, an economist at Deutsche Bank in London. So far, that hasn't happened. Investment in production assets rose 8.7 percent in 2001, the government says. Lower Petroleum Prices Russian officials say they're making the best of lower petroleum prices. Cheaper oil will produce steadier growth, they predict, because it will force Russia to focus on making finished goods, a more stable market. ``If oil prices are too high, we won't at the end of the day make anything but oil,'' says Andrei Illarionov, Putin's economic adviser, glancing at a Cossack whip in his Kremlin office. As investors assess Russia's merits, some companies are trying to tip the scale by adopting Western-style accounting and disclosure. Mikhail Khodorkovsky, CEO at Russia's No. 2 oil producer, AO Yukos Oil Co., had epitomized companies' mistreatment of minority shareholders and manipulation of assets. In 1999, Yukos changed the location of a shareholder meeting to a town 160 miles from Moscow without telling minority shareholders. The move prevented them from voting against the sale of assets to an offshore company. Today, Khodorkovsky employs Americans as top managers and reports Yukos's results under U.S. generally accepted accounting principles. Yukos Shares Triple Yukos shares more than tripled in the past 12 months, giving the company a market value of $17.9 billion on March 20, the biggest of any Russian company. Still, Yukos hasn't published the names of its controlling shareholders, let alone disclosed their past. Most other Russian companies are even less transparent. ``There are two breeds of companies: the likes of Yukos and the bunch that hasn't yet made a commitment to good management and corporate governance,'' says Coast Sullenger, who manages a 75 million-euro ($66 million) East European fund at Lombard Odier & Cie. in Geneva. ``A random stock would belong to the second camp.'' Until most companies fall into the first group, Russia won't attract the foreign investment it needs to keep growing.'' ******* #9 Hermitage’s Browder Says Being An Activist Investor Pays in Russia By Pete Gallo, Editor March 20, 2002 MOSCOW (HedgeWorld.com)—Being a hedge fund manager in Russia within walking distance of the Kremlin has given William Browder a front-row seat for the country’s ongoing reforms and equity rally, which put the country on the top of the emerging-markets charts last year. Mr. Browder’s Hermitage Fund, as of mid-March, was up nearly 15% with assets closing quickly on the US$500 million mark. And emerging markets hedge funds have been stronger of late with the emerging markets component of the CSFB/Tremont Hedge Fund Index picking up an additional 2.9% in February, pushing year-to-date returns to 5.7%, representing the strongest showing for any individual segment of the alternative benchmark. But Mr. Browder isn’t sitting idly just hoping that Russia’s public companies will rise off their incredibly low P/E ratios. Two-thirds of Russian stocks still trade at under six times earnings. In some ways, Mr. Browder is helping make that rally happen. “In Russia, you have to be an activist investor,” Mr. Browder said. “We run a concentrated portfolio with about 10 positions forming our core holdings. We like to invest in undervalued companies with problems and get very involved in the portfolio’s companies to try to fix those problems. That can mean taking a seat on the board, pursuing legal action or even exposing corporate graft to the news media.” Mr. Browder is not kidding about exposing corruption. He says that on a number of occasions he has worked with major western and Russian press to highlight criminal and corporate shenanigans by top executives at companies he invests in. A Hedge Fund Spearheading Russian Reform “Russia is a very different market from other places in the world,” Mr. Browder said. If you have an Enron-style accounting scandal in the U.S., the share price often drops dramatically when the information is publicized. In Russia, the situation is entirely different. We have regularly seen share prices rising after scandals are exposed.” Why would exposing scandal encourage investment? “Because it often signals a beginning of the reform process at the company. What happens is that once you expose what is going on, investors realize that the company will have to reform,” he said. “In many cases you are identifying problems that others vaguely knew existed, and that’s why their p/e (ratios) were so low. But once the problems are publicized and properly spelled out there are a number of interested parties, including the government, who are spurred into action because of the publicity. This stimulates investor interest.” “Sometimes, I have to laugh when I hear about a scandal in the U.K., when you hear that shareholders are complaining that a CEO should be making $2 million a year instead of $3 million,” he said. “In Russia, you can find yourself dealing with companies whose executives are stealing billions.” In addition to the outright embezzlement, Mr. Browder said he often sees companies issuing securities to friends and families of executives at ridiculous discounts to the market price of those securities. Not surprising, these issues wind up diluting value for other shareholders, and Hermitage has in a number of instances prevented this from occurring. In one of the most high-profile of these cases, Hermitage blasted “corruption” at Gazprom, the country’s biggest company the world's largest gas company which accounts for 25% of the world’s natural gas reserves and more than half of Western Europe’s supply of such fuel. Hermitage did more than just go after Gazprom. It targeted Gazprom’s auditor PriceWaterhouseCoopers for allegedly failing to disclose the problems. The scandal was covered in some 200 articles in Russia and abroad, Mr. Browder said. “You could call it Russia’s Enron scandal,” he said. “In many cases, we’re actually helping to establish standards that will become the norm in Russia,” he said. “And, we’re not opposed to agitating in a way that increase the level of scrutiny. The goal is not causing trouble for its own sake, but to shake things up to bring positive change and make the next guy think twice about making the same mistake.” Because of the company’s size, the Gazprom scandal over insider trading was pivotal and has left foreign investors more confident that Russian companies and their top executives would be held more accountable for their practices and lead to greater reform on a national scale. Still, progress is sometimes one-step forward one-step back. Only this week, Gazprom was accused by Moscow of being Russia’s biggest tax dodger. Mr. Browder and Hermitage are not just activists in the boardroom, but also on the political scene. He says that the firm has successfully lobbied for legislative reform in Russia aimed at improving business practices. One success has been in getting recent legislation passed that stops the issuance of dilutive shares issues. But things are far from being all doom and gloom in Russia. The country’s reforms have exceeded what many investors such as Mr. Browder had hoped for. “If two years ago, you had asked me what reforms I would have liked to see in Russia, I would have said tax reform, judicial reform and business de-regulation,” he said. “Largely thanks to President Putin, Russia has gotten all of that ahead of schedule—plus more. There have been at least nine major reforms put forth and this has translated into real growth for the Russian market and equities.” “Putin is batting nine for nine in my book,” he said. “Just today he sacked Russia’s central banker, whom a number of people internationally had identified as the worst central banker in the world.” “It’s been a bumpy ride sometimes, but the reforms are real,” he said. Ample Opportunities in Low P/E Environment Much of the investment being done in Russia these days is in the oil-and-gas sector, which is one of the country’s biggest industries. Improvements in companies fiscal fitness combined with trends in the sector worldwide have made it a hot spot, according to Mr. Browder. But opportunities exist in other sectors as well. One of Hermitage’s best plays last year was in Sberbank, a banking interest that holds 75% of deposits from individual Russians. Mr. Browder said that Hermitage gathered up 10% of the proxies to demand for the resignation of the chief executive after he put forward a dilutive share issue instead of cutting costs. Sberbank’s equity has rallied nearly 400% in the last year, and Hermitage still owns a sizable stake in it. But at three-times earnings and ) 0.9 times book value he believes it is still cheap. With valuations like that in the public arena, there is really no need to stray into private equity deals—and Hermitage doesn’t. On the macro level, Mr. Browder sees the Russian markets in a place where Russian government bonds trade at a premium to emerging markets bonds, but Russian P/E ratios are the cheapest in the emerging market universe. “That would suggest that either bonds prices have to fall or equity prices have to rise,” he said. “My view is that the latter is more likely.” Russia’s markets haven’t been hurt by Argentina’s default either. Mr. Browder says that the slow unveiling nature of Argentina’s problems allowed the market to slowly absorb the information preventing the kind of contagion seen in 1997 and 1998 due to Russia’s woes. So are investors leading a gold rush in Russian markets? “There has definitely been an increase in the number of investors in Russia,” Mr. Browder said. “For individual investors—or for that matter institutional (investors)—looking for absolute returns there have been opportunities.” “But the fund of funds tend not to get involved for good reason,” he said. “If a fund of funds has a goal of reigning in volatility for a portfolio, Russia probably isn’t the place they want to be.” ******* #10 From: "Mikhail Slobodinskii" Subject: Yegor Gaidar's Conference Date: Thu, 21 Mar 2002 Dear Mr. Johnson I write this letter on behalf of the Institute for the Economy in Transition. I am an assistant to Dr. Yegor Gaidar (former prime minister of Russian Federation). Just an hour ago we closed our conference "Economic Growth after the Communism". (Take plase Moscow, 20-21 March 2002, Hotel Aerostar) Please, find the attached file (gaidar.doc) with the brief descriprion of the conference. Not all of participants are mentioned (Like Irina Khakamada etc.) because of the limited time for this letter. In a while all presentations and discussions will be published on our site www.iet.ru . Thank your for your work Mikhail Slobodinskii Information support Institute for the Economy in Transition 101999 Moscow Gazetny street, d 5 str 3 office 452 TEL 7-095-2294883 FAX 7-095-2024378 www.iet.ru mslobod@iet.ru Institute for Economy in Transition (Gaidar Institute) on March 20-21, 2002 held in Moscow an international conference "Post-Communist Economic Growth." The end of the first stage of the post-communist transformation made it urgent to discuss the character of economic growth in Russia and the possible ways of its consolidation. The following economists have taken part in the conference: - Yegor Gaidar - IET Director and the Deputy of the State Duma of RF - Anne Krueger - First Deputy Managing Director of the IMF, - Arnold Harberger - Professor, UCLA - Alexander Pochinok - Minister of Labor and Social Development of RF - Alexei Ulyukaev - First Deputy Finance Minister of RF - Andrei Illarionov - Economic Counselor to the RF President - Mikhail Zadornov - Deputy Chairman of the Budget Committee of the State Duma, and the Former Finance Minister of RF - Arkadiy Dvorkovitch - Deputy Minister of Economic Development and Trade of RF - Vladimir Mau - Head of the Working Center for Economic Reform under the Government of the RF - Sergei Dubinin - Deputy Chairman of the Board of Directors, RAO UES of Russia, Former Chairman of the Central Bank of Russia - William Easterly - Senior Fellow, Center for Global Development and Institute for International Economics, Washington - Kalman Mizshei - Director of Bureau on Europe and CIS, UNDP - Barry Eichengreen - Professor, University of California, Berkley - Thorvaldur Gylfason - Research Professor, University of Iceland in Reykjavik - Michael Alexeev - Professor, University of Indiana, Bloomington - Leon Aron - Senior Fellow, American Enterprise Institute, Washington - Tatiana Paramonova - First Deputy Chairman of the Central Bank of Russia - Irina Hakamada - Deputy Chairman, State Duma - Robert Conrad - Professor, Duke University - Niclas Sundstrom - Chief Economist-Russia and Economic-Political Strategist, Citigroup/Schroder Salomon Smith Barney - Alexander Zhukov- Chairman of the Budget Committee of RF - Anatoliy Vishnevsky - Head, Center for Demography and Human Ecology - Anders Aslund - Senior Fellow, Carnegie Foundation, Washington All the speakers highly praised the Russian economy development after 1998. Such issues as consolidation of economic growth, creation of guarantees for sustainable economic growth in Russia became the focus of the discussion at the conference Anne Krueger highly praised the results of the Russian economic development for the last three years and the current economic policy of the Russian government. She has named the following priorities in the economic policy in Russia: banking reform, strengthening of the ownership rights, reform of the natural monopolies, etc. In a separate presentation she shared her vision of the development of the international finance architecture and the prospects for its restructuring. Alexei Ulyukaev has analyzed the results of the year 2001 and has described major trends in financial policy for the near future as a main prerequisite for sustainable growth. Mikhail Zadornov has proposed the vision of this issue from the point of view of lawmakers. He has stressed the need to create a stabilization fund in order to guarantee the economic growth in Russia. He also mentioned the need to turn to a three year period for budgetary planning, to include the dynamics of tariffs of natural monopolies into budgetary planning, deepening of the fiscal federalism Yegor Gaidar has warned the economists about "the dangerous conceit" and especially the politicians who try to raise the economic growth artificially. Vladimir Mau has aired this issue in detail. He stressed that artificial stimulation of economic growth can result in major economic fiasco. Aimed at the economic growth, the economic policy should correspond a simple criterion - it should not be populist and should be understood by an investor who reads Financial Times. Andrei Illarionov on the basis of the detailed analysis of macroeconomic factors of economic development for 1990s has revealed the threats that are in the way of economic growth in Russia at present. The main threat comes from the policy of appreciation the real of ruble and from a refusal to contain the growth of tariffs of natural monopolies. Arnold Harberger has developed a detailed system of arguments against the real ruble appreciation in contemporary Russia. On the contrary, Sergei Dubinin has insisted on the real ruble appreciation and increase in the tariffs of natural monopolies, which, according to his view, should stimulate structural reforms. Alexander Pochinok has discussed the issues of strengthening reform in the social sphere. His main conclusion was unexpected for conventional ideas about the Minister of labor and Social Development. Instead of usual complains about the shortage of budgetary funds for social sector, he has called for a deep restructuring on present budget expenditure on social needs in order to radically increase the efficiency of their use. Barry Eichengreen and William Easterly have given their views to the reasons for insufficient of international financial institutes and have offered their vision to the ways of reform of those institutes. Naturally, their recommendation differed considerably. Thorvaldur Gylfason has explained in detail the issues of the importance of natural resources on the future of economic growth. This influence, to his view, is in the majority of cases negative. The work of the following panel have been organized in the framework of the conference: - Macroeconomic Determinants of Economic Growth - Institutional Aspects of Growth - International Financial Institutions in Russia: Past and Future - Budget and Fiscal Policy and Economic Growth - Myths and Realities of the Agrarian Sector - Social Dimensions of Economic Growth - Political Economy of Economic Growth - Regional Aspects of Economic Growth - Economic Growth and Natural Resources Detailed information on the conference and presentations will appear on IET web site: www.iet.ru ****** #11 Carnegie Endowment for International Peace www.ceip.org Meeting report Gazprom and Itera: A Case Study in Russian Corporate Misgovernance March 18, 2002 Speaker: William F. Browder, Chief Executive Officer, Hermitage Capital Management, Moscow. The meeting was chaired by Andrew Kuchins, director of the Russian and Eurasian program. "I'm going to tell you a war story-my war story," opened Browder. " It's one that involves Gazprom, Itera, and PricewaterhouseCoopers. I'm not a diplomat so this won't be diplomatic," he cautioned. As an investor, he looks to find companies whose stock is cheap, and Gazprom is "by far the cheapest oil and gas company in the world," if one divides the value of the company by its total reserves. Because the market discounts virtually the entire value of Gazprom with the assumption that 99% of its assets are stolen, Gazprom's reserves trade at 10 cents for energy equivalent to one barrel of oil. (Exxon Mobil's reserves, by way of comparison, trade at $13.80 per barrel.) Eighteen months ago, deciding he needed a better understanding of the factors underpinning Gazprom's undervaluation, Browder dug around a bit using public information and found that the stealing was "so brazen" that Former CEOs Rem Vyakhirev and Viktor Chernomyrdin and others transferred assets openly to members of their family. "The arrogance was so extreme that there was no cover-up whatsoever," Browder remarked. "But that was helpful to us, because it enabled us to paint a very accurate picture of what had been stolen." In October 2000, Browder's investigation pinpointed seven dubious transactions that stripped enormous value away from Gazprom. These seven companies - Purgaz, Rospan, Tarkosaleneftegaz, Sibneftegaz, Achimneftegaz, Vostokgaz, and Severneftegazprom - were worth $5,805 million to Gazprom, but were sold away for a total of $325 million between 1997 and 2001, a lost value of 5,480 million dollars. In losing these assets, Gazprom lost just under 10% of its total reserves, a quantity comparable in size to Exxon-Mobil's entire reserves worldwide. So, Browder discovered that though the markets perceived that 99% of Gazprom's assets had been stolen, in reality only 10% had been. Browder said he was impatient for perception to catch up with reality, since the good news was likely to increase Gazprom's share value and decided to speed along the process. His findings were published and shared with other Gazprom shareholders, with members of the Gazprom board, as well as with journalists from five publications [Business Week, The New York Times, Financial Times, The Wall Street Journal, and The Washington Post], each of whom went on to run stories between October 2000 and February 2001 exposing large scale graft by the company's managers and their relatives. Mobilized by the ensuing public outrage, Gazprom investors in December 2000 called for an independent audit to examine the evidence of asset stripping and to assess the murky relationship between Gazprom and Itera, a Florida-registered gas trading company. The investors further proposed that an outside firm, Deloitte and Touche, be given the task, rather than Gazprom's internal auditor, PricewaterhouseCoopers (PwC). Incensed, Gazprom management rejected the call for an independent audit and consented only to a confidential PwC audit. That audit was presented to the company's board alone in June 2001, though the report was subsequently leaked. Using excerpts from that report, Browder gave five examples to illustrate the patent misconduct by Gazprom executives for the benefit of Itera, whose assets ultimately must have accrued to the executives themselves, as well as the absurdity of PwC's economic evaluations. A BLISTERING REVIEW 1. The Purgaz Joint Venture Gazprom, in 1998, had put 381 billion m3 of reserves into Purgaz, a joint venture with Itera, which received a 49% stake in return for nothing concrete, only the promise to contribute future funding. The next year, Gazprom sold an additional 32% in Purgaz to Itera for the ridiculously low price of $1,200. In its report, PwC valued Purgaz at $1,768 million, meaning 32% of that would be worth $566 million-exponentially more than the price Itera paid. PwC, however, concluded on page 32 of its report that it was "difficult to evaluate the [Itera purchase of Purgaz] transaction from a commercial point of view due to the absence of comparative information regarding the acquisition of Russian gas fields, noted Browder incredulously. Earlier in the report, PwC says it was "significant cash shortages" that forced Gazprom to let Itera and other companies obtain stakes in the companies holding licenses for gas reserves. But that avoids the more revealing, fundamental problem: transfers from Gazprom to Itera, totaling $616 million in 2000, caused the cash shortages. "Gazprom was a poor company only because it was making Itera rich," explained Browder. 2. A Siberian Scam The Gazprom/Itera Yamal-Nenets tax scam, whereby Itera drained even more cash-on the order of $5.53 billion-from Gazprom between 1997 and 2000, is another example of flagrant impropriety on the part of Gazprom's managers. It worked in this manner: Gazprom owed significant back taxes in the Yamal-Nenets region in northeastern Siberia and gave gas valued at $2-$4 per 1000 m3 to the tax authorities there as payment in kind for its arrears. Yamal-Nenets, needing something to do with such huge quantities of natural gas, then contracted to transfer the gas at that same price to gas trader Itera, which sold the gas on the CIS market at the going price, between $30 and $90 per 1000 m3. Had Gazprom sold the gas on the market in the first place, revenues from just 5% of the gas it ultimately gave to Yamal-Nenets would have covered the $341 million in taxes it owed. The remaining 95% could have been sold for a profit of $5,527 million, which begs the question of why the company would deny such a profit opportunity, if not for the managers' personal financial interest. In the face of this compelling information, PwC, incomprehensibly in Browder's mind, again equivocated, concluding that Gazprom actually benefited from this arrangement because they saved scarce cash resources and would have been forced to raise debt financing when the interest rate reached 50%. But that defies basic economics, said Browder. Interest rates would have had to reach 1600% to justify selling gas at $2-$4 per 1000 m3 instead of borrowing money. 3. Negotiations with Niyazov In Browder's third illustration of Gazprom's misdealings and PwC's misjudgment, Gazprom CEO Rem Vyakhirev negotiated in December 1999 with Turkmenistan's president Niyazov on behalf of Itera. Under their agreement, Itera bought Turkmen gas at $35.4 per 10000 m3 and resold it to Gazprom at $45 per 1000 m3, reaping an $87 million profit. PwC determined that this was roughly equal to Itera's transportation costs, and thus Itera's profit was negligible. The truth, Browder stressed, was that Gazprom reimbursed Itera for its transportation costs by a separate agreement so Itera simply pocketed the money. 4. Exports to Belarus Itera, furthermore, was the recipient of two gifts from Gazprom, for which it gave no compensation whatsoever. The first, 35% of the Belarusian gas market-the third largest in the CIS, one worth $500 million a year-accounted for a $99.7 million annual loss to Gazprom. PwC declared that the profit margins for operations in Belarus were of little significance, making this an inconsequential gift, but Browder, using Audit Chamber information, claimed that Itera sold its exports to Belarus at a staggering 57% margin. 5. Diluted Ownership The second gift, the gift of Tarkosaleneftegaz, worth between $247 million and $896 million took place over the course of several years, during which time Gazprom, reluctant to ante up further funds, allowed its ownership stake to be reduced by almost 40% by non-participation in all but one in a series of new share issues. [For more information, please see Browder's graphs/or, click here] ] Those rights issues that Gazprom opted out of would have cost a total about $8 million. The sole one in which Gazprom did choose to participate cost the company $65.5 million, or eight times more. Gazprom sold 16.2% of its share, ostensibly to avoid future obligation of financing for the project, though despite the massive inflow of capital that occurred with each share issue, Tarkosaleneftegaz executives say they don't have sufficient capital to operate successfully. Said Browder, "This is shocking stuff, even to jaded, post-Enron eyes." WHAT IS TO BE DONE? In light of this evidence, Browder had the following recommendations for the Russian government, which could exert considerable influence through its 38% controlling stake in Gazprom: 1. Immediately reopen a forensic audit of Gazprom's transactions, using an auditor other than PwC and including non-Itera asset stripping; 2. Sack PwC as Gazprom's official auditor at the upcoming annual general meeting and replace the firm through a transparent tender procedure; 3. Launch an international lawsuit against PwC for malpractice; 4. Improve audit legislation by introducing better rules governing auditors' behavior and by strengthening regulatory bodies; 5. Set up an interdepartmental government task force to retrieve Gazprom's (i.e. the state's) lost assets, fire Gazprom managers found to be accountable for the losses, and/or prosecute them. At Gazprom's annual general meeting, Browder said he intends to make use of Russia's joint stock law which gives him, as a shareholder with at least a 2% stake, the right to add any item to the agenda. He would like to see the Board of Directors: 1. Adopt Russia's new Corporate Governance Code as the code for Gazprom itself; 2. Amend the Charter to give Board of Directors oversight of asset transactions; 3. Further amend the charter to allow the Board to initiate any audit of any transaction it chooses and create a subcommittee to supervise all audits; 4. Give the Board purview over all of Gazprom's financial activity - all lending, all borrowing, all encumbrance; 5. Replace PwC with a new auditor chosen by a transparent tender procedure. Browder told the audience in Washington that later that day, he hoped to encourage U.S. government officials he was meeting with to implement these recommendations: 1. Cease to fund-and thereby condone-Itera. (The U.S. Trade and Development Agency has given a $868,000 grant to Itera.) 2. Pressure PwC to withdraw from the Gazprom account, leveraging the USAID funding PwC receives for technical assistance programs in India, Morocco, and elsewhere; 3. Launch an SEC investigation into misleading financial statements affecting U.S. American Depositary Receipts (ADRs) for which PwC's accounting failures are responsible; 4. Open a Justice Department investigation into Itera's activity in the U.S. on the basis of the Foreign Corrupt Practices Act; 5. Pressure the Russian government to bring transparency to Gazprom, using Russia's membership in the pro-transparency organizations like the World Bank, IMF, European Bank for Reconstruction and Development (EBRD), etc. Despite the unflattering publicity generated by Browder's better-corporate-governance campaign, Gazprom's share price has risen steadily, he maintained, to about $6 a share, and will only continue to climb as greater transparency is achieved. Q & A Asked how to quantify for the Russian government the benefit of positive changes and thus motivate it to take action, Browder said that, were Gazprom to be valued properly, the government's 38% share would be equivalent to all the debt it owes to creditors. Though it is an economic actor by virtue of its position on the Gazprom board, the Russian government doesn't behave as such, responding instead to political incentives not to rock the boat. Officials worry that if they do, they'll lose their jobs. This is where media exposure and American influence can help, he thought. If Putin, whom Browder characterized as "risk-averse," can tell Gazprom managers, "Look, sorry, I don't have any choice here," and deflect some of the resentment for the changes away from him personally. Browder recounted that German Gref, the Trade and Development Minister, seemed "glad to have the Business Week article ["Russia's Enron? Gazprom and PricewaterhouseCoopers Are Under Fire," February 18, 2002] to wave around in meetings." And Alexei Miller, whom Putin appointed last May to replace former CEO Rem Vyakhirev, "is a good guy with a gigantic [restructuring] task that dwarfs him and needs all the help he can get." The markets will "absolutely reward" Gazprom for greater transparency, Browder argued. On the Europeans' role and ability to exert influence, Browder gave the example of the German company Ruhrgas, which gets approximately 25% of its gas from Russia. Browder said he was told by a German diplomat that Germany cares about nothing other than the safe supply of gas to the country and sees no interest in shaking matters up. Browder agreed with CSIS's Sarah Mendelson that Western governments have been aware of this, yet have done nothing about it, calling it a maddening "conspiracy of silence." PwC accountants in London "whitewashed" the audit, likely in order to keep its client happy, and in so doing, keep the $13 million in Gazprom fees it receives each year-a story parallel to Arthur Andersen and Enron. "All accounting firms do the same," said Browder, and will continue to until the rules are strengthened to the point that firms are scared to sign off on anything shy of the full truth for fear of the consequences. There is no incentive, currently, for accounting firms to stand up to company executives. On Itera, Browder said its grant from the U.S. Trade and Development Agency confers upon it a certain legitimacy and never should have been given, especially when the EBRD had previously refused a loan to Itera until the company's ownership was clarified. Having recently lost Purgaz, whose acquisition is detailed above and which accounted for 70% of Itera's production capacity, Itera lost a key cash flow asset and is "on the ropes right now," said Browder, "but they still have a lot that they stole." In terms of facilitating better corporate governance, Browder thought that the teams of international specialists sent to Russia by international organizations like the International Finance Corporation (IFC) and EBRD would have a much greater ripple effect if they were assigned to work with Gazprom rather than with myriad small, $10 million companies. Russia and the international community could-and should, contended Browder-use Gazprom as a very visible demonstration of their commitment to transparency reforms. Summary by Caroline McGregor, Junior Fellow, Russian and Eurasian Program. ********