RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 IN BRIEF Contents “Between the conception And the creation IN BRIEF 1 Falls the shadow.” POLITICS AND GOVERNMENT 3 MACROECONOMY 4 FINANCE 5 “The Hollow Men”, T. S. Eliot MEDIA AND COMMUNICATIONS 7 ENERGY 21 Dancing Bear SPORTS 27 Delivers Reformist Duma UPCOMING EVENTS 30 INDEX TO THIS ISSUE 31 Based on the count of over 82% of votes cast, the pro-Kremlin Unity, or Medved (“Bear”), party is expected to occupy about 30% of the Duma, while the Union of Right Forces - its closest pos- sible ally - is likely to control approximately 10% of the Duma. The Communist Party will be forced to become more pragmatic as its aging supporters expire along with their memories. Only an alliance between the Communists and Luzhkov could threaten implementation of mar- ket reforms in Russia. “Medved ... clearly stands for support of government policies and support for the continuation of the power of the Kremlin.” Martin Diggle, Director Brunswick Warburg brokerage A “feel good” party, Unity, was created ninety days before the election. Often referred to as a virtual party, Unity is a stage-managed, non-ideo- logical, opportunistic coalition of regional bar- ons who can deliver a vote, “Action Man” Sergei Shoigu (photogenic head of the recently created Ministry of Emergency Situations), Kremlin in- sented by the Fatherland All Russia party of siders and an Olympic-gold wrestler cobbled to- former Primer Minister Primakov and Moscow gether to resist the threat to the Kremlin repre- Mayor Yuri Luzhkov. 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Investors should seek financial advice regarding the appropriateness of investing in any securities or implementing investment strategies discussed or recommended in this material and should understand that statements regarding future prospects may not be realised. Vol. II, No. 12 page 1 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 IN BRIEF (Continued) Half the Duma seats are apportioned among the candidates of parties receiving at least 5% of “Primakov’s image of stability the votes. The remaining half are allocated to has been replaced by the macho image the individual candidates first past the post in of Putin, their particular district. Both Boris Berezovsky a dynamic leader defending Russia and former Prime Minister Viktor Chernomyrdin and returning it to a great power.” won parliamentary seats. Andrei Piontkovsky Combined, the pro-government coalition will Center for Strategic Studies have 55-57% of the votes in the next Duma. Based on the preliminary results of the Duma The greatest surprise was the Union of Right elections, Unity, the Union of Right Forces, and Forces. Considered an outsider by many ex- Yabloko will likely control the majority of the perts, Right Forces gained about 8% of the vote, Duma. The Zhirinovsky block, which at first surpassing its liberal competitor, Yabloko. glance looks a nationalist party, can be expected to go along with the pro-government parties. “It is clear that the situation in Chechnya Thus, the Duma can be considered reformist for is the key to the whole political process in Russia”. the first time since the beginning of economic reforms in Russia in 1992. Turnout was 107 mil- Anatoly Chubais lion, over 55%. Leader Union of Right Forces and Former Deputy Prime Minister These results are positive for portfolio investors in the immediate to mid-term. Many view the Boys To War .... election as a referendum on the war in Chechnya. Once Grozny falls, the West will for- get Chechnya and normal relations will resume. We expect the new Duma will be much more expeditious with production sharing agreements and possibly a bankruptcy law. That is, unless history repeats itself. Five years ago, on 31 December 1994, Russian troops launched a major offensive against the Chechen capital of Grozny. Within five days, more than 2,000 Russian troops were killed in house-to-house fighting, undermining Russian domestic support for the war. What has Russia’s leadership learned from watching Kosovo? “Information is an essential part of any war effort, as important as rockets, as artillery, as troops.” Boris Berezovsky, ORT Television Moscow, 10 December Vol. II, No. 12 page 2 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 IN BRIEF (Continued) Today, with Chechnya raging on the back pages, the Kremlin family is firmly in power and reform- ists appear in the ascendent. For Putin, a successful military operation would launch him into the presidency. Most Russians would consider him a national hero who deci- sively solved the Chechen problem and spurned the West. Since taking a back seat to NATO’s incursion in Kosovo, Russians have condoned defiance of the West. In fact, Prime Minister Putin, and his virtual party POLITICS AND GOVERNMENT “Unity” have tremendously benefited from West- ern opposition to the Chechen war. His popu- larity has skyrocketed because Russians con- 18 Dec (Interfax): Yevgeny Primakov announced sider any politician who defies the West a “na- he’ll run for president in the June election. tional hero”. In any event, once the Chechen “anti-terrorist” campaign is over, the West will Russia to Lend $150 million forget Grozny and focus its attention on Putin’s to Yugoslavia positive qualities. 16 Dec (www.tanjug.co.yu): Yugoslavia will re- “If Europe should ever be ruined, ceive a $150 million loan from Russia by the end it will be by its warriors.” of the year, according to Yugoslav Foreign Trade -Montesquieu Minister Borisloa Vukovic, reported state-owned Yugoslav news agency Tanjug. Sunday’s election brought a dramatic shift from the left to the center. We expect the Duma will 14 Dec (Interfax): Prime Minister Putin declared become more pragmatic, emphasizing concrete that he would continue market reforms if he were solutions, not ideological debate. Legislators elected president. ...Comment: Putin has finally can act on tax reform, bankruptcy law and re- announced his position on future economic policy form of the banking system. if he becomes president. A combination of lib- eral economic views (compliments of Union of However, one would be well advised not to take Right Forces leader and former Deputy Prime reform for granted. The Unity party is a tempo- Minister Chubais) and his unrelenting assault on rary construct and exists only in name. The Chechnya may be well received in the Duma. same people who conceived the Unity party also Putin is viewed as a strong “locomotive” for fu- introduced unprecedented capital flight and ture market reforms and as an enforcer of “law crippled Russia’s banking sector, conceived and and order” based on his decisive moves against benefited from loans for shares and arranged a Chechen militants. His policies will ultimately very pliable cabinet around the retiring president depend on which groups have the greatest in- Yeltsin. Time to close the gate and introduce fluence over him after the presidential elections the rule of law now the horse is out of the barn. in June. Vol. II, No. 12 page 3 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 POLITICS AND GOVERNMENT (Continued) 2 Dec (Bloomberg): Moscow Tax Police said 14 Dec (Interfax): A bomb exploded in the lift of they dropped a criminal investigation against the a nine-story apartment block in St. Petersburg. local office of Ernst & Young LLC, the world’s No one was injured. third largest accounting and consulting firm, because it’s paid all of its taxes. 9 Dec: Russian authorities lost radio con- tact with a passenger plane flying over the Last month, Ernst & Young said the city’s tax Russian Far East this morning, Interfax reported, police opened a criminal investigation against citing the Emergency Situations Ministry. The its management for tax evasion. The company An-14 aircraft was on a test flight following re- today said police called off the investigation on pairs with three crew members and four spe- 25 November because Ernst & Young had actu- cialists on board. A search and rescue opera- ally paid all back taxes and penalties as of 1 tion is being carried out, the agency said. November. 9 Dec: Deutsche Bank AG Chief Executive Rolf An earlier court ruling concluded the company Breuer said Russia has no immediate need to didn’t owe the 40.1 million rubles ($1.5 million ) reduce the $32 billion in Soviet era debt owed to the city’s tax service said it must pay, after con- bank creditors, Russia daily Vremya reported. ducting an audit of the company’s books from Breuer, speaking at a conference on debt yes- 1995 to 1997. The court reduced the penalties terday in Frankfurt, said: “Russia, in connection to 3.1 million rubles, the company said. with the continuous rise in oil prices, doesn’t have an immediate need for lowering the volume of “This is a situation which proves once again that its debt to private creditors.” The tone of the the Russian tax system requires additional im- meeting between the Russian delegation and provement,” said Alexander Ivlev, director of its bank creditors became more political after marketing at the Moscow office of Ernst and Russia stepped up its war in the breakaway Young.