In this issue:

Yukos Oil Squeezed by Justice Ministry

Russia Adjusts Oil Duties To Favor CIS

Putin: CIS Faces Moment of Truth

Saakashvili: U.S., UK Approved Ossetia, Abkhazia Showdown

CIS, Russian Foreign Ministry Blast OSCE

Analyst: Moscow 'Hawks' Perceive Encirclement

U.S., Russian Labs Push Nuclear Power

Duma Passes Entitlements Reform

From Volume 3, Issue Number 32 of Electronic Intelligence Weekly, Published Aug. 10, 2004
Russia and the CIS News Digest

Yukos Oil Squeezed by Justice Ministry

The surge in crude oil prices to the vicinity of $45/barrel during the week of Aug. 2, was spun in the world financial media as being "Russia's fault," as the Russian Justice Ministry ruled that Yukos Oil must spend all available liquidity to pay its tax bills, rather than on operating expenses. (For the greater factor, global hedge-fund activity, see our World Economic News Digest). Yukos had earlier said that it would run out of operating funds by mid-August, with or without this ruling or the pending likely addition of another $3 billion to the tax bill (bringing it to $10 billion). Yukos crude output, which is about one-fifth of the Russian total, represents just under two percent of world production.

Pointing out that imports from Russia and the CIS accounted for only 10 million out of 561 million tons U.S. oil consumption last year, Prof. Nodari Simoniya, of the Institute of the World Economy and International Relations (IMEMO), said in a late-July interview in the weekly Argumenty i fakty, that exaggeration of Russia's role in world oil, as a potential "replacement" for Persian Gulf producers, is a bluff. Nonetheless, the London Observer of Aug. 1 sounded the alarm: "Will Yukos tax bill be a burden for us all?" Conal Walsh's article called the July 29 report, and subsequent denial, that Yukos had been forbidden to sell any oil, an "episode [that] left little doubt that a genuine halt in production at Yukos had the potential to cause chaos."

Russia Adjusts Oil Duties To Favor CIS

RIA Novosti has reported that the Russian government as of Aug. 1 implemented a 68% increase in export duties on crude oil, raising the rate from $41.60 to $69.90 per metric ton. Then on Aug. 3, after meeting with President Putin, Deputy Prime Minister Alexander Zhukov announced that duties on oil and other fuel exports to CIS member countries are being substantially reduced, in a move that "will be very important for integrating CIS member countries within the Eurasian Economic Community" (Russia, Belarus, Kazakstan, Kyrgyzstan, and Tajikistan).

Energy integration was high on the agenda of Putin's July 26 meeting with Ukrainian President Leonid Kuchma. They finalized agreement for the Odessa-Brody pipeline to be used in the West-East direction, to ship West Siberian oil to the port of Odessa, rather than for taking yet-to-materialize Caspian oil to the West in circumvention of Russia, as originally contemplated. The Russian and Ukrainian natural gas companies agreed to set up a joint venture for shipping and selling gas from Turkmenistan.

Putin: CIS Faces Moment of Truth

On July 19, President Putin addressed the Security Council, taking up what he had called, in his speech to the diplomatic corps a few days earlier, Russia's top foreign policy priority: relations with the former Soviet republics, now members of the Commonwealth of Independent States (CIS). Already in May, Foreign Minister Sergei Lavrov had warned that the CIS was ineffective and inactive. Putin put the matter bluntly: "I believe we have approached a decisive moment in the development of the Commonwealth. In essence, there is only one choice: either we qualitatively strengthen the CIS, and create a working, globally influential structure, or this geopolitical area will inevitably be eclipsed and, as a result, will lose any importance for its member states. We must not let the latter scenario happen."

Saakashvili: U.S., UK Approved Ossetia, Abkhazia Showdown

Michael Saakashvili, whose accession to power in Georgia at the end of last year was a project of megaspeculator and geopolitics dabbler George Soros, is escalating tension around two districts in Georgia, which have been autonomous for the past decade and which border on Russia: South Ossetia and Abkhazia. Both of them were the scene of bloody combat in the early 1990s, leading to an uneasy truce, under which the Tbilisi central government stayed out of these areas and Russian forces policed the ceasefire. The roots and current state of the conflicts are complex, involving the legacy of Stalin's nationalities policy in the Soviet Union, the panoply of separatist ethnic movements across the Caucasus (many of them promoted by foreign intelligence agencies for their own perceived advantage), and the economic interests of criminal clans in the region. Saakashvili first ousted Aslan Abashidze's leadership in semi-autonomous Ajaria. Now he is moving to retake South Ossetia and Abkhazia, but the outcome is uncertain and threatens to be bloody.

During July, incidents occurred between South Ossetia and the rest of Georgia, when Georgian forces were sent to the border area, officially to fight smuggling. Russian trucks, protected by Russian military units, were among the targets. Several rounds of South Ossetian-Georgian talks were inconclusive. On July 20, speaking in Ajaria, Saakashvili threatened South Ossetia and Russia with abrogation of the 1992 Dagomys Agreements, which ended the war between Tbilisi and Tskhinvali and established the Russian peacekeeping contingent. South Ossetian leader Eduard Kokoyev rejoined, "Denunciation of the Dagomys Agreements means war.... And he is saying this upon his return from Britain, a country with centuries-old democratic traditions." On July 18, Saakashvili made a quick, unannounced visit to South Ossetia; the Russian Foreign Ministry protested that it had not been notified.

Saakashvili escalated on Aug. 3, declaring that any foreign ships arriving in Sukhumi or other Abkhazian ports, including boatloads of Russian tourists on the popular Sochi-Sukhumi route, may be fired on by Georgia without warning. With the July 31 shelling of a Turkish cargo ship off the Abkhazian coast, that autonomous area's leaders had broken off talks with Tbilisi, stating that Georgia had "embarked upon a policy of wrecking the process of peaceful settlement of conflicts." On Aug. 3 in South Ossetia, Georgian snipers fired on the motorcade of Andrei Kokoshin, head of the Defense Committee of Russia's State Duma.

Interspliced with these actions, Saakashvili visited London and Washington. In London on July 14, he said that Georgia seeks a close relationship not only with the USA, but also Britain, and urged Defense Secretary Jeff Hoon to send more British specialists to Georgia and take Georgian officers for training in Britain. When Kokoyev warned of war, Saakashvili boasted, "The British SAS can easily smash the GRU spetsnaz" (Russian special forces). On Aug. 2, after Saakashvili visited Israel with his foreign and defense ministers, it was announced that Georgia will import Israeli light weaponry. Then Saakashvili came to Washington and, at the Georgetown Center for Strategic and International Studies Aug. 5, issued his latest warning: Russian tourists should not visit Abkhazia, which he called "not a vacation area, but a war zone from which 300,000 Georgians have been expelled." August 4 and 5, Saakashvili met with U.S. Secretary of Defense Donald Rumsfeld, Secretary of State Colin Powell and National Security Adviser Condoleeza Rice.

The Russian Duma issued a warning Aug. 5, that the conflict in Georgia could develop into a large-scale military confrontation, with Russian involvement.

CIS, Russian Foreign Ministry Blast OSCE

On July 8, Russian Deputy Foreign Minister Vladimir Chizhov sent to the Permanent Council of the Organization for Security and Cooperation in Europe (OSCE) a joint statement, adopted by CIS members, excepting Georgia, at their July 3 summit. Its gist was that the OSCE was overactive in the "human rights" area, at the expense of economics and security. The CIS accused the OSCE of violating the 1975 Helsinki Treaty, which formed the CSCE (predecessor to the OSCE), and other joint security accords, by ignoring "such fundamental Helsinki principles as non-involvement in domestic affairs of countries, and respect for their sovereignty." The statement said, "A selective focus upon particular states, with neglect of problems existing in other member countries, is a violation of OSCE's mandate and evidence of double standards and selective approaches.... This selective approach is especially visible in the practice of OSCE's Bureau for Democratic Institutions and Human Rights, which is mostly engaged with monitoring and interpretation of the election procedures in member states."

Chizhov, who has handled Moscow's negotiations with the European Union, warned that Russia and other CIS countries might "lose all interest" in the OSCE if it continues to "degenerate" rather than reform.

Analyst: Moscow 'Hawks' Perceive Encirclement

Writing in the Russian newspaper Vremya Novostei of July 7, Nikolai Poroskov discussed "asymmetric" responses to what some Russian circles see as a potential attack on the country from several directions. Under the headline "NATO's Eastward Expansion Prompting Review of Russian Nuclear Strategy," Poroskov began, "'The ring of foreign military bases around our country is tightening up, and the threat of invasion is increasingly probable!' Assertions of this type, not heard since the days of the USSR, are being made more and more frequently in Russia today. The so-called 'hawks' perceive three global sectors as threats: the Muslim world today, China in the distant future, and the West as early as tomorrow."

Citing military expert Aleksei Arbatov—a member of the Yabloko party, not usually "hawkish"—on how "the patrolling of the Baltic airspace [by NATO] confirms the anti-Russian thrust of the alliance's expansion," Poroskov focussed on one element of potential Russian asymmetric responses: the placement of tactical nuclear missiles in Kaliningrad, just west of Lithuania and east of Poland.

His article, which also lamented the reduction in size of Russia's ground forces, appeared before the dismissal of Gen. Anatoli Kvashnin as Chief of the Armed Forces General Staff, and the downgrading of the General Staff. Nonetheless, Poroskov cited incoming Chief of Staff Gen. Yuri Baluyevsky as an advocate of maintaining tactical nukes, as the U.S. does in Western Europe—especially since U.S. short-range missiles there, "might as well be strategic, as far as Russia is concerned."

U.S., Russian Labs Push Nuclear Power

At an International Agency for Atomic Energy (IAEA) meeting in Vienna, July 19-21, heads of seven American and nine Russian nuclear labs issued a joint call for the global expansion of nuclear energy technologies. The document states that, "of all current or imminently developable energy technologies, only nuclear power is capable of meeting the growing world demand for safe, clean, plentiful, and economically viable sources of electricity, fresh water, and hydrogen." The American and Russian scientists stated that, "with government encouragement and the right regulatory and economic conditions, nuclear energy could supply a substantial part of U.S. and Russian energy needs, and 30-40 percent of the world electricity demand by 2050." Flying in the face of the technological apartheid practiced by the current U.S. administration, the statement says that nuclear energy policy "must preserve access to nuclear energy sources for all countries in the world, and in parallel, reduce the risks of nuclear arms proliferation, nuclear terrorism, and hazardous impacts on environment and population health."

Duma Passes Entitlements Reform

On Aug. 3, the Russian State Duma rushed through 300 votes in an eight-hour session, to amend the government's bill to replace in-kind entitlements with cash payouts, for large categories of Russian citizens. (Background on this legislation appeared in the In-Depth section of EIW No. 30, "Russian Economy: A Leap in the Wrong Direction"). The bill was then passed in its second reading. On Aug. 5, the bill swiftly passed in its third and final reading, before the Duma recessed until September. The amendments ostensibly protect the rights of veterans, the disabled, World War II Leningrad blockade survivors and some other groups, but the principle is unchanged: free access to medicine, transport and other benefits—above certain very low limits—is essentially a thing of the past for these layers of society in Russia.

The cash compensation ranges from 800 rubles ($27) per month for some disabled persons to a high of 3500 rubles ($120) for the tiny number of "Hero of the Soviet Union" and "Hero of Russia" medal holders, and averages 1500 rubles ($51). Many retirement pensions are 1500-2000 rubles, nearly 30 million people (just under 20% of the population) live below the official poverty line of 2200 rubles ($75) per month income, and the food "subsistence minimum" costs over 1100 rubles. The pressure to spend grandma's "medicine" money on other vital necessities will be extreme in many families.

Now Finance Minister Kudrin must find 171 billion rubles ($5.8 billion) in the 2005 budget to cover the cash payouts. The problem in regional budgets is even tighter than at the Federal level, and the regions are supposed pay a portion of the new cash benefits. A Federation Council staff member quoted in the Aug. 4 Moscow Times said, "Governors [who sit on the Federation Council] complain that they don't know where to take the money from, but they won't say anything against the bill. Everyone is afraid of doing anything against the Kremlin."

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