N°86-87 - November 6 2008 Published every two weeks / International Edition CONTENTS EXCLUSIVE P. 1-4 Politics & Government c KREMLIN Shipbuilding: Moscow hopes to c Dmitry Medvedev asserts his authority in Moscow purchase warships from France c Army: Anatoly Serdyukov A true revolution – described by a source close to the matter as an “extraordinary event” – is ta- wants to break with Soviet heritage king place in cooperation in military shipbuilding between France and Russia. As Russia’s naval flags- hip, the Peter the Great missile launcher, anchored at Toulon on Wednesday 5 November – for the INGUSHETIA c Roza Malsagova : first time in a western country following the joint decision of presidents Sarkozy and Medvedev at “President Zyazikov’s very their meeting in Evian on 8 October – Russian Intelligence learnt that sensitive hitherto unpubli- life was threatened” shed documents were discussed by French industrialists and a big Russian delegation led by Navy DIPLOMACY Chief of Staff Admiral Vladimir Vysotsky in the corridors of the Euronaval International Naval De- c Russia-China: A well- fence and Maritime Exhibition and Conference. understood friendship ALERT The Admiral immediately drew the attention of journalists present at Euronaval to his strong in- c Gaddafi in Moscow: A visit terest in the exhibition stand of Thales, a group for which his words were almost laudatory, and to a for nothing? question asked in the form of a jest to an official at the DCNS military shipbuilders’ stand (“How much would such a ship cost and how long would France need to build one like it for Russia?”). Accor- P. 5-8 Business & Networks ding to information obtained by Russia Intelligence, Admiral Vysotsky’s action was everything but an FOCUS improvisation, and the discussion continued, though more discreetly, notably in the presence of Kons- c South Stream: Gazprom tantin Biryulin, the Number Two of the Federal Service of Military-Technical Cooperation (FSVTS), sounds out Romania Admirals Borisov and Trofimov of the general Chief of Staff, Captain Maksim Kazantsev – the Rus- ENERGY sian Federation’s Naval Attaché in France - as well as Alexandre Bryndikov, head advisor to Anatoly c NPO Saturn: Yuri Isaykin, the chairman of Rosoboronexport. The subject of the discussions was the Amphibious as- Lastochkin pushed out the sault, command and projection ship Mistral. The Russian side would like the DCNS to build a vessel door of this type with specifications almost identical to those of the French navy for 2013. An official let- c Inter RAO EES unaffected ter on this matter is due to be sent very soon by the Russian government to the French ministry of by crisis Defense. For its part, the Russian ministry of Defense is expected to request a visit of a Mistral class P. 9-12 Regions & CIS warship to the International Maritime Defence Show (IMDS) in St. Petersburg in June 2009. Accor- ding to information gathered by Russia intelligence, it would appear that during his discussions Ad- UKRAINE miral Vysotsky also brought up the subject of technical cooperation and exchanges of expertise in the c Why a gas war will (proba- bly) not take place context of formative programs like, for example, multi-mission frigates, aircraft carriers and even sub- marines. It is, in fact, understood that France and Russia are engaged in simultaneous processes of FOCUS c When Alexandre renewing their escort fleets and thinking about the construction of aircraft carriers for around 2015- Lukashenko “takes French 2017. leave” ALERTS The ball is now in the French camp. Thales and DCNS undoubtedly will undertake intense lob- c Dmitry Kozak does some bying so that the demands of CIEEMG (the inter-ministerial commission for examining exports of de- housecleaning in Sochi fense equipment) – that will undergo speeded-up procedures - are taken on board. But it is, of course, c Saint Petersburg not to the Elysée Palace that will make the final decision. The industrialists in question would like a prin- fund Gazprom tower cipled decision to be taken before the EU-Russia summit in Nice on 14 November. Is France ready to sell the most sophisticated military equipment to Russia? And, if this is the case, what are the limits SUBSCRIPTION Print Edition to such cooperation? It is understood, in fact, that for a long time French industrialists and particu- (23 issues, airmailed overseas) larly Thales have sought to obtain contracts on other projects such as the Fifth Generation Fighter. €770 TTC If Paris were to give the go-ahead for the sale of a PCB to Moscow it may reasonably be envisaged that The Web Pack other transactions that to date have been improbable – as, for example, the sale of radar systems and (Print Edition missiles – are possible. In any case, it will be interesting to see the reaction of other NATO members + PDF + archives acess) and especially that of the new US administration to closer relations between France and Russia which € 880 TTC – added to other matters like that of Shtokman and Alstom/TransmashHolding (Russia Intelligence The Premium No.85) – could somewhat resemble the 1890s. In any case this matter confirms that taboos are be- Subscription ginning to fall among the Russian military. The myth of the self-sufficiency of Russia’s defense indus- (Print Edition + PDF + access tries was one of the most tenacious among Moscow’s chiefs of staff (but not among far-seeing obser- to all the website contents) vers). The wide-ranging reforms launched by the Russian Defense minister Anatoly Serdyukov € 1200 TTC therefore should both be closely observed and taken seriously. d www.russia-intelligence.fr RUSSIA INTELLIGENCE Politics & Government

KREMLIN c Dmitry Medvedev asserts his authority in Moscow As the eyes of the world were turned to the United States Russian executive are on the same wavelength when it comes on Wednesday, November 5, following the election of Barack to strategic issues. Referring to this summer’s conflict, Dmitry Obama, another highly important event was taking place in Medvedev declared that it “was used as a pretext for send- Russia: Dmitry Medvedev’s first annual state of the nation ing NATO warships to the Black Sea”. He hammered out address before parliament. The first major speech on gen- that Russia “will not stand back”. In his speech, the presi- eral policy given by Russia’s new head of state is very instruc- dent also reviewed in detail another sensitive subject: anti- tive, both because of its general tone and because of the pri- missile defense. Medvedev announced that Iskander tacti- orities he sets out. This was an opportunity for the president cal missiles will be deployed in the Kaliningrad region. He to assert himself in Russia’s power system by subtly taking a said Russia would also use electronic jamming there to counter distance from his prime minister, Vladimir Putin, on certain the proposed US missile installations in Poland. Multipolar- matters. The following points in his speech are, we believe, ity is still on the agenda and the president mentioned BRIC noteworthy: several times in his speech. It is interesting to note that Dmitry Medvedev explicitly mentioned his support to “the Reforms within the leadership are being prepared. Dmitry new face of the Russian armed forces”, a clear message ad- Medvedev proposed that the president’s mandate be extended dressed to sceptical military officials to show his backing of from 4 to 6 years, and that the mandate of deputies in the Anatoly Serdyukov’s reforms (see below). State Duma be extended to 5 years. Like Vladimir Putin in 2000, the Russian president said he also hoped to reform the The Kremlin wants to appear undaunted by the financial Federation Council. The 10-year residency clause upon be- crisis. “We will overcome the consequences of the global fi- ing elected to a region, which was introduced last year, will nancial crisis and will come out of it stronger”. The state- be repealed. Whereas currently regional executive leaders ment, which borders on a denial of reality, is typical. It is in- (governors or republic presidents) and the regional assem- teresting to point out one quote by the president – one that bly each delegate a senator to the upper house of parliament, may seem harmless except for the fact that Russia is a di- the Federation Council members will now be elected from archy: Dmitry Medvedev declared “Today the most impor- amongst the members of regional and local assemblies. Also, tant thing is to implement the anti-crisis measures fully. I in a bid to ensure greater representation in parliament, Dmitry would like to attract the attention of the government, the Medvedev proposed that a certain number of seats in the Central Bank of Russia and all governmental bodies to the Duma be reserved for parties that did not reach the 7% thresh- fact that any delays in applying these measures are unac- old currently in force. ceptable”. And so, with one sentence, Dmitry Medvedev makes it clear who now occupies the Kremlin, and who must give No change in foreign policy is expected. There was proof accounts on the crisis and, implicitly, on the economic poli- already during the Georgian crisis that the two heads of the cies put in place these past years. d

Military reforms: Anatoly Serdyukov wants to break with Soviet heritage

As Russia Intelligence pointed out in its conscripted soldiers in their second year of 106th Tula Airborne Division. The October 9 issue, Defense Minister Anatoly service (or third year for the fleet). Kantemirovskaya Tank Division and the Serdyukov appears quite decided to take Financing the creation of this new corps of 98th Guards Airborne Division stationed in advantage of the context resulting from the career noncommissioned officers will Ivanovo are expected to follow. It is conflict in Georgia to initiate a deep reform require a planned 85 billion rubles (that is a noteworthy that with the new reform each of Russia’s military apparatus. Apart from bit over 2 billion euros) between 2009 and of the six military regions in the country will significant cuts in personnel (the general 2011. Anatoly Serdyukov also intends to have at least one airborne brigade. staff’s main department for operations alone reassess the organization of the operational Will Serdyukov’s reforms encounter greater will lose 300 soldiers by next March while chain and get rid of the division echelon, success than those initiated by his the total number of generals will be cut which is considered obsolete. For the predecessors, including Sergey Ivanov’s in from 1100 to 900) the planned measures record, up till now the Russian system has 2001-2002? Sources close to the ministry, concern two elements at the core of Soviet been made up of four levels: district, army, questioned by Russia Intelligence, say that military culture - with which the minister division, regiment. The announced reform these reforms have the political backing at apparently intends to take a distance, if not introduces a system with three levels: the highest level of the state. It remains make a complete break. The first of these district, operational command, brigade. however that although this small revolution deals with reinforcing the intermediary According to information leaked in Moscow, - as cultural as it is military - will take place ranks by setting up a professional corps of the new system will be tested by elite units. in a financial context incomparably better noncommissioned officers. One of the Anatoly Serdyukov signed instructions to suited for this purpose than the 1990s, it special things about the Red Army, inherited split the well-known Tamanskaya (2nd would have been easier had it been by post-Soviet Russia, is that officers in Motorized Rifle Guard Division, based in launched during Vladimir Putin’s second d 2 charge of supervising the ranks were mainly Alabino east of Moscow), as well as the mandate. Russia Intelligence N°86-87 j November 6 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Politics & Government

INGUSHETIA c Roza Malsagova : “President Zyazikov’s very life was threatened”

The Kremlin finally gave in. On October 30, manner. During the summer, the opposi- deed, Murat Zyazikov’s successor is a rela- Dmitry Medvedev announced that Ingush tion collected 80,000 signatures calling on tive unknown. Colonel Yevkurov, a career President Murat Zyazikov was to take up the president to resign and for Ruslan Aus- soldier, has, up till now, been the second- other duties in Moscow. He immediately hev to return to power (Russia Intelligence in-command at the GRU for the Ural-Volga proposed to replace him by Yunus-Bek n°81). The protests and violence increased military district. He distinguished himself in Yevkurov, whose candidacy the local par- after the murder of the opposition journa- 1999 when he headed the column of Rus- liament ratified the following day. list Magomed Yevloev (Russia Intelligence sian paratroopers that seized Pristina’s mili- The decision does not come as a real sur- n° 83). Confronted with the risk that the re- tary airport. In April 2000 he was awarded prise. The situation in the tiny North Cau- public was teetering on the brink of irrepa- the title “Hero of Russia”, the highest honor casus republic had been deteriorating conti- rable chaos, Moscow decided to relent. As in the country, for bravery in Chechnya. nually, and Murat Zyazikov’s leadership was is often the case, the Kremlin surprised Vladimir Putin personally bestowed the being contested in an increasingly open many by its choice of a replacement. In- award on him.

Most observers believe that, despite the worsening si- your social status or whatever the clan you are affiliated with. tuation in Ingushetia, the Kremlin would not agree to re- That’s why it’s difficult to imagine that the situation can be place President Zyazikov. How do you explain the deci- changed quickly by the new president alone. Yevkurov’s mis- sion? sion is to bring together a team of competent economists The situation demanded a swift and radical response. The and executives who could earn the confidence of the peo- murder of Magomed Yevloev, the owner of the Internet infor- ple. The presence of people like Ruslan Aushev (president mation site Ingushetia.ru (Russia Intelligence n°83) preci- of Ingushetia between 1993 and 2001 – Ed) will reinforce pitated things. Attacks against security forces and bloody re- the authority of the new president. prisals against members of the Zyazikov clan put an end to his presidency. There is another factor that must not be un- How did Ingushetia view the events concerning South derestimated: Murat Zyazikov’s very life was threatened. The Ossetia? vendetta decreed by Yevloev’s clan was not just talk and the The summer 2008 conflict brought to mind, in many ways, status of president would not have protected Zyazikov at all. another “five day war” – the one that took place in 1992 in The Kremlin had a choice: either sacrifice Zyazikov physi- the Prigorodny district when, protected by Russian tanks, cally, which would have led to a new spiral of violence in In- militias from South Ossetia destroyed Ingush villages, pilla- gushetia with more troops sent and reprisals against the ci- ged, plundered and raped with total impunity, leaving hun- vilian population, or exfiltrate him and try to save appearances. dreds of people dead and missing. That’s the same thing Zyazikov’s resignation was greeted with fireworks and lez- that happened in Georgian villages. As in 1992, Teziev was ginka (traditional dance of the Caucasus – Ed) by the Ingush implicated (Oleg Teziev, former interior minister of South people the world over. This speaks volumes on the extent to Ossetia – Ed). In 1992, the Ingush were designated as the which the former president was hated. aggressors, today it’s the Georgians. The basic reason is the same: the Ossetians do not want to live alongside other peo- How is the new Ingush president seen locally? What is ple. Ossetia is the only Caucasus republic that has been his margin of maneuver? trying for decades to redraw the region’s borders to its ad- Yunus-Bek Yevkurov is a career soldier who lived most of vantage. his life outside Ingushetia and therefore does not have ties with the local political and economic elite. That is his main advantage. No one will dare to pressure him, at least not right away. From my personal contacts with Yunus-Bek Yevkurov, From time to time we hear about plans to reunify In- I get the impression of someone who is unquestionably ho- gushetia and Chechnya, like at the time of the USSR. To nest and straight. The question of whether he will succeed what extent do you believe this prospect is realistic? in controlling the situation depends on the real prerogatives Indeed, trial balloons are launched regularly. It allows given to him by the Kremlin. If the federal authorities conti- the Kremlin to remind everyone of who holds the reigns of nue the murderous and blind “special operations” without al- power. If such a scenario were to take place it would lead lowing the Ingush president any say, then we cannot envisage to a conflict between the Ingush and Chechen people. North any stabilization of the situation in Ingushetia. I don’t think Ossetia is another protagonist that favors restoring Chech- that is what Dmitry Medvedev wants, and Yunus-Bek Yevku- nya-Ingushetia. If this were to happen, the question of re- rov should have his hands free to a certain extent. turning Prigorodny to Ingushetia will automatically disap- pear from the agenda. d What is your assessment of the situation in Ingushetia? Right now it is in at a dead end. There is massive unem- Roza Malsagova is editor-in-chief of the independent ployment, 92% of the budget is financed by the federal go- news site Ingushetia.ru. She currently lives in France vernment, there is total and permanent insecurity whatever where she asked for political asylum. 3 Russia Intelligence N°86-87 j November 6 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Politics & Government

DIPLOMACY c Russia-China: A well-understood friendship

The 13th summit of the heads of government of Russia cording to Igor Sechin, Russian deputy prime minister in charge and China took place on October 28 in a context of luke- of energy and chairman of Rosneft’s board of directors, the talks warm bilateral relations, to say the least. One may recall should be over by November 25. It appears that the sticking that Dmitry Medvedev’s visit to Beijing in late May – his points concern the method of calculating the price of crude de- first visit outside the CIS as Russia’s new president – was livered to China and the interest rates on the future loans (Ros- rather disappointing (Russia Intelligence n°78). The cau- neft loses between $5 and $7 per barrel compared to the 2005 tious attitude of the People’s Republic of China during Rus- contract and announced last spring that it did not plan to ex- sia’s war with Georgia as well as during the ensuing diplo- tend it in these conditions). matic power struggle between Russia and the West, did not go down too well with Moscow, even though no one expec- To all appearances the deals signed on October 28 and those ted Beijing to recognize the independence of South Osse- expected to follow are good news for Moscow. Russia’s aim of tia and Abkhazia. And although a more positive note had diversifying its export routes, a prospect it brandishes regularly been introduced with the final settlement of a bilateral to Europe, is taking shape, and in the meantime the cash flow border dispute - symbolized by the inauguration on Octo- problems of two pillars of its energy sector should be over. And ber 14 of new boundary markers on the Large Usuriysk Is- yet the atmosphere surrounding the Russian delegation was land - where violent clashes broke out between Soviet and anything but enthusiastic, and this was confirmed by the som- Chinese forces in 1969 - the reaction in the Russian Far ber and worried expression on Vladimir Putin’s face during his East remains very non-committal. joint press conference with Wen Jiabao. The fact is that the Oc- tober 28 oil deals, although definitely a success in the short On the eve of the meeting between Vladimir Putin and term, will accentuate the imbalance in bilateral trade between his counterpart Wen Jiabao, persistent rumors were going the two nations. Whereas manufactured goods represented around Moscow concerning a major breakthrough in the nearly a third of Russian exports in 2004-2005, this is down to energy sector and in particular that China had granted two 2% this year, due in particular from the lack of new arms contracts loans, totaling $25 billion, to the state companies Trans- between the two countries. While delighted over the record le- neft and Rosneft. The rumors were all the more credible vel of bilateral trade (with $50 billion expected for 2008), Vla- in that Sergey Bogdanchikov’s group is heavily in debt (for dimir Putin stressed that the content was just as important and a total of $21 billion, $13 billion of which must be reimbur- pointed out that Russia had a growing deficit (9 billion this sed or refinanced by the summer 2009) and is looking for year). Considering the matter from this point of view, the out- fresh money (the group will be the main recipient of emer- come of his latest meeting with his Chinese counterpart is mixed. gency loans granted by the government via Vneshekonom- Of course, there was a deal signed between Oboronprom and bank – Russia Intelligence n° 86). It is also true that back AVIacopter to develop jointly a new heavy helicopter with the in 2004 Rosneft had already resorted to easy term finan- Mi-46 providing the basis for it, but it calls for it to be produced cial help from China. In order to finance the purchase of in China. The $300 million loan Export-Bank of China has gran- Yuganskneftegaz, the state company had, at the time, re- ted Gazprombank has also been sharply criticized in Moscow ceived $6 billion from the CNPC in advance payment for since it is linked to the purchase of Chinese drilling equipment. 48 million tons of crude to be delivered between 2005 and Meanwhile, according to Russia Intelligence’s sources, Vladi- 2010. mir Yakunin, the head of Russia’s railways is having difficulty getting his Chinese counterparts interested in the Asia-Europe In the end, two documents dealing with oil cooperation railway corridor that he plans to develop with Deutsche Bahn. were signed on October 28. The first is a memorandum of understanding which calls for the delivery of 15Mt of Rus- During his joint press conference with Vladimir Putin, Wen sian crude to China between 2011 and 2030. The second Jiabao said that confidence, friendship and common interests is an agreement between Transneft and CNPC on the gui- were the three pillars of the close ties between China and Rus- delines for building and using the oil pipeline between Sko- sia. Although Russia had no illusions about the first two, it notes vorodino and China. One may recall that Transneft is cur- with bitterness that the third is becoming increasingly a one- rently building the first section of the Eastern Siberia-Pacific way street. d Ocean oil pipeline (VSTO) between Tayshet in the region of Irkutsk and the important rail and logistics hub of Sko- ALERT vorodino, located some sixty kilometers from the Chinese border. This section, with an annual capacity of 30 Mt is 3 Gaddafi in Moscow: A visit for nothing? expected to be finished by autumn 2009. The second phase of the VSTO project calls for an extension of the pipeline The keenly awaited visit of the Libyan leader to Moscow has left the towards the bay of Kuzmino on the pacific coast, as well as Russian leadership unsatisfied. No agreement was signed, even the construction of a diversion towards China from Skovo- though on the eve of Moammar Gaddafi’s discussions with Dmitry rodino. The October 28 agreement focused precisely on Medvedev and Vladimir Putin, sources close to the matter had lea- this phase. However, there was no allusion to the much ked information on the conclusion of arms contracts and a possible talked-about $25 billion loan mentioned on the eve of the agreement on the Russian navy’s use of the port of Benghazi. As visit. It is not being called into question but negotiations far as can be known, it was the subject of civil nuclear cooperation are continuing between CNPC, Rosneft and Transneft. Ac- that the Russians and Libyans discussed on 1 November. d 4 Russia Intelligence N°86-87 j November 6 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

ENERGY c OPEC, “Gas Cartel”: Moscow seeks a stratagem to counter falling price of hydrocarbons Russian officials are worried in the extreme over the fall in never inspired enthusiasm in Moscow. One may recall that the the price of crude below the $70 mark – the average price on lack of consensus between Russia and Iran on the charter of which the 2009-2011 triennial budget prepared by Alexey Ku- such an organization caused its founding summit, which was drin is based. The situation has led them to embark on a cer- to be held in June in Moscow, to be delayed (Russia Intelli- tain number of diplomatic measures that speak volumes about gence n°78). Tehran wants an organization that is structured their current state of agitation. and functions like OPEC, that is with constraining mechanisms, whereas Russia - in this case Gazprom – has no intention of gi- Over the past weeks Moscow has primarily sought to give ving up one bit of its autonomy. Although the basis of their res- credence to the idea that it is drawing closer to the Organiza- pective positions has hardly changed, Russia, Iran and Qatar, tion of Petroleum Exporting Countries (OPEC). In mid-Sep- meeting in Tehran on October 21, reached an agreement on tember, Igor Sechin, deputy prime minister in charge of energy, formalizing the creation of the new organization within 30 days was at the cartel headquarters in Vienna on a highly symbolic – most likely to take place in Moscow on November 18. Other visit. Then on October 22, Dmitry Medvedev had a long mee- member nations of the forum of gas exporters will take part, ting in Moscow with visiting OPEC Secretary General Abdal- including Algeria, Indonesia, Libya, Malaysia, Nigeria, The Uni- lah Salem al-Badri. Before the meeting, the Russia president ted Arab Emirates, Egypt, Trinidad and Tobago and Venezuela. declared, “Interaction with OPEC is a key area (…) for buil- ding up our energy policy in general”. As the Kremlin has no Moscow-based experts whom we questioned believe that intention of joining OPEC nor will it willingly cut back on its the Tehran meeting confirms the fact that a wave of panic has oil production, such interaction remains rhetorical in essence. begun at Gazprom. It is true that with the barrel at $70, the Igor Sechin did bring up the possibility of setting up a produc- group’s profits could fall from $30 billion in 2008 to a little un- tion reserve in Russia in order to influence prices if this be nee- der $5 billion next year - six times lower than forecasts made ded but it is difficult to imagine how this could happen since this spring. Consequently, the Russian group does not recoil companies are working with a just-in-time production system from a bit of hype over Moscow’s rapprochement with Iran and and are having trouble maintaining their levels of extraction. Qatar. Perhaps in a bid to remind Europe of its existence, Mos- cow even proposed that the headquarters of the as yet non- Another option that has been resuscitated by the Kremlin existent “Gas OPEC” be located in Zug, where Nord Stream – at least verbally – is to form a “Gas OPEC”. The idea, put for- AG, South Stream AG, RosUkrEnergo and Stockman Develop- ward in 2006 by Iranian President Mahmoud Ahmadinejad, ment AG are registered. d

South Stream: Gazprom sounds out Romania Things remain very unstable concerning the long sought to convince its Russian friends to pacity was initially scheduled for this autumn South Stream gas pipeline project. Gaz- chose the Romanian port of Constanza ra- but will not take place until the last quarter of prom thought the most difficult part was over ther than Burgas in Bulgaria as the termina- 2009. It will therefore not start operating un- when it succeeded in rallying the Serb, Bulga- ting point of South Stream’s under water sec- til 2011 at the earliest. The Bosansky-Brod rian, Hungarian and Greek governments at tion as this option would be shorter by some refinery, located in the Bosnian Serb Republic the beginning of the year (Russia Intelligence one hundred kilometers and therefore less and bought last year by the small state com- n°70). After some uncertainties connected expensive. According to information obtai- pany Zarubezhneft, is not able to function with the change in the governing majority in ned by Russia Intelligence, Gazprom could for lack of authorization from the Bosnian fe- Belgrade and the departure of Russia’s main use this to put pressure on the Bulgarian go- deral authorities who took a dim view of the intermediary, Vojislav Kostunica, the gas vernment, which, despite it being rather pro- arrival of the Russians to their country. In agreement, signed by Serbian President Bo- Russian, apparently still wants to obtain ow- Montenegro, Oleg Deripaska is engaged in a ris Tadic in Moscow at the end of January, nership of the section of the pipeline that battle with the local authorities to get them to was finally ratified in mid September. But it would cross its territory. The Russians have lower the price of electric power supplied to appears that Gazprom is not completely sure no intention of accepting this as it reminds the Podgorica (KAP) Aluminum Combine, of its plans and is looking for alternative them too much of the Ukrainian situation. owned by Deripaska’s group Basel since routes. In late October, it was revealed that Regarding Serbia, Gazprom is now worried 2005. Using the drop in world aluminum Vlada Rusakova, director of strategic plan- about effects of the Cvetkovic government’s prices as an argument, the group is deman- ning and member of the Russian gas group’s recent sacking of Sasha Ilic, former Srbijagas ding that the authorities maintain preferential board of directors, had traveled to Bucharest boss, who was one of Gazprom’s main lob- rates for the combine or else it would have to to discuss, among other things, Romania’s byists in Belgrade. halt a portion of its production. Meanwhile - participation in South Stream. The issue was It is interesting to note that other Russian pro- most likely in a bid to up the pressure on the also addressed a few days earlier in Moscow jects in the Balkans, apart from South Stream, government of Podgorica - Base Element also during a meeting between Alexey Miller and are experiencing difficulties. The Burgas- submitted a case to the arbitration court of his counterparts from Romgaz and Transgaz. Alexandroupolis oil pipeline project, which Frankfurt claiming 300 million euros in da- No announcement was made in relation to was officially ratified in March 2007, is expe- mages from Montenegro for reporting false this, but it is known that Gazprom’s strategic riencing delays. The start of construction on information during the privatization of partner in Southern Europe, Italy’s ENI, has this 280 km pipeline with an annual 35Mt ca- KAP. d 5 Russia Intelligence N°86-87 j November 6 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

AERONAUTICS c NPO Saturn: Yuri Lastochkin pushed out the door It was understood that the financial crisis would usher in gine Manufacturers’ Corporation) operated and managed by a large-scale redistribution of assets in Russia. The first signs Oboronprom, a subsidiary of Rosoboronexport. ODK would of this are becoming visible in sectors that one thought would have four hubs: Klimov (Saint Petersburg), Salyut (Moscow), not be as affected as the hydrocarbons, metallurgy and pu- NK Dvigateli (Samara) and Saturn. The latter should, accor- blic works sectors, whose bosses are rushing to the Vneshe- ding to the Russian government, integrate Perm Motors and konombank and to Deputy Prime Minister Igor Sechin’s wai- UMPO, the production plant located in Ufa. The project to re- ting room (see Russia Intelligence n°85). form the engine manufacturing sector is headed by Denis Man- turov, a protégé of Sergey Chemezov. Manturov was head of One of the first heads to roll will be that of Yuri Lastoch- Oboronprom before being appointed deputy minister of indus- kin, head of the NPO Saturn engine manufacturer. The case try. should be followed very closely as it affects a sector that, by definition, is a sensitive one, and could also affect the inte- Yuri Lastochkin prefers a different plan. He too wants NPO rests of the French company, SNECMA. For the record, NPO Saturn to be a major industrial hub and is in favor of drawing Saturn, located in Rybinsk, was formed out of the merger of closer to UMPO, a move he initiated by buying 19.98% of the the Lyulka-Saturn design bureau and Rybinskie Motory at the engine maker Ufa at the end of 2007 (Russia Intelligence start of this decade. It develops and produces engines for n°71). But he has no intention of stepping aside to make room both military aircraft (in particular the AL-31 that powers the for Oboronprom. That, at any rate, has been his position so Su-27/30 family of engines, the AL-55 for the Yak-130 and the far. 117-S designed for the future Su-35) as well as for civil avia- tion (the D-30KP Burlak for the II-76 heavy transport aircraft, But considering the latest developments in Moscow, the and the SaM146 for the SuperJet-100 regional aircraft pro- odds are that Yuri Lastochkin will have to give way. Rather ject). There is one important detail: NPO Saturn is a private unexpectedly, Alexey Kudrin, the deputy prime minister in company. The group’s director general, Yuri Lastochkin, charge of finance openly accused NPO Saturn of being respon- controls about 60% of its capital. The state controls 37%. sible for delays in the Superjet-100 program. He said decisions aimed at “changing the shareholding makeup and other mea- The problem is that Lastochkin and the Russian authori- sures to stabilize the company” will be taken shortly. Forcing ties do not exactly see eye-to-eye when it comes to reforming a businessman to give up his assets, sometimes for free, is a the aeronautics industries and, in particular, to the role NPO particularly difficult task for Russia. But in the present case, Saturn should play. In its February 14 2008 issue, Russia In- it is likely that the procedures will be respected. According telligence attracted its readers’ attention to these differences. to information leaked in Moscow, NPO Saturn has serious cash The state would like to reorganize the engine-manufacturing flow problems and has asked the VEB to finance the SaM146 sector in a way similar to the reorganization of aircraft ma- program. Apparently, one of the conditions for obtaining this nufacturers (OAK) and the shipbuilding sector (OSK). The loan is to sell 13% of the group to Oboronprom, which will bring aim is to set up a public holding company (ODK) (United En- the state’s participation to 50% plus one share. d

Inter RAO EES unaffected by crisis

Inter RAO EES, generally not very well Minister Sergey Shmatko and received the billion over the next two years. The group’s known beyond a small circle of experts and, blessings of the Russian and French prime priorities include the Balkans (Serbia - where of course, less visible than Gazprom, Rosneft ministers at a recent bilateral summit (Russia Inter RAO signed a framework agreement or Lukoil, should nonetheless be closely wat- Intelligence n° 84). with Elektroprivreda Srbije last April, Roma- ched by all those who are interested in Rus- Two recent events have attracted attention. nia - most likely in partnership with the sia’s foreign policy with regards to energy. The first is the election of Deputy Prime Mi- Czech CEZ, and even Turkey - where it won, Inter RAO EES was the former international nister Igor Sechin as head of t Inter RAO’s along with Atomstroyexport, the govern- subsidiary of the state company RAO EES, board of directors, replacing Alexandre Vo- ment bid to build the country’s first nuclear which was dismantled last July 1st as part of loshin. Since Sechin is not known for taking power plant), South East Asia (Laos, Thailand reforms in the electric power sector led by on token roles, this means that the group will and Cambodia) as well as Latin America (Ve- Anatoly Chubais (Russia Intelligence n° 81). from now on benefit fully nezuela, Cuba and Nicaragua – countries It is now controlled by Rosatom, which holds from the government’s recently visited by Igor Sechin). These pro- 57% of its shares. Inter RAO EES inherited “administrative resource” jects will be financed essentially by Vneshe- assets in 14 countries – in the Caucasus and (meanwhile the young konombank (VEB) which is to buy a 25% in Central Asia in particular – as well as rela- Yevgeny Dod, an ally of stake in Inter RAO for $2 billion thanks to a tively modern thermal power stations on Andrey Rappoport, re- capital increase – a move it decided on well Russian territory (in Sochi, Kaliningrad and mains executive director before the financial crisis. It is worth noting Ivanovo). It is well known that Electricité de Yevgeny Dod of Inter RAO). The se- that although Inter RAO’s executives still fa- France is considering entering the group’s cond event was the vor the EDF option, the group also has co- capital (up to 4% initially) and the initiative is group’s announcement of ambitious plans to operation projects with Italy’s ENEL and, very very favorably regarded by Russian Energy expand internationally. It plans to invest $5.5 likely, with Slovenia in the works. d 6 Russia Intelligence N°86-87 j November 6 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

ECONOMICS c Who is handling the financial crisis in Moscow?

With the growing number of announcements and decisions made year-old native Muscovite holds a degree in international eco- by Dmitry Medvedev and Vladimir Putin over the past few days, nomic relations and began his career at the foreign affairs min- Russia Intelligence is proposing that its readers take a closer istry. While posted in Stockholm from 1987 to 1993 he met Sergey look at the other players, some of them lesser known, who are Ivanov, a specialist of Sweden in the First Chief Directorate of handling the financial crisis in Moscow. the KGB. According to our sources, Sergey Ivanov actively cam- paigned on his behalf at the Kremlin, starting in 2004. Alexey Kudrin, Sergey Ignatev: the quiet victory of the guardians of orthodoxy. The deputy prime Two other important Russian bankers – German Gref (Sber- minister in charge of finance, and the head of bank) and Andrey Kostin (Vneshtorgbank, VTB) – have been Russia’s central bank, who were in the front line exceptionally discreet since the beginning of the crisis – a sign when it came to putting out the fire, are quietly that their respective institutions are in difficulty. relishing their revenge. After being criticized Alexey Kudrin for months for being too careful, even overcau- Vladimir Milovidov, Ilya Lomakin-Rumyantsev: tious, in managing the oil revenue, these two technocrats on guard. Two other high-ranking high-level economists, on friendly terms with officials play an important technical role in man- one another, have scored points. Sergey Ignatev, aging the financial crisis in Moscow and will con- 60, who has been at his post since March 2002 tinue to do so. One of them is Vladimir Milovi- after having spent many years at the Finance dov, 48, head of the Federal Financial Markets ministry during Yeltsin’s presidency, is one of Vladimir Service. Milovidov, a former researcher at IMEMO the rare Russian high-ranking government of- Milovidov and at the Kurchatov Institute for nuclear power Sergey Ignatev ficials with a spotless reputation. As for Alexey research, who was successively advisor to Yevgeny Kudrin, apart from the satisfaction of seeing Primakov, Viktor Khristenko and Mikhail Frad- that his approach worked, he has just had a major political suc- kov, will take over as head of the Secretariat of cess: his deputy, Sergey Storchak, who had been incarcerated the Council for the Development of Financial at the Lefortovo prison since the end of 2007 (Russia Intelli- Markets presided by Igor Shuvalov. gence n°66) was freed on October 21. One may recall that Sergey Storchak’s arrest came at the height of the clan war that raged Ilya Lomakin-Rumantsev, 51, will also sit on the in Moscow just before Vladimir Putin appointed his successor. Ilya Lomakin- council. A former senator who represented the Despite the weakness of the case and repeated interventions by Rumyantsev small republic of Mari El at the Federation Coun- Alexey Kudrin who vouched for his deputy, the Investigation cil from 2001 to 2004, he has been little known beyond the cir- Committee of the Prosecutor General’s Office preferred to keep cle of experts. He has headed the Federal Insurance Supervi- Storchak locked up. The outcome of this case is a good indica- sory Service (Rosstrakhnadzor) since 2004. tor of the balance of power in Moscow and highlights Alexey Ku- drin’s growing authority both at the Kremlin and in the White House. Dmitry Ananev, Vladislav Reznik: parliamenta- Igor Shuvalov: the president’s lookout. Pushed rians on deck. Two parliamentarians were co- center stage by Dmitry Medvedev at the 12th Eco- opted by Dmitry Medvedev to take part in the nomic Forum in Saint Petersburg (Russia In- Shuvalov Commission: Dmitry Ananev and telligence n° 79), First Deputy Prime Minister Vladislav Reznik. The former, a senator and Igor Shuvalov has just been assigned a new mis- businessman with close ties to Sergey Mironov, sion by the president: he will preside the Coun- Dmitry Ananev may be familiar to our readers. The November cil for the Development of Financial Markets, 9 2007 issue of Russia Intelligence gave an ac- an inter-ministerial body set up on October 17 which is expected count of the difficulties facing Dmitry Ananev, to play a key role in coordinating government action (as well as who last year became the 37th richest person in allow Dmitry Medvedev to take the matter over from Vladimir his country. It is worth noting that he has al- Putin). Besides Shuvalov, two other of the president’s associ- ready been asked by the authorities to pitch in ates will sit on the council: Arkady Dvorkovich, his G8 sherpa financially. Thus Promsvyazbank, 85% of which and main economic advisor, and Anton Ivanov, chairman of the is owned by Ananev in equal portion with his Supreme Arbitration Court and one of Medvedev’s former uni- Vladislav brother Alexey, bought in mid-October the small versity comrades (Russia Intelligence n°68). Reznik Yarsotsbank, which was on the brink of bank- ruptcy. Vladimir Dmitriev, the new kingmaker. As head of the Vneshekonombank (VEB), the “armed Vladislav Reznik is the head of the State Duma Commission on branch of the state” through which pass most Financial Markets. He found himself, unwillingly, the focus of me- of the public funds allocated by the government dia attention in mid-October when it was revealed that Spanish to save the banking sector and bail out the large police had searched his villa in Majorca. Judge Baltazar Garzon Russian groups, Vladimir Dmitriev in without a suspects him, on the evidence of a confession by Gennady Petrov, doubt one of the most powerful and most courted the “Godfather” of the Tambov mafia, of having links to criminal men in the country. Appointed to his post in June 2007, this 55- organizations involved in money laundering operations in Spain. d 7 Russia Intelligence N°86-87 j November 6 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

BEHIND THE SCENE cc FOCUS The Draganov affair: is Deripaska targeted? Iceland: Is Alexey Kudrin going to The skeletons are coming out of the closets the rescue of Russian oligarchs? in Moscow. On October 21 it was revealed that Russia’s Supreme Court had authorized The case of Russia’s controversial 4 billion euro loan to Iceland (Russia In- the Investigation Committee of the telligence n° 85) continues to run its course while new details have shed a dif- Prosecutor General’s Office to launch ferent light on the Kremlin’s eagerness to back the finances of the small nor- proceedings against Valery Draganov, thern nation. deputy chairman of the State Duma’s Industry Committee. Draganov is charged On October 15, with Reykjavik’s stock market index falling a record 77% in with abuse of power dating back to 1998- a single session, several high-ranking Icelandic officials traveled to Moscow to 1999 when he was head of Russian customs. meet Russian Deputy Finance Minister, Dmitry Pankin. Following their talks, The court is particularly interested in the the director of international operations at Iceland’s central bank, Sigurdur conditions in which the accounts of some Sturla Palsson, declared they had “an excellent reception”. He said that these regional customs departments were preliminary talks were solely devoted to presenting Iceland’s financial situa- transferred from Most-Bank to Rosbank, tion, without any mention, at this point, of the sums or the terms of any pros- from where the money in question pective Russian aid. The talks are to continue, but there is little doubt that disappeared in the wake of the summer 1998 Reykjavik will agree to the 4 billion euro loan that Russian Finance Minister financial crisis. Contesting the allegations, Alexey Kudrin mentioned on October 8, independently of the outcome of talks Valery Draganov immediately lodged an it began with the International Monetary Fund and certain northern states appeal. If his appeal is rejected, the such as Sweden and Denmark (Norway, which has a comfortable cushion of Investigation Committee could ask the State petrodollars, has been surprisingly silent on this matter). Duma to vote to lift his parliamentary immunity. According to Iceland’s ambassador to Russia, Benedikt Asgeirsson, the This case is surprising in more ways than “Russian loan” is simply a financial issue. In other words, there will be no po- one. First of all, the allegations date from litical strings attached to any prospective Russian assistance. Some American the Yeltsin era and the statute of limitations specialists at the Pentagon, questioned by Russia Intelligence, say they are se- could apply in a few months time. riously worried over the prospect of seeing Moscow bail out a full-fledged mem- Moreover, Valery Draganov is known to have ber of the Atlantic Alliance. They say it would be a major coup in the “race to good “connections” in Moscow. This the Arctic”. These same sources believe that Moscow, which is annoyed at Swe- Donetsk-born man of Bulgarian origin, who den for taking a harder line against it, and increasingly less sure of Finland’s spent his entire career from 1973 to 1999 at neutrality, is gradually reviewing its system of alliances in Scandinavia. After the Russian customs, was elected to the having coaxed the highly Atlanticist Norway into entering the Shtokman pro- Duma three times on the lists of the ject (Russia Intelligence n°65) (whether a coincidence or not, Oslo was one governing party. Between 2006 and 2007 he of the capitals that expressed reservations concerning Ukraine and Georgia at briefly left politics to join Oleg Deripaska’s last April’s NATO summit in Bucharest), Russia appears to be poised to lite- Rusal group, where he was in charge of rally buy a new ally in the region – an utterly plausible supposition considering relations with state bodies. Russia’s strategic policies. Yet, some elements point to the fact that the move Some Moscow sources questioned by Russia may simply be due to essentially financial decisions, as Ambassador Asgeirs- Intelligence believe that this may very well son pointed out. Indeed, it appears that by rescuing Iceland’s banks, Alexey be the reason for Draganov’s problems. A Kudrin may have been thinking less of a potential geopolitical conquest than battle has been raging for months between of getting some prominent figures of Russian capitalism out of a bind. Vladimir Potanin and Oleg Deripaska over Norilsk - and Rusal’s boss has no lack of If one is to believe reports by journalists Bo Elkjaer, John Mynderup and enemies elsewhere too. Another possibility Vladimir Pimonov published as of November 2006 in the Danish tabloid Eks- is that Valery Draganov may be the first tra Bladet, Icelandic banks – Kaupthing in particular – are very much impli- victim of the anti-corruption drive Dmitry cated in operations involving European acquisitions on behalf of Russian oli- Medvedev launched in early autumn (Russia garchs. These operations were undertaken though offshore companies registered Intelligence n°85). Whether a coincidence or in the Virgin Islands. At least two of them (Shapburg Ltd and Quenon Invest- not, the head of the Investigation Committee, ments Ltd) have direct ties with Mikhail Fridman’s Alfa-Bank and with the Alexandre Bastyrkin, declared at a large state-owned group Alrosa, whose supervisory council chairman is none department meeting in Saint Petersburg on other than Alexey Kudrin (Shapburg Ltd is co-founder of Alrosa and Alfa- October 21, a few hours before the Draganov Group’s subsidiaries in Luxembourg, while Quenon investment Ltd is the ad- case was made public, that “no crime (of ministrator of Alrosa Finances). Another oligarch known to have close ties to corruption – ed) committed by executive the Russian finance minister and who has interests in Iceland is Metalloinvest authority officials, by deputies, by agents of boss Alisher Usmanov. It was through the London subsidiary of Kaupthing the power structures – prosecutors, judges or that he acquired about 5% of Norilsk Nickel this summer (he managed to ex- others – has been brought to light so far”. filtrate three quarters of the amount from the Icelandic bank, the rest – 1.5% Of course Russia Intelligence will be - was apparently recuperated by BNP Paribas, which had financed the opera- following developments in this affair very tion). Usmanov also kept in Iceland the 0.5% stake in Sberbank that he acqui- closely in its upcoming issues. d red in early 2007. d 8 Russia Intelligence N°86-87 j November 6 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Regions & CIS

FOCUS c Dmitry Kozak tends to the Sochi 2014 Winter Olympics

Dmitry Kozak has been newly appointed to be in charge scale venues are not yet off the ground. One may recall that of Sochi 2014, a project dear to Vladimir Putin. In fact, on Olympstroy, the state corporation in charge of construction October 14 the Kremlin appointed Kozak to the post of de- for Sochi 2014, was the focus of an epic power struggle bet- puty prime minister in charge of preparations for the winter ween the different clans gravitating around the Kremlin, Olympic games. Dmitry Medvedev’s gesture was in response each one wanting to become involved in the huge financial to the request of his prime minister who is apparently wor- flow generated by the building projects ($12 billion in pu- ried over the difficulties and delays in construction of the ve- blic funds as represented by the Federal Program for Sochi nues at the site. 2014). Former Transneft boss, Semyon Vaynshtok, was dis- missed from his post last April and replaced by the mayor of The choice of 50-year-old Dmitry Kozak for the job is not Sochi, Viktor Kolodyazhny. The latter has close ties to the a random one. Kozak is of Ukrainian origin and graduated governor of the region of Krasnodar, Alexandre Tkachev, from Leningrad’s faculty of law in1985. Proud to have done who is himself backed by Oleg Deripaska who has many in- his military service in the GRU Special Forces, he is in fact terests in the region. Semyon Vaynshtok was known to be an old fellow traveler of Vladimir Putin and Dmitry Medve- sympathetic to the interests of the clan of Moscow mayor dev, with whom he has worked since the early 1990s and the Luzhkov, whose wife, Elena Baturina, heads one of the main “Sobchak period” in Saint Petersburg. Having the trust of construction and public works groups of Russia. It was the- Moscow’s two leaders, Dmitry Kozak is a specialist in high- refore the Tkachev-Deripaska tandem that came out on top risk missions (impossible ones according to malicious gos- (Russia Intelligence n°76). sip). During Vladimir Putin’s first mandate, he was put in charge, with varying success, of administrative reforms and At this stage, Sochi 2014 is organized in the following way: settling the conflict in Transnistria. Ten days after the Bes- on the political level Dmitry Kozak will directly oversee lan tragedy, Dmitry Kozak was named super-prefect in the Olympstroy. Alexandre Zhukov, the other deputy prime mi- Southern Federal District, where for three yeas he handled nister in charge of the winter Olympics is responsible for the the many upheavals of the North Caucasus. He was back in sporting aspect. He is working with Dmitry Chernyshev, the Moscow in 2007 and Vladimir Putin reinstated him to his post chairman of the Sochi 2014 organizing committee. as regional development minister last spring. According to Russia Intelligence’s sources in Moscow, Dmitry Kozak’s mission is to take charge of a complex pro- one of Dmitry Kozak’s priorities will be to ensure that the ject of considerable financial and symbolic importance for large Russian industrial groups that are supposed to parti- Russia. Over the last months things have not progressed much, cipate in financing the construction of infrastructure (Vla- to say the least. Land issues have still not been settled, in dimir Potanin’s Interros, Oleg Deripaska’s Base Element, spite cursory expropriation proceedings passed by the Duma etc.) keep to their pledges despite their current financial last year (Russia Intelligence n°65). Building sites for large- difficulties. d

Ukraine: Difficulties for Russian television stations in run-up to election

Whether for technical, legal or political only Russian channels. Several of Ukraine and Ukraine’s Euro-Atlantic aspirations reasons, Ukraine’s National Council on Intelligence’s sources in Kiev have have been set up. The Russian media has Television and Radio Broadcasting has just corroborated the “political angle”, saying undivided occupation of Crimea and the threatened to remove several Russian that the move taken by the National eastern regions of the country”. channels (including RTR-Planeta, Ren TV, Council on Television and Radio It is true that the news angle of the TVCI and ORT), currently broadcast via Broadcasting can be seen in the same Russian channels, which have a large cable. The council’s president, Vitaly light the conclusions reached at a meeting viewership, is quite different from Viktor Shevchenko, says the channels do not on March 21 last of the National Security Yushchenko’s point of view. The latter is, respect Ukrainian legislation, in particular and Defense Council. This meeting, in fact, systematically attacked, the last hot with regard to advertising and moral devoted to security of information, was topic being the supply of Ukrainian arms codes. If they do not comply, they will be marked by rather sharp statements on the to Georgia. With the Kremlin adopting a banned from broadcasting as of part of Viktor Yushchenko. Pointing to favourable attitude towards the president’s November 1st. the “expansion of foreign states in the main enemy, Yulia Timoshenko, and the The heads of the channels concerned domain of information”, the Ukrainian country entering what for Viktor expressed surprise at not being warned of president declared that “psychological Yushchenko is a high-risk election cycle, these problems beforehand. They pointed campaigns to disinform society on issues some in Kiev apparently believed that it out that - coincidence or not - the such as national unity, territorial integrity, was time to “purge” the media Ukrainian authorities’ reproaches concern language, cultural and religious questions landscape. d 9 Russia Intelligence N°86-87 j November 6 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Regions & CIS

INTERVIEW DOSYM SATPAEV * c “Kazakhstan is the Central Asian country that has suffered the most from the global financial crisis”

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

10Russia Intelligence N°86-87 j November 6 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Regions & CIS

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

Russia Intelligence N°86-87 j November 6 2008 www.russia-intelligence.fr11 RUSSIA INTELLIGENCE Regions & CIS

cc FOCUS ALERTS When Alexandre Lukashenko “takes French leave” 3 Dmitry Kozak does some housecleaning in Sochi In our previous issues, we reported on Alexandre Lukashenko’s “urge to take No sooner has Dmitry Kozak been appoin- flight” and on the start of warmer relations between Minsk and western capitals, ted deputy prime minister in charge of prepa- which approved the release this summer of the opposition leader Alexandre Kozu- rations for the winter Olympics (Read article lin (Russia Intelligence n°82). Belarus’ relations with Russia, on the other hand, page 9) than he has already taken things in have become more strained over recent weeks, especially as President Lukashenko’s hand. The mayor of Sochi, Vladimir Afana- reservations concerning recognition of the independence of Abkhazia and South senkov was obliged to quit his post on Octo- Ossetia did not go down well at all with the Kremlin. Matters between the two ap- ber 30, barely three months after being elec- peared to be back to normal at the end of September. The OSCE had, in the end, ted. Officially, his decision has to do with declared the Belarusian legislative elections “non-democratic”. Then, on October health problems, but no one is taken in. A 6, while Vladimir Putin was on visit in Minsk, Alexandre Lukashenko stressed that few hours before the news was made official, his friendship with Russia was not for sale (Russia Intelligence n°85). Judging by Vladimir Afanasenkov was in Moscow where the Belarusian president’s recent initiatives, Minsk and Moscow are still calling each he took part in a meeting hosted by Dmitry other’s bluff. Kozak on progress for the Sochi 2014 project. The governor of Krasnodar region, Alexandre On October 22 the central bank and the government of Belarus sent a joint let- Tkachev and Viktor Kolodyazhny, head of the ter to the International Monetary fund asking for a $2 billion loan. It must be said Olympstroy state corporation, also attended. that the global economic crisis has not spared the country. The foreign exchange According to information leaked in Moscow, reserves of the Belarus central bank fell by nearly 12%. But there are two surpri- the delay in adopting the urban planning pro- sing elements in Minsk’s initiative. The first is its suddenness. The IMF, which last ject for Sochi – which was supposed to take lent to Belarus in 1996 and no longer has a bureau in Minsk, was apparently taken place by November 1 2008 – is the reason by surprise. More importantly, the request for aid from the IMF was revealed the behind Vladimir Afanasenkov’s dismissal. day after Russian Finance Minister Alexey Kudrin spoke about the $2 billion loan Afanasenkov will be replaced by Dzhambulat that had been under discussion between Moscow and Minsk for several months. Ku- Khatuov, former mayor of Armavir who has drin confirmed that there was an agreement in principal but remained evasive as close ties to Viktor Kolodyazhny and Alexan- to the terms of the loan and when it would be made available. The procrastination dre Tkachev. d convinced Alexandre Lukashenko to play the IMF card. 3 Saint Petersburg not to Whether it was a coincidence or not, the Belarusian president was received by fund Gazprom tower Dmitry Medvedev at the Kremlin as a matter of urgency on October 25. The two The financial crisis has caused its first major men were effusively polite with one another but could not hide the lack of any casualty in the “northern capital”. On Octo- concrete progress. According to information leaked in Moscow, Russia wants the ber 29, Saint Petersburg’s mayor, Valentina loan to be accompanied by concessions from Belarus on setting up a single currency Matvienko, introduced an amendment to the – which Alexandre Lukashenko is not prepared to do. As an additional sign that city budget for 2009 suspending financing of things are not going quite as expected, the November 3 meeting of the High State “Okhta-Tsentr”, the vast building complex Committee, the highest body in the Russia-Belarus Union, which was to be devoted project intended to house the future head- to finalizing the constitutional act, has been postponed indefinitely. And on Octo- quarters of Gazprom Neft. One may recall ber 31, at its inaugural session, the Belarus parliament did not include the issue of that in May 2007 Valentina Matvienko and recognition of Abkhazia and South Ossetia on its agenda. Gazprom chief Alexey Miller signed an agreement, with great pomp, to build the cen- Alexander Lukashenko has thus decided to continue oscillating between Mos- ter over which there is much controversy be- cow and the West, and this has not been without success. On visit in Minsk at the cause of the planned buildings’ height - 400 end of October, the Czech deputy foreign affairs minister, Tomas Pojar, declared meters - and their proximity to the historic that his country was actively preparing an EU-Belarus summit to take place in the city center, in particular to Smolny. The plan first half of 2009 during the Czech presidency of the EU. In the meantime, Alexan- called for the city of Saint Petersburg to fi- dre Lukashenko will undoubtedly taken advantage of renewed freedom of move- nance 49% of the total investment – a little ment, with the end of EU sanctions, to visit London, where an investment forum on more than one billion dollars. In exchange it Belarus is to take place on November 18. This event, which will mark the end of a would derive tax benefits from the transfer of year of ostracism and international isolation of the Minsk regime, is being organi- the Gazprom subsidiary to Saint Petersburg. zed by Sir Timothy Bell, former advisor to Margaret Thatcher and, since last sum- It therefore appears likely that Okhta-Tsentr mer, in charge of public relations for Alexandre Lukashenko. d will not be inaugurated in 2016 as planned. d

One Year Subscription c Russia Intelligence j Group Publisher and Managing Editor : François Roche j Editor-in-chief : Printed Edition The Web Pack Arnaud Dubien j 115, rue Saint Dominique 75007 PARIS - France j Editorial: [email protected] (23 issues, (Printed Edition + / Tel. : 33 1 53 59 35 72j Subscription: [email protected] / Tel. & Fax 33 1 46 45 53 75 airmailed overseas) PDF + online acess) j ISSN : 1771-3900 j Commision paritaire : 1206 I 85736 j Imprimerie : Hemmerlé, 75002 Paris j €770 TTC € 880 TTC Copyright : Eurasian Intelligence 2006 - Copy and dissemination in any form prohibited (including Intranet). Tél: + 33 1 46 45 53 75 c Russia Intelligence is published by Eurasian Intelligence SAS - Fax: + 33 1 46 45 53 75 Capital euros 37,000 j CEO: François Roche j RCS Paris B 479 124 943 E-mail: [email protected] j Headquarter : 115 rue Saint Dominique - 75007 - PARIS

Russia Intelligence N°86-87 j November 6 2008 www.russia-intelligence.fr