N°85 - October 9 2008 Published every two weeks / International Edition CONTENTS FINANCIAL CRISIS P. 1-3 Politics & Government c FINANCIAL CRISIS The game of massacre in Moscow c The game of massacre in The financial crisis has turned into a game of massacre in Moscow. October 6, 7 and 8, the Rus- Moscow sian stock market had to suspend operations several times, which did not prevent some shares from ARMY plunging by unimaginable proportions. lost close to a quarter of its value in one session, No- c Serdyukov draws the lessons from the war in rilsk Nickel close to 40%, these two firms being probably the worst hit because they are the indus- Georgia trial standard-bearers of the Moscow marketplace and are especially the most “liquid” assets. The ALERT entirity of the listed Russian oil sector (including Transneft and ) is worth today a bit less c -Iceland : the than 130 billion dollars, or the equivalent of the value of the Brazilian company Petrobras according underside of a loan with to simulations by Russian analysts, which gives an idea of the price that Russia is paying in the cur- interest rent financial crisis. Even if the collapse of the Russian markets is totally exaggerated, investors consi- FOCUS der that Russia combines three major risks : a liquidity crisis in the banking sector despite massive c Anti- corruption campaign, support by the public authorities, a heavy indebtedness by the major industrial and energy compa- national cause or lost cause nies and the drop in oil prices and most of the primary commodities, on which the economic activity BEHIND THE SCENE is based. c The Union of rightist forces scuttles itself In the storm of the last few days, a certain number of facts are particularly significant :

P. 4-6 Business & Networks 1/ Hardly anyone knows fully what is going on in the inner workings of the banking sector. The data revealed by the Central bank for the first eight months of the year in fact demonstrate the complete FOCUS surprise that the crisis has provoked in recent weeks. At the end of August, corporate and private de- c Transhmashholding : a boulevard for Alstom posits were on the increase by 60% over the same period in 2007 (974 billion dollars). On the credit side, it was, for the same period, on the rise by 52% for companies and 38% for individuals, figures in- ENERGY c Asia : Moscow explores the dicating a record progression. Since the start of the crisis, the “Kudrin package” for the banking sec- Korean option tor could be estimated at 200 billion dollars by the end of September, or 11% of the estimated GDP c Gazprom consolidates its for 2008, which is not negligable. But on October 7, the authorities announced supplementary mea- alliances in Germany and sures : 36 billion dollars in loans accorded to banks, for a period of five years, of which 19 billion for Italy the Sberbank, 8 billion for the Vneshtorgbank, 1 billion for the Rosselkhozbank and 9 billion for the LATIN AMERICA other banks. Nevertheless, the greatest secrecy reigns over the way these funds will be spread into c La Paz, new extension of the entire financial sector and toward companies and the greatest anxiety reigns over the number of Moscow/Caracas axis banks and companies that risk being left on the floor for technical or political reasons.

2/The major players in the energy, metal and mining sectors are beginning to be extremely weake- P. 7-8 Regions & CIS ned by both the very significant drop in prices and by liquidity problems. , considered CHECHNYA up until now as the most powerful oligarch in Russia, even if this type of classificaton hardly has any c Interview with Mairbek sense, has been struck in a very concrete fashion. His group announced October 3 that the 20% of the VACHAGAEV Canadian auto component manufacturer Magna, acquired in 2007 at a cost of 1.54 billion dollars, MOLDOVA/TRANSDNISTRIA through a loan of 1.2 billion from BNP Paribas, had “left” the perimeter of the group to the profit of c Russia and the West strug- gle for the initiative the French bank, which held a guarantee on these shares. Accordiing to persistent rumours in Mos- cow, the 30% of the Base Element group in the public works firm Strabag and the 10% in Hochtief, purchased in 2007, were also in a position of being transferred to creditor banks. Strabag, involved in SUBSCRIPTION Print Edition very important property projects in Moscow and (last year its turnover in Russia (23 issues, airmailed overseas) amounted to 1.6 billion euros in a total figure of 9.8 billion), has in fact announced a freeze of certain €770 TTC sites, for a volume of 200 million dollars. Another important subsidiary of Base Element is in diffi- The Web Pack culty, the automobile manufacturer GAZ (Gorki Avtozavod), which announced October 7 the stop- (Print Edition page of all its activities because of the lack of liquidity to pay its suppliers. Suddenly, questions arise + PDF + archives acess) as well on the fate of the 25% interest by in , bought from for € 880 TTC a total of 7.5 billion dollars, and 14% of the capital of Rusal. The operation was conducted by borro- The Premium wing 4.5 billion dollars, guaranteed by the Norilsk shares. Financial analysts have already calculated Subscription that in view of the collapse of the Norilsk shares (which have gone from 285 in April 2008 to less than (Print Edition + PDF + access 100 recently), Rusal must have spent at least 1.5 billion dollars in margin calls and if the value of No- to all the website contents) rilsk continues to drop, this amount might even reach 3 billion. ddd € 1200 TTC

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ARMY c Anatoly Serdyukov draws the lessons from the war in Georgia A bit more is starting to be known about the measures that nual budget that must be examined in second lecture on Oc- the Russian authorities intend to take to remedy the weak- tober 17. These amendments foresee an additional increase nesses brought to light by the “five-day war” against Georgia in the allocation for the Defence ministry of 68 billion roubles (Russia Intelligence n°82 of August 28 2008). If information (a bit more than 2 billion dollars) next year. Which, added to circulating in Moscow can be believed — information judi- the increase originally adopted, will lead to a growth in mili- ciously distilled by the media just after Dmitry Medvedev, on tary expenditures of 25% in 2009 (1277 billion roubles, or around September 30, noted the compelling need to improve the lea- 36 billion euros in exchange rate parity). dership structure — the central administration of the Defence ministry and the General staff should experience important It is a bit less than announced by Vladimir Putin in Sep- personnel reductions. The directorate general for operations tember (he had spoken of 80 billion roubles). More than any- and the one in charge of the organisation and mobilisation are thing, these additional expenses are to go for constuction of especially concerned since a “streamlining” on the order of new iunfrastructure and not for the procurment of materiel, 50% of the officer staff has been suggested. It must be said that which seems in contradiction to the announcements of the the number of posts in the general staff had not been signifi- Russian Prime minister and President “on the spot” after the cantly reduced since 1990, although the overall manpower of war in Georgia. As a result, it cannot be excluded that the cor- the army went from 4.5 million to 1.3 million. In addition, since rected budget proposed by the Defence commission and the it is not able to provide its higher-grade officers coming from “extension” announced by Vladimir Putin lead to different the provinces accommodations worthy of the name in the ca- things, and that another distinct budget line for the acquisi- pital, the Defence ministry had gradually abandoned any tur- tion of additional arms will soon appear. If the “five-day war” nover within the general staff and had been recruiting Mosco- has the effect of drawing attention of the Kremlin to the need vites above all, leading to the appearance of a special caste of to renew materiel and to invest in high-technology projects colonels and generals with no unit command experience for such as drones or the Glonass navigation system, it is impos- more than a decade. More surprising, military intelligence sible to also say that we are witnessing the “militarisation” of (GRU), at the spearhead of the Caucasus conflicts, had not the Russian budget. Expenses allocated to national defence in been spared. fact represent a bit less than 2.5% of GDP, and the increases expected in 2010 and 2011 (8.86% and 6.45%) are below cur- According to sources close to Anatoly Serdyukov contacted rent inflation. d by Russia Intelligence, these decisions had been taken as ear- lier as the summer. The war in Georgia only served to provide ALERT a pretext to accelerate their implementation. It is a good bet that this series of measures, which have not been officially an- 3 Russia-Iceland : the underside of a loan nounced but whose pilosophy are not in doubt, will not contri- with interest bute to an improvement in the already tense relations between the Defence ministry and the top military echelons. The latter First denied by the vice Finance minister Dmitry Pankin, then by has not accepted the reforms initiated by Anatoly Serdyukov, the vice Prime minister Alexandre Zhukov, who were obviously in which the uniformed services still see a former furniture not in on the secret, the information was then confirmed Tuesday dealer or, at best, a former tax agent. Conducted in the name October 8 in the afternoon by the vice Prime minister in charge of of rationalisation and efficiency, these reforms truly upset their Finance, Alexey Kudrin. Russia had indeed received a request for habits and affect numerous priviledges (sometimes financial credit amounting to 4 billion dollars on the part of the Icelandic in fact). The departure of General Yuri Baluevsky from the ge- government and was studying the question. Or rather, the boss of neral staff last June, brought into the open light the scale of the Icelandic central bank, David Oddson had declared that dis- the unease and contributed to the call to order of the higher cussions were engaged and being looked on “with optimism for a military hierarchy. (Russia Intelligence n°79 of June 29 2008). conclusion”.In a critical economic and financial situation, Reykja- vik, first sought assistance from the European union. In vain, Whether by coincidence or not, the reductions in person- which obliged Iceland, according to its Prime minister Geir nel foreseen in defence by chance come at the same time as Haarde, to “look for new friends”. important works in the buildings of the general staff on the Although itself confronted with a complex situation; Russia should, Novy Arbat, construction which led to several hundreds of of- in a most unusual event, save a Western country from bankruptcy ficers being forced to relocate into the offices of the former (the loan of 4 billion dollars represents about 30% of the GDP of Warsaw Pact on Leningradsky prospekt where some have no Iceland). The matter should be watched closely since it risks having office or telephone (certain Russia Intelligence sources in Mos- sensitive political consequences. If it does not have an army, Ice- cow have drawn our attention to the disorganisation borne from land is nevertheless a full member of NATO. We can easily imag- this relocation in the early hours of the war against Georgia in ine what reciprocity Moscow could ask on the eve of a meeting of August). Foreign affairs ministers of the Alliance that should decide on Ukraine and Georgia in December. While the “battle of the Arctic” The other consequences awaited from the conflict in Geor- has just begun (Russia Intelligence n°84 of September 25 2008), gia are on the budget. The Defence commission of the State the Kremlin also quickly grasped the unique opportunity that was Duma has just presented a series of amendments to the trian- d 2 opening to recruit an ally in the region. Russia Intelligence N°84 j October 9 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Politics & Government

cc FOCUS BEHIND THE SCENE The Union of rightist forces Medvedev’s anti-corruption campaign, scuttles itself national cause or lost cause ? The salvation of democracy passes through the Kremlin. That is, by hardly It is well-known that the issue is particularly dear to the heart of trained lawyer stretching credulity, the message sent in Dmitry Medvedev. Even before his election to the presidency, during a visit to Nizhny- early October by the Union of rightist Novgorod February 27, he had announced the preparation of a national anti-corrup- forces (SPS), the liberal party which inclu- tion plan. Then, barely installed in the Kremlin, he had, on May 19, signed a decree ded in its ranks certain emblematic and in that direction and created a national committee with himself as the leader. Since controversial figures such as Anatoly Chu- then, the teams from the Presidential administration, the Justice ministry and the bais (who was for a long time its principal Prosecutor’s office, under the direction Sergey Naryshkin, have been working on the source of financing through the national drafting new legal texts. They were finally presented during a plenary session of the electricity company RAO EES), Irina Kha- national anti-corruption committee on September 30, even before being officially kamada , or else the former vice Prime transmitted October 6 to the State Duma for a first reading in November. If every- minister . Marginalised, de- thing proceeds as expected, the “anti-corruption package” will enter into law next prived of a parliamentary presence, strug- January 1. gling between an intransigent wing in its opposition to the Kremlin and a group This “package” contains no less than four legal texts. Several elements — or ab- ready for a number of concessions to find sences — have drawn the attention of observers. In the first instance, even the no- a parcel of power, the party decided on tion of corruption does not give rise to a precise definition (we note in passing that October 2 to dissolve itself in order to join this was already the case for extremism, without preventing the adoption in 2002 of a new group on the right being constituted a law to fight against this phenomenon). On the other hand, the notion of “conflict by political consultants from the Kremlin, of interest” appears for the first time in Russian law. The texts transmitted to the who seem to feel the need for a facade Duma introduce a period of “quarantine”, according to the Russian terminology, of a that is more or less credible to dilute the period of two years during which a civil servant leaving the public service and his new awkward impression of a single party born employer are bound to inform the administration of previous employment of the per- out of the domination of United Rus- son concerned about the signature of a work contract. An ad hoc commission will sia.Opposed to this option, , then have to give its approval. The objective is obviously to avoid “cozy” relations and has decided to throw in the towel. It is the- other scandals of self-serving abuses between former public officials and the private refore Leonid Gozman, a faithful of Ana- sector with which these agents concerned had previous contacts during their careers. toly Chubais who will manage day-to-day affairs and will guide the process. Accor- It should elsewhere be noted that Dmitry Medvedev’s anti-corruption package in- ding to information filtering in Moscow, cludes a certain number of amendments of the law “on the status of judges”. One of the new right-wing group will be spea- them stipulates that it is forbidden for judges to exercise personally or “through other rheaded by Boris Titov, the head of the persons” any commercial activity whatsoever. More generally, it is provided to strengthen employers association Delovaya Rossia, as the inspection of income and property statelents by public officials and especially of well as by the journalist Georgy Bovt. members of their families, often used as proxies. In case of refusal or false declara- The democratic and liberal movement ap- tions, the public official risks dismissal. At a more political level, the proposals made pears therefore more fragmented than by the President aim, according to an explanatory note accompanying them, to cre- ever.Yabloko, which has always refused to ate within the society “an intolerance to corrupt behaviour, including through the as- align itself with SPS because of its proxi- sistance of anti-corruption propaganda”. mity with the Kremlin, should continue to lead an independent and more and more Pious wishes or a first stage in winning crusade against one of the endemic scourges confidential existence after the departure of Russia ? The future will tell, but it can already be noted that the drafts proposed of its historical leader Grigory Yavlinsky to the parliament have aroused some worrisome signals which, in any case, give rise (Russia Intelligence n°80 of July 30 2008). to feelings that, to paraphrase the Count of Lampadussa, “everything must change so The SPS rebels, such as Nikita Belykh or that nothing changes”. The famous “quarantine” could wind up being the most theo- Maria Gaydar, the daughter of the former retical, since the contracts signed by ex-officials are considered as valid unless they Prime minister, should find themselves joi- are annuled. But the annulment procedures are not defined. Georgy Satarov, the ning the marginal opposition around Vla- president of the Indem foundation, which regularly publishes developments on cor- dimir Ryzhkov (Republican party), Garry ruption in Russia, goes even further and considers that this proposal risks to increase Kasparov (United civic front) or Mikhail the abuse, since authorisations and other exemptions represent in fact one of the tra- Kasyanov (United patriotic democratic). In ditional bread-winners of the Russian bureaucracy. order to clarify the situation, the former Soviet President Mikhail Gorbachev and Dmitry Medvedev in any case has made this matter a personal one, which, in pass- deputy Alexandre Lebedev also announ- ing, can become for the Russian President a means of affirming his authority among ced in all seriousness the creation of ano- the population, while the powerful shadow of Vladimir Putin continues to weigh heav- ther group, the Independent democratic ily. Yuri Chaika, the Prosecutor general is at this stage charged with the interminis- party of Russia. terial coordination, but it is currently said in Moscow that the Justice minister, Alexan- “Controlled democracy”, as can be seen, dre Konovalov — the only close associate of Dmitry Medvedev in the government — has bright days ahead. d is also equally active in this process. d 3 Russia Intelligence N°84 j October 9 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

RAILWAYS c Transhmashholding : a boulevard for Alstom

The basic elements of a Franco-Rissian industrial ope- ting a strategic partnership with Transmashholding and ration of a first order are being put into place. October 6, who feared having lost the Russian market — came back Alstom Transport and the construction firm Transmash- into contention. The speed with which the French signed holding (TMH) signed an accord to establish a strategic a strategic partnership accord with TMH after the with- partnership.The document foresees a technical coopera- drawal by Bombardier surprised most Moscow observers. tion between the two companies and could lead, following It must nevertheless be understood that, according to an audit and dependent on a final accord, in a stakehhol- information gathered by Russia Intelligence, the teams ding by Alstom in TMH of 25% plus one share. headed by Philippe Mellier, the boss of the Alstom trans- port division, continued to be in constant contact with We recall that Transmashholding is the leading manu- Iskander Makhmudov, who was personnally in favour facturer of railway materiel in Russia. The group notably of the French option, as opposed to Vladimir Yakunin, produces electric and diesel locomotives, converters, freight an English-speaker with an avowed weakness for the Ca- cars and passenger wagons, cars for suburban trains and nadians. According to our sources, the boss of TMH would metros, as well as motors for locomotives. Employng more have been so inclined toward the French offer because than 65000 salaried personnel, TMH last year registered a it included an accord on technical management that al- turnover of 1.9 billion euros, essentially with the Russian lowed him to step back and devote more time to his mi- railways, RZhD, for which it is the leading supplier of ma- ning activities. teriel. The firm was put together and until now has been controlled by Iskander Makhmudov, the oligarch of Uzbek As can be seen, it was therefore a good operation pre- origin who is also present in the copper sector via UGMK pared by Alstom in Russia, after having already scored (Russia Intelligence n°51 of March 16 2007), and his part- points in 2006 and 2007 in the energy sector (contracts ners Andrey Bokarev and Maksim Liksutov (Transgroup). for the construction of power stations in partnership In November 2007, they created The Breakers Investment agreements with Atomenergomash in the nuclear field). B.V., an entity under Dutch law which bought 100% of the In view of the priviledged relations between the CEO of shares of TMH. In the wake, the Russian national railway the French group, Patrick Kron, and President Nicolas company entered into the cpital for 25% + 1 share for 370 Sarkozy, it is hoped in addition in the Kremlin that the million dollars. The president of RZhD, Vladimir Yakunin, deal — if it is concluded — will have just as positive an wanted in this way to have a voice in the restructuring of impact on the bilateral environment as the contract by TMH, and notably on the choice of its industrial alliances. Total on Shtokman in July 2007. d On November 30 2007, he announced he was holding dis- cussions with Bombardier in view of an entry by the Cana- dian group into the capital of TMH. The stake was collosal ALERT when it is considered that the Strategic development plan for railway transport until 2030 adopted by the Russian go- 3 Ukraine : Metallurgical Industry in vernment on September 6 2007 included some 85 billion the Red euros to be allocated for the acquisition of new materiel. Ukraine Intelligence in its previous edition warned readers of All during the first half of 2008, the teams assigned by Vla- the impact of the world financial crisis in Ukraine and on the dimir Yakunin conducted negotiations with Bombardier on potential risks for the metallurgical industry. The pessimistic the details of the operation. Considered during a first phase, assessments for this key sector of the national economy an exchange of shares was rapidly discarded because of the appear to have been confirmed. The daily production of sever- difference in value between TMH and the Canadian group al front-ranking companies such as the Illyich Iron and Steel (the case being that the Russians would have had to dis- Works of Mariupol (Vladimir Boyko), the Alchevsk burse more than one billion euros, and in addition the sale Metallurgical Combine (the ISD of Segey Taruta) and of 25% of their company, to obtain an equivalent share in ArcelorMittal Krivoy Rog (formerly Krivorozhstal) is half the their partner). The second scenario, involving the acquisi- amount anticipated by the economic indicators in July. The tion of 25% of the Breakers Investment B.V. by Bombardier, minister of Industry was expected to convene a crisis meeting was the preferred option. But it stumbled in September ap- with the main industry players for 6 October. For the record, parently because of the high price sought by the Russian the metallurgical industry represents 40% of Ukraine’s exports, 12% of the State’s tax revenues and employs almost 500,000 side. This is what the CEO of the Canadian group, Pierre people. According to Illyich Iron and Steel Works Number Two Baudoin, officially announced to Vladimir Yakunin on Sep- Sergey Matvienkov, Ukraine’s steel now is 25% more expen- tember 25 in Berlin in the margins of the InnoTrans exhi- sive than its Russian and Chinese competitors, which does not bition. augur well on the eve of a further rise in the price of gas. According to Ukraine Intelligence sources in Kiev, it would The scenarios confirm the indications made in early Sep- appear that Industrial Union of Donbass head Sergey Taruta tember to Russia Intelligence by certain French sources has informed Yulia Timoshenko that she should not expect close to the matter, who were convinced, discretely but with financing from him in the event of a campaign for new legisla- assurance — on the failure of the TMH-Bombardier deal. tive elections. d As a result, Alstom — who was also very interested in crea- 4 Russia Intelligence N°84 j October 9 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

ASIA c Moscow explores the Korean option While relations with China have become more and more that the Koreans will continue exploring the reserves loca- complex despite their “strategic partnership” on display (Rus- ted west of Kamchatka. sia Intelligence n°78 of May 29 2008) and the fragile option of unfreezing the Kuerile island dispute with Japan has still Another issue was not raised during the Russo-Korean not materialised (Russia Intelligence n°71 of February 14 summit but which nevertheless has been the subject of re- 2008), Russia is looking to diversify its policy in northeast gular discussions since several months, that is the construc- Asia by drawing closer to South Korea. From this viewpoint; tion — in parallel to the planned gas pipeline — of an oil the visit of President Lee Myung-bak to Moscow in late Sep- pipeline. According to our information, the boss of Transneft, tember undoubtedly marks a turning point in the — young Nikolay Tokarev, may have received on two occasions this — history of bilateral relations (we remind that it was only summer representatives of KNOC (the last time on Septem- in 1990 that Mikhail Gorbachev opened an embassy in Seoul). ber 12). This plan is to develop discussions between Moscow Logically, it was around energy that discussions between the and Pyongyang on construction by , of a refi- Russian and South Korean President focused. Important pro- nery in North Korea (Russia Intelligence n°52 of March 30 gress was registered on two deals. In the first case, Gazprom 2007). This country, could according to a South Korean mi- and Kogas signed a preliminary accord covering the annual nister, draw close to 100 million dollars in transit rights, which delivery of 10 billion cubic metres for a period of 30 years be- could mitigate the dogmatic isolationism up to now in prac- ginning in 2015. The two sides also give themselves until 2010 tice in Pyongyang. The entry into service of an interkorean to complete technical and financial studies, but the favoured oil pipeline originating in Russia is nevertheless dependent option is the construction of a gas pipeline from Vladivostok of the completion of the eastern Siberian -Pacific ocean pi- to Seoul via North Korea (a cost of 3 billion dollars is being peline (VSTO), which has posted delays and cost overruns spoken of). The Sakhalin deposits would play the role of sup- (Russia Intelligence n°71 of February 14 2008). plying the required amounts. In addition, President Medve- dev gave guarantees to his South Korean counterpart concer- We also call attention to the fact that the linking of the ning the participation of KNOC (Korean National Oil transkorean railway system to the transiberian, an ambitious Corporation) in the development of the continental shelf off geo-economic project promoted by the boss of RZhD, Vladi- Kamchatka. The Korean state group hs been present in the mir Yakunin (present during the plenary discussions), as zone since 2003 and even financed up to 50 million dollars well as the participation of Korean companies in the construc- the drilling works, but certain worries had emerged in Seoul tion of infrastructure in Vladivostok in preparation for an after , KNOC’s partner on the project, lost the explo- APEC summit in 2012 and in Sochi for the Winter Olympics ration license in August. It is in all likelihood beside Gazprom of 2014, were also discussed. d

La Paz, a new extension of the Moscow-Caracas axis

As early as the spring of 2007, we drew the attention of our rea- the regions of Santa-Cruz, Tarija and Pando — the Venezuelan ders on the scenario of a possible collaboration between Russia president nevertheless announced new fields of cooperation with and Bolivia (Russia Intelligence n°57 of May 31 2007). The Moscow. In the hydrocarbon sector, Gazprom signed an unders- abrupt deterioration of relations between La Paz and Washing- tanding with PDVSA covering participation of the Russian group, ton — punctuated by the expulsion in mid-September of the US for 15%, in the third phase of the Delta Caribe Oriental project ambassador Philip Goldberg — as well as the desire of Moscow (exploration and development of the offshore gas deposits at to illustrate its presence in Latin America as a symbolic reply to Blanqilla and Tortuga in partnership with , Petronas and Ener- the policy of the United States in the Caucasus have accelerated gias de Portugal). Gazprom will invest 850 million between 2009 the process. September 18, Alexandre Medvedev, the n°2 of and 2016. Gazprom in charge of international relations, signed with Santos Moscow and Caracas also decided to cooperate in a new and par- Ramirez, the president of the Bolivian national company YPFB, ticularly senstive domain, civil nuclear power. an accord worth 4.5 billion dollars to explore its deposits and Receiving Hugo Chavez in Novo-Ogarevo, Vladimir Poutine build refineries. This project will be carried out in partnership confirmed that Moscow was ready to consider such an option. A with Total, already well established in that country. The Russo- joint working group including experts from Atomstroyexport, was Bolivian cooperation should also experience additional develop- even created . The project has already been designated as “Bus- ments in the near future. 5 Mi-17 transport helicopters should be her-2” by Moscow observers because of the hostility it will un- delivered to La Paz, according to the new Russian ambassador to doubtedly arouse in Washington. Bolivia, Leonid Golubev. Russians and Venezuelans have nontheless not lost sight of more The proximity between Moscow and La Paz benefits from the full traditional cooperation. Despite the uncertainty linked to the world support of Hugo Chavez, who conducted a lightning visit to Rus- financial crisis, the Russian government did not hesitate to grant a sia in late September (he had already visited Dimitry Medvedev credit of a billion dollar to Caracas in view of new arms acquisi- in the Kremlin in July). If he didn’t recognise the independence of tions. It is recalled that Rosoboronexport signed, as early as the Abkazia and South Ossetia — a position that can be explained by spring of 2005, 12 contracts for an amount totalling 4.4 billion dol- the difficulties of his friend Evo Morales with the governors of lars with the Venezuelan Defence ministry. d 5 Russia Intelligence N°84 j October 9 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

ddd In the mining and metals industries,spotlight 3/ As much as the outflows of capital are significant, they are should be cast on the the significant increase in the stocks of not yet alarming. According to the Russian Central Bank, the net coal of 3.7 million tonnes for , or 12% of its estimated outflows of capital in the private sector reached 16.7 billion dol- production in 2008, 3.2 million tonnes for Kuzbassrazrezugol, lars during the third quarter of 2008, or 15.9 billion attributed to or 7% of its production. The stocks in the region of Kuzbass, the banking sector which provokes a slight deterioration of the the most important coal producer, was estimated at 17.3 mil- balance of services and payments while the trade balance re- lion tonnes on September 1, a significantly higher level than mained stable at 153.3 billion dollars for the first nine months of normal (in the neighbourhood of 5 million tonnes). Producers the year, essentially because of an increase of 36% in exports whose are putting the responsibility for this situation on RZhD, but it cause can probably be found in the price of the barrel registered is highly probable that it is due to a reduction in purchases by last summer (147 dollars in July). steelmakers. The MMK group (the steel complex of Magnito- gorsk) has just announced an immediate reduction of 15% in The difference with that in August 1998, the current crisis its production and reduction of 10% of its personnel (or aboout does not involve public finances, which alone, are capable of lim- 3000 jobs), due to a fall of 40% in orders. The demand in semi- iting the damage and should require that a statue be erected to finished products sharply declined in September, especially in Alexey Kudrin, the Finance minister, for having preserved against Europe and the United States, and it is probable that groups winds and tides, the financial reserves without which Russia to- such as Severstal and Evraz will have to also adjust their pro- day would on the edge of the precipice. In all likelihood, this cri- duction in the weeks to come. sis will very probably provoke profound doubts about the finan- cial management of companies and in the regulation and control With the oil companies, the worries are of another or- of financial markets. It is also virtually certain that in view of the der. The drop in the price of the barrel (to about 80 dollars for collapse of the price of industrial assets, some more or less vol- Urals crude on October 7) put them under intense pressure to untary redistributions should occur in the coming months. There the point where , Rosneft, TNK-BP and Gazprom have is little doubt that the first to be targeted will be the very fragile official requested aid from the State to face their most urgent and currently very shaken complex constituted by Norilsk Nickel, obligations vis à vis foreign banks of about 80 billion dollars. , Rusal and the group belonging to . d ENERGY c Gazprom consolidates its alliances in Germany and Italy The visit of Angela Merkel to Sochi on August 15 is remem- As a result, after this operation, E.ON will retain only 3.5% of the bered for having left a bitter taste with Russian leaders, who did capital of Gazprom (the Russian State’s share increases therefore not appreciate the harshness of her declarations about Georgia automatically by about 1.5%) The October 2 accord between Gaz- and who thought they could discern a shift in Berlin’s position prom and E.ON is important in itself, but also because it re-en- on the question of NATO enlargement. It was in a completely forces the credibility of the Nord Stream project and solidifies the different tone that the discussions between the German Chan- Russo-German couple. cellor and Russian President Dmitry Medvedev took place in Saint Petersburg. All the differences on Caucasia obvously did A few days earlier, Gazprom had tightened its links with its not disappear, but the impression that emerged was of a return other major European partner —ENI. September 29, Alexey Mil- to the traditional paradigm of Russo-German relations. “Busi- ler and his Italian counterpart agreed to conclude before the end ness as usual”, one would be tempted to say, or the exact oppo- of October an accord concerning, on the one hand, the sale by ENI site message that most Europeans — Angela Merkel included to Gazprom of half of its holding in the Libyan Elephant deposit — said they wanted to send in August. The most telling illustra- (33% evaluated at close to 2 billion dollars) and, on the other hand, tion of this normalisation was the signature, in the presence of on the details of management of Arktikgaz, the former the leaders of both countries, of an accord between Gazprom subsidiary acquired in the spring of 2007 by ENI and . The and E.ON on the Yuzhno-russkoye deposit. It should be recalled Italians should notably hold the authorisations necessary to pro- that this operation whose development began in late 2007 and ceed with the first wells and have a framework allowing them to which contains more than 800 billion cubic metres destined to see more clearly the conditions for development and transport of supply, beginning in 2011, the first section of the future Nord the gas that they would extract. In other terms, Russians and Ita- Stream gas pipeline (about 27 billion m³/yr). For more than four lians complete the twin operation that should allow the ENI/ENEL years, Gazprom and E.ON had discussed the details of the entry tandem to have access to the Yamal deposits in exchange for a of the German group into the project. Finally, the plan adopted ticket offered to Gazprom to enter into a country, Libya, whose is the following : E.ON obtains 25% less one share of Severnefte- increasing importance for Moscow is well known (Russia Intelli- gazprom, owner of the development license of Yuzhno-russkoye. gence n°46-47 of January 19 2007, n°76 of April 24 2008). In exchange, Gazprom takes total control of Gerosgaz, a joint venture created in 1999 with E.ON and which holds 2.9% of the The first days of October also brought some light on the imple- Russian gas giant. In view of the share price of Gazprom on Oc- mentation of another project conducted by Gazprom and ENI, the tober 2, the transaction amounts to 5.13 billion dollars. It concerns, South Stream gas pipeline. If we can believe certain leaks filte- first of all, an excellent deal for the Russian gas giant since in ring in Moscow, the primary plan of the Russian gas industry for December 2007, it had sold a stake of more than 25% plus one the period 2009-2030 prepared by the Russian group foresees that preferred share of Yuzhno-russkoye to its other German partner, the entry into service of the pipeline will take place only in 2014 BASF, for about 2 billion euros (this preferred share will allow or even 2015 and that its capacity will be of 31 billion m³/yr. Last BASF to receive 35% and not 25% of the project’s revenues, a January, Alexey Miller had confirmed publicly that the opening clause explained by the investments accepted by the German of South Stream was expected for 2013, a date that at the time 6 group during the first phase of the development of the deposit). was based on that of its competitor Nabucco. d Russia Intelligence N°84 j October 9 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Regions & CIS

CHECHNYA c MAIRBEK VACHAGAEV* : “Putin is the only person to whom Kadyrov feels he must justify himself”

How do you interpret the assassination of Ruslan Yama- The Chechen authorities endlessly affirm that stability has dayev in the centre of Moscow on September 24 ? been established in the republic and that the hour is for re- Since 1991 and the proclamation of independence by Dzo- construction. What’s the reality ? khar Dudayev, the life expectancy in Chechnya is quite short. The truth requires acknowledging that, at least in Grozny, Ruslan Yamadayev became a public figure in the fall of 1999, we have gone from a cosmetic cleaning of facades, to a real re- at the time of the outbreak of the second Chechen campaign, construction, thanks to the collosal funds allocated by Moscow. when he delivered the city of Gudermes to Russian troops Although Chechnya traditionally has a high rate of unemploy- before entering the service of the federal forces. His brother ment, Kadyrov has hired virtually all the male population for Sulim for his part became well-known in the summer of 1998 the construction sites. An important detail : the funds spent by when he militarily crushed the radical salafist Islamists in the Russian government transit through the Akhmad Kadyrov Gudermes. Since then, the Yamadayev brothers had divided Foundation, which means that most of the people in Chechnya their roles : Ruslan had entered the political arena (he was feel they are personnally indebted to the Chechen President for elected deputy to the State Duma in 2003), while Sulim fought the improvement of their material conditions. That’s the second against the independentists at the head of the “Vostok” bat- element of the pact between Kadyrov and the Kremlin : the grant talion, attached to the GRU, Russian military intelligence. of massive financial aid in exchange for the declared loyalty of the population toward Moscow. On the whole, it must be said The assassination of Ruslan was not a mistake, in the sense that the population is rather favourable toward the recent de- where he could have been mistaken for Sulim, whose car he velopments, since it did not expect such changes to take place was driving at the time of the events. Since it was impossi- for decades to come. People want to believe that soon, all the ble to physically strike at Sulim, the designated attackers de- republic will look like the broad avenues of Grozny which have cided to hit his older brother, which in passing is contrary to been rebuilt. the Caucasian vendetta custom. You cannot avenge a “blood debt” on a member of the family of the “guilty” party as long Certain Western observers have noted with surprise that as the latter is still alive, which leads me to believe that in Ramzan Kadyrov seems to accord a growing place to reli- this case, it was not a matter of a classic vendetta but a sett- gion ? What does this mean, in your estimation ? ling of political scores. By killing Ruslan, the killers knew This should not be surprising, since Ramzan Kadyrov is the they also affected the reputation of Sulim, and especially cut son of a former mufti of Chechnya and as a result was raised in him off from the political networks of his brother in the Rus- a very religious environment. It should also be membered that sian capital. it was Akhmad Kadyrov who raised Islam to the rank of a quasi- State religion between 2000 and 2004. For the older Kadyrov, How do qualify the relations between Ramzan Kadyrov the sufi tradition was an ideological form capable of rallying the and the federal authorities ? hearts of Chechens, who by and large hold the salafists as res- Today, relations between Chechnya and Russia (that is ponsible for the encroachment into Dagestan in August 1999 between Kadyrov and the Putin-Medvedev tandem) rest on and therefore of the unleashing of the second war. As gradually the “pacification of the republic. No-one else could have done as Ramzan Kadyrov has introduced certain elements of the Is- what was achieved by the Chechen President. Remember lamic tradition into the local administration, his support levels that the Centre had, before Kadyrov, relied on other local po- have naturally increased with the population. That being done, litical figures, such as Beslan Gantamirov, Alu Alkhanov, Ma- Ramzan Kadyrov pulls the rug out from under the salafists. Mos- lik Saidulayev, but none could go beyond their own family or cow has given a free hand to the Chechen President in this do- clan horizon. Ramzan Kadyrov, anxious to avenge the death main, which can also prove to be a dangerous ploy. of his father (Akhmad Kadyrov, killed during a bomb attack in Grozny May 9 2004, editors’ note), intransigent toward in- Can we say today that Ingushetia or Dagestan are, from the dependentist fighters, presented an ideal profile for Moscow. Kremlin’s viewpoint, more problematic than Chechnya ? He is linked to the n°2 of the Russian Presidential adminis- No, we can’t see things this way. It is undoubtedly true that tation, Vladislav Surkov (born Aslanbek Dudayev, but raised the attacks against representatives of the authorities — fede- by his mother in Russia). It was Surkov who opened all the ral as well as local — are more frequent than in Chechnya. But doors for Ramzan Kadyrov in Moscow, including Vladimir Pu- the fundamental difference is that separatist ideas are margi- tin’s, the only person to whom the Chechen President feels nal in Ingushetia and Dagestan, while they remain popular in he must justify himself. In his new role, the Russian Prime Chechnya. The last remains the catalyser of all separatist mo- minister continues to “cover” his protégé without looking at vements in the region. This explains the indulgance granted by expenses (construction of a 5 star hotel in Grozny and of a Moscow to Ramzan Kadyrov, who can in reality permit himself mosque for 1000 persons, the largest in Europe, without spea- everything. d king of a local Disneyland or of the largest hippodrome in southern Russia). The only problem with Kadyrov is his per- *Chechen historian, refugee in Paris, analyst for the sistent conflict with the military. If ever the links with Putin Jamestown Foundation, Mairbek Vachagayev has published and Kadyrov deteriorated, the army could play a more active numerous works and articles on the Caucasus and sufism, in- role against the Chcechen President. cluding "The Eagle and the Wolf", Paris, Bouchet & Castel, 2008. 7 Russia Intelligence N°84 j October 9 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Regions & CIS

MOLDOVA/TRANSDNISTRIA c Russia and the West struggle for the initiative Major manoeuvres are underway in the wings between dimir Voronin in Dubosary and Novye Aneny, under the pre- Russians and Westerners in the case of the frozen conflict in text that his security was not assured (whereupon the Moldo- Transdnistria. It has been obvious that for several weeks, van President declared he was ready to meet in Tiraspol, but the Kremlin has been very actively trying to persuade Chisi- Igor Smirnov has still not replied to this proposal). nau and Tiraspol to conclude a peace accord under its aus- pices, preferably before the annual meeting of the Foreign Another complication for Moscow, the Western attitude, and affairs ministers of NATO scheduled for early December. The especially that of the Americans, who are not really enchanted goal is to demonstrate to the other members of the CIS, but to see a Pax Russica established on the shores of the Dnistr especially to Westerners, that Moscow retains the initiative only a few weeks after the crushing of Mikheil Saakashvili. in the region following the Georgian incidents (Russia Intel- The US amabassador to Chisinau, Asif Chaudhry (a native of ligence n°82 of August 28 2008). From this standpoint, the Pakistan specialised in agriculture, who is a Russian speaker end of the summer had brought some encouraging signals for following posting in Moscow in the late 1990s) devoted consi- Russia. The Moldovan President, Vladimir Voronin, had been derable energy in late September to convince Vladimir Voronin particularly conciliatory during his meeting with Dmitry Med- to renounce the traditional 2+1 format (Moldova, Transdnis- vedev in late August, insisting at length on a point that he tria, Russia) and to chose the traditional 5+2 negotiating for- knew to be crucial to Moscow, the future neutral status of his mat (Russia, Ukraine, OSCE, USA, EU). The head of the OSCE country (which means rejection of NATO membership). A mission in Moldova, Philip Remler, a French-speaking Ameri- meeting between the Moldovan President and the strongman can diplomat who was also political counsellor at the US em- of Tiraspol should even have taken place around September bassy in Moscow, has also been heavily engaged in the same 25. sense and felt he held the prospect of uniting all the protago- nists in Vienna on October 8. This 5+2 meeting will not, howe- The subject is nevertheless a bit more complicated than ver, take place, it was learned on October 5. According to infor- foreseen for Russian authorities. First of all because Igor mation gathered by Russia Intelligence, Valery Nesterushkin, Smirnov hardly appreciates having his hand forced to sign a former ambassador to Mauritius who has been responsible an accord that will consecrate the return, in even purely sym- for Moldovan issues since 2004 at the Russian MID Foreign af- bolic form, of Transdnistria into the Moldovan fold, although fairs ministry, clearly let it be known to Vladimir Voronin and he holds the proof — in the Abkhazian and South Ossetian Igor Smirnov that Moscow was not in favour of their presence models — that Moscow can cross the line and recognise the in Vienna. Five years after having failed in extremis to have the independence of secessionist entities in the ex-USSR. The famous Kozak Plan signed, Russia seems decided not to let it- “President” of Transdnistria therefore refused to meet Vla- self be outflanked by the West over Transdnistria. d

Alexandre Lukashenko returns home “Our friendship with the Russians is not for sale”. Receiving Vladi- The meetings by Vladimir Putin with Alexandre Lukashenko and the mir Putin in Minsk October 6 on the occasion of the meeting of Belarus Prime minister Sergey Sidorsky highlighted the presistence the governments of the Russia-Belarus union, Alexandre Luka- of serious problems between Moscow and Minsk. At the economic shenko sought to dispel the misunderstandings born in Moscow in level, Russia is late in releasing a credit of 2 billion dollars agreed to the face of what was perceived as an attempt to strike a distance in principle several months ago. Belarus sources let leak information (Russia Intelligence n°82 of August 28 2008). It can be remembered according to which nothing would move until Minsk had not offi- in fact that the Belarus President had delayed to display his support cially recognised the independence of Abkhazia and South Ossetia. — even discreet — for Moscow over the Georgian episode and that Neither was an agreement reached on the price of Russian gas in the Westerners, Americans in the lead, satisfied by the release of 2009.This question is obviously crucial for Minsk, already quite wor- dissident Alexandre Kozulin, had extended a few gestures on the ried over the size of its trade deficit with Moscow (9.6 billion dollar eve of the legislative elections on September 28. Since these latter for the 8 first months of the year, although Belarus only pays nevertheless were conducted in conditions similar to the previous 128$/1000m³). To retain some leverage in these negotiations with votes (no representative of the opposition gained access to the par- Russia, the Belarus regime has decided not to immediately sign the liament), the thaw between Belarus and the West did not last long bilateral accord on the integration of anti-air defences, a measure and Alexandre Lukashenko has minimised the scope of his over- that Moscow advocates in response to the Polish-American accords tures toward the West. on the anti-missile defence. d

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