N°82 - August 28 2008 Published every two weeks / International Edition CONTENTS c P. 1-4 Politics & Government Moscow puts « humiliations » behind and Georgia embarks on a battle of wills with the west.

Crisis The crisis that broke out between Russia and Georgia on August 7 and that resulted in Moscow’s c The military dimension recognition of the independence of Georgia’s two secessionist republics, South Ossetia and c Who managed the crisis in Abkhazia, shows the extent of the gulf of incomprehension between the Russia of Vladimir Putin Moscow ? and Dmitry Medvedev, and the countries of the West, when it comes to the future of the post So- c Moldova/Transnistria: viet arena. In order to gauge the significance of the events that have taken place over the past Moscow wants to set ano- few weeks in the Caucasus and the Black Sea, it is important to review the underlying causes ther “example” of the war in South Ossetia, the way in which Russia’s executive power functioned during this crisis, and the political and economic repercussions of these events.

P. 5-7 Business & Networks 1/ This crisis is the logical conclusion to Russia’s long-standing face-off with the United States, METALLURGY, MINES Europe, NATO – and Georgia. Ever since the United States decided to set up an antimissile shield c Mechel and Norilsk still in in Central Europe to counter an Iranian threat, and ever since the possibility of NATO member- turmoil ship for Georgia and Ukraine became a reality, Russia’s diplomatic language changed, a fact that OIL we have often chronicled. The fact that Russia was seeking a new international status, and the c TNK-BP: The standoff support that Moscow gave Washington following the September 11, 2001 attacks, led the Russ- BEHIND THE SCENE ian leadership to believe, for a while, that the Bush administration would not try to counteract c The new lobbyists for the Nord Stream Pipeline Moscow’s influence in the Caspian region, the Caucasus or Central Asia, nor that NATO’s strat- egy would consist in redeploying towards the East, on the very borders of the Federation. This FOCUS c Gazprom: Agreement with is not to mention Washington’s activism in Central Asia, where hardly a week goes by without a Turkmenistan, offensive in special envoy from the US administration trying to convince one political leader or the other in the Far East the region to export his country’s oil and gas to Europe by bypassing Russian territory.

For Moscow, the Georgian affair put an end to a period in which Russia felt “encircled” by the P. 8 Regions & CIS United Sates and some its western allies – a period in which the most striking events were un- BELARUS doubtedly the “colored revolutions” in Georgia, Ukraine, and to a lesser extent, Kyrgyzstan. All c Alexandre Lukashenko and the objective conditions for a forceful response on the part of Russia were to be found in Geor- the urge to take flight gia, both due to calculation on the part of Moscow, as well as to the circumstances. Georgia is the United States’ favoured base in the region. There has been a strong presence of US military READ ALSO… advisers and intelligence agencies for several years. This has led Moscow to focus its attention on what is truly taking place in Tbilisi. The fact that the 2014 winter Olympic Games will take Analysis of the Georgian place in Sochi, not far from Georgia, served to sharpen Russia’s determination to “secure” the Crisis in our other news- region, while the determination of the Abkhaz and South Ossetian leaders (Sergey Bagapsh and letters: Eduard Kokoity) to push their advantage, knowing they had Russian backing, completed Geor- Ukraine Intelligence gia’s slow transformation into a diplomatic and political powder keg. Central Asia & Caspian Russia pushed Mikheil Saakashvili into committing a misstep, through the intermediary of Intelligence armed Ossetian groups whose activity intensified considerably as of July, as well as through the diplomatic activism of Sergey Bagapsh, who was in Paris in June (invited by the magazine For- SUBSCRIPTION Print Edition eign Policy) after having previously welcomed Javier Solana in Sukhumi. In the July 17 issue (23 issues, airmailed overseas) of Russia Intelligence, we attracted our readers’ attention to the heightened tension in the re- €770 TTC gion (attacks in Sukhumi and Gali in June and July, artillery fire in Tskhinvali on July 4, arrest The Web Pack of Georgian police in South Ossetia on July 8) as well as to the rather alarming prospect of the (Print Edition “Caucasus 2008” manoeuvres taking place in Russia using considerable military means and over + PDF + archives acess) 8,000 soldiers. € 880 TTC

The Premium Meanwhile, Mikheil Saakashvili did not exactly play the appeasement card with Moscow. Dur- Subscription ing the last presidential election, his main political communication strategy focused on “reinte- (Print Edition + PDF + access grating” South Ossetia and Abkhazia, abiding by a strategy that won him the election in 2003, at to all the website contents) the time of the “Rose Revolution”. Glorifying Georgian nationalism was a way of cov- ddd € 1200 TTC

www.russia-intelligence.fr RUSSIA INTELLIGENCE Politics & Government

ddd ering up a few flaws in his leadership (rampant Kazakhstan, Kyrgyzstan, Uzbekistan and Tajikistan) in corruption, internal struggles, brutally sup- which Dmitry Medvedev and his Chinese counterpart Hu Jin- Georgiapressed demonstrations, poor economic re- tao will take part. Moscow is hoping that the member coun- Crisis sults), but it is a weapon that must be han- tries of the organization will make an official declaration in dled skilfully, as the events in August prove. Some American which they will express their unequivocal support to Russia’s advisers probably assured Mikheil Saakashvili of the unfail- decision to recognize the independence of the two republics. ing support of the United States if Georgia decided to take Intense discussions are focusing on this point. There is lit- South Ossetia and Abkhazia by force. Information gathered tle doubt that Russia will try to get a certain number of friendly by CIA surveillance stations in Georgia naturally detected nations to recognize the independence of Abkhazia and South Russian troop movements in the north Caucasus and in Abk- Ossetia. And the Kremlin is concentrating its attention on hazia. This should have induced the Georgian military to be Beijing. Recognition by China would put the west in an em- prudent and certainly to refrain from any forceful moves in barrassing position, although the Chinese authorities are Tskhinvali without serious thought to how Russia would re- most certainly examining the consequences such a move act. But in the end, Georgia got caught in the trap. would have on the situation in Tibet and Xinjiang. It already appears a sure thing that Chinese capital will be invested in Whether it was the outcome of a skilful Russian plan or a Abkhazia, whose economic and tourist potential attracts a strategic blunder on the part of Saakashvili does not matter lot of attention. Of course, if Russia and China put up a com- much. Georgia is now almost in tatters. Part of its infrastruc- mon front concerning the Ossetian and Abkhaz territories, ture is destroyed, it military potential has been crushed, and China will be expecting some compensation in the form of a its territory dismembered de facto. The Russian army is keep- larger stake in exploring Russia’s oil and gas resources. The ing “check points” on Georgia’s major roads and occupies Kremlin has the means to satisfy China in this regard. Poti, the country’s only deep-sea port. Behind-the-scenes manoeuvres have begun in Georgia’s small political sphere 4/ The European Union and NATO can no longer avoid a re- aimed at turning the page on Saakashvili in favour of former view of their assessment and strategies concerning Russia and Parliament Speaker Nino Burdzhanadze, or even former De- the former Soviet arena. Can the current crisis deteriorate fense Minister Irakli Okruashvili, who currently has refugee into an armed conflict between, say, Russian and NATO forces? status in France (for the political consequences of the crisis Although Russia has adopted a very combative tone over the within Georgia itself, see the latest issue of Central Asia and last few hours, and the concentration of naval forces in the Caspian Intelligence). Black Sea is hardly reassuring, it is likely that the Russian decision concerning the independence of Abkhazia and South 2/ Russia’s executive leadership proved to be more homo- Ossetia will meet with almost general condemnation in the geneous than either feared or hoped. Even if one tries hard, West - in more or less nuanced terms according to the nature it is difficult to detect divergences between President Medvedev of the leadership and each nation’s economic interests in and his prime minister. Of course, as far as image goes, Russia - but that a sort of status quo will be established. Vladimir Putin appears to have difficulty hiding the satisfac- Mikheil Saakashvili will, of course, do everything to ensure tion he feels from frequenting the military and using terms that international mobilization against Russia does not weaken of warfare. Dmitry Medvedev’s character is different but both and that the question of Georgia’s NATO membership bid is men are complementary and share the same reasoning when not forgotten. The same type of activism can be expected on it comes to the “lesson” that Russia must give the United the part of Ukrainian President Viktor Yushchenko, who has States, NATO and the European Union. In this matter, it is expressed fears that the Crimea will be the next destination interesting to note the behind-the-scenes role of Sergey Ivanov, for Russian paratroopers (for the consequences of the Geor- probably one of the kingpins in the operation (see page 4). gian crisis in Ukraine, see the latest issue of Ukraine Intel- Buoyed by favourable public opinion, and by a large part of ligence). an even more favourable press, the Russian leadership is as- suming and even concretizing, to a certain extent, the mes- The matter remains however that the Georgian crisis will sage it gave out at the last economic forum in Saint Peters- be a serious obstacle in Russia’s relations with the United burg, when Medvedev spoke of Russia as a nation that could States and Europe. Europe is to some extent lacking unity propose to the world new rules of the game. More generally, on the issue, and the outcome of upcoming European sum- the great spirit of openness that some had predicted when mits must be examined to evaluate the extent of the division Medvedev took over at the Kremlin has not materialized, nei- between member states and their capacity to adopt a com- ther on the foreign policy front nor in Russia’s relations with mon resolution with some substance. Russia has embarked large firms (see page 5). on a power struggle. It believes, rightly or wrongly, that the United States is no loner in a position to exercise world lead- 3/ A decisive role for China. On the diplomatic front, there ership, that Europe is inefficient because of its lack of unity will be an increase in activity in the coming days. One should and that NATO must end its expansionist policy in the east. expect a volley of protests from the United States and the Eu- Can Washington, Brussels, Paris, Rome and Berlin together ropean Union against Russia’s recognition of the independ- handle this power play with Moscow while avoiding a clash ence of South Ossetia and Abkhazia. Meanwhile Russia will that would have serious political and economic repercussions be counting its friends - apart from Alexandre Lukashenko both for Europe (more so than for the United States) and for and Bashar al Assad, who were the first to lend their sup- Russia? These are the stakes in the coming days, but one port to Russia’s decision. On Thursday, August 28th Dushanbe cannot help but notice that, like for Georgia, relations be- the capital of Tajikistan is hosting the summit of the Shang- tween the West and Russia have taken a mighty step back- hai Cooperation Organization (grouping Russia, China, wards. d 2 Russia Intelligence N°82 j August 28 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Politics & Government

Georgia Crisis The military dimension

A long-planned Russian military intervention? The ques- On the Georgian side, the army totaled 22,000 men, or- tion has been troubling the small sphere of military analysts, ganized into 5 brigades and deployed in Gori, Senaki, Ku- especially in London and Washington, over the past few days. taisi, Vaziani and Khoni. At the time the war broke out, The Georgian authorities and their supporters claim that, far most of the 1st brigade (2,000 men) was in Iraq. The Geor- from being spontaneous, Russia’s military response was in gian army had at its disposal 191 T-72 tanks, including 160 fact carefully programmed. This is also the opinion of Mos- that Ukraine and the Czech Republic had been supplying cow journalist Pavel Felgengauer (known, it’s true, for his since 2005 (44 of them were reportedly captured in perfect systematically negative analysis of the Russian army). The condition by the Russians). speed with which the Sebastopol-based Black Sea Feet units were deployed, the implementation of the logistics chain, and Moscow pointed a finger at Israel, which had supplied the fact that military exercises similar to what was to be the Hermes and Aerostar drones to Georgia. According to the Russian intervention were conducted in the north Caucasus daily Haaretz, two retired generals, Yisrael and Hirsh, took at the end of July, tend to give credence to the theory that part in training the Georgian army but had “eased up” in Moscow was lying in ambush. But the 12-hour time period recent months at the request of the government in Tel-Aviv. that elapsed between the start of the Georgian attack on Contrary to what some of the Russian press is saying, Ukraine Tskhinvali and the first responses from the Russian army did not supply the S-200 long-range air defense system but tends to indicate that Russia was taken by surprise. Flaws the BukM1 – a shorter range and more recent system (3 in intelligence that were, in particular, responsible for the units with 48 missiles supplied in 2007). It was these wea- loss of several planes (see below) can be interpreted either pons that brought down a Tu-22M strategic bomber. as a lack of preparedness on the part of the Russian forces, or an example of the incompetence of the GRU. Finally, it is worth noting that according to information communicated to Russia Intelligence by a Georgian source, There is hardly any doubt that the Russian military plan- the United States had a small SIGINT station near Gori, ned the details of an intervention in Georgia a long time ago, which was reportedly destroyed by Russian fire. One mem- but this does not mean that Moscow had the initiative in star- ber of the US personnel was killed. ting the conflict. A high-ranking officer in the French army pointed out to Russia Intelligence that the role of all mili- A few lessons from the “five day war”. Moscow proved tary leaders is precisely to plan, and that the French army its capacity to deploy 20,000 soldiers within 72 hours and also has a plan for the Caucasus tucked away. to conduct a large-scale operation beyond its borders, a feat that the armies of many big countries within NATO are not Russian forces and Georgian weapons. Between August 8 capable of accomplishing. The Russians routed an army and 10, Moscow’s deployment in South Ossetia included ele- that had been equipped and trained by the West - a highly ments of the 135th, 429th, 503rd and 693rd mechanized infan- important symbol in the eyes of the Kremlin even though try regiments of the 58th army based in Vladikavkaz as well Georgia’s combat preparedness was questionable according as a regiment of paratroopers from the 76th Airborne Division to some American instructors on the spot. The fact is that based in Pskov, elements of the 45th special intelligence re- with the destruction of most of its infrastructure and heavy giment of the air force and the 10th and 22nd special forces weaponry the Georgian army has been set back 10 years. brigades. These forces were completed by artillery elements from the 42nd division based in Chechnya, two Chechen de- And yet the conflict in Georgia cannot be summed up as tachments (including the much talked-about “Vostok”, led a victory march for the Russian army. The fighting high- by Sulim Yamadav, the sworn enemy of Ramzan Kadyrov), lighted some serious defects. It wasn’t until August 10, fol- as well as by a tactical group from the 98th airborne division. lowing heavy fighting and after several Georgian counter- This came to a total of 10,000 men and 150 tanks. At the same attacks that the Russian forces took Tskhinvali. Moscow time Moscow sent the same number of men to Abkhazia sources also mentioned heavy Georgian opposition on Au- (mostly from the 7th and 76th airborne divisions of Novoro- gust 12 near Zemo-Nikozi. The loss of 5 combat aircraft in- siysk and Pskov, as well as marine infantry units from the cluding a Tu-22M strategic bomber attests to the vulnera- Black Sea Fleet in Sebastopol). bility of Russia’s air force. The navy, which fired for the first time since 1945, fared better, but considering the weakness The Russian naval group, which was deployed facing the of its opponent, this is hardly meritorious. It is clear intel- Abkhaz coast and which destroyed most of the Georgian navy, ligence and combined arms coordination were both defi- totaled some fifteen ships, including the “Moskva” missile cient. cruiser, the flagship of the Black Sea Fleet. The Russian Air Force, for its part, undertook several hundred sorties (Su-24, The other lesson has to do with the obsolescence of Rus- Su-25 and Tu-22M). It should be noted that it was not able sian equipment. To a great extent Russia was missing pre- to use combat helicopters until quite late, after having conver- cision weapons and means of electronic warfare– key ele- ted an appropriate terrain near Tskhinvali. Finally, the Rus- ments in any operation conducted by the West. This, along sian military is alleged to have used some fifteen Tochka tac- with the drones and the Glonass satellite system, are ex- tical missiles (SS-21) and to have tested the new Iskander pected to figure prominently in the amendments to the arms (SS-26) system, in conditions of combat. program announced by the defense ministry. d 3 Russia Intelligence N°82 j August 28 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Politics & Government special Georgia Who managed the crisis in Moscow ?

Whether or not it was prepared a long time in advance (see Vladimir Putin to the role of NATO and the United States article page 3), the Georgian crisis provided a few answers in the post Soviet arena was naïve, to say the least. concerning the balance of power in Moscow and the wor- kings of the state machinery. The role of the GRU. Since 1825 and the Decembrist re- volt, the Russian authorities have always ensured that the Medvedev/Putin: Six of one and half a dozen of the other. military is “under control” and plays no role in the politi- Ever since Dmitry Medvedev was “designated” on Decem- cal sphere. This approach was also valid during the Soviet ber 10, 2007 and then took power on May 7 last, western po- era. One may recall, for example, that Stalin banished Mar- liticians and observers have been carefully scrutinizing the shal Zhukov from Moscow after 1945 and outlawed the for- workings of the “tandem” at the head of the Russian state, mation of a veterans’ association. The KGB at the time had to employ the expression used in Moscow. We have analy- branches in each of the Soviet army units and kept an eye zed at length the new balance of power both between the on things. Matters became more complicated under Yelt- Kremlin and the White House - the government headquar- sin. Although distrustful of both the secret services and ters - as well as within these Russian seats of power. Should the military, he had to resort to the military in October 1993 we conclude from the current crisis that the real power is to put down the parliament revolt. His defense minister at not in the hands of President Medvedev and that it is his the time, Pavel Grachev, had considerable room to maneu- prime minister, Vladimir Putin, who is in command? The ver. It is interesting to note that the first questions on the fact is that things are a lot more complex. Of course, it is effectiveness of the political authorities’ control over the true that in the first hours of the crisis, Vladimir Putin spoke military goes back to 1993, with the conflict in Abkhazia. with George Bush in Beijing and then went to Vladikavkaz, lending credence to the supposition that he was the driving Over the past months there has been quite a bit of in- force behind the Russian reaction. Long reports on Rus- comprehension between the civilian authorities and the sian television showed pictures of Putin in Daghestan and military (Russia Intelligence n° 79 dated June 19 2008). Chechnya in the autumn of 1999 when he was prime minis- The nomination of Anatoly Serdyukov as defense minister ter. The western press also focused on the tone of a discus- and his reforms aimed at “demilitarizing” and “trimming sion between Vladimir Putin and Dmitry Medvedev in the the fat” in the ministry went down badly with the upper Kremlin, during which the president may have given the im- echelons of the military. The uneasiness was illustrated pression that he was the passive executor of suggestions with the replacement of General Yuri Baluevsky, chief of made to him by the prime minister. However, in the second staff of the armed forces, in early June. And yet, the mili- phase of the crisis Vladimir Putin was gradually eclipsed. tary’s influence in the Georgian crisis was considerable. By decorating soldiers who had taken part in the operation “Communication” was ensured by the deputy chief of staff and signing the decrees recognizing the independence of of the armed forces, General Novogitsyn - the humorless South Ossetia and Abkhazia, Dmitry Medvedev retook com- Jamie Shea of the Russian army. But it is especially through mand and adopted a hard line. The Georgian affair is proof, intelligence, gathered primarily through the GRU, that the if needed, that the nuances and differences in assessment Russian military influences the political direction of the between Dmitry Medvedev and Vladimir Putin concern the country. According to information obtained by Russia In- economy, the role of the state, and, perhaps, the role of the telligence, an informal crisis committee on Georgia was set civil society, but certainly not foreign policy and defense. up in Moscow in which the deputy prime minister and for- To believe, as did Viktor Yuschenko and Mikheil Saakash- mer defense minister Sergey Ivanov took part, even though vili before the last CIS summit of heads of state in Saint he had appeared to be losing ground since his non-appoint- Petersburg that Dmitry Medvedev would be less hostile than ment as Vladimir Putin’s successor in December 2007. d

Moldova/Transnistria: Moscow wants to set another “example”

While the attention of most western observers and the media is tur- On August 25, the day before he recognized the independence of ned towards Georgia, Moscow is preparing a diplomatic coup in ano- South Ossetia and Abkhazia, Dmitry Medvedev warmly welcomed in ther secessionist republic: Transnistria. As we pointed out in our Ja- Sochi his Moldovan counterpart, Vladimir Voronin. The following nuary 31st issue, Moscow and Chisinau have established closer day, Russian Foreign Minister Sergey Lavrov declared that they were relations over the past few months. In exchange for Moldovan gua- very close to a diplomatic solution concerning the “frozen conflict” in rantees on Russian property rights in Transnistria and, more impor- Transnistria. He said the two parties were ready to go back to the “Ko- tantly, adopting a legally binding document stipulating the country’s zak Plan” that Moldova rejected at the last minute in late 2003, due to neutral status (that is, renouncing NATO), the Kremlin is ready to pro- western pressure. For the record, the plan calls for Russian military mote the return - at least the formal return – of Tiraspol back to Chi- forces to be stationed in Moldova. It is noteworthy that Ukrainian Pre- sinau. This was a way of signaling to other members of the CIS that sident Viktor Yushchenko, who had talks on the subject with his Ro- may be tempted by a rapprochement with NATO that they have every manian counterpart, Basescu, in mid-August, is very worried by the interest in choosing a form of “Finlandization” rather than pursuing prospect of seeing a “Pax Russica” in Transnistria. d the Atlantist path. 4 Russia Intelligence N°82 j August 28 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

METALLURGY, MINES c Mechel and Norilsk under reinforced surveillance by Putin and Sechin

Even though its priorities have been elsewhere since Au- focus on his coal producing activities, especially since in re- gust 7, the government, including Prime Minister Vladimir Pu- cent months Mechel acquired very important reserves in Ya- tin, has been taking an increasingly keen interest in the me- kutia (Russia Intelligence n°63 dated October 11, 2007) . The tallurgy and mining industry since late July. As we have often atmosphere may remain tense for a while and Russia’s busi- reported, the truth of the matter is that the Russia’s executive ness circles have noticed with some unease that Vladimir Pu- branch has always kept a close watch on what is taking place tin’s rhetoric against Mechel closely resembled the one used in this highly strategic sector. On July 25, during a meeting in against Mikhail Khodorkovsky in the Yukos affair. Nizhny-Novgorod devoted to this sector, Vladimir Putin poin- ted a finger at the Mechel group, accusing it, rather sharply, The Kremlin’s reach was also felt in the Norilsk/Rusal case. of selling its coking coal to its Russian clients on the spot mar- Rusal chief Oleg Deripaska, who is involved in a fierce battle ket for twice as much as it sells to foreign companies. He also for control of the world’s largest nickel producer, attempted a once again brought up the old debate over the “tolling” system forceful attack against Vladimir Potanin in order both to pre- that is used by many metallurgical groups in the country. “Tol- vent him from getting elected chairman of Norilsk’s board of ling” allows profits to be stored in offshore trading structures, director and, in particular, to keep him from appointing a di- which are often controlled by the shareholders of the group rector general of his choice (Russia Intelligence n°81 dated concerned. July 17). Deripaska was held in check for the first nomination and witnessed quite a strange scenario regarding the second. The attack was a sharp but carefully planned one directed Whereas Sergey Batekhin, a loyal supporter of Potanin and against Igor Zyuzin, the main shareholder at Mechel since he number two at Interros (Potanin’s holding company) was ap- bought the shares of his former partner Vladimir Iorikh two pointed by the board on July 7, at a new board meeting on Au- years ago. Since April, the Federal Antimonopoly Service (FAS) gust 8 Vladimir Potanin proposed a surprise candidate, Vladi- has been conducting investigations following complaints from mir Strzhalkovsky, despite a Oleg Deripaska’s opposition. two Russian steel producers, Novolipetsk, belonging to Vladi- mir Lisin, and MMK (the Magnitogorsk combine) owned by The 54-year-old Strzhalkovsky, a native of Saint Petersburg, Viktor Rashnikov. Both steel producers protested against Me- is a former KGB officer who served from 1980 to 1991 and for- chel, Russia’s leading producer of coking coal, for raising its mer deputy minister of sports and tourism and later of econo- price (an 80 to 100 percent increase between January and April mic development. Until recent weeks he was director general 2008) and for refusing to supply its two clients if they did not of Rosturism, the federal tourist agency. Presented as an as- agree to the new rates. Since then the FAS and the govern- sociate of Vladimir Putin, he appeared to be a compromise can- ment have enacted new rules, practically obliging coking coal didate, who would heed the prime minister’s request to put an suppliers to conclude long-term contracts with their Russian end to the conflict that has severely affected Norilsk’s stock clients. On July 22, Mechel announced that he agreed to these market performance (it’s price fell by 40% since May, further rules. However, Igor Sechin, deputy prime minister in charge weakened by the fall in the price of nickel). The compromise of industry and energy, who probably considered that an ans- failed and Oleg Deripaska intervened on two issues: he accu- wer was too long coming, slipped the file onto Vladimir Putin’s sed Vladimir Potanin of holding a larger portion of Norilsk’s desk, which thus explains the explosive attack on July 25… It capital than he declared to the Russian stock market authori- is interesting to note, as an anecdote, that Igor Zyuzin had cal- ties (over 34% as opposed to about 30%), and he wrote a letter led in sick that day in Nizhny-Novgorod. By means of the press, to Strzhalkovsky denouncing Norilsk Nickel’s “catastrophic” the prime minister proposed sending him a doctor in order to situation regarding the environment and proposed his services “settle the whole matter”. Mechel’s market capitalization fell to remedy the situation, which is also a way of attracting the by nearly six billion dollars in just a few days. attention of Norilsk’s foreign institutional shareholders to an issue over which they are becoming increasingly sensitive. Other metallurgical groups are under surveillance, mainly to do with the tolling system, but as Russian Intelligence has It seems in fact that Igor Sechin intervened here too. The often depicted, the case regarding Mechel is a special a one. Russian press alluded to a three-way meeting between Sechin, Part of the group’s activities is being closely watched by Ser- Deripaska and Potanin that took place on July 29. The prota- gey Chemezov, who would very much like to take control of the gonists did not confirm that such a meeting took place, but Chelyabinsk metallurgical combine, Mechel’s subsidiary spe- one cannot help but imagine that Strzhalkovsky’s nomination cializing in special steel. Chemezov, who heads the Rostek- as director general of Norilsk is a sort of “tribute” that Pota- nologii industrial holding company, makes no secret of his wish nin paid to Vladimir Putin and Igor Sechin in a bid to obtain to bring Chelyabinsk to Russpetsstal, the subsidiary of Roso- the government’s backing against Oleg Deripaska. As a result boronexport, which itself is a stakeholder in Rosteknologii. of this, Deripaska publicly called into question the capacities Mechel is resisting for the time being since Iorikh has even de- of Norilsk’s new director general, who has had no experience cided to increase his personal stake in the group and divide in this type of industry nor this role. But it is not sure that the Mechel into autonomous structures quoted on the stock-ex- battle is over. We will have a first indication of which camp change (steel, coal and ferroalloy). This is hardly to the liking “fortune” has favored when the state awards the Udokan cop- of the government which believed it had convinced Iorikh to per field in mid-September. d 5 Russia Intelligence N°82 j August 28 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

OIL c TNK-BP: The standoff The open crisis between the British and Russian sharehol- Russian shareholders to turn against one another, with rather li- ders of TNK-BP, a situation regularly chronicled by Russia In- mited success up till now. According to our sources, he seems to telligence since it broke out last spring, escalated further in re- believe that Mikhail Fridman (Alfa) leans more in favor of a com- cent weeks. Targeted by Viktor Vekselberg and his partners, promise than does either Viktor Vekselberg, or, more especially, TNK-BP boss Robert Dudley finally decided to leave Russia on German Khan, who played a key role in setting up TNK at the end July 24, but continues to exert control over the group from abroad. of the 1990s. It was, at any rate, with Fridman in London on the A meeting on July 30 between BP boss Tony Hayward and Mi- evening of July 30 that Hayward discussed a way out of the crisis. khail Fridman, head of the AAR (Alfa-Access-Renova) consor- As far as one can tell, a compromise took shape that would have tium, aimed at exploring certain compromise scenarios, failed included nominating a more neutral figure than Robert Dudley (the to change the course of events. The Russian side initiated new name of another TNK-BP executive, Tim Summers, former advisor legal proceedings while BP is now mentioning retaliatory mea- to Lord Bowne, was mentioned) and replacing the entire top ma- sures against AAR’s owners. The situation appears completely nagement of TNK-BP (including Khan and Vekselberg). But the deadlocked and the very functioning of TNK-BP may soon be af- plan was quickly scuttled by Viktor Vekselberg, apparently quite fected. According to information gathered by Russia Intelli- unwilling to pay the price of political appeasement. Reliable sources gence, some divergences appear to have emerged amongst the say he is even ready to take the matter to the tax department, most group’s Russian shareholders over the next steps to be taken. likely through the intermediary of a “friendly” structure such as Meanwhile, a decision by the prosecutor general’s office to ap- Tetlis, the minority shareholder, whose initiative it was to lodge peal a verdict aimed at disqualifying Robert Dudley from hol- complaints against Robert Dudley to the department of labor. ding any other executive role in Russia could indicated that the Kremlin has finally decided to break with the neutral position Will the Kremlin take a stance? The state has often declared it it has so far adopted regarding this matter. wants to remain neutral in the conflict between BP and AAR, and it has indeed made sure it did not get involved in the settling of Robert Dudley is not resigning. Since the sha- scores current taking place. While this is commendable in itself reholders’ general assembly at the end of June and meant to contrast in a positive way with the Kremlin’s position was unable to get rid of Robert Dudley, the AAR in the Yukos affair, it could prove to be counterproductive. The bu- consortium decided to prevent him from ac- siness community and observers focus less on the government’s tually directing the group. Viktor Vekselberg neutrality than on AAR’s aggressive tactics and the difficulties of alerted the immigration service, which deli- the British oil major in asserting its rights in Russia. This state of Robert Dudley vers work visas for foreigners, to the fact that affairs is, in the end, rather removed from the liberal prospects out- the contract of the TNK-BP boss had expired lined by Dmitry Medvedev and Igor Shuvalov at the 12th Economic on December 31, 2007 and that he could no Forum in St. Petersburg in early June (Russia Intelligence n°79, longer claim to remain on Russian territory to dated June 19 2008). exercise any professional activity. Robert Dud- ley and his advisers put forward the argument Is the situation changing? It is still too early to tell but Viktor that an article in the labor code stipulates that Vekselberg and his allies – who are not considered to the favorite any short time contract becomes a permanent oligarchs of either Vladimir Putin or Dmitry Medvedev - have per- Viktor one if it is not cancelled two weeks before it haps crossed a red line. At any rate, a close watch should be kept Vekselberg expires. But Dudley received no such official on the fact that the office of Prosecutor General Yuri Chayka has letter prior to December 15, 2007. In the end, launched an appeal – with suspensive effect – against the decision he was granted a 10-day transit visa on July 19. of Moscow’s Presnensky court to ban Robert Dudley from exerci- This, according to the immigration service, al- sing any executive function in Russia for a period of 2 years. lowed him to stay in Russia the time needed to settle the shareholders’ conflict, but did not It is worth noting that Robert Dudley has, in the meantime, gone give him the right to work. Dudley left Rus- on the offensive. He has referred the matter to the ministry of eco- Mikhail sian territory on the 24th for an unspecified nomic development and to the ministry of justice (headed by Alexan- Fridman Central European country, from where he conti- dre Konovalov, a loyal ally of Dmitry Medvedev), as well as to the nues to direct the group. On the previous day, FSB and the new anti-corruption council close to the presidential 60 other British expatriates had returned to London. A few days administration. TNK-BP’s boss has stated that, considering the nu- later, TNK-BP’s financial director, James Owen, threw in the to- merous procedures the labor inspection office launched right in wel. the middle of a shareholder’s row, one is led to believe that it is ac- ting “on orders”. As things stand now, Robert Dudley is directing the group from a distance, sending out orders and instructions by e-mail The British have thus decided to take Dmitry Medvedev and the and fax (documents requiring his signature are sent to Moscow government liberals at their word. It is a risky gamble, but it may, by DHL). However, as BP boss Tony Hayward acknowledged du- paradoxically, be facilitated by the diplomatic climate weighed ring a press conference in London on July 29, this arrangement down by the war in Georgia. According to our sources in Moscow, does not look viable in the long term. Igor Shuvalov and Alexey Kudrin are actively engaged in getting the president to make a strong gesture on the economic front and Fridman vs. Vekselberg? In its July 3 issue, Russia Intelligence make his position known at the next Valday forum set for early Sep- d 6 pointed out that BP’s boss, Tony Hayward, was trying to incite tember. Russia Intelligence N°82 j August 28 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

cc FOCUS BEHIND THE SCENE Gazprom: Agreement with The new lobbyists for the Nord Stream Pipeline Turkmenistan, offensive in the Far East After having recruited former chancellor Moscow continues unabated its efforts in the “great game” for Caspian gas. Gerhard Schröder at the end of 2005, Three weeks following Dmitry Medvedev’s visit to Baku and Ashgabat (Russia and approached the former Italian prime Intelligence n°18 dated July 17 2008), Alexey Miller went to Turkmenistan to ne- minister Romano Prodi last spring, Gaz- gotiate the framework of a bilateral gas cooperation agreement that will take ef- prom has just enlisted the services of a fect as of January 1st 2009, the crucial date when Turkmenistan, Kazakhstan and new lobbyist from Europe’s political Uzbekistan plan to export their gas at market rates (as opposed to $150/1000m_ sphere: Paavo Lipponen, the former today). prime minister of Finland.

We should bear in mind that Moscow and Ashgabat signed a 25-year agreement Officially he will be an independent in May 2003 in which Gazprom pledged to buy all the gas Turkmenistan had avai- consultant for Nord Stream AG, the ope- lable for export (with the exception of gas destined for the Turkmenistan-Iran pi- rator of the future pipeline whose partici- peline) - a preemptive move to beat the West to these gas reserves. Experience pants include Gazprom (51%), BASF has shown, however, that Saparmurat Niazov and his successor Gurbanguly Ber- (20%), E.ON (20%) and the Dutch Gasu- dymukhammedov have never really felt bound by this agreement. Indeed, both nie (9%). Paavo Lipponen’s main mis- Turkmen presidents continued to hold discussions with China and Europe with sion will be to convince the Finnish and the aim of building new export pipelines. Moreover, the agreement signed in 2003 Swedish authorities of the environmental stipulated that the terms of delivering Turkmen gas to Russia – in particular the harmlessness of the Nord Stream and to price - must be negotiated annually, a system that keeps both Gazprom, and Ukraine, dispel their doubts regarding the installa- the main recipient of Central Asian gas, in the dark. tion of the pipeline in their exclusive eco- nomic zones. Stockholm and Helsinki Apparently Alexey Miller scored some points in Ashgabat in late July, bringing had asked that additional appraisals be back to Moscow an “agreement on the price formation principles” of Turkmen gas. conducted, leading Gazprom to fear that In pure eastern tradition, Gurbanguly Berdymukhammedov also uttered some plea- the pipeline would not be able to be put sing words in the ear of Gazprom’s boss, reminding him that the Russian group is, into operation at the end of 2011 as ini- and will always be, Turkmenistan’s strategic partner. And yet, on closer examina- tially planned. tion, we can see that Alexey Miller’s visit does not represent a real breakthrough. The agreement, which was not made public, is a framework document and not a However, a Swedish diplomatic told contract. Moreover, it does not answer the main question, which is how much Gaz- Russia Intelligence in mid-July that, prom will pay for Turkmen gas as of January 1st next. It was agreed that new talks contrary to what some Russian officials in the autumn would focus on price. What we do know is that according to the appear to believe, the Swedish decision terms of the July 25 agreement, Gazprom has pledged to finance infrastructure is not a political one, but strictly legally- projects on Turkmen territory at zero percent interest. No details were given ei- based and that in this respect the posi- ther concerning the amount of financing or the projects involved, but it will pro- tion of the Russian-German-Dutch bably concern mainly the Turkmen section of the Peri-Caspian pipeline, a project consortium was a very strong one. The that was decided on by President Putin, Nazarbaev and Berdymukhammedov in same source indicated the “hot potato” May 2007. If we are to believe some indiscreet remarks made in Alexey Miller’s could, in the end, fall to Denmark, which circle, Gazprom will also finance pipelines from oil fields located in eastern Turk- is generally sensitive to US pressure and menistan and has convinced Gurbanguly Berdymukhammedov to increase the ca- arguments from the Baltic States. pacity of the Turkmen section of the future pipeline to 30 billion cubic meters per year, as opposed to 20 as originally planned. Russia has understood that if it does Meanwhile a rather mysterious event, to not provide the financing, the projects Turkmenistan has formally agreed to might say the least, took place with regard to never see the light of day. Nord Stream. In mid-July, a German In- ternet site (derwesten.de) reported a Gazprom has also made inroads in the Far East in recent weeks. It is well statement by former Polish president known that Alexey Miller’s group and Rosneft have been engaged in a struggle Alexander Kwasnewski in which he said over this new oil and gas province for several months (Russia Intelligence n°/ da- that Warsaw should join the Nord Stream ted /) - to such an extent that Dmitry Medvedev had to call on the two state oil ma- project. The interview was widely re- jors to find a compromise in the interest of the region. It was in this spirit that layed by the Russian press and sharply Rosneft facilitated an agreement between the Sakhalin-I consortium (of which criticized in Poland. A few days later, the he owns 20% alongside ExxonMobil) and Gazprom for the sale of 2 billion cubic former Polish head of state denied utte- meters on the domestic Russian market (whereas the US group and its partner ring such words or having backed the would like to export all of the Sakhalin-I gas themselves). But the truce between Nord Stream. A former French intelli- the two rivals was short-lived. In mid-August Rosneft legally contested the mino- gence official, confiding to Russia Intelli- rity-blocking stake granted to Gazprom in Daltransgaz, the operator of the pipe- gence, said that this case was strongly re- line between Sakhalin and Khabarovsk – a transaction planned as part of the “re- miniscent of an “active measure” of gional armistice”. It must be said that a few days earlier, Gazprom took over from disinformation on the part of the SVR, Rosneft the license to develop the entire continental shelf off the coast of Kam- which has many intermediaries in Ger- chatka. d many. d 7 Russia Intelligence N°82 j August 28 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Regions & CIS

BELARUS c Alexandre Lukashenko and the urge to take flight

In its March 17 issue, Russia Intelligence attracted the at- political prisoners: Andrey Kim and Sergey Parsyukevich. tention of its readers to Alexandre Lukashenko’s attempts to Given this context, the mission of Sir Timothy Bell, Marga- loosen Russia’s hold and begin normalizing relations with the ret Thatcher’s former spin-doctor, seems less destined to fail. West. This process, at first a timid one, gained new momen- Alexandre Lukashenko recruited him at great cost in mid- tum over the past weeks and has provoked a certain amount July to restore Belarus’ image in the west. of irritation on the part of the Kremlin where - if we are to un- derstate the matter - some believe that this time around the It is worth noting that the United States reacted quite Belarusian president is not just acting on a simple whim. As swiftly to signals put out by Minsk. A few hours following the usual when it comes to Moscow and Minsk, the falling-out star- release of Kim and Parsyukevich, the State Department pu- ted over the issue of gas. On August 3, Belarus’ first deputy blished a communiqué pointing out that President Luka- prime minister, Vladimir Semashko, declared during a press shenko’s decision paved the way for “a true possibility of im- conference that his country wished to terminate the contract proved relations between the United Sates and Belarus”. A linking it with Gazprom. For the record, at the end of an un- rather high-ranking diplomat, David Merkel, was sent to precedented power struggle, Moscow and Minsk signed a Minsk for a first series of talks. US sanctions against Bela- contract on December 31 2006 according to which the price rus, adopted in 2007, could be lifted, at least partially, in par- Belarus pays for its gas would only be raised progressively to ticular those concerning the large state chemical group Bel- international gas prices by 2011. In exchange, Alexandre Lu- neftekhim, especially if legislative elections, slated for kashenko had to agree to allow Gazprom to enter into the ca- September 28, take place in more acceptable conditions than pital of Beltransgaz, the public operator, although he was, in the presidential vote of 2006. passing, also handed a check for $5 billion (Russia Intelligence n°46-47 dated January 19, 2007). Belarus paid $127.9/1000 cu- When Dmitry Medvedev received him in Sochi on August bic meters in the second quarter of 2008 (as opposed to Ukraine, 19, Alexandre Lukashenko tried to downplay somewhat the which paid $179.5 and the European Union, which paid an ave- significance of these diplomatic openings towards the west rage of $320). Although given highly preferential conditions, by providing the Kremlin with certain assurances. An agree- Minsk found them insufficient. According to Vladimir Se- ment was clinched on a unified air defense system – a topic mashko, “new circumstances” have arisen which justify a to- that had been under discussion since 2000 - in response to tal review of bilateral gas relations. One of these, he says, is the US-Polish anti-missile defense deal. The Belarus presi- the fact that Russia is considering - although it has not yet ac- dent agreed to condemn “Georgia’s aggression” and declared ted upon - postponing the liberalization of gas prices on the to Dmitry Medvedev, in front of the cameras, that the Rus- Russian market from 2012 to 2014 or even 2015. sian president had acted in Ossetia “in a calm way, wisely and beautifully”– a statement in which Russian officials believe The second cause for Russian discontent arose a few days they detected a note of irony. Meanwhile, Alexandre Luka- later when the conflict in Georgia flared up. The Kremlin shenko carefully avoided using the term “genocide” during considered Alexandre Lukashenko’s lack of explicit support his meeting with “Presidents” Sergey Bagapsh and Eduard for the federal troops’ peace enforcement operation a breach Kokoyty. of the most basic concept of loyalty on the part of an ally. On August 12, Russia’s ambassador in Minsk, Alexandre Surikov, Privatization is another issue that should be closely mo- did not fail to make mention of Belarus’ “discreet silence”. Vla- nitored. Up till now Alexandre Lukashenko has prevented dimir Putin’s icy welcome to his counterpart Sergey Sidorsky entry of Russia’s main industrial groups except, as we have at the Kremlin was an additional sign of the strain between seen, for Gazprom. But he may yield some ground. The pri- Moscow and Minsk. The Belarusian prime minister, who came vatization plan for 2008-2010 calls for the sale of the Belaru- to negotiate a 2 billion dollar loan, went away empty-handed. sian section of the Druzhba oil pipeline – an initiative that Alexandre Lukashenko’s position is frowned upon all the more Minsk hopes will prompt Transneft to pack up the BTS-2 pro- because in the meantime he instructed his foreign affairs mi- ject (Russia Intelligence n°80 dated July 3, 2008). Moreo- nister to improve relations with the European Union and the ver, the Belarusian government has initiated discussions with United States. Putting his own words into action, on August Rosneft concerning the sale of two petrochemical complexes 16 the Belarusian president freed Alexandre Kozulin, the op- - Polimir and Naftan – which are also coveted by Lukoil. position member and former 2006 presidential candidate who Meanwhile Sergey Chemezov’s Rostekhnologii may buy se- had been sentenced to five and a half years in prison for breach veral companies (MEZ, KB Radar) specializing in defense of public order. Then, on August 21, he amnestied two other electronics. d

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