Johnson's Russia List
#6163
30 March 2002
davidjohnson@erols.com
A CDI Project
www.cdi.org

[Note from David Johnson:
  1. AP: Experts: Russian Mob Disorganized.
  2. AFP: Russia's Orthodox patriarch sends pope "Easter kiss"
  3. Reuters: Ukraine's poll hit by dirty tricks row, killing.
  4. BBC Monitoring: Russians lose trust in authorities - poll.
  5. Kyodo News Service: U.S. overconfidence poses danger: Medvedev.
(interview with Roy Medvedev)
  6. UPI: Ex-Soviet states eye economic union.
  7. BBC Monitoring: Libel case against Russia's Nezavisimaya Gazeta editor
political - chief editor.
  8. Financial Times (UK): David Stern, Russia reforms tax rules for smaller
companies.
  9. Los Angeles Times: Maura Reynolds, Russia Admits Abuses Occur in
Chechnya
Raids. Caucasus: Military leaders issue guidelines and acknowledge the
problem
of 'disappearances.'
  10. Wall Street Journal editorial: A New Alliance. (re NATO)
  11. New York Times book review: Janice Nimura, 'The Siege': When Hunger
Meant
Hunger in the Soviet Union. (re THE SIEGE by Helen Dunmore)
  12. March 2002 – Some thoughts on Gazprom.]

*******

#1
Experts: Russian Mob Disorganized
March 29, 2002
By PAUL WILBORN

LOS ANGELES (AP) - Five Los Angeles residents vanish over a span of six
months. Faxes from Russia demand millions in ransom, and one desperate family
wires $200,000 to various banks.

All five turn up dead, bound and dumped in a Sierra foothills reservoir.

Authorities said the kidnappings were part of a Russian organized crime plot,
and they have arrested six Russian men as suspects.

But as ruthlessly efficient as the crime might appear, experts and federal
authorities say violence is rare for America's Russian mob. They also say the
criminals are nothing like La Cosa Nostra or the drug cartels south of the
border.

The alleged kidnappers even left a credit card and money trail investigators
could follow, prompting a spokesman for the U.S. attorney's office to refer
to them as ``knuckleheads.''

``The truth is, Russian organized crime just isn't that organized,'' said
William Callahan, a former federal prosecutor who now runs an international
security company in New York. ``They are clannish and thuggish, but they have
never developed the organization of the old Italian Mafia.''

What passes for the Russian mob in America is believed to be hundreds or
thousands of small criminal enterprises, connected by blood, religion,
ethnicity or expediency. They are a growing presence in the burgeoning
Eastern European immigrant communities in New York, Los Angeles, Miami,
Toronto and Portland, said Louise Shelley, an expert on international crime
at American University.

Experts say most Russian-speaking criminals are clever opportunists who grew
up in a society where scamming the government was a way of survival. They
prefer fraud over kidnapping, deceit over muscle.

``We haven't run across a lot of stuff that has been heinous and bloody,''
said Larry Cho, an assistant U.S. attorney in Los Angeles who specializes in
organized crime. ``If you can make millions defrauding the government why get
your hands dirty?''

The most popular scams for Russians are gas tax frauds, in which dummy
companies sell fuel below market value and never pay the fuel excise taxes.
Insurance scams, often involving faked auto accidents, are another favorite.

``They are intelligent people and they come over here and see all these
programs are offered by the country and the state. And they see these
programs aren't policed well, and they just jump in with both feet,'' said
Lt. Dan Hooper of the Los Angeles Police Department's organized crime and
vice division.

A Medicaid scam in Los Angeles in 1996 brought in millions before authorities
broke it up. One group recently scammed a small fortune in nickels from
California's recycling reimbursement program.

Less sophisticated mobsters resort to old-fashioned shakedowns for protection
money in the ethnic neighborhoods of Hollywood and New York's Brighton Beach.

Along with fraud and shakedowns, Russian-speaking criminals are branching out
into the vices. Some crime groups are using false documents to smuggle
eastern European women into the country, then setting them up as prostitutes.

``They are really good at forgery and fraudulent production of immigration
documents,'' Hooper said.

Which is why the recent murders stand out.

The bodies were found in New Melones Lake near Sacramento between October and
last week. Federal prosecutors said all five were abducted, blackmailed and
killed by Russian mobsters.

The six men in custody are charged with hostage-taking or receiving ransom
money. More than $5.5 million in ransom was demanded of relatives, and the
kidnappers managed to persuade one family to wire more than $200,000 to banks
in the U.S. and elsewhere.

Four of the five victims were from the Russian immigrant community, Hooper
said.

In Los Angeles, the Russian-speaking community has grown to almost 500,000,
centered in Hollywood, West Hollywood and Glendale.

Yurik and Ruzanna Beloshitski, recent immigrants to Hollywood, said it's too
bad the criminals followed the good people to America.

``America is a magic land,'' Ruzanna said, as the Russian couple paused along
the Walk of Fame. ``But a lot of people come to make a mess here.''

*******

#2
Russia's Orthodox patriarch sends pope "Easter kiss"
March 30, 2002
AFP

The head of Russia's Orthodox Church, Alexy II, put aside a long-running
feud with the Roman Catholic church to send ailing Pope John Paul II an
"Easter kiss" and best wishes "for many blissful years," Interfax reported.

"Greeting you with love and an Easter osculation (kiss) on these joyful
days, I sincerely wish the Lord may save and fortify you, multiplying your
powers for many blissful years," the Russian patriarch said Saturday in his
message to the pontiff.

The 81-year-old pope, who is suffering from advancing Parkinson's disease
and arthritis, has had to cut back on his duties in the run-up to this
weekend's Roman Catholic Easter.

The patriarch is currently locked in a bitter row with the Vatican over
alleged Roman Catholic proselytism in Russia and has refused to meet the
pope until he renounces so-called Vatican "expansionism" in this
predominantly Orthodox country.

Catholics, numbering around 500,000 in Russia, represent a tiny minority of
Russia's 145 million-strong population, most of whom will celebrate
Orthodox Easter on May 5.

*******

#3
Ukraine's poll hit by dirty tricks row, killing
By Elizabeth Piper

KIEV, March 30 (Reuters) - Dead voters, fake addresses and a glut of ballot
papers will secure victory for forces loyal to President Leonid Kuchma in
Ukraine's parliamentary poll and fuel widespread corruption, an opposition
leader said on Saturday.

Ukrainians vote on Sunday in an election marred by the slaying of a
little-known pro-presidential candidate and accusations of widespread dirty
tricks during campaigning.

Western investors and observers see the poll as a key test of the ex-Soviet
state's young democracy and the popularity of their longest serving
post-independence leader, Kuchma.

Julia Tymoshenko, an outspoken critic of Kuchma and one of Ukraine's most
charismatic politicians, said her party -- the Bloc of Julia Tymoshenko --
would monitor voting and run a parallel counting system to prove the
results were faked.

"Today, there are so many dead souls in all the regions of Ukraine...There
are addresses where people just do not live," Tymoshenko said.

She was making reference to a satire by Nikolai Gogol about a man who
bought up dead serfs to increase his social standing by giving the
impression he was in charge of more people.

"We are sure that the election will be falsified...So we are setting up an
alternative system," she said, barely audible after losing her voice during
an earlier rally to thousands in the centre of capital, Kiev. Ukrainian
election law bans campaigning the day before the election.

GAS PRINCESS TAKES ON KUCHMA

Tymoshenko, dubbed Ukraine's "gas princess" for her striking looks and
involvement in the energy sector, said her party could fail to make the
four percent threshold to enter parliament due to alleged widespread
violations initiated by the authorities.

Kuchma and the For United Ukraine party, led by the head of his
administration, have denied the charges, saying all has been done to ensure
a fair election.

Tymoshenko, who is the subject of a fraud and bribery probe into her time
as head of a private gas trading firm in the mid-1990s, said Kuchma
intended to run for a third term as head of state, which is banned by the
constitution.

"Repression and falsification are widespread in Ukraine," she said.

In a sign of rising tensions at the tail-end of election campaigning, a
pro-presidential candidate for parliament was shot and killed in the
pro-European region of western Ukraine late on Friday.

Kuchma was quoted by Interfax Ukraine as ordering the police to launch an
investigation immediately. It also quoted the local prosecutor as saying
the murder was politically motivated.

Western observers have voiced concern over election violations in the
country, strategically placed between a growing European Union and Russia,
its former imperial master.

Media freedom in Ukraine was thrust into the spotlight when the headless
corpse of a journalist critical of Kuchma was discovered almost two years
ago.

The publication of tapes in which a voice alleged to be similar to Kuchma's
discussed the reporter's kidnapping sparked Ukraine's biggest political
scandal in a decade. Kuchma has denied any role in the journalist's death.

*******

#4
BBC Monitoring
Russians lose trust in authorities - poll
Source: NTV, Moscow, in Russian 1600 gmt 29 Mar 02

An opinion poll carried out by VTsIOM, the All-Russian Public Opinion
Research Centre, showed a "considerable decline in the level of trust" in
the authorities at all levels, the Russian NTV channel said on 29 March. At
the same time, President Vladimir Putin's popularity is still high with 72
per cent of those polled still supporting him, against 75 per cent in
February. The number of those who are not satisfied with his policy is up
by 4 per cent, i.e. 24 per cent.

In contrast, only 45 per cent of those polled support Prime Minister
Mikhail Kasyanov against 54 per cent in February. The number of people
supporting the Russian government as a whole also declined, as has declined
support for the pro-Kremlin One Russia centrist party (21 per cent).

*******

#5
WorldNow: U.S. overconfidence poses danger: Medvedev

MOSCOW, March 30 (Kyodo) - By: Shigeyuki Yoshida
The Russian historian, Roi Medvedev, is known for being an alternative
Marxist. In the 1960s, he fought for democratization of the Soviet Union,
exposed the Stalin personality cult and was thrown out of the Soviet Union
Communist Party. As a member of the intelligentsia with leftist tendencies,
he kept a close eye on the disintegration of the Soviet Union and the
changes going on in Russia. Kyodo News' interview with Medvedev was
conducted in his modest house on the snowy outskirts of Moscow. In answer
to the question as to what is most important in the uncertain and
unpredictable 21st century, he replied, ''Patience and attention to
people's needs.''

The following are excerpts of Kyodo News' interview with Medvedev.

How did the Sept. 11 attack in the United States affect society?

The world community realized that the threat of Islamic terrorism had
become threat No. 1. As leader among the Western countries, this was the
first time that the U.S. had directly encountered Islamic radicalism.
Russia had come up against this threat earlier in the form of the Chechnyan
war, but this was nothing compared to what happened in the U.S.

But Islamic radicalism was around before this.

True. It was born in the Near Middle East, in countries like Algeria and
Egypt and then moved across to Russia, mainly to Chechnya. However, the
terrorist attack in the U.S. showed, for the first time, that Islamic
terrorism had become a force to be reckoned with on a global scale. We need
to be worried about the fact that the terrorists don't choose their weapons
of war. In terms of war, Islamic radicalism is a weak political force. The
U.S. is much more powerful as far as weapons go and no one can stand up to
this country right now. So, there was no alternative for the radicals but
to use barbaric methods in their struggle with the U.S. There was no other
way.

Can you justify Islamic radicalism in choosing terrorism as its one means
of attack?

Of course not. But the bombing of Palestine by the Israelis is just the
same sort of barbaric act as those carried out by the Palestinian kamikaze
attackers. The victims come from the population at large.

You said terrorist acts cannot be justified, yet the Soviet Union's
Communist regime was responsible for terror on a large scale.

The Bolsheviks maintained that terror was unavoidable during war. Yet, even
after gaining power, they still used terror on a massive scale. This cannot
be justified. As a historian, terrorism repulses me.

Will the 21st century become marked by conflict between the United States
and Islamic radicalism?

Although Islamic radicalism counts the U.S. as enemy No. 1, this is a
threat to the whole of the civilized world. It is a serious matter that
Islamic radicalism puts forward requests that cannot be fulfilled. For
example, that the U.S. pulls out of Saudi Arabia and that the Jewish people
leave Israel. In Russia, Islamic radicals made plans to obtain control of
the whole of the northern Caucasus, Chechnya and other regions. So, the
war, more likely than not, will continue. However, it's not clear if this
conflict will continue for the whole of the 21st century. Is it possible
for Islamic radicalism to have the same global effect as fascism? This
depends on the actions of the whole of the civilized world. In the whole of
Islam, made up of more than a billion people, Islamic radicalism is only a
comparatively small part of the Muslim population.

The main thing in the struggle with Islamic radicalism is not to overstep
the boundaries of the struggle. The fight with Islamic radicalism and war
with countries such as Iraq or Iran are completely different things. A war
with Iraq would involve the entire Islamic world. I fear that the U.S. may
provoke an escalation in the struggle with Islamic radicalism.

Can it be said the fight against Islamic radicalism involves all of
civilization?

Not yet. But there is a danger that this could happen if the conflict with
Islamic radicalism deepens. All available means must be used to avoid this.
Islamic radicalism is an unknown threat for us. The U.S. and the Soviet
Union studied each other in great detail during the Cold War. However, I
cannot say Russia has ever fully studied Islam as a religion. So, it is
very important to look at Islamic radicalism as an ideology.

How should the world community react to this conflict?

It must be overcome. There were a few outbreaks like this Islamic one in
the 20th century. There was fascism and, most frighteningly, Bolshevism.
Appearing in the 19th century, the communist movement, aiming for world
domination, proclaimed a world revolution in the 20th century. Thus, it
became a threat to the capitalist world. This became the major reason for
the start of the Cold War.

Has there ever been anything like the terrorist attack of Sept. 11 in the
20th century?

Probably the nuclear attack on Hiroshima and Nagasaki. This was also an act
of terrorism. Something that was meant to frighten Japan caused the death
of several hundreds of thousands of innocent people.

This could be called an act of war, but also war terrorism.

You mean terrorism and an act of war are the same thing?

No, not the same thing. War between governments and the fight with Islamic
terrorism are different. However, there is no clear distinction between an
act of war and terrorism. The United Nations and other International
organizations should give clear definitions.

In your book about President Vladimir Putin, published this year, you
support the war in Chechnya.

The Chechen problem is complex. It involves religion, though it is mainly
concerned with independence and separatism. The war was unavoidable in
preventing Chechnya from becoming independent.

If you say Bolshevism is a radical ideology, how then should Russia develop?

Russia should build a democracy of its own, not based on Western ideology.
I don't think that choosing socialism was a mistake. Now, Russia has chosen
capitalism. And, as a result, a large percentage of the population is in a
desperate position. I hope that Russia returns to socialism in the future.
I mean to a social-democratic path. But Russia is not poor right now. And
in order to change over to a social-democratic lifestyle, a certain social
development is necessary.

What lessons can be learned from the fight against terrorism in the 20th
century?

The 20th century was a century of revolutions. At the same time, the world
was much changed by technical advances. We must be patient with each other,
attentive to each other's needs. We shouldn't put on airs and act high
handedly. President (George W.) Bush's doctrine agrees with what (Vladimir
Ilyich Ulyanov) Lenin said. It is wrong to say, ''He who is not with us is
against us.'' That is a dangerous Bolshevik thesis. I would say, ''He who
is not with us is not against us.'' Since someone not in league with our
enemy may become our future partner.

Has U.S. domination of the world grown in the aftermath of the terrorist
attacks?

I don't think so. Why should we automatically side with the U.S.? President
Bush's watchword is its own type of radicalism. It looks as if radicalism
can be found among rich nations as well as poor. At the roots of this
radicalism is the idea that only that which Americans hold dear should be
what the whole of civilization holds dear. I don't like that sort of
self-centered confidence.

Medvedev continues by explaining what kind of leftist ideology should be
adopted after the end of the Cold War in Russia, where the entire basis of
the socialist revolution has been completely overturned. He also compares
the U.S. effort to have things and ideas which the U.S. holds dear to be
generally accepted to the persecution of alternative thinkers in the old
Soviet Union.

Biographical Note: Roi Medvedev, a Russian historian, was born in Tbilisi,
Georgia, in 1925, and graduated from Leningrad University. During the
Soviet era, he criticized Stalin and Stalinism from a Marxist viewpoint.
Medvedev became a researcher at the Education Academy after joining the
Soviet Union Communist Party in 1956. In the early 1960s, he started an
anti-government movement, engaging in underground publications. In 1969, he
was purged from the party after publication of his book ''Let History
Judge,'' that stressed Stalin and Stalinism at a time when official Soviet
propagandists were trying to partially rehabilitate the dictator. Later
Medvedev was severely oppressed for his active pro-democracy support by
announcing an open letter along with Andrei Sakharov to the Soviet
leadership in 1970. Medvedev restored his reputation Mikhail Gorbachev
launched his perestroika program of gradual political and economic reforms
and returned to the ruling party in 1989. He was elected to the Soviet
Union's Congress of People's Deputies and was named as member of the
Supreme Soviet, the permanent working body of the Congress. Even after the
dissolution of the Soviet Union in December 1991, he maintains his
social-democratic stance, supporting President Putin. Zhores Medvedev, a
dissident biologist, exiled to Britain in 1970s, is Roi's twin brother.
Medvedev is the author of numerous books.

*******

#6
Ex-Soviet states eye economic union

PRAGUE, Czech Republic, March 27 (UPI) -- While West Europe revels in the
unifying success of its new euro currency, finance leaders in the
now-independent nations of the former Soviet Union are considering similar
steps aimed at mingling their economies and creating another multinational
powerhouse on the world market.

The steps under discussion include a proposal to form a single,
Moscow-centered currency system for at least some of the 15 countries in
the region dominated by Russia and making up the Commonwealth of
Independent States.

Another plan calls for banks in CIS countries to work together to attract
foreign investment capital, mainly from the West, while fully embracing
globalization.

Rumblings of a revival of Soviet-style economic commaderie, minus the
communist five-year plans and military element, were evident Wednesday at a
bankers conference in Prague. Representatives from central banks in
Ukraine, Latvia, Russia and Belarus were among the CIS financiers eyeing
the proposals for cooperation at the European Banking and Financial Forum.

One proponent of closer relations was Mikhail Sarafanov, chairman of the
International Investment Bank in Moscow. He said the bank is "being created
from scratch" from remnants of the former Comeco economic community.

Comeco was formed in 1949 as a financial framework for communist countries.
It peaked with 10 member-nations including the Soviet Union, other Warsaw
Pact states, Cuba and Vietnam before collapsing in 1991.

Sarafanov said the CIS region is poised to attract longterm foreign capital
"in the context of globalization." He predicted the influx will begin in a
few years, after "the post-Soviet states and (former Comeco) member
countries go through the current transition period."

Key to that transition is the ongoing process of settling Russia's huge
debt inherited from the Soviet era. As of last year, Moscow owed more than
$70 billion to nations in the Paris club, London club and its former Soviet
allies.

Private investment to former Soviet countries should increase substantially
once the debt problem is solved, Sarafanov said, adding that "this year we
will finalize the technical phase of this settlement."

On some cooperative proposals, the financiers were divided.

The single-currency proposal, for example, was strongly promoted by the
head of the National Bank of Belarus, Pyotr Prokopovich. He said the plan
was discussed in detail last month at a meeting of CIS leaders in his
capital, Minsk.

The region's dominant currency now "is either dollars or euros,"
Prokopovich said. "But our economy is closely linked to neighboring
countries" of the former Soviet Union "and this needs to be continued and
even strengthened."

Although Prokopovich did not name potential currency sharers other than
Belarus and Russia, he said the changeover could begin in two years. "We
hope other post-Soviet countries will join us," he said.

But Oleksandr Sharov of the National Bank of Ukraine said his country would
keep its national currency unless invited, perhaps in 10 years, to join the
euro zone and the European Union.

Speaking of the Kiev government's recent financial decrees, Sharov told
United Press International, "We've made European integration our choice,
not CIS integration."

Nevertheless, Sharov acknowledged that business ties between Ukraine and
Russia, more than a decade after the Soviet collapse, still keep their
economies closely linked. "Of course we would cooperate with Comecon if it
brings in money," he said. "Russia is a rich country."

The latest World Bank report on Russia said its economy expanded faster
than expected last year thanks to an emerging consumer market, and despite
repercussions of Moscow's 1998 financial crisis. But private investment
growth last year was just 8 per cent, half of the level posted in 2000, and
most of the money was pumped into energy and other natural resource projects.

Russian government reform in business regulation and taxes will be needed
before adequate foreign capital can arrive, concluded the World Bank report
as well as a report last year by the European Bank for Reconstruction and
Development.

Yet the reports also said Russia's parliament and President Vladimir Putin
have pushed through major reforms in the past two years that should
stimulate investment.

Russia and other CIS states also are speeding up the privatization of
state-controlled companies. The exception is banking. In Russia, for
example, state-owned banks control two-thirds of the nation's capital and
the largest, Sberbank, controls 76 percent of all household deposits and 20
percent of the precious metals market, according to EBRD.

At the bankers' conference, Latvia Ministry of Finance Secretary Valentina
Andrejeva said her small country has almost completed privatization "and
now strategic investors are coming in." She added, "Latvia has solved most
of the problems from the transition process."

Ukraine, however, is struggling. Sharov said about 30 of the country's 187
banks are "in the process of closing." And consumers haven't recovered from
the loss of all their life savings -- about 120 billion Russian rubles --
when the Soviet banking system dissolved a decade ago.

"It all went to Moscow," Sharov said. "It was a huge amount for our country
-- more than the assets of all the banks we have now."

Andrejeva said she chaired a Latvian committee that tried to negotiate a
savings-loss settlement with the Russians. "This issue hasn't been resolved
but there've been no negotiations for the past two years," she said.

Yet for most of the bankers the need build regional economic cooperation --
and perhaps someday a competitor to the European Union -- outweighs the
lingering sting of savings bank losses and the 1998 crisis.

Sarafanov said his bank, created to promote development in the CIS, has
about $700 million worth of projects in the pipeline for the next two
years. He predicted more activity as the ex-Soviet partners work together.

"The business relations between the Comeco member states is continuing
(because) it is politically possible." Sarafanov said. And referring to his
bank, he said "we plan to return to the markets in 2003."

*******

#7
BBC Monitoring
Libel case against Russia's Nezavisimaya Gazeta editor political - chief
editor
Source: Ekho Moskvy news agency, Moscow, in Russian 0925 gmt 30 Mar 02

[No dateline as received] The summons served on Igor Zotov to come for
questioning is an attempt to exercise "powerful psychological pressure of
the staff of the paper, probably, on the paper's shareholders and the
journalistic community, at least that of Moscow", chief editor of
Nezavisimaya Gazeta Tatyana Koshkareva has told the Ekho Moskvy radio.

On 30 March Nezavisimaya Gazeta reported that its deputy chief editor Igor
Zotov had been summoned for questioning to the Moscow prosecutor's office.

Journalist Igor Zotov does not deal with political reporting, Koshkareva
said. He was in charge of cultural issues and is "in fact the chief editor
of the Ex Libris literary supplement to Nezavisimaya Gazeta", Koshkareva
explained. Zotov's main job consisted of writing book and film reviews. His
only publication with a political angle, Koshkareva said, was a report on
the London screening of the documentary "Attack on Russia" [on the 1999
explosions in apartment blocks in Moscow and Volgodonsk]. She explained
that the latter was not a review of the film but a factual report on the
film's presentation.

"I think they want to turn Igor Zotov into a hostage and comparisons to the
arrest of [former Media Most top manager] Anton Titov at the beginning of
the NTV story would be appropriate here," Koshkareva said.

She added that she did not think that Zotov should go to the prosecutor's
office for questioning. Koshkareva promised that the paper would do
everything possible to resolve the present situation and that lawyers had
already been invited to offer their advice.

********

#8
Financial Times (UK)
30 March 2002
Russia reforms tax rules for smaller companies
By DAVID STERN

Russia took another step forward in liberalising its economy this week by
significantly simplifying taxes for small and medium-sized businesses.

The move follows the introduction of a flat 13 per cent income tax
introduced two years ago.

President Vladimir Putin announced during a visit to the eastern Siberian
city of Bakailsk on Thursday that small entrepreneurs would now have a
choice of paying 20 per cent tax on profits or 8 per cent on revenues,
starting in 2003.

Taxes would be collected quarterly - not monthly as is currently the method
- and would apply only to cash already received.

The new plan would apply only to those businesses that employed up to 20
people and received an annual income of no more than R10m a year (around
Dollars 322,000).

Mr Putin also said that businesses would be able to write off 100 per cent
of capital expenditures immediately.

The plan does away with value-added tax, sales tax, property tax and income
tax that businesses are currently required to pay.

The new tax "can be considered no less revolutionary than the decision on
the flat, 13 per cent tax for individuals", Mr Putin said on Russian
television.

Russia's flat income tax rate is the lowest in Europe and has been credited
with initially increasing state revenues.

The government also simplified and slashed the corporate tax rate to 24 per
cent last year.

The Russian president said he hoped that the government would submit the
necessary legislation to the country's parlia-ment, the State Duma, by
April 10.

German Gref, Russia's economic development and trade minister, said that Mr
Putin's initiative was aimed at reducing the tax burden for small and
medium-sized businesses - which employ officially around 19m Russians - and
inducing unregistered companies out of the shadow economy.

The president's announcement was greeted warmly by the Russian business
community, which has long complained of lack of support for the country's
small and medium-sized businesses.

"This is very good. It is even more liberal than we expected," said Alexei
Moisseev, an economist with Renaissance Capital, the Moscow-based brokerage
firm.

*******

#9
Los Angeles Times
March 30, 2002
Russia Admits Abuses Occur in Chechnya Raids
Caucasus: Military leaders issue guidelines and acknowledge the problem of
'disappearances.'
By MAURA REYNOLDS, TIMES STAFF WRITER

MOSCOW -- In the first broad effort to curb "disappearances" and other
abuses in occupied Chechnya, Russian military leaders issued new
instructions ordering troops to treat civilians politely, identify
themselves during raids and keep public records of all detainees, officials
said Friday.

In announcing the new rules, known as Order 80, the commander of Russia's
armed forces in the separatist republic acknowledged for the first time
that disappearances are an endemic problem.

"We are raising the responsibility of all officials so people will not go
missing without a trace," said Lt. Gen. Vladimir Moltenskoi, who signed the
order. "There are facts showing that innocent or not-so-innocent people
have gone missing during special operations--either through the fault of
individual commanders or others who conducted these operations." Human
rights groups welcomed Moltenskoi's comments. But they cautioned that it
remains to be seen whether the new rules will increase military
accountability or whether--coming more than two years after the occupation
began--they are too little too late.

"All of this has been promised before, and most of it is already in Russian
law," said Diederik Lohman, director of the Moscow office of New York-based
Human Rights Watch. "You can produce laws and decrees, but in the end it
all comes down to implementation. Right now, soldiers and officers don't
really feel there is a real chance they will be prosecuted if they break
the law."

Human rights groups and Chechen civilians have long complained about
so-called document sweeps or "mopping up" operations in which Russian
troops go door to door interrogating and detaining men they suspect of
having links to rebels. Military officials said they have changed tactics
and now conduct only "targeted" special operations.

Lohman noted that after several controversial sweeps last summer,
Moltenskoi ordered that military officials give local civilian authorities
a list of all people detained in such operations. However, Human Rights
Watch has documented the disappearance of more than 50 people since then.

"We've found there is a selective approach to recording those detained,"
Lohman said. "The only people on the list are the people who've been
released."

Under the new rules, soldiers entering a household are required to identify
themselves and their rank and state the reason for the search. Civilian
legal authorities, clergy and journalists are allowed to observe. Lists of
those detained must be delivered to local authorities along with
information about their place of confinement. And, except in rare
instances, soldiers are not allowed to wear ski masks or otherwise disguise
themselves. Their vehicles must carry registration numbers.

"[The order] stresses that internal investigations and those by prosecutors
have revealed facts of looting, verbal abuses, rudeness and abuse of power
on the part of federal servicemen," said Sergei Yastrzhembsky, an aide to
President Vladimir V. Putin.

Russian troops entered Chechnya in 1999 after rebels, who had controlled
the republic since 1996, were blamed for a series of bombings that killed
about 300 people in Russia. Since then, the military has reoccupied nearly
the entire republic, and it conducts frequent operations to find rebels
hiding amid the civilian population.

Yastrzhembsky said Russian authorities have done their best to investigate
reported abuses: 33 servicemen have been convicted of various crimes, and
62 others face trial, 12 of them on murder charges.

However, human rights groups say Russian authorities have dragged their
feet in many of the investigations and that the number of prosecutions is a
small fraction of the number of cases documented.

Yastrzhembsky accused Human Rights Watch and other groups of relying on
unverified information. And Vsevolod Chernov, the chief prosecutor in
Chechnya, insisted again Friday that uniformed gunmen who commit abuses are
actually Chechen rebels disguised as Russian soldiers.

Human rights groups have questioned such assertions, noting that many of
the troops arrive in armored vehicles, and that any armored vehicles
belonging to rebel forces were destroyed early on in the conflict.

The human rights group Memorial described the new rules as meeting their
"minimal demands."

"If Order 80 is implemented and observed, it could help prevent many
serious crimes against peaceful residents of Chechnya and significantly
improve the human rights situation . . . " the group said in a statement.
"However, serious improvement will only occur if wide-scale 'sweep'
operations are curbed."

********

#10
Wall Street Journal
March 28, 2002
Editorial
A New Alliance

Big changes are afoot at the North Atlantic Treaty Organization, and about
time. After looking dazed and confused in the weeks after September 11, the
military alliance may be seeing a little more clearly where it is going
next. The vision isn't 20-20, but we're getting there.

The key to the success of the transition to a new era will be American
leadership. And in recent days, Washington has taken a renewed interest in
NATO, after sidelining the institution in Afghanistan and generally paying
it little heed.

This week, with winks and nods, the U.S. tipped its hat toward putting
seven countries -- as opposed to two or five -- on the short list for
membership. The new additions are Bulgaria and Romania, long shots before
the war on terrorism started. We also hear the U.S. seems more committed to
overhauling NATO's internal structures, in the face of opposition from some
Europeans. And all the while, the alliance is working out a new kind of
relationship with Russia .

The tricky part in the months before the crucial Prague summit this
November will be to get all these reforms right. Hasty decisions will have
lasting consequences for the institution and America's relationship with
Europe. Ultimately, the aim must be to keep NATO at the heart of the
trans-Atlantic relationship, and relevant to the security needs of today.

Enlargement is one important step forward. In an important speech last
summer in Warsaw, President George W. Bush committed the U.S. to an
ambitious expansion of NATO, possibly to include Estonia, Latvia and
Lithuania. Thanks in part to the clear message sent by Washington, the
Baltics aren't even contentious anymore. Russia , eager for a deal of its
own with NATO, sounds resigned to the Baltic states coming in. September 11
has further rubbed away old Cold War fault lines.

By putting its sights on Bulgaria and Romania, however, the U.S. backs a
push by NATO into the truly vulnerable flank of the continent, Southeastern
Europe. The threat in the Balkans isn't conventional war, but organized
crime, lawlessness, drugs and weapons running, and minor ethnic wars. These
weak states may easily become havens for terrorism, too; a cell was
recently uncovered in Bosnia.

If NATO wants to look relevant to the problems at hand, it should take the
Black Sea basin and the Balkans even more seriously. That means possible
membership for Romania and Bulgaria, assuming they meet appropriate
criteria; and as important, ever closer security ties with Ukraine, the
western Balkans and the Caucasus region.

Deputy Secretary of State Richard Armitage sent a clear message by spending
two days in Bucharest earlier in the week. Attending a summit of the nine
aspirants for NATO membership, he passed on a written message from
President Bush that the U.S. was committed to remove "the remaining
divisions of Europe." European NATO members were, once again, conspicuous
by their absence from these discussions.

In growing eastward and closer to Russia , the alliance must beware not to
undermine NATO's great strength, its cohesion and military backbone. While
the candidates will be joining a different kind of alliance, a larger NATO
must not be another talk shop; there are plenty in Europe already.
Membership, and the pledge of mutual defense, must be taken as seriously as
before. We don't know when the alliance might be forced to go into battle,
but the candidates should be accepted only if they deserve to be members
and contribute to the alliance, not weaken it.

As for Russia , NATO has reason to tread carefully. The U.S., NATO and
Russia share many common interests; President Vladimir Putin sees good
reasons for Russia to cooperate with NATO. But any deal can't be a sop,
real or perceived, to Moscow for abiding enlargement, or a green light to
meddle with its former colonies beyond NATO frontiers.

The final piece of the puzzle is internal reform. In his Bucharest message,
Mr. Bush said: "We will move to adapt NATO structures and improve its
capabilities so that our societies and our citizens are better protected
against new threats wherever they emerge." This sounds like a clear mandate
for real change at an institution with too much baggage left over from the
Cold War.

George Robertson, the secretary-general, wants NATO forces better prepared
for chemical and biological threats and the alliance to take part in civil
emergency planning. Too often, such initiatives get caught up in needless
intramural squabbling. His efforts to get Europe to spend more on defense
have also yielded little so far.

While the alliance may not have the preeminent role it had during the Cold
War, NATO still matters for Europe and the U.S. It keeps peace in the
Balkans and pools the military resources of the world's greatest
democracies. Few other institutions have served America's or Europe's
common interests so well for so long.

Sure, the alliance needs a makeover. The U.S. pushed NATO to redefine its
role in the 1990s by intervening in the Balkans and warming up to Russia
and Central Asia. It must show the way forward again. If it doesn't, no one
else will.

*******

#11
New York Times
March 31, 2002
book review
'The Siege': When Hunger Meant Hunger in the Soviet Union
By JANICE P. NIMURA

THE SIEGE
By Helen Dunmore.
294 pp. New York: Grove Press. $24.

It is an act of literary audacity to set a novel during the siege of
Leningrad, more so if you are a British writer born more than a decade
after that siege began. How can Helen Dunmore presume to understand the
confusion and terror and pain that descended on the city in 1941, a
nightmare so distant from the daily experience of her readers and herself?
How is she able to convey the strange power of the city once (and now
again) known as St. Petersburg, with its ''crushingly magnificent''
buildings, its ''beauty built on bones''?

After the first few pages of Dunmore's seventh novel, questions like these
become irrelevant. The best historical fiction delivers emotional truth
through the lives of imaginary but ordinary people, making it possible to
feel the texture of events that have been smoothed out by the
generalizations of conventional histories. In ''Siege,'' the specific
becomes epic as five people huddle in one freezing room and Dunmore
describes what is happening to them in language that is elegantly, starkly
beautiful.

Anna Levin is 23. Six years earlier, her mother died after giving birth to
Anna's brother, Kolya. Since then, Anna has been mother to the boy as well
as housekeeper to her father, Mikhail, a writer increasingly out of step
with Stalin's directives. Her life as an art student has been replaced by
the drudgery of a job at a nursery and standing in endless lines for food
and supplies. Taking care of other people has become Anna's art.

And then the Germans attack. Anna finds herself digging trenches while her
father fights with the People's Volunteers. ''There are two realities
now,'' she muses. ''There are summer trees, flights of startled birds, the
smell of honeysuckle in the depths of the night. This is the old reality,
as smooth as the handle of a favorite cup in your hand. And then there's
the new reality which consists of hour after hour of digging, and seconds
of terror as sharp as the zigzag of lightning.''

Two unlikely refugees join the Levin household: Marina, an aging,
out-of-favor actress whose past is entwined with Mikhail's, and Andrei, a
medical student who brings Mikhail home, wounded, from the front. As Anna
learns of Marina and Mikhail's shared history and tentatively begins her
own with Andrei, the city's stores of food and fuel dwindle to nothing. The
inhabitants of Leningrad, ''urbanites who forage in queues, not in the
earth,'' face the horrifying fact that there is nothing to queue for.
Officials make lists of edible resources: laboratory animals, nettles,
wallpaper paste. The focus of life narrows to the search for bread and
firewood.

As the cold weather descends, the city begins to die by quiet, invisible
degrees, ''like the death of a hive in winter.'' Uncounted bodies stiffen
in their beds; on her exhausting daily search for food Anna avoids the
park, where there are ''people sitting on benches, swathed in snow, planted
like bulbs to wait for spring.'' ''Being dead is normal,'' she thinks.
''You have to patrol yourself all the time, to stop yourself slipping over
the border between this world and the next.''

Without a trace of sentimentality, Dunmore manages to sound a fierce note
of humanism that relieves the relentless grimness. Starvation overwhelms
the paranoia produced by Stalin's purges -- no one has energy to spare for
such mutually agreed-upon Soviet fictions as ''Life has become better,
comrades, life has become more cheerful.''

''Words are regaining their meanings, after years of masquerade,'' Anna
realizes. ''Hunger means hunger, terror means terror, enemy means enemy.''
Anna's solidity and vitality are worth more than any political pedigree.

Dunmore, the winner of Britain's Orange Prize for ''A Spell of Winter,''
has walked the delicate line of the literary gothic in her previous novels,
incorporating everything from adultery and extortion to incest and dead
babies. But -- despite a confession of adultery and the death of a child --
The Siege'' is both quieter and more powerful than her earlier work. There
is no need here to manufacture fear. History is frightening enough.

Janice P. Nimura is a freelance writer in New York.

*******

#12
Date: Sat, 30 Mar 2002
Subject: Some thoughts on Gazprom
From: The author, who requested to remain anonymous, is a Western
consultant who has worked with Gazprom in the past. Comments and questions
can be sent to gazpromjrl@yahoo.com

March 2002 – Some thoughts on Gazprom

Gazprom, as befits its role as Russia’s largest company and as the largest
energy producer in the world, has been the object of intense debate for
many months, with the main themes sadly being mismanagement, financial
transparency (or lack thereof), minority shareholders rights, and asset
stripping. This debate has been largely driven by Western investors who
would like Gazprom’s market capitalization to get closer to its potential
value by Western standards (based on its production or reserve levels) as
reflected in the recent text by W. Bowder published in JRL#6149). This has
led this debate to come into the mainstream newspapers and has seen these
investors side with V. Putin in his attempts to take control of the company
back from its former management led by Rem Viakhirev.
This text presents a different perspective on what can realistically happen
with Gazprom and argues that what Putin is doing could be dangerous for
Gazprom and for Russia.

Many of the arguments on Gazprom are about the visible part of the iceberg,
i.e. the hard-currency revenues generated by the export of gas to Europe at
“real” international prices. The debate then focuses on the way these
revenues are shared between legitimate company spending, taxes, other
company expenses of various kinds, and returns to shareholders. The
relationship between Gazprom and the Russian authorities (local and
national) is seen mostly through the angle of control by the government.
This text argues argue that the interactions between Gazprom and public
bodies are complex and shape the way Gazprom is and has been run in many
ways independently of the fact that the Government owns a controlling
stake. The way Putin seems tempted to take over the company will not change
these underlying influences which were understood by the previous
management but not, it would appear, by the new one.

The “strategic deal” between Gazprom and the Russian government

The main elements of the relationship between Gazprom and Russian
authorities are the following:

(i) Gazprom produces over 500 bcm/y of natural gas, of which less than a
quarter is fully monetised (through exports to Europe) while the rest is
distributed in Russia and some countries of the FSU at a very low cost.
This means that most (at least 75%) of the economic rent generated by
Gazprom through the exploitation of Russia’s gas reserves is captured by
the Russian population and the Russian economy. Discussions on the
monetised part of the rent focus, per force, on the more visible but
smaller portion of the wealth created by Gazprom, while the rest, although
much bigger, is neglected because it is domestic and much less measurable
in monetary terms. It nevertheless constitutes the core of the relationship
between Gazprom and Russian authorities.

(ii) Vis ŕ vis Russian authorities, Gazprom’s core obligation is to provide
(i.e. produce and transport over large distances) natural gas to its export
and domestic clients on a continuous basis. Gazprom has fulfilled this
obligation consistently over the past (turbulent) 10 years. To do so, it
has taken advantage of its huge resource base (including several
super-giant gas fields) and of the large infrastructure investments which
were done at the end of the Soviet period. Nevertheless, and contrary to
the current common wisdom, this is a significant achievement: gas
production has been stable over the last 10 years (while Russian industrial
production and GDP were almost divided by 2). Exports obligations were
fulfilled to the maximum at all times (and have been growing regularly over
the period), while domestic needs deemed essential (mostly heating and
electricity generation) were met although formal prices bore no link to
costs and effective payments even less. Whether this was a good thing for
Russia should be debated, but one can argue that this allowed the Russian
population and some of its industry to survive – and that was a clear and
legitimate, if unsaid, goal of all Russian governments. Gazprom has managed
to keep up with the necessary maintenance and investments throughout the
period while at the same time contributing significant funds to public
budgets, local and federal. That funds were also used for other, less
legitimate, purposes does not eliminate the fact that Gazprom has fulfilled
its main functions, i.e. keep the gas deliveries going and provide export
revenues to the government.

(iii) An implicit "deal" between Gazprom and Russian authorities at all
levels has made this possible. In exchange for reliably providing export
revenues and delivering cheap gas inside Russia, the management of Gazprom
has had a lot of autonomy to run the company as it saw fit.
This autonomy was put to very different uses as concerns purely domestic
activities and export related activities. Domestically, that autonomy was
used mostly to gain political or personal advantages from the distribution
of a vital good (see below). Outside Russia, Gazprom's management was
granted control, within certain limits, of the monetised part of the gas
rent generated by the monopoly on gas exports. The management allocated
this hard cash as follows:

I. Priority uses
(a) pay all foreign debt,
(b) pay for vital maintenance and investment requiring imported equipment,
(c) provide a minimum amount of hard currency to the federal budget, and
(d) provide extra revenues to the top managers and their “partners”

II. Other uses (once the vital needs are fulfilled, any amount remaining
can (and will) be fought over by all entities potentially having access to
these funds :
(e) other investment requirements within Gazprom,
(f) more taxes to the federal government,
(g) politically useful expenses (including investments outside Gazprom's
core business),
(h) increase the private slush funds.

The management of the monetised rent has been quite restrained, at least by
Russian standards. The proportion of cash which was not put to legitimate
use has probably been the lowest of all Russian export businesses (which,
admittedly, and sadly for the country, is not saying much…). The sheer size
of the company has made the amounts large in absolute terms. In the recent
period of 2000/01 when export revenues were very high thanks to high gas
prices and the management was on its way out, (g) and (h) - which are the
least legitimate uses of the money - took over a larger share of the pie
and became much more visible, although this did not have an impact on the
underlying industrial activity. Conversely, it must be emphasized that in
1998/99, when European gas prices were very low, and Gazprom hard currency
revenues correspondingly lower, priority was given to the most
industry-legitimate uses of the funds and other uses (including tax
payments to the government) were curtailed significantly.

This control by Gazprom's management over Gazprom's hard currency receipts
has been used, for the most part, rationally, in the sense that any
misappropriation was done after the vital task of producing and
transporting the gas was fulfilled (i.e. after a reasonable level of
legitimate expenses were incurred). The engineering culture of the company
and background of its managers have probably helped in that respect. In any
case, the important thing to note is that, contrary to perception, the cash
/ hard currency part of the company is probably the "cleanest". The biggest
uncertainty for outside investors is to know what the tax payment to the
federal budget will be, as a permanent negotiation goes on between Gazprom
and the government on that subject, with the result depending a lot on the
political and financial environment of the country. As a rule of thumb, the
budget gets “everything but” : (a), (b) and (d) are usually safe, but the
rest is not. Obviously, a lot depends on what is deemed “vital
maintenance”, and on who are the creditors of Gazprom. The one quality of
the Viakhirev management is to have been reasonable and realistic on
maintenance and investment.

In that respect, it is not clear that the new team put together by V.
Putin, with Alexei Miller at its head, will bring any progress, including
from the perspective of minority shareholders. It appeared initially that
(h) was cut back, with (f) benefiting, but current indications are not so
favorable, with (h) beginning again (with new beneficiaries), (g) still
continuing, and more worryingly, (e) and (b) being threatened. It seems
that Putin/Miller, distrustful of Gazprom personnel in general and unable
to ascertain the legitimacy of certain expenses, are limiting investments,
in favor of (c)/(f) (money to the government). If lasting, this is a
worrying trend that could ultimately have nasty consequences, as a probably
growing minimum level of investments is needed to maintain the system, in a
context where gas prices are unlikely to be as high as they were for the
past 2 years.

(iv) The other side of the coin is that managing Gazprom on the domestic
side is first and foremost a political job. The main part of the job is not
to seek maximum returns on investment as in a normal enterprise, but to
successfully conduct permanent negotiations with the government and local
authorities on the allocation of the gas rent which Gazprom produces.

Locally, Gazprom will try to seek to limit its deliveries, lower its taxes
and extract the highest political price (in terms of support in Moscow or
assistance in "pet" projects). Centrally, Gazprom will try to lower its tax
burden, to extract payment for gas in various ways (goods useful to or
tradable by Gazprom) and to channel additional investments into activities
which bring the most return, politically and personally, to the top
managers of the company and their allies.

In that context, it is very likely that Gazprom itself has invented the
tale that it does not have enough money to maintain gas production : this
is a strong argument to deliver less gas inside Russia and pay less taxes.
Anectodal evidence suggests that Gazprom voluntarily limits its production
and could produce more if it wanted  - and if it found markets to sell it
profitably to. (This shows that Gazprom does not behave only as a old-style
Soviet dinosaur and does take into account the profitability of its
production if there are incentives, however distorted, to do so...).

These domestic negotiations involve the local authorities and enterprises
(politicians/ businessmen being often undistinguishable…), their suppliers
and clients, the federal government as such and via its local entities, and
the various units of Gazprom (transportation, procurement,...) in a complex
web of relationships to settle gas deliveries, tax payments, ownership of
various assets, political quid pro quos,... Local and federal issues
interact, and factions within all entities (including government bodies but
also within Gazprom itself) will have conflicting goals. This is a
permanent "market place" of favors (business or political), goods to
barter, IOUs, as well as blackmail, threats, etc…, with Gazprom at its
center as gas was for a time the most liquid commodity and is the most
universally needed in that cold country. The domestic entity “Mejregiongaz”
has been explicitly created to centralize all of Gazprom’s non-monetary
transactions inside Russia, and is now one of the largest clearing centers
of the country.

Gazprom’s top managers and their respective allies in the political world
therefore have tremendous political clout inside Russia. Gazprom, under the
current "deal", is forced to deliver gas cheaply and is therefore the
single biggest source of largesse in Russia (political in the form of gas
valued by the population or financial in the form of tax payments or
participations to various domestic deals). This power gathered by Gazprom's
top managers (and shared with the top echelons of the political world) is
nevertheless constrained by the fact that it is hard to exercise (cutting
gas deliveries cannot be done lightly ; political transactions cut both
ways) and by the need to keep the system functioning, i.e. channeling in
priority a significant (and probably growing) portion of available
resources to legitimate production expenses.

In any case, as long as the massive subsidy to the domestic market remains,
any attempt to alter the balance of the system, and in particular through
the opening of gas exports to others, would be profoundly disruptive as it
would prevent Gazprom from fulfilling its central domestic role, i.e.
heating the population: if any portion of the hard currency generated by
Russian gas exports were taken away from Gazprom and not compensated for,
it would not be able to pay for the maintenance of the gas system for very
long, even if its operations suddenly became totally "clean". The
consequence could eventually be a decline in production but this would be
preceded by local incidents in the transportation network leading to cuts
and shortages with increasing frequency, with unpredictable but potentially
wide social and political repercussions.

The new management will have the same power and the same constraints. It is
possible, if the management is loyal to Putin, that the share of the rent
which was captured or distributed by Gazprom's management and its cronies
for its own benefit will be captured instead by the State. This would be a
good evolution but that only concerns a small portion overall of the gas
rent (it would not change the fact that most of it is still distributed to
the population), and it would be optimistic to believe that the benefit
will actually go towards the public good rather than to simply another
small group of well-connected people.

In fact, an additional danger is that was is seen today as a sign of
progress (the steady replacement of “Gazprom old-timers” by managers loyal
to Putin/Miller) could become a liability in the future, as (i) State and
other minority shareholder interests begin to diverge, after a period of
unusual convergence, and (ii) the new management of the company becomes
estranged from the industrial heart of the company and forgets the first
part of the deal between Gazprom and the State : get the gas produced and
transported. This issue should not be underestimated for the sake of
reforms, however useful these are. There are disturbing signs in the way
the government is interfering in the investment process within Gazprom. The
government should have a say on how Gazprom invests ; it is also desirable
that useless investments and overpaying be avoided, but that should not
mean either that any capital expense is suspicious per se and that the
money should go to government coffers instead (in line with point (i)
above, it is unlikely that much of it will go to other shareholders, there
are too many “outsiders” among them…). Thus Putin must avoid the temptation
to starve off Gazprom in order to avoid waste or theft, because this would
lead to underinvestment and distribution problems, thus breaking what works
within Gazprom without any discernable benefit.

The relative value of Russian gas assets

Putting aside cash movements and moving on to assets, it is clear that
there have been fewer restraints on the domestic side on Gazprom's
management ability to gain personal benefit from Gazprom's transactions, so
long as gas was delivered.

In 2000/01 in particular, Viakhirev et al. (knowing that they would in all
likelihood leave the company) organised the distribution of contracts or
assets to "interested parties" on a larger scale than before (also taking
advantage of higher gas prices as well as a generally improving domestic
situation). Again, some of these arrangements should be put in perspective,
i.e., in a context whereby Gazprom has fulfilled one of its “duties” by
exporting as much gas as the Western European markets will take, and
bringing (most of) the proceeds back into Russia. It is meaningless, for
instance, to evaluate domestic gas assets given (or sold at very low
prices) to other companies on the basis of the price that the gas would
fetch at European prices, because that market simply is not available in a
context which requires Gazprom’s export monopoly to function. Any gas sold
by another Russian company would reduce Gazprom’s market share (and
revenues) and not add to it. Therefore, as Gazprom already produces enough
for all its needs from its existing fields (and will continue to do so for
many years), any non producing asset is currently not worth much to the
company, nor to anyone else.

Unless, of course, those other potential producers have the possibility to
sell gas where Gazprom cannot, or somewhere where it can get a better price
than Gazprom. This is the case in some former Soviet republics or in some
cases inside Russia, where Gazprom cannot charge for its deliveries, or
cannot enforce payments, whereas a (well-connected) private company may do so.

This was the original rationale behind the creation of Itera : to sell
Russian gas in Ukraine where Gazprom could not get paid for its deliveries.
Gazprom has practically never been able to extract cash payments for gas
delivered to Ukraine. This does not mean that gas was not paid for by
consumers (for part it was not, as in Russia), but that the Ukrainian
payment collector chose not to pay Gazprom because it could (for the very
simple reason that it controls the pipelines through which 90% of Gazprom’s
export to Europe flow). Gazprom’s solution was to have the gas delivered by
someone else, would could cut off supplies to Ukraine without risking
retaliation as Gazprom could not (each time it reduced its deliveries to
Ukraine, deliveries to the West were effectively cut off). Gas was procured
by Itera from Turkmenistan to build the fiction that it is not delivered
from Russia. In practice, this meant that money that would go to Gazprom in
an ideal world now went into the pockets of people with links to Gazprom’s
management instead of into the pockets of people with links to Ukrainian
authorities. There was no loss for Gazprom, but only in the narrow sense
that money would not have reached the company in any case.
Today, Gazprom delivers to Ukraine approx. 25-30 bcm per year as payment of
transit tariffs for its export gas (by the way, this payment in kind can be
legitimately accounted for at many different prices, as there is a set-off
for another service, transport, which can also have many realistic prices).
Another 25-30 bcm of gas are shipped every year from Russia, by Itera or
others and not by Gazprom (who still acts as transporter of the gas to the
Ukrainian border). If that gas came from Russia, any positive price that
Gazprom gets is pure profit for Gazprom, because it previously had to
deliver this gas without getting any payment. The question that arises is
then a question of the fairness of the allocation of that payment between
Gazprom and Itera (which is a legitimate question with Itera a vehicle for
Gazprom-related investors), but not whether Gazprom lost out in the deal,
because it did not, as far as the Ukrainian market is concerned. (If
financial guarantees, or preferential transportation tariffs have been
provided by Gazprom to Itera, this may need to be reassessed, but
information on that subject is hard to come by). To improve the situation
for Gazprom shareholders, the gas market in Ukraine would need to be
changed. It is not clear at all here that competition between Russian
exporters for access to Ukrainian pipelines would bring any improvement to
this situation.

As far as domestic sales were concerned, the same line of reasoning (the
inability of Gazprom, for political reasons, to cut off supplies in case of
non payment) led to selective distribution by Itera and a few others to
selected customers inside Russia (who had the means to pay but the
political means to avoid it if the shipper was Gazprom, but not if it was
another entity with enforcement capacity). This was initially profitable
for Gazprom, because of the distorsions it had to live with in the first
place.
What has probably happened since these early days is that Itera has found a
life of its own as it grew with Gazprom’s help (including easy access to
the transportation network) ; its interests are now no longer aligned with
those of Gazprom and it is likely to emerge as one of its most serious
competitors. The ideal situation would see other competitors having the
same rights and access to the pipeline network and other facilities…

To get back to valuation issues, abandoning Gazprom’s monopoly on exports
would admittedly improve the potential value of fields inside Russia, but,
that would threaten Gazprom’s ability to have the funds to produce gas for
both exports and domestic use and therefore require a complete overhaul of
the “strategic deal” which currently rules Gazprom’s motus operandi.
In any case, Gazprom’s reserves are so staggeringly huge that the number is
meaningless as a means to value the company – most of the gas will not be
produced in the foreseeable future, and it may make sense for the company
to dispose of assets if it finds a buyer. There are no reasonable arguments
on Gazprom’s side against full transparency in such transactions and any
lack of disclosure certainly reflects sub-optimal pricing for the company…
This is probably the kind of transactions where minority shareholder
efforts for better information make the most sense, especially as it is
hard, as indicated above, to get a fair price evaluation for an asset in
the current situation. A good test of the new management will be to see if
efforts at transparency continue once control over Gazprom by Putin/Miller
is complete.

Ideas for reform

The only way to reform the hard-currency part of Gazprom would be to reform
at the same time the domestic part, and the only way to do that is to
massively increase domestic gas prices - and enforce payments. This could
be done progressively, as has been done for oil and oil product prices in
the 90s, and does not in any case require that domestic prices reach
international levels (taking into account transportation costs, gas will
always be much cheaper to deliver in most of Russia anyway).

What would be required are price increases that eventually (i) generate
sufficient cash-flow for Gazprom to pay normally for its operating costs,
investments and a reasonable level of taxes without having to negotiate
special deals at all stages to protect its hard-currency revenues, and (ii)
make gas delivery a commercial and not a political business, with payment
in cash and not in favors, bribes, votes, etc... Only if such conditions
are met (and it is hard to know which one of the two is easiest) will it
make sense to try and change the distribution of the monetized portion of
the gas rent.

Industrially speaking, Gazprom is a reasonably efficient entity, able to
produce large quantities of gas at low cost and transport it to where it is
needed. That most of the rent created is distributed inside Russia, and
that a part of the monetized fraction is further captured by privileged
parties does not eliminate the fact that Gazprom is able to produce this
value. Any reorganization of the company to change the repartition of the
visible, "monetized", value between various parties (the company itself,
its managers and other "interested parties", the government, shareholders,
outsiders such as oil companies or Western majors) should take into
consideration the impact of such a reorganization on the ability of Gazprom
or the potential successor entities to keep on creating all the value added
and the impact (economic, political) on current rent-holders in Russia,
i.e. first and foremost the population and second, Gazprom managers and
their politician/"biznessmen" friends.

In any case, it is very unlikely that Western companies will want to invest
in the gas sector in Russia so long as gas prices remain low in the
country : they will naturally require rights to future revenues to pay for
their investments – and as a priority to export revenues (especially if
they want to finance these investments), and Russia cannot afford to
abandon any portion of these exports so long as this is the main resource
to keep the gas production - and the gas distribution to the population -
going.
Russian oil companies would only be interested in the current context (low
domestic prices, and an obligation to deliver a significant portion of
their gas domestically) if they found an interest in converting these
obligations into political clout, or if they could find ways to avoid
fulfilling such obligations, in a sad repeat of the games of the oligarchs
of the mid-90s. That does not seem likely today and is probably a good
thing...(some of the oligarchs would probably be interested to go back to
these games to which they are better suited than the good old-fashioned
running of a big industrial enterprise, but the majority would probably
rather remain in today’s Russia where the returns are not as high as
before, but ownership of assets is assured beyond a few months).

Furthermore, from a strategic point of view, Russia probably has good
reasons to maintain its export monopoly. Although the Russians themselves
are among those who believe that the on-going liberalization in Europe will
bring prices down, those hopes (or fears, in the Russians’s case) are
likely to be dashed in the medium term. Europe’s need for imports is
growing, and Gazprom is in a unique position to provide an also-growing
share of these imports, thanks to its reserve base and to its unique
infrastructure allowing it to bring its gas to the European market in large
volumes. Throughout the last decade, (and this is another point in favor of
the old management) Gazprom has relentlessly continued to build new export
pipelines, including the Yamal-Europe line through Belarus and Poland, the
Blue Stream pipeline to Turkey, and capacity increases on the Balkan pipe
and other connecting lines. These pipelines are now in service or close to
be, which makes it physically possible for Gazprom to sell its gas at
marginal cost, which for the Russian company is extremely low (certainly
lower than 1 $/mbtu). In view of the volumes of gas that Gazprom is able to
deliver (close to 130 bcm/y to Europe in the past few years, with pipeline
capacity for probably 30 bcm/y more today), its ability to flood the market
with cheap gas is massive. The mere implied threat lowers the price
threshold at which new investments to bring gas to the European market (by
LNG or pipeline) must be profitable, thus making fewer such projects
possible (or at least financeable), and eventually pushing prices up.

It is not clear yet that Russia will have the political will to trigger
such a crisis with Europe (let alone the financial discipline to go with
significantly lower gas revenues for several months or longer), but Gazprom
has the capacity to influence gas prices in Europe upwards on a long term
basis. In that context, it could make sense for Russia to use this power in
the gas business to reinforce its position in Europe, which would require
to keep some form of control over its gas exports. Whether Russia uses such
a power intelligently or usefully, and whether it is used positively (for
instance to get closer to Europe) or negatively, is another question
altogether. (The example of Ukraine, which has made no positive use
whatsoever of its absolute stranglehold on Gazprom, should be kept in mind
here, and Gazprom, which is on the receiving end there, no doubt will).

In both cases (the domestic situation and the export markets), it is clear
that with Gazprom, whoever controls transportation controls the gas
business – or to be more precise in a post-Soviet context, whoever gets
paid for transportation controls the gas business. Gas executives have long
argued against the separation of production and transportation of gas, but
it can be said that Gazprom’s core business already is gas transport rather
than gas production, considering the technical constraints it faces
(supergiant but relatively simple fields in locations requiring long
distance pipeline transport capacity). By keeping control of the unified
transport network within Gazprom (including control of the export lines)
but progressively transferring production to third parties, Russia could
conceivably develop a long term gas strategy whereby Gazprom would collect
revenues via tariffs to maintain the network and ensure transportation of
gas on behalf of many producers. Export tariffs could be set at a high
level, thus ensuring revenue flows to State budget while making domestic
deliveries relatively profitable (and allowing Russia to lead the external
gas policy it chooses). This would allow competition to grow and make it
possible to change domestic prices at the pace chosen by the government to
reflect its other priorities (inflation, social policy…).

In the absence of such drastic overhaul, the big question today could be
put in the following terms: given that the gas system ("Gazprom" in its
original meaning of "gas industry") will probably require in the future
much larger investments than what has been done in the past 10 years (to
sustain domestic demand and provide for regularly growing exports), but
that its resources are for the time being limited (to hard currency export
payments) and fought over harder than ever, what will give in first? Will
domestic prices be raised high enough and quickly enough to change the
business model of Gazprom, or will the government choose to maintain low
prices to protect domestic users, effectively preventing any real reform of
the company? Will the current system collapse one day from the conflicting
demands put on it? Gazprom has faithfully sustained Russia for the past 10
years; when will Russia give it the framework to grow again?

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