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1 N November CONTENTS EXCLUSIVE P. 1-4 Politics & Government KREMLIN c Dmitry Medvedev asserts his authority in Moscow c Army: Anatoly Serdyukov wants to break with Soviet heritage INGUSHETIA c Roza Malsagova : President Zyazikov s very life was threatened DIPLOMACY c Russia-China: A wellunderstood friendship ALERT c Gaddafi in Moscow: A visit for nothing? P. 5-8 Business & Networks FOCUS c South Stream: Gazprom sounds out Romania ENERGY c NPO Saturn: Yuri Lastochkin pushed out the door c Inter RAO EES unaffected by crisis P Regions & CIS UKRAINE c Why a gas war will (probably) not take place FOCUS c When Alexandre Lukashenko takes French leave ALERTS c Dmitry Kozak does some housecleaning in Sochi c Saint Petersburg not to fund Gazprom tower SUBSCRIPTION Print Edition (23 issues, airmailed overseas) 770 TTC The Web Pack (Print Edition + PDF + archives acess) 880 TTC The Premium Subscription (Print Edition + PDF + access to all the website contents) 1200 TTC Published every two weeks / International Edition cshipbuilding: Moscow hopes to purchase warships from France A true revolution described by a source close to the matter as an extraordinary event is taking place in cooperation in military shipbuilding between France and Russia. As Russia s naval flagship, the Peter the Great missile launcher, anchored at Toulon on Wednesday 5 November for the first time in a western country following the joint decision of presidents Sarkozy and Medvedev at their meeting in Evian on 8 October Russian Intelligence learnt that sensitive hitherto unpublished documents were discussed by French industrialists and a big Russian delegation led by Navy Chief of Staff Admiral Vladimir Vysotsky in the corridors of the Euronaval International Naval Defence and Maritime Exhibition and Conference. The Admiral immediately drew the attention of journalists present at Euronaval to his strong interest in the exhibition stand of Thales, a group for which his words were almost laudatory, and to a question asked in the form of a jest to an official at the DCNS military shipbuilders stand ( How much would such a ship cost and how long would France need to build one like it for Russia? ). According to information obtained by Russia Intelligence, Admiral Vysotsky s action was everything but an improvisation, and the discussion continued, though more discreetly, notably in the presence of Konstantin Biryulin, the Number Two of the Federal Service of Military-Technical Cooperation (FSVTS), Admirals Borisov and Trofimov of the general Chief of Staff, Captain Maksim Kazantsev the Russian Federation s Naval Attaché in France - as well as Alexandre Bryndikov, head advisor to Anatoly Isaykin, the chairman of Rosoboronexport. The subject of the discussions was the Amphibious assault, command and projection ship Mistral. The Russian side would like the DCNS to build a vessel of this type with specifications almost identical to those of the French navy for An official letter on this matter is due to be sent very soon by the Russian government to the French ministry of Defense. For its part, the Russian ministry of Defense is expected to request a visit of a Mistral class warship to the International Maritime Defence Show (IMDS) in St. Petersburg in June According to information gathered by Russia intelligence, it would appear that during his discussions Admiral Vysotsky also brought up the subject of technical cooperation and exchanges of expertise in the context of formative programs like, for example, multi-mission frigates, aircraft carriers and even submarines. It is, in fact, understood that France and Russia are engaged in simultaneous processes of renewing their escort fleets and thinking about the construction of aircraft carriers for around The ball is now in the French camp. Thales and DCNS undoubtedly will undertake intense lobbying so that the demands of CIEEMG (the inter-ministerial commission for examining exports of defense equipment) that will undergo speeded-up procedures - are taken on board. But it is, of course, the Elysée Palace that will make the final decision. The industrialists in question would like a principled decision to be taken before the EU-Russia summit in Nice on 14 November. Is France ready to sell the most sophisticated military equipment to Russia? And, if this is the case, what are the limits to such cooperation? It is understood, in fact, that for a long time French industrialists and particularly Thales have sought to obtain contracts on other projects such as the Fifth Generation Fighter. If Paris were to give the go-ahead for the sale of a PCB to Moscow it may reasonably be envisaged that other transactions that to date have been improbable as, for example, the sale of radar systems and missiles are possible. In any case, it will be interesting to see the reaction of other NATO members and especially that of the new US administration to closer relations between France and Russia which added to other matters like that of Shtokman and Alstom/TransmashHolding (Russia Intelligence No.85) could somewhat resemble the 1890s. In any case this matter confirms that taboos are beginning to fall among the Russian military. The myth of the self-sufficiency of Russia s defense industries was one of the most tenacious among Moscow s chiefs of staff (but not among far-seeing observers). The wide-ranging reforms launched by the Russian Defense minister Anatoly Serdyukov therefore should both be closely observed and taken seriously. d

2 Politics & Government KREMLIN c Dmitry Medvedev asserts his authority in Moscow As the eyes of the world were turned to the United States on Wednesday, November 5, following the election of Barack Obama, another highly important event was taking place in Russia: Dmitry Medvedev s first annual state of the nation address before parliament. The first major speech on general policy given by Russia s new head of state is very instructive, both because of its general tone and because of the priorities he sets out. This was an opportunity for the president to assert himself in Russia s power system by subtly taking a distance from his prime minister, Vladimir Putin, on certain matters. The following points in his speech are, we believe, noteworthy: Reforms within the leadership are being prepared. Dmitry Medvedev proposed that the president s mandate be extended from 4 to 6 years, and that the mandate of deputies in the State Duma be extended to 5 years. Like Vladimir Putin in 2000, the Russian president said he also hoped to reform the Federation Council. The 10-year residency clause upon being elected to a region, which was introduced last year, will be repealed. Whereas currently regional executive leaders (governors or republic presidents) and the regional assembly each delegate a senator to the upper house of parliament, the Federation Council members will now be elected from amongst the members of regional and local assemblies. Also, in a bid to ensure greater representation in parliament, Dmitry Medvedev proposed that a certain number of seats in the Duma be reserved for parties that did not reach the 7% threshold currently in force. No change in foreign policy is expected. There was proof already during the Georgian crisis that the two heads of the Russian executive are on the same wavelength when it comes to strategic issues. Referring to this summer s conflict, Dmitry Medvedev declared that it was used as a pretext for sending NATO warships to the Black Sea. He hammered out that Russia will not stand back. In his speech, the president also reviewed in detail another sensitive subject: antimissile defense. Medvedev announced that Iskander tactical missiles will be deployed in the Kaliningrad region. He said Russia would also use electronic jamming there to counter the proposed US missile installations in Poland. Multipolarity is still on the agenda and the president mentioned BRIC several times in his speech. It is interesting to note that Dmitry Medvedev explicitly mentioned his support to the new face of the Russian armed forces, a clear message addressed to sceptical military officials to show his backing of Anatoly Serdyukov s reforms (see below). The Kremlin wants to appear undaunted by the financial crisis. We will overcome the consequences of the global financial crisis and will come out of it stronger. The statement, which borders on a denial of reality, is typical. It is interesting to point out one quote by the president one that may seem harmless except for the fact that Russia is a diarchy: Dmitry Medvedev declared Today the most important thing is to implement the anti-crisis measures fully. I would like to attract the attention of the government, the Central Bank of Russia and all governmental bodies to the fact that any delays in applying these measures are unacceptable. And so, with one sentence, Dmitry Medvedev makes it clear who now occupies the Kremlin, and who must give accounts on the crisis and, implicitly, on the economic policies put in place these past years. d Military reforms: Anatoly Serdyukov wants to break with Soviet heritage As Russia Intelligence pointed out in its October 9 issue, Defense Minister Anatoly Serdyukov appears quite decided to take advantage of the context resulting from the conflict in Georgia to initiate a deep reform of Russia s military apparatus. Apart from significant cuts in personnel (the general staff s main department for operations alone will lose 300 soldiers by next March while the total number of generals will be cut from 1100 to 900) the planned measures concern two elements at the core of Soviet military culture - with which the minister apparently intends to take a distance, if not make a complete break. The first of these deals with reinforcing the intermediary ranks by setting up a professional corps of noncommissioned officers. One of the special things about the Red Army, inherited by post-soviet Russia, is that officers in charge of supervising the ranks were mainly conscripted soldiers in their second year of service (or third year for the fleet). Financing the creation of this new corps of career noncommissioned officers will require a planned 85 billion rubles (that is a bit over 2 billion euros) between 2009 and Anatoly Serdyukov also intends to reassess the organization of the operational chain and get rid of the division echelon, which is considered obsolete. For the record, up till now the Russian system has been made up of four levels: district, army, division, regiment. The announced reform introduces a system with three levels: district, operational command, brigade. According to information leaked in Moscow, the new system will be tested by elite units. Anatoly Serdyukov signed instructions to split the well-known Tamanskaya (2 nd Motorized Rifle Guard Division, based in Alabino east of Moscow), as well as the 106th Tula Airborne Division. The Kantemirovskaya Tank Division and the 98th Guards Airborne Division stationed in Ivanovo are expected to follow. It is noteworthy that with the new reform each of the six military regions in the country will have at least one airborne brigade. Will Serdyukov s reforms encounter greater success than those initiated by his predecessors, including Sergey Ivanov s in ? Sources close to the ministry, questioned by Russia Intelligence, say that these reforms have the political backing at the highest level of the state. It remains however that although this small revolution - as cultural as it is military - will take place in a financial context incomparably better suited for this purpose than the 1990s, it would have been easier had it been launched during Vladimir Putin s second mandate. d 2 Russia Intelligence N j November

3 Politics & Government INGUSHETIA c Roza Malsagova : President Zyazikov s very life was threatened The Kremlin finally gave in. On October 30, Dmitry Medvedev announced that Ingush President Murat Zyazikov was to take up other duties in Moscow. He immediately proposed to replace him by Yunus-Bek Yevkurov, whose candidacy the local parliament ratified the following day. The decision does not come as a real surprise. The situation in the tiny North Caucasus republic had been deteriorating continually, and Murat Zyazikov s leadership was being contested in an increasingly open manner. During the summer, the opposition collected 80,000 signatures calling on the president to resign and for Ruslan Aushev to return to power (Russia Intelligence n 81). The protests and violence increased after the murder of the opposition journalist Magomed Yevloev (Russia Intelligence n 83). Confronted with the risk that the republic was teetering on the brink of irreparable chaos, Moscow decided to relent. As is often the case, the Kremlin surprised many by its choice of a replacement. Indeed, Murat Zyazikov s successor is a relative unknown. Colonel Yevkurov, a career soldier, has, up till now, been the secondin-command at the GRU for the Ural-Volga military district. He distinguished himself in 1999 when he headed the column of Russian paratroopers that seized Pristina s military airport. In April 2000 he was awarded the title Hero of Russia, the highest honor in the country, for bravery in Chechnya. Vladimir Putin personally bestowed the award on him. Most observers believe that, despite the worsening situation in Ingushetia, the Kremlin would not agree to replace President Zyazikov. How do you explain the decision? The situation demanded a swift and radical response. The murder of Magomed Yevloev, the owner of the Internet information site Ingushetia.ru (Russia Intelligence n 83) precipitated things. Attacks against security forces and bloody reprisals against members of the Zyazikov clan put an end to his presidency. There is another factor that must not be underestimated: Murat Zyazikov s very life was threatened. The vendetta decreed by Yevloev s clan was not just talk and the status of president would not have protected Zyazikov at all. The Kremlin had a choice: either sacrifice Zyazikov physically, which would have led to a new spiral of violence in Ingushetia with more troops sent and reprisals against the civilian population, or exfiltrate him and try to save appearances. Zyazikov s resignation was greeted with fireworks and lezginka (traditional dance of the Caucasus Ed) by the Ingush people the world over. This speaks volumes on the extent to which the former president was hated. How is the new Ingush president seen locally? What is his margin of maneuver? Yunus-Bek Yevkurov is a career soldier who lived most of his life outside Ingushetia and therefore does not have ties with the local political and economic elite. That is his main advantage. No one will dare to pressure him, at least not right away. From my personal contacts with Yunus-Bek Yevkurov, I get the impression of someone who is unquestionably honest and straight. The question of whether he will succeed in controlling the situation depends on the real prerogatives given to him by the Kremlin. If the federal authorities continue the murderous and blind special operations without allowing the Ingush president any say, then we cannot envisage any stabilization of the situation in Ingushetia. I don t think that is what Dmitry Medvedev wants, and Yunus-Bek Yevkurov should have his hands free to a certain extent. What is your assessment of the situation in Ingushetia? Right now it is in at a dead end. There is massive unemployment, 92% of the budget is financed by the federal government, there is total and permanent insecurity whatever Russia Intelligence N j November your social status or whatever the clan you are affiliated with. That s why it s difficult to imagine that the situation can be changed quickly by the new president alone. Yevkurov s mission is to bring together a team of competent economists and executives who could earn the confidence of the people. The presence of people like Ruslan Aushev (president of Ingushetia between 1993 and 2001 Ed) will reinforce the authority of the new president. How did Ingushetia view the events concerning South Ossetia? The summer 2008 conflict brought to mind, in many ways, another five day war the one that took place in 1992 in the Prigorodny district when, protected by Russian tanks, militias from South Ossetia destroyed Ingush villages, pillaged, plundered and raped with total impunity, leaving hundreds of people dead and missing. That s the same thing that happened in Georgian villages. As in 1992, Teziev was implicated (Oleg Teziev, former interior minister of South Ossetia Ed). In 1992, the Ingush were designated as the aggressors, today it s the Georgians. The basic reason is the same: the Ossetians do not want to live alongside other people. Ossetia is the only Caucasus republic that has been trying for decades to redraw the region s borders to its advantage. From time to time we hear about plans to reunify Ingushetia and Chechnya, like at the time of the USSR. To what extent do you believe this prospect is realistic? Indeed, trial balloons are launched regularly. It allows the Kremlin to remind everyone of who holds the reigns of power. If such a scenario were to take place it would lead to a conflict between the Ingush and Chechen people. North Ossetia is another protagonist that favors restoring Chechnya-Ingushetia. If this were to happen, the question of returning Prigorodny to Ingushetia will automatically disappear from the agenda. d Roza Malsagova is editor-in-chief of the independent news site Ingushetia.ru. She currently lives in France where she asked for political asylum. 3

4 Politics & Government DIPLOMACY c Russia-China: A well-understood friendship The 13 th summit of the heads of government of Russia and China took place on October 28 in a context of lukewarm bilateral relations, to say the least. One may recall that Dmitry Medvedev s visit to Beijing in late May his first visit outside the CIS as Russia s new president was rather disappointing (Russia Intelligence n 78). The cautious attitude of the People s Republic of China during Russia s war with Georgia as well as during the ensuing diplomatic power struggle between Russia and the West, did not go down too well with Moscow, even though no one expected Beijing to recognize the independence of South Ossetia and Abkhazia. And although a more positive note had been introduced with the final settlement of a bilateral border dispute - symbolized by the inauguration on October 14 of new boundary markers on the Large Usuriysk Island - where violent clashes broke out between Soviet and Chinese forces in the reaction in the Russian Far East remains very non-committal. On the eve of the meeting between Vladimir Putin and his counterpart Wen Jiabao, persistent rumors were going around Moscow concerning a major breakthrough in the energy sector and in particular that China had granted two loans, totaling $25 billion, to the state companies Transneft and Rosneft. The rumors were all the more credible in that Sergey Bogdanchikov s group is heavily in debt (for a total of $21 billion, $13 billion of which must be reimbursed or refinanced by the summer 2009) and is looking for fresh money (the group will be the main recipient of emergency loans granted by the government via Vneshekonombank Russia Intelligence n 86). It is also true that back in 2004 Rosneft had already resorted to easy term financial help from China. In order to finance the purchase of Yuganskneftegaz, the state company had, at the time, received $6 billion from the CNPC in advance payment for 48 million tons of crude to be delivered between 2005 and In the end, two documents dealing with oil cooperation were signed on October 28. The first is a memorandum of understanding which calls for the delivery of 15Mt of Russian crude to China between 2011 and The second is an agreement between Transneft and CNPC on the guidelines for building and using the oil pipeline between Skovorodino and China. One may recall that Transneft is currently building the first section of the Eastern Siberia-Pacific Ocean oil pipeline (VSTO) between Tayshet in the region of Irkutsk and the important rail and logistics hub of Skovorodino, located some sixty kilometers from the Chinese border. This section, with an annual capacity of 30 Mt is expected to be finished by autumn The second phase of the VSTO project calls for an extension of the pipeline towards the bay of Kuzmino on the pacific coast, as well as the construction of a diversion towards China from Skovorodino. The October 28 agreement focused precisely on this phase. However, there was no allusion to the much talked-about $25 billion loan mentioned on the eve of the visit. It is not being called into question but negotiations are continuing between CNPC, Rosneft and Transneft. Ac- cording to Igor Sechin, Russian deputy prime minister in charge of energy and chairman of Rosneft s board of directors, the talks should be over by November 25. It appears that the sticking points concern the method of calculating the price of crude delivered to China and the interest rates on the future loans (Rosneft loses between $5 and $7 per barrel compared to the 2005 contract and announced last spring that it did not plan to extend it in these conditions). To all appearances the deals signed on October 28 and those expected to follow are good news for Moscow. Russia s aim of diversifying its export routes, a prospect it brandishes regularly to Europe, is taking shape, and in the meantime the cash flow problems of two pillars of its energy sector should be over. And yet the atmosphere surrounding the Russian delegation was anything but enthusiastic, and this was confirmed by the somber and worried expression on Vladimir Putin s face during his joint press conference with Wen Jiabao. The fact is that the October 28 oil deals, although definitely a success in the short term, will accentuate the imbalance in bilateral trade between the two nations. Whereas manufactured goods represented nearly a third of Russian exports in , this is down to 2% this year, due in particular from the lack of new arms contracts between the two countries. While delighted over the record level of bilateral trade (with $50 billion expected for 2008), Vladimir Putin stressed that the content was just as important and pointed out that Russia had a growing deficit (9 billion this year). Considering the matter from this point of view, the outcome of his latest meeting with his Chinese counterpart is mixed. Of course, there was a deal signed between Oboronprom and AVIacopter to develop jointly a new heavy helicopter with the Mi-46 providing the basis for it, but it calls for it to be produced in China. The $300 million loan Export-Bank of China has granted Gazprombank has also been sharply criticized in Moscow since it is linked to the purchase of Chinese drilling equipment. Meanwhile, according to Russia Intelligence s sources, Vladimir Yakunin, the head of Russia s railways is having difficulty getting his Chinese counterparts interested in the Asia-Europe railway corridor that he plans to develop with Deutsche Bahn. During his joint press conference with Vladimir Putin, Wen Jiabao said that confidence, friendship and common interests were the three pillars of the close ties between China and Russia. Although Russia had no illusions about the first two, it notes with bitterness that the third is becoming increasingly a oneway street. d ALERT 3 Gaddafi in Moscow: A visit for nothing? The keenly awaited visit of the Libyan leader to Moscow has left the Russian leadership unsatisfied. No agreement was signed, even though on the eve of Moammar Gaddafi s discussions with Dmitry Medvedev and Vladimir Putin, sources close to the matter had leaked information on the conclusion of arms contracts and a possible agreement on the Russian navy s use of the port of Benghazi. As far as can be known, it was the subject of civil nuclear cooperation that the Russians and Libyans discussed on 1 November. d 4 Russia Intelligence N j November

5 Business & Networks ENERGY c OPEC, Gas Cartel : Moscow seeks a stratagem to counter falling price of hydrocarbons Russian officials are worried in the extreme over the fall in the price of crude below the $70 mark the average price on which the triennial budget prepared by Alexey Kudrin is based. The situation has led them to embark on a certain number of diplomatic measures that speak volumes about their current state of agitation. Over the past weeks Moscow has primarily sought to give credence to the idea that it is drawing closer to the Organization of Petroleum Exporting Countries (OPEC). In mid-september, Igor Sechin, deputy prime minister in charge of energy, was at the cartel headquarters in Vienna on a highly symbolic visit. Then on October 22, Dmitry Medvedev had a long meeting in Moscow with visiting OPEC Secretary General Abdallah Salem al-badri. Before the meeting, the Russia president declared, Interaction with OPEC is a key area ( ) for building up our energy policy in general. As the Kremlin has no intention of joining OPEC nor will it willingly cut back on its oil production, such interaction remains rhetorical in essence. Igor Sechin did bring up the possibility of setting up a production reserve in Russia in order to influence prices if this be needed but it is difficult to imagine how this could happen since companies are working with a just-in-time production system and are having trouble maintaining their levels of extraction. Another option that has been resuscitated by the Kremlin at least verbally is to form a Gas OPEC. The idea, put forward in 2006 by Iranian President Mahmoud Ahmadinejad, never inspired enthusiasm in Moscow. One may recall that the lack of consensus between Russia and Iran on the charter of such an organization caused its founding summit, which was to be held in June in Moscow, to be delayed (Russia Intelligence n 78). Tehran wants an organization that is structured and functions like OPEC, that is with constraining mechanisms, whereas Russia - in this case Gazprom has no intention of giving up one bit of its autonomy. Although the basis of their respective positions has hardly changed, Russia, Iran and Qatar, meeting in Tehran on October 21, reached an agreement on formalizing the creation of the new organization within 30 days most likely to take place in Moscow on November 18. Other member nations of the forum of gas exporters will take part, including Algeria, Indonesia, Libya, Malaysia, Nigeria, The United Arab Emirates, Egypt, Trinidad and Tobago and Venezuela. Moscow-based experts whom we questioned believe that the Tehran meeting confirms the fact that a wave of panic has begun at Gazprom. It is true that with the barrel at $70, the group s profits could fall from $30 billion in 2008 to a little under $5 billion next year - six times lower than forecasts made this spring. Consequently, the Russian group does not recoil from a bit of hype over Moscow s rapprochement with Iran and Qatar. Perhaps in a bid to remind Europe of its existence, Moscow even proposed that the headquarters of the as yet nonexistent Gas OPEC be located in Zug, where Nord Stream AG, South Stream AG, RosUkrEnergo and Stockman Development AG are registered. d South Stream: Gazprom sounds out Romania Things remain very unstable concerning the South Stream gas pipeline project. Gazprom thought the most difficult part was over when it succeeded in rallying the Serb, Bulgarian, Hungarian and Greek governments at the beginning of the year (Russia Intelligence n 70). After some uncertainties connected with the change in the governing majority in Belgrade and the departure of Russia s main intermediary, Vojislav Kostunica, the gas agreement, signed by Serbian President Boris Tadic in Moscow at the end of January, was finally ratified in mid September. But it appears that Gazprom is not completely sure of its plans and is looking for alternative routes. In late October, it was revealed that Vlada Rusakova, director of strategic planning and member of the Russian gas group s board of directors, had traveled to Bucharest to discuss, among other things, Romania s participation in South Stream. The issue was also addressed a few days earlier in Moscow during a meeting between Alexey Miller and his counterparts from Romgaz and Transgaz. No announcement was made in relation to this, but it is known that Gazprom s strategic partner in Southern Europe, Italy s ENI, has Russia Intelligence N j November long sought to convince its Russian friends to chose the Romanian port of Constanza rather than Burgas in Bulgaria as the terminating point of South Stream s under water section as this option would be shorter by some one hundred kilometers and therefore less expensive. According to information obtained by Russia Intelligence, Gazprom could use this to put pressure on the Bulgarian government, which, despite it being rather pro- Russian, apparently still wants to obtain ownership of the section of the pipeline that would cross its territory. The Russians have no intention of accepting this as it reminds them too much of the Ukrainian situation. Regarding Serbia, Gazprom is now worried about effects of the Cvetkovic government s recent sacking of Sasha Ilic, former Srbijagas boss, who was one of Gazprom s main lobbyists in Belgrade. It is interesting to note that other Russian projects in the Balkans, apart from South Stream, are experiencing difficulties. The Burgas- Alexandroupolis oil pipeline project, which was officially ratified in March 2007, is experiencing delays. The start of construction on this 280 km pipeline with an annual 35Mt capacity was initially scheduled for this autumn but will not take place until the last quarter of It will therefore not start operating until 2011 at the earliest. The Bosansky-Brod refinery, located in the Bosnian Serb Republic and bought last year by the small state company Zarubezhneft, is not able to function for lack of authorization from the Bosnian federal authorities who took a dim view of the arrival of the Russians to their country. In Montenegro, Oleg Deripaska is engaged in a battle with the local authorities to get them to lower the price of electric power supplied to the Podgorica (KAP) Aluminum Combine, owned by Deripaska s group Basel since Using the drop in world aluminum prices as an argument, the group is demanding that the authorities maintain preferential rates for the combine or else it would have to halt a portion of its production. Meanwhile - most likely in a bid to up the pressure on the government of Podgorica - Base Element also submitted a case to the arbitration court of Frankfurt claiming 300 million euros in damages from Montenegro for reporting false information during the privatization of KAP. d 5

6 Business & Networks AERONAUTICS c NPO Saturn: Yuri Lastochkin pushed out the door It was understood that the financial crisis would usher in a large-scale redistribution of assets in Russia. The first signs of this are becoming visible in sectors that one thought would not be as affected as the hydrocarbons, metallurgy and public works sectors, whose bosses are rushing to the Vneshekonombank and to Deputy Prime Minister Igor Sechin s waiting room (see Russia Intelligence n 85). One of the first heads to roll will be that of Yuri Lastochkin, head of the NPO Saturn engine manufacturer. The case should be followed very closely as it affects a sector that, by definition, is a sensitive one, and could also affect the interests of the French company, SNECMA. For the record, NPO Saturn, located in Rybinsk, was formed out of the merger of the Lyulka-Saturn design bureau and Rybinskie Motory at the start of this decade. It develops and produces engines for both military aircraft (in particular the AL-31 that powers the Su-27/30 family of engines, the AL-55 for the Yak-130 and the 117-S designed for the future Su-35) as well as for civil aviation (the D-30KP Burlak for the II-76 heavy transport aircraft, and the SaM146 for the SuperJet-100 regional aircraft project). There is one important detail: NPO Saturn is a private company. The group s director general, Yuri Lastochkin, controls about 60% of its capital. The state controls 37%. The problem is that Lastochkin and the Russian authorities do not exactly see eye-to-eye when it comes to reforming the aeronautics industries and, in particular, to the role NPO Saturn should play. In its February issue, Russia Intelligence attracted its readers attention to these differences. The state would like to reorganize the engine-manufacturing sector in a way similar to the reorganization of aircraft manufacturers (OAK) and the shipbuilding sector (OSK). The aim is to set up a public holding company (ODK) (United Engine Manufacturers Corporation) operated and managed by Oboronprom, a subsidiary of Rosoboronexport. ODK would have four hubs: Klimov (Saint Petersburg), Salyut (Moscow), NK Dvigateli (Samara) and Saturn. The latter should, according to the Russian government, integrate Perm Motors and UMPO, the production plant located in Ufa. The project to reform the engine manufacturing sector is headed by Denis Manturov, a protégé of Sergey Chemezov. Manturov was head of Oboronprom before being appointed deputy minister of industry. Yuri Lastochkin prefers a different plan. He too wants NPO Saturn to be a major industrial hub and is in favor of drawing closer to UMPO, a move he initiated by buying 19.98% of the engine maker Ufa at the end of 2007 (Russia Intelligence n 71). But he has no intention of stepping aside to make room for Oboronprom. That, at any rate, has been his position so far. But considering the latest developments in Moscow, the odds are that Yuri Lastochkin will have to give way. Rather unexpectedly, Alexey Kudrin, the deputy prime minister in charge of finance openly accused NPO Saturn of being responsible for delays in the Superjet-100 program. He said decisions aimed at changing the shareholding makeup and other measures to stabilize the company will be taken shortly. Forcing a businessman to give up his assets, sometimes for free, is a particularly difficult task for Russia. But in the present case, it is likely that the procedures will be respected. According to information leaked in Moscow, NPO Saturn has serious cash flow problems and has asked the VEB to finance the SaM146 program. Apparently, one of the conditions for obtaining this loan is to sell 13% of the group to Oboronprom, which will bring the state s participation to 50% plus one share. d Inter RAO EES unaffected by crisis Inter RAO EES, generally not very well known beyond a small circle of experts and, of course, less visible than Gazprom, Rosneft or Lukoil, should nonetheless be closely watched by all those who are interested in Russia s foreign policy with regards to energy. Inter RAO EES was the former international subsidiary of the state company RAO EES, which was dismantled last July 1 st as part of reforms in the electric power sector led by Anatoly Chubais (Russia Intelligence n 81). It is now controlled by Rosatom, which holds 57% of its shares. Inter RAO EES inherited assets in 14 countries in the Caucasus and in Central Asia in particular as well as relatively modern thermal power stations on Russian territory (in Sochi, Kaliningrad and Ivanovo). It is well known that Electricité de France is considering entering the group s capital (up to 4% initially) and the initiative is very favorably regarded by Russian Energy Minister Sergey Shmatko and received the blessings of the Russian and French prime ministers at a recent bilateral summit (Russia Intelligence n 84). Two recent events have attracted attention. The first is the election of Deputy Prime Minister Igor Sechin as head of t Inter RAO s board of directors, replacing Alexandre Voloshin. Since Sechin is not known for taking on token roles, this means that the group will from now on benefit fully from the government s administrative resource (meanwhile the young Yevgeny Dod, an ally of Andrey Rappoport, remains executive director Yevgeny Dod of Inter RAO). The second event was the group s announcement of ambitious plans to expand internationally. It plans to invest $5.5 billion over the next two years. The group s priorities include the Balkans (Serbia - where Inter RAO signed a framework agreement with Elektroprivreda Srbije last April, Romania - most likely in partnership with the Czech CEZ, and even Turkey - where it won, along with Atomstroyexport, the government bid to build the country s first nuclear power plant), South East Asia (Laos, Thailand and Cambodia) as well as Latin America (Venezuela, Cuba and Nicaragua countries recently visited by Igor Sechin). These projects will be financed essentially by Vneshekonombank (VEB) which is to buy a 25% stake in Inter RAO for $2 billion thanks to a capital increase a move it decided on well before the financial crisis. It is worth noting that although Inter RAO s executives still favor the EDF option, the group also has cooperation projects with Italy s ENEL and, very likely, with Slovenia in the works. d 6 Russia Intelligence N j November

7 Business & Networks ECONOMICS c Who is handling the financial crisis in Moscow? With the growing number of announcements and decisions made by Dmitry Medvedev and Vladimir Putin over the past few days, Russia Intelligence is proposing that its readers take a closer look at the other players, some of them lesser known, who are handling the financial crisis in Moscow. Alexey Kudrin, Sergey Ignatev: the quiet victory of the guardians of orthodoxy. The deputy prime minister in charge of finance, and the head of Russia s central bank, who were in the front line when it came to putting out the fire, are quietly relishing their revenge. After being criticized Alexey Kudrin for months for being too careful, even overcautious, in managing the oil revenue, these two high-level economists, on friendly terms with one another, have scored points. Sergey Ignatev, 60, who has been at his post since March 2002 after having spent many years at the Finance ministry during Yeltsin s presidency, is one of the rare Russian high-ranking government officials with a spotless reputation. As for Alexey Sergey Ignatev Kudrin, apart from the satisfaction of seeing that his approach worked, he has just had a major political success: his deputy, Sergey Storchak, who had been incarcerated at the Lefortovo prison since the end of 2007 (Russia Intelligence n 66) was freed on October 21. One may recall that Sergey Storchak s arrest came at the height of the clan war that raged in Moscow just before Vladimir Putin appointed his successor. Despite the weakness of the case and repeated interventions by Alexey Kudrin who vouched for his deputy, the Investigation Committee of the Prosecutor General s Office preferred to keep Storchak locked up. The outcome of this case is a good indicator of the balance of power in Moscow and highlights Alexey Kudrin s growing authority both at the Kremlin and in the White House. Igor Shuvalov: the president s lookout. Pushed center stage by Dmitry Medvedev at the 12 th Economic Forum in Saint Petersburg (Russia Intelligence n 79), First Deputy Prime Minister Igor Shuvalov has just been assigned a new mission by the president: he will preside the Council for the Development of Financial Markets, an inter-ministerial body set up on October 17 which is expected to play a key role in coordinating government action (as well as allow Dmitry Medvedev to take the matter over from Vladimir Putin). Besides Shuvalov, two other of the president s associates will sit on the council: Arkady Dvorkovich, his G8 sherpa and main economic advisor, and Anton Ivanov, chairman of the Supreme Arbitration Court and one of Medvedev s former university comrades (Russia Intelligence n 68). Vladimir Dmitriev, the new kingmaker. As head of the Vneshekonombank (VEB), the armed branch of the state through which pass most of the public funds allocated by the government to save the banking sector and bail out the large Russian groups, Vladimir Dmitriev in without a doubt one of the most powerful and most courted men in the country. Appointed to his post in June 2007, this 55- Russia Intelligence N j November year-old native Muscovite holds a degree in international economic relations and began his career at the foreign affairs ministry. While posted in Stockholm from 1987 to 1993 he met Sergey Ivanov, a specialist of Sweden in the First Chief Directorate of the KGB. According to our sources, Sergey Ivanov actively campaigned on his behalf at the Kremlin, starting in Two other important Russian bankers German Gref (Sberbank) and Andrey Kostin (Vneshtorgbank, VTB) have been exceptionally discreet since the beginning of the crisis a sign that their respective institutions are in difficulty. Vladimir Milovidov Ilya Lomakin- Rumyantsev Vladimir Milovidov, Ilya Lomakin-Rumyantsev: technocrats on guard. Two other high-ranking officials play an important technical role in managing the financial crisis in Moscow and will continue to do so. One of them is Vladimir Milovidov, 48, head of the Federal Financial Markets Service. Milovidov, a former researcher at IMEMO and at the Kurchatov Institute for nuclear power research, who was successively advisor to Yevgeny Primakov, Viktor Khristenko and Mikhail Fradkov, will take over as head of the Secretariat of the Council for the Development of Financial Markets presided by Igor Shuvalov. Ilya Lomakin-Rumantsev, 51, will also sit on the council. A former senator who represented the small republic of Mari El at the Federation Council from 2001 to 2004, he has been little known beyond the circle of experts. He has headed the Federal Insurance Supervisory Service (Rosstrakhnadzor) since Dmitry Ananev Vladislav Reznik Dmitry Ananev, Vladislav Reznik: parliamentarians on deck. Two parliamentarians were coopted by Dmitry Medvedev to take part in the Shuvalov Commission: Dmitry Ananev and Vladislav Reznik. The former, a senator and businessman with close ties to Sergey Mironov, may be familiar to our readers. The November issue of Russia Intelligence gave an account of the difficulties facing Dmitry Ananev, who last year became the 37 th richest person in his country. It is worth noting that he has already been asked by the authorities to pitch in financially. Thus Promsvyazbank, 85% of which is owned by Ananev in equal portion with his brother Alexey, bought in mid-october the small Yarsotsbank, which was on the brink of bankruptcy. Vladislav Reznik is the head of the State Duma Commission on Financial Markets. He found himself, unwillingly, the focus of media attention in mid-october when it was revealed that Spanish police had searched his villa in Majorca. Judge Baltazar Garzon suspects him, on the evidence of a confession by Gennady Petrov, the Godfather of the Tambov mafia, of having links to criminal organizations involved in money laundering operations in Spain. d 7

8 BEHIND THE SCENE The Draganov affair: is Deripaska targeted? The skeletons are coming out of the closets in Moscow. On October 21 it was revealed that Russia s Supreme Court had authorized the Investigation Committee of the Prosecutor General s Office to launch proceedings against Valery Draganov, deputy chairman of the State Duma s Industry Committee. Draganov is charged with abuse of power dating back to when he was head of Russian customs. The court is particularly interested in the conditions in which the accounts of some regional customs departments were transferred from Most-Bank to Rosbank, from where the money in question disappeared in the wake of the summer 1998 financial crisis. Contesting the allegations, Valery Draganov immediately lodged an appeal. If his appeal is rejected, the Investigation Committee could ask the State Duma to vote to lift his parliamentary immunity. This case is surprising in more ways than one. First of all, the allegations date from the Yeltsin era and the statute of limitations could apply in a few months time. Moreover, Valery Draganov is known to have good connections in Moscow. This Donetsk-born man of Bulgarian origin, who spent his entire career from 1973 to 1999 at the Russian customs, was elected to the Duma three times on the lists of the governing party. Between 2006 and 2007 he briefly left politics to join Oleg Deripaska s Rusal group, where he was in charge of relations with state bodies. Some Moscow sources questioned by Russia Intelligence believe that this may very well be the reason for Draganov s problems. A battle has been raging for months between Vladimir Potanin and Oleg Deripaska over Norilsk - and Rusal s boss has no lack of enemies elsewhere too. Another possibility is that Valery Draganov may be the first victim of the anti-corruption drive Dmitry Medvedev launched in early autumn (Russia Intelligence n 85). Whether a coincidence or not, the head of the Investigation Committee, Alexandre Bastyrkin, declared at a department meeting in Saint Petersburg on October 21, a few hours before the Draganov case was made public, that no crime (of corruption ed) committed by executive authority officials, by deputies, by agents of the power structures prosecutors, judges or others has been brought to light so far. Of course Russia Intelligence will be following developments in this affair very closely in its upcoming issues. d c FOCUS Business & Networks Iceland: Is Alexey Kudrin going to the rescue of Russian oligarchs? The case of Russia s controversial 4 billion euro loan to Iceland (Russia Intelligence n 85) continues to run its course while new details have shed a different light on the Kremlin s eagerness to back the finances of the small northern nation. On October 15, with Reykjavik s stock market index falling a record 77% in a single session, several high-ranking Icelandic officials traveled to Moscow to meet Russian Deputy Finance Minister, Dmitry Pankin. Following their talks, the director of international operations at Iceland s central bank, Sigurdur Sturla Palsson, declared they had an excellent reception. He said that these preliminary talks were solely devoted to presenting Iceland s financial situation, without any mention, at this point, of the sums or the terms of any prospective Russian aid. The talks are to continue, but there is little doubt that Reykjavik will agree to the 4 billion euro loan that Russian Finance Minister Alexey Kudrin mentioned on October 8, independently of the outcome of talks it began with the International Monetary Fund and certain northern states such as Sweden and Denmark (Norway, which has a comfortable cushion of petrodollars, has been surprisingly silent on this matter). According to Iceland s ambassador to Russia, Benedikt Asgeirsson, the Russian loan is simply a financial issue. In other words, there will be no political strings attached to any prospective Russian assistance. Some American specialists at the Pentagon, questioned by Russia Intelligence, say they are seriously worried over the prospect of seeing Moscow bail out a full-fledged member of the Atlantic Alliance. They say it would be a major coup in the race to the Arctic. These same sources believe that Moscow, which is annoyed at Sweden for taking a harder line against it, and increasingly less sure of Finland s neutrality, is gradually reviewing its system of alliances in Scandinavia. After having coaxed the highly Atlanticist Norway into entering the Shtokman project (Russia Intelligence n 65) (whether a coincidence or not, Oslo was one of the capitals that expressed reservations concerning Ukraine and Georgia at last April s NATO summit in Bucharest), Russia appears to be poised to literally buy a new ally in the region an utterly plausible supposition considering Russia s strategic policies. Yet, some elements point to the fact that the move may simply be due to essentially financial decisions, as Ambassador Asgeirsson pointed out. Indeed, it appears that by rescuing Iceland s banks, Alexey Kudrin may have been thinking less of a potential geopolitical conquest than of getting some prominent figures of Russian capitalism out of a bind. If one is to believe reports by journalists Bo Elkjaer, John Mynderup and Vladimir Pimonov published as of November 2006 in the Danish tabloid Ekstra Bladet, Icelandic banks Kaupthing in particular are very much implicated in operations involving European acquisitions on behalf of Russian oligarchs. These operations were undertaken though offshore companies registered in the Virgin Islands. At least two of them (Shapburg Ltd and Quenon Investments Ltd) have direct ties with Mikhail Fridman s Alfa-Bank and with the large state-owned group Alrosa, whose supervisory council chairman is none other than Alexey Kudrin (Shapburg Ltd is co-founder of Alrosa and Alfa- Group s subsidiaries in Luxembourg, while Quenon investment Ltd is the administrator of Alrosa Finances). Another oligarch known to have close ties to the Russian finance minister and who has interests in Iceland is Metalloinvest boss Alisher Usmanov. It was through the London subsidiary of Kaupthing that he acquired about 5% of Norilsk Nickel this summer (he managed to exfiltrate three quarters of the amount from the Icelandic bank, the rest 1.5% - was apparently recuperated by BNP Paribas, which had financed the operation). Usmanov also kept in Iceland the 0.5% stake in Sberbank that he acquired in early d 8 Russia Intelligence N j November

9 Regions & CIS FOCUS c Dmitry Kozak tends to the Sochi 2014 Winter Olympics Dmitry Kozak has been newly appointed to be in charge of Sochi 2014, a project dear to Vladimir Putin. In fact, on October 14 the Kremlin appointed Kozak to the post of deputy prime minister in charge of preparations for the winter Olympic games. Dmitry Medvedev s gesture was in response to the request of his prime minister who is apparently worried over the difficulties and delays in construction of the venues at the site. The choice of 50-year-old Dmitry Kozak for the job is not a random one. Kozak is of Ukrainian origin and graduated from Leningrad s faculty of law in1985. Proud to have done his military service in the GRU Special Forces, he is in fact an old fellow traveler of Vladimir Putin and Dmitry Medvedev, with whom he has worked since the early 1990s and the Sobchak period in Saint Petersburg. Having the trust of Moscow s two leaders, Dmitry Kozak is a specialist in highrisk missions (impossible ones according to malicious gossip). During Vladimir Putin s first mandate, he was put in charge, with varying success, of administrative reforms and settling the conflict in Transnistria. Ten days after the Beslan tragedy, Dmitry Kozak was named super-prefect in the Southern Federal District, where for three yeas he handled the many upheavals of the North Caucasus. He was back in Moscow in 2007 and Vladimir Putin reinstated him to his post as regional development minister last spring. Dmitry Kozak s mission is to take charge of a complex project of considerable financial and symbolic importance for Russia. Over the last months things have not progressed much, to say the least. Land issues have still not been settled, in spite cursory expropriation proceedings passed by the Duma last year (Russia Intelligence n 65). Building sites for large- scale venues are not yet off the ground. One may recall that Olympstroy, the state corporation in charge of construction for Sochi 2014, was the focus of an epic power struggle between the different clans gravitating around the Kremlin, each one wanting to become involved in the huge financial flow generated by the building projects ($12 billion in public funds as represented by the Federal Program for Sochi 2014). Former Transneft boss, Semyon Vaynshtok, was dismissed from his post last April and replaced by the mayor of Sochi, Viktor Kolodyazhny. The latter has close ties to the governor of the region of Krasnodar, Alexandre Tkachev, who is himself backed by Oleg Deripaska who has many interests in the region. Semyon Vaynshtok was known to be sympathetic to the interests of the clan of Moscow mayor Luzhkov, whose wife, Elena Baturina, heads one of the main construction and public works groups of Russia. It was therefore the Tkachev-Deripaska tandem that came out on top (Russia Intelligence n 76). At this stage, Sochi 2014 is organized in the following way: on the political level Dmitry Kozak will directly oversee Olympstroy. Alexandre Zhukov, the other deputy prime minister in charge of the winter Olympics is responsible for the sporting aspect. He is working with Dmitry Chernyshev, the chairman of the Sochi 2014 organizing committee. According to Russia Intelligence s sources in Moscow, one of Dmitry Kozak s priorities will be to ensure that the large Russian industrial groups that are supposed to participate in financing the construction of infrastructure (Vladimir Potanin s Interros, Oleg Deripaska s Base Element, etc.) keep to their pledges despite their current financial difficulties. d Ukraine: Difficulties for Russian television stations in run-up to election Whether for technical, legal or political reasons, Ukraine s National Council on Television and Radio Broadcasting has just threatened to remove several Russian channels (including RTR-Planeta, Ren TV, TVCI and ORT), currently broadcast via cable. The council s president, Vitaly Shevchenko, says the channels do not respect Ukrainian legislation, in particular with regard to advertising and moral codes. If they do not comply, they will be banned from broadcasting as of November 1 st. The heads of the channels concerned expressed surprise at not being warned of these problems beforehand. They pointed out that - coincidence or not - the Ukrainian authorities reproaches concern Russia Intelligence N j November only Russian channels. Several of Ukraine Intelligence s sources in Kiev have corroborated the political angle, saying that the move taken by the National Council on Television and Radio Broadcasting can be seen in the same light the conclusions reached at a meeting on March 21 last of the National Security and Defense Council. This meeting, devoted to security of information, was marked by rather sharp statements on the part of Viktor Yushchenko. Pointing to the expansion of foreign states in the domain of information, the Ukrainian president declared that psychological campaigns to disinform society on issues such as national unity, territorial integrity, language, cultural and religious questions and Ukraine s Euro-Atlantic aspirations have been set up. The Russian media has undivided occupation of Crimea and the eastern regions of the country. It is true that the news angle of the Russian channels, which have a large viewership, is quite different from Viktor Yushchenko s point of view. The latter is, in fact, systematically attacked, the last hot topic being the supply of Ukrainian arms to Georgia. With the Kremlin adopting a favourable attitude towards the president s main enemy, Yulia Timoshenko, and the country entering what for Viktor Yushchenko is a high-risk election cycle, some in Kiev apparently believed that it was time to purge the media landscape. d 9

10 Regions & CIS INTERVIEW DOSYM SATPAEV * c Kazakhstan is the Central Asian country that has suffered the most from the global financial crisis What are the repercussions of the global financial crisis for Kazakhstan? Of all the countries of Central Asia, Kazakhstan has suffered the most. This is due to the fact that the banking system in the country was deeply integrated into the international financial system. Kazakh banks had borrowed $80 billion and had to reimburse $17 billion to their foreign creditors for the year 2008 alone. The other victim of the crisis is the building sector. The real estate bubble burst after having inflated dramatically over the last five year. Real Estate prices in both the old and new sectors have already fallen by 40% to 60%. Most building sites are at a standstill. The government which reacted rather belatedly to the crisis decided to inject $10 billion into the country s financial system in order to stabilize the situation. This sum is to be taken from the national fund made up of hydrocarbons revenue. It should be noted that given this new economic context, the government is naturally going to try to raise taxes on companies in the extractive sector. The Russian and Kazakh presidents recently met in Aktyubinsk. How do you size up bilateral relations? The new Russian strategy in Central Asia is in two parts. The first is economical. Russian business has begun to penetrate rather aggressively in Kyrgyzstan, Tajikistan and Uzbekistan. And, incidentally, Kazakhstan does the same. The second part of Russia s strategy is political-military: Moscow wants to gain ground over the United States. On the bilateral level, Moscow and Astana have settled their border issue. Concerning the Caspian Sea, the two countries have more points in common than they have differences. They have, moreover, decided to coordinate their positions regarding the WTO. The anti-russian sentiment that one may come upon in Georgia or in the Baltic countries is just about non-existent in Kazakhstan. Going on the assumption that tension between the West and Russia is not about to disappear, it is - and will continue to be - in Moscow s interest to preserve its partnership relations with Astana. This makes things easier for us. One of the issues on which we need to reach an agreement is the CPC oil pipeline between Tengiz and Novorosiysk. Because of Russia s reluctance to increase its capacity from 32 to 67 Mt/year, Chevron is considering using the Baku- Ceyhan pipeline and says it doubts the long-term prospects of transit through Russia. Meanwhile Moscow and Astana are fighting over control of the Sultanate of Oman s 7% stake in the CPC. How does Astana view the Russian-Georgian conflict? At the end of September, President Nursultan Nazarbaev declared that Kazakhstan had no intention of recognizing the independence of South Ossetia and Abkhazia. Any other decision would be contrary to his national interests. There is another dimension in this matter an economic one. Kazakhstan has no intention of losing the roughly $2 billion it invested in Georgia in recent years, a matter recently pointed out by our foreign affairs minister, Marat Tazhin, during a speech at the Carnegie Foundation in Washington. In order to resist any pressure by Russia over the Georgian issue, Kazakh leaders have adopted a position that is both flexible and clever, which is to remind Russia that early in the year Astana had refused to recognize the independence of Kosovo. This position served as a signal to other countries in the region, which were also looking to escape friendly pressure by Moscow. It was also a signal to the European Union, which explicitly asked Nursultan Nazarbaev not to recognize the independence of Georgia s two secessionist provinces. How would you analyze the political-strategic situation in Central Asia? The political situation is deteriorating the quickest in Kyrgyzstan. On October 13, President Kurmanbek Bakiev dismissed the secretary of the Kyrgyz national Security Council, Ismail Isakov, one of his closest former companions. This move reflects the divisions within the leadership in Bishkek and illustrates the fragility of the situation there. There is another factor that could seriously affect the stability of Kyrgyzstan as well as of Tajikistan and Uzbekistan that is the potential mass return of workers who had migrated to Russia and Kazakhstan over recent years. It should be noted that the money transfers these Gastarbeiter make to their countries of origin represent nearly one third of Tajikistan and Kyrgyzstan s GDP. These funds contribute significantly in maintaining a semblance of economic and thus political stability in these countries. If this flow should peter out, a dramatic recession can be expected with exceptionally heavy political consequences. In mid-september a Forum was held in Paris between the European Union and Central Asia devoted to security issues. What role do you think the EU can play in the region? It is important first of all to stress that the EU does not share a common view on what Central Asia represents. For some, it s a peripheral region faced with many problems that Europeans are not inclined to deal with. For others, Central Asia is an important reservoir of hydrocarbons within the context of Europe s efforts to diversify its energy supplies. Some in Europe also see the region as an advanced post in the fight against religious fundamentalism and drug trafficking. I think that the European Union must understand that the five countries of Central Asia are very different, both as far as their socio-economic and political systems are concerned as well as their integration into the international community. Brussels must have a policy that takes into consideration the specific nature of the states from this region. On the other hand, I believe that the latter must build relations with the major centers of influence in a more pragmatic way in order to benefit more advantageously. From this point of view, Russia s return and China s growing activism can allow us to be more demanding with Europe. d * Dosym Satpaev is one of the most prominent political scientists in Kazakhstan. He is head of the Risks Assessment Group consulting firm (www.risk.kz). 10 Russia Intelligence N j November

11 Regions & CIS UKRAINE c Why a gas war will (probably) not take place It is one of the rare items of good news from Kiev in recent days. Whereas the political situation remains deadlocked to a good extent and, despite an agreement in principle with the IMF on a stand-by loan of $16 billion, the economic outlook remains uncertain, Gazprom and Naftogaz Ukrainy appear determined to prevent a new crisis just before the new year. One may recall that Vladimir Putin and Yulia Timoshenko already cleared the way in early October. Two documents were signed during the Ukrainian prime minister s visit to Moscow: a Memorandum between the Government of the Russian Federation and Ukraine s Cabinet of Ministers on Cooperation in the Domain of Gas, and an Agreement on the Main Conditions for Future Development of Relations in the Domain of Gas (Ukraine Intelligence n 64). Then on October 23, it was revealed that Gazprom and Naftogaz Ukrainy had just signed a new agreement entitled Agreement on the Principles of Long-term Cooperation in the Domain of Gas which, while modifying a few points, reinforces the October 2 accords. In this document, the two sides pledge, in particular, to conclude bilateral negotiations in early November. At least four points are worthy of attention. 1/RosUkrEnergo to disappear from the scene. Confirming the agreement in principle of October 2 between Vladimir Putin and Yulia Timoshenko, the document made public on October 23 stipulates that as of January 1, 2009, Naftogaz Ukrainy will be the sole importer of gas delivered by Gazprom at the border. This is therefore a first rate victory for the Ukrainian prime minister, who vowed, since her return to the helm, that evicting the Swiss intermediary, a symbol of opacity and corruption, was her main objective. One point remains pending however: the agreement points out that Gazprom will take upon itself Naftogaz s debt to RUE, but does not indicate either the amount or the method in which Ukraine will pay back this debt. Figures varying between $600 million and $2 billion are circulating in Kiev. It is well known, however, that Naftogaz Ukrainy has serious cash flow problems and it is difficult to imagine how they may be solved through a loan in the current context. (Ukraine Intelligence n 63). 2/ Russia is prepared to align the price of gas it delivers to Kiev on international rates in a gradual manner, and guarantees a minimum volume of gas supply and transit. of Naftogaz chief Oleg Dubina, the new gas price should be somewhere between $230 and $250/1000 cubic meters. This represents a 30% hike in relation to the current price. It is, however, well below the catastrophic conjectures made before the summer when there was talk of $350 or even $400/1000 cubic meters. Experts on energy issues, questioned by Russia Intelligence in Kiev, stressed that Moldova, a nation much more economically vulnerable than Ukraine, has been able to bear reasonably well Gazprom s bill of $279/1000 cubic meters. 3/ As in the controversial agreement of January 4, 2006, gas transit rates are once again disassociated from the change in the price of gas delivered to Ukraine. This is one of the most important changes made to the October 2 memorandum. The current transit rate of $1.70/1000 cubic meters per 100 kilometers will be maintained after January 1 st, whereas Gazprom will put up its rate for gas delivery. Moreover, Naftogaz Ukrainy will not be able to re-export gas towards Europe unless with Russia s agreement. 4/ Gazprom establishes itself on Ukraine s domestic market. The Russian group currently holds a five year licence allowing its subsidiary Gazpromsbyt-Ukraina to sell, in Ukraine, 7.5 billion cubic meters that is 10% of the Ukrainian market. Over 30 industrial groups, including the steelworks Ilich of Mariupol and Azovstal, buy their gas directly from Gazprom. The document made public on October 23 points out that the duration of Gazprom s license will be equal to the Russian-Ukrainian bilateral gas agreement. This has not been specified as yet, but, based on Gazprom s dealings with Europe, it varies between 15 and 25 years. If ratified in Moscow and Kiev, these agreements could have significant impact. In fact, the gas issue, which has shaped Russian-Ukrainian relations for better or for worse since the collapse of the USSR, will disappear from the bilateral agenda, and therefore even from Europe s list of worries. However, there was one important detail in Prime Minister Vladimir Putin s declaration on October 2. He had insisted heavily on the fact that the fate of the gas agreements was linked to that of the signatory Ukrainian government. It is, however, not sure that Yulia Timoshenko will be at the helm as of next January 1 st. d ALERT In conformity with the October 2 agreement, this adjustment will take place over a three year period. The gas that 3 Kazakhstan: Russia buys Oman s CPC Naftogaz Ukrainy will buy this November and December will be at the current rate, that is $179.50/1000 cubic meters. share Gazprom has pledged to have at least 120 billion cubic meters A new and major development has taken place in the matter of the of gas transit annually via Ukrainian territory and to supply Caspian Pipeline Consortium (CPC), the oil pipeline linking the Kiev with a minimum 55 billion cubic meters per year. This Tengiz oilfield to the Russian port of Novorossiysk on which we amount, added to the roughly 20 billion cubic meters extracted have regularly informed our readers (Russia Intelligence n 46-47, in Ukraine, responds to the country s needs. It is noteworthy N 69 and n 84). It is finally Russia that has purchased for a sum estimated however that, here too, some important points have not been at $350 million the 7% shareholding held until now by the clarified, the main one being the mechanism that will be used Sultanate of Oman. It appears that Moscow now controls 31% of to establish the price that Ukraine will pay for gas. It should the CPC. At the political level, the transaction was rubber-stamped be similar to the one Gazprom uses with its European clients, during discussions between Putin and Nazarbaev on 30 October. According probably with a clause anticipating the drop in the price of gas to our sources, in return the Kazakh side expects an early resulting automatically, but with a few months discrepancy, agreement on the thorny bilateral problem of increasing the CPC s from the price of crude. According to leaks within the circle capacity to 67 million tonnes a year. d 11 Russia Intelligence N j November

12 c FOCUS When Alexandre Lukashenko takes French leave In our previous issues, we reported on Alexandre Lukashenko s urge to take flight and on the start of warmer relations between Minsk and western capitals, which approved the release this summer of the opposition leader Alexandre Kozulin (Russia Intelligence n 82). Belarus relations with Russia, on the other hand, have become more strained over recent weeks, especially as President Lukashenko s reservations concerning recognition of the independence of Abkhazia and South Ossetia did not go down well at all with the Kremlin. Matters between the two appeared to be back to normal at the end of September. The OSCE had, in the end, declared the Belarusian legislative elections non-democratic. Then, on October 6, while Vladimir Putin was on visit in Minsk, Alexandre Lukashenko stressed that his friendship with Russia was not for sale (Russia Intelligence n 85). Judging by the Belarusian president s recent initiatives, Minsk and Moscow are still calling each other s bluff. On October 22 the central bank and the government of Belarus sent a joint letter to the International Monetary fund asking for a $2 billion loan. It must be said that the global economic crisis has not spared the country. The foreign exchange reserves of the Belarus central bank fell by nearly 12%. But there are two surprising elements in Minsk s initiative. The first is its suddenness. The IMF, which last lent to Belarus in 1996 and no longer has a bureau in Minsk, was apparently taken by surprise. More importantly, the request for aid from the IMF was revealed the day after Russian Finance Minister Alexey Kudrin spoke about the $2 billion loan that had been under discussion between Moscow and Minsk for several months. Kudrin confirmed that there was an agreement in principal but remained evasive as to the terms of the loan and when it would be made available. The procrastination convinced Alexandre Lukashenko to play the IMF card. Whether it was a coincidence or not, the Belarusian president was received by Dmitry Medvedev at the Kremlin as a matter of urgency on October 25. The two men were effusively polite with one another but could not hide the lack of any concrete progress. According to information leaked in Moscow, Russia wants the loan to be accompanied by concessions from Belarus on setting up a single currency which Alexandre Lukashenko is not prepared to do. As an additional sign that things are not going quite as expected, the November 3 meeting of the High State Committee, the highest body in the Russia-Belarus Union, which was to be devoted to finalizing the constitutional act, has been postponed indefinitely. And on October 31, at its inaugural session, the Belarus parliament did not include the issue of recognition of Abkhazia and South Ossetia on its agenda. Alexander Lukashenko has thus decided to continue oscillating between Moscow and the West, and this has not been without success. On visit in Minsk at the end of October, the Czech deputy foreign affairs minister, Tomas Pojar, declared that his country was actively preparing an EU-Belarus summit to take place in the first half of 2009 during the Czech presidency of the EU. In the meantime, Alexandre Lukashenko will undoubtedly taken advantage of renewed freedom of movement, with the end of EU sanctions, to visit London, where an investment forum on Belarus is to take place on November 18. This event, which will mark the end of a year of ostracism and international isolation of the Minsk regime, is being organized by Sir Timothy Bell, former advisor to Margaret Thatcher and, since last summer, in charge of public relations for Alexandre Lukashenko. d Regions & CIS ALERTS 3 Dmitry Kozak does some housecleaning in Sochi No sooner has Dmitry Kozak been appointed deputy prime minister in charge of preparations for the winter Olympics (Read article page 9) than he has already taken things in hand. The mayor of Sochi, Vladimir Afanasenkov was obliged to quit his post on October 30, barely three months after being elected. Officially, his decision has to do with health problems, but no one is taken in. A few hours before the news was made official, Vladimir Afanasenkov was in Moscow where he took part in a meeting hosted by Dmitry Kozak on progress for the Sochi 2014 project. The governor of Krasnodar region, Alexandre Tkachev and Viktor Kolodyazhny, head of the Olympstroy state corporation, also attended. According to information leaked in Moscow, the delay in adopting the urban planning project for Sochi which was supposed to take place by November is the reason behind Vladimir Afanasenkov s dismissal. Afanasenkov will be replaced by Dzhambulat Khatuov, former mayor of Armavir who has close ties to Viktor Kolodyazhny and Alexandre Tkachev. d 3 Saint Petersburg not to fund Gazprom tower The financial crisis has caused its first major casualty in the northern capital. On October 29, Saint Petersburg s mayor, Valentina Matvienko, introduced an amendment to the city budget for 2009 suspending financing of Okhta-Tsentr, the vast building complex project intended to house the future headquarters of Gazprom Neft. One may recall that in May 2007 Valentina Matvienko and Gazprom chief Alexey Miller signed an agreement, with great pomp, to build the center over which there is much controversy because of the planned buildings height meters - and their proximity to the historic city center, in particular to Smolny. The plan called for the city of Saint Petersburg to finance 49% of the total investment a little more than one billion dollars. In exchange it would derive tax benefits from the transfer of the Gazprom subsidiary to Saint Petersburg. It therefore appears likely that Okhta-Tsentr will not be inaugurated in 2016 as planned. d One Year Subscription Printed Edition (23 issues, airmailed overseas) 770 TTC The Web Pack (Printed Edition + PDF + online acess) 880 TTC Tél: Fax: c Russia Intelligence j Group Publisher and Managing Editor : François Roche j Editor-in-chief : Arnaud Dubien j 115, rue Saint Dominique PARIS - France j Editorial: / Tel. : j Subscription: / Tel. & Fax j ISSN : j Commision paritaire : 1206 I j Imprimerie : Hemmerlé, Paris j Copyright : Eurasian Intelligence Copy and dissemination in any form prohibited (including Intranet). c Russia Intelligence is published by Eurasian Intelligence SAS - Capital euros 37,000 j CEO: François Roche j RCS Paris B j Headquarter : 115 rue Saint Dominique PARIS Russia Intelligence N j November

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