Publication: Fortnight in Review Volume: 3 Issue: 20

The Fortnight in Review

The political future of Russian first deputy premier Anatoly Chubais remained a subject of media speculation over the past fortnight, but despite that ongoing saga and the enactment of a breakthrough law on land reform in Saratov Oblast, the Kremlin’s eyes were fixed in large part beyond Russia’s borders. This highlighting of foreign policy was the result of Moscow’s efforts to win international support for the ruble, as well as of high-level talks between Russia’s president and German, Swedish, and Ukrainian leaders. An informal summit meeting between Boris Yeltsin and Ukrainian president Leonid Kuchma carried special significance, with regard both to bilateral relations and, possibly, to Kuchma’s future political prospects.

Russia Seeks International Support for Ruble

Increasing turmoil on world markets threatened Russia with a deepening financial crisis and propelled the government on a frenzied quest for cash. Despite a decision by the Central Bank to raise the refinancing rate to 28 percent and Lombard rates to 36 percent, foreign investors removed U.S. $5 billion from Russia’s government debt markets. That forced the Central Bank to spend over $3 billion of its hard currency reserves in an effort to offset demand for dollars and to prevent the ruble’s slide from accelerating.

The government was clearly alarmed that speculation against the ruble would undermine the Russian economy. Two senior officials were dispatched to Washington to urge the International Monetary Fund to expedite payment of the latest $700 million tranche of its $10 billion extended Fund facility, suspended in October following IMF criticism of Russia’s poor tax collection record. Meanwhile, First Deputy Premier Anatoly Chubais approached a number of leading western banks with a request to prepare an emergency financing package of up to $2 billion to enable the government to cover its budget deficit and pay off wage arrears to federal employees. The plan was for the loan to be paid repaid out of profits from future privatizations.

The ruble and the Russian stock market rallied in response to a Central Bank promise of further hikes in interest rates, but government sources warned that the rises would depress investment. Chubais gloomily predicted that the country’s long hope for economic recovery would be set back by a further six months. Several key oil privatizations, expected to inject billions of dollars into state coffers, had to be canceled or postponed because of fears that they would not attract the anticipated prices. The resulting liquidity crisis made it painfully clear that the government would not be able to meet President Yeltsin’s grandiose promise, reportedly made against the advice of Chubais, that wage arrears of around $1.6 billion to state employees would all be cleared by January 1.

Yeltsin Keeps Chubais in Cabinet "for Now"

President Yeltsin promised to keep Chubais in the cabinet as First Deputy Premier, saying he did not see a successor "for the moment." However, many observers saw Chubais as a lame duck following revelations that he accepted money from a publishing company with links to a bank whose privatization interests Chubais had been in a position to prefer. Yeltsin’s statement seemed designed primarily to reassure the international financial community, which was alarmed that Chubais’s dismissal as Finance Minister would throw the future of Russian economic reform into doubt. Igor Malashenko, head of the NTV network, predicted that Yeltsin was keeping Chubais in store in order to sack him in January, a move that, according to Malashenko, would be necessary to appease popular anger once it became clear that the government was unable to pay off its wage arrears.

Yeltsin remarks about Chubais followed the first meeting of the "Big Four" (Yeltsin, the prime minister, and the speakers of the two houses of the Russian parliament). The president agreed to institute regular roundtables and "Big Four" meetings in return for the Duma’s agreement to withdraw a threatened vote of no confidence in the government.

Land Reform in a Single Oblast

A pioneering law on land came into force in Saratov Oblast on December 3. The law expressly permitted, for the first time in Russian history, the free sale and purchase of agricultural land. Adopted by the Saratov Oblast Duma in defiance of Russia’s opposition-controlled State Duma, the law gave substance to the constitutionally guaranteed right to land ownership.

President Yeltsin and the State Duma had been at odds over land reform for months. The longer the battle continued, the more determined Yeltsin apparently became that land liberalization should be his legacy for posterity. The Duma argued that restrictions on the buying and selling of land were essential in order to prevent foreigners from buying up Russia’s farmland and impoverishing its peasants. The Duma accordingly introduced wording outlawing the sale of agricultural land before approving a draft land code in the first reading in the spring. The Duma’s changes were rejected by the Federation Council, whereupon the Duma overrode the upper house and went on to adopt the code in the second and third readings. Yeltsin then vetoed the bill, but the Duma mustered a large enough majority to override the presidential veto. Yeltsin nevertheless refused to sign the bill. He claimed that the Duma’s vote was fraudulent because more ballots were cast (304) than deputies were present in the chamber (184). (Deputies often vote for absent colleagues, and Yeltsin had not challenged the practice on other occasions, but technically its use was not legitimate.) Yeltsin accordingly returned the land code to the Duma.

By sidelining the State Duma, Saratov’s law offered a means of liberalizing land ownership by the back door. In setting, a precedent likely to be followed in other liberalizing regions; moreover, the new law threatened to promote the further differentiation of Russia’s regions into market-reform "winners" and "losers." Some observers warned that it would also encourage the centrifugal tendencies that some fear are already transforming the Russian Federation into a loose confederation of increasingly autonomous regions.

Boosting Ties with Bonn

As the confrontation between Moscow and Washington over UN policy toward Iraq settled into an uneasy equilibrium, Russia’s diplomatic energies over the past two weeks turned to a pair of high-profile meetings between Russian and European leaders. The first, which took place on November 30, involved a half-day of talks outside Moscow between Russian president Boris Yeltsin and one of his most steadfast supporters in Europe, German chancellor Helmut Kohl.

The highlight of the Yeltsin-Kohl meeting was an announcement that the first in a series of German-French-Russian summits will be held sometime in the first half of 1998. The announcement, which builds upon a proposal made by Yeltsin during the October Council of Europe summit in Strasbourg, complements the Kremlin’s recent policy of seeking to exploit tensions between Washington and several European members of the Western alliance. In the runup to the Strasbourg summit, and on several occasions in its aftermath, Yeltsin has criticized what he says is Washington’s inordinate influence in European affairs. He has also called upon European leaders to work "independently" with Russia in solving the continent’s problems.

Yeltsin and Kohl also discussed a number of other issues aimed at boosting bilateral relations. They agreed to hold two summit meetings next year and also announced that experts from the two countries will meet later this month in order to discuss the development of a European military transport plane — one that would lessen Europe’s dependence on U.S. transports — based on a Russian-Ukrainian aircraft. Yeltsin reportedly also spoke of Russia’s need to receive greater amounts of financial assistance from the international community, and won a pledge from Kohl that he would discuss the matter with other world leaders. The Kohl-Yeltsin meeting, which came one day before a partnership and cooperation agreement between Russia and Europe came into effect, marked the fifth "informal" summit between the two leaders.

Surprises in Stockholm

The Kremlin’s diplomatic agenda over the past fortnight was topped by Boris Yeltsin’s December 2-4 visit to Sweden, during which the Russian president continued his recent practice of making sensational and unexpected announcements on major security issues. Yeltsin’s Stockholm surprises were an announcement, on December 2, that Russia will reduce the number of its nuclear warheads by one-third, and another, made one day later, that Moscow will "unilaterally cut its armed forces in northwest Russia by more than 40 percent."

But Yeltsin’s latest pledges, while welcomed, were of dubious value. Kremlin spokesman Sergei Yastrzhembsky was quick to clarify that Moscow had, in fact, no intention of making any unilateral cut in its strategic warheads, and that Yeltsin’s remark on that score was but a "possible proposal" for the START III talks which will formally get underway only after Russia ratifies START II. In a similar fashion, Yeltsin’s reference to force reductions in northwest Russia appeared to reflect Moscow’s long-planned policy of reducing the size of its armed forces as a whole from 1.7 to 1.2 million by the end of next year. Moreover, even that policy contains an element of wishful thinking: many experts believe that the number of soldiers Russia actually has in uniform has already fallen to 1.2 million and that the nation’s crumbling army may have difficulty sustaining that number of troops in the years to come.

Yeltsin’s Stockholm announcements thus appeared to be in the tradition of other sensational — but in large part empty — pronouncements that Yeltsin has made over the past year on key security issues while on foreign visits. In May, for example, Yeltsin said during a visit to Paris, where he was to sign a major NATO-Russia agreement, that Moscow would no longer target NATO countries with its nuclear missiles. But aides quickly clarified that Yeltsin meant only that the Russian missiles would be taken off alert and their targeting programs erased — an operation that can be reversed in a matter of minutes. More recently, in October, Yeltsin announced unexpectedly in Strasbourg that Russia would sign an international conventional banning land mines. The statement sharply contradicted Russian policy to that time, and "clarifications" were quickly forthcoming from officials in Moscow. Russia was not among the nations signing the land mines convention in Ottawa earlier this week.

Yeltsin did, in any event, receive a royal welcome in Sweden, and the 200-strong Russian delegation that he headed signed a number of agreements with their Swedish counterparts — aimed mostly at improving joint crime-fighting efforts and at boosting economic relations. Those agreements included accords on fighting money-laundering, rescheduling some of the former Soviet Union’s debts to Sweden, and on cooperation in nuclear safety and space exploration. The two sides also agreed to study a proposal involving the construction of a gas pipeline from Russia to Sweden.

The Spies Among Us…

Russia’s special services personnel were as busy as the country’s diplomats. On November 23 agents of the Federal Security Service (FSB) arrested a Russian navy captain and military journalist, Grigory Pasko, on espionage charges. Details of the case are murky, but may involve the fact that Pasko has written a number of articles unfavorably chronicling the Pacific Fleet’s poor record in handling nuclear waste. If so, Pasko’s case would parallel that of Aleksandr Nikitin, a former Russian navy captain who has fought a long and ugly battle with the FSB over charges that he used classified materials in a study on the dangers posed by the Northern Fleet’s nuclear wastes.

Meanwhile, FSB officials operating in southern Russia on November 25 arrested an American businessman on charges that he had used satellite receivers, illegally brought into Russia, to gather information from restricted sites in the cities of Rostov and Bataisk. The accused, Richard L. Bliss, is an employee of a San Diego-based communications company that is carrying out several projects in Russia. A U.S. embassy official denied that Bliss — or another American who was arrested with him and then released — was connected with the U.S. government or that they were spies.

On November 28, finally, German authorities said that they had arrested two German citizens on suspicion of having spied for the Soviet Union and, later, for Russia. Spokesmen for Russia’s intelligence services denounced Bonn for making the announcement on the eve of the Yeltsin-Kohl talks, but refused comment on the charges themselves.

Russian-Ukrainian Summitry: Political Implications for Kyiv

The Presidents of Russia and Ukraine, Boris Yeltsin and Leonid Kuchma, met on November 16-17 at Zavidovo outside Moscow for the first "no-necktie summit" in CIS history. The meeting’s professed goal was to "lend substance" to the interstate agreement on friendship and cooperation, signed by Yeltsin and Kuchma last May in Kyiv, but not followed up by functional cooperation agreements. More to the point, the meeting was held under the shadow of a hard-fought electoral campaign that has begun in Ukraine with another one to follow.

Far More than Trade at Stake

Yeltsin and Kuchma attempted to settle two acrimonious trade disputes, which had led Kuchma to complain repeatedly of a Russian "economic war" against Ukraine. First, the two presidents agreed in principle to eliminate value-added taxes from bilateral trade, and instructed their respective cabinets to work out the legal and economic mechanisms for reciprocal renunciation of those taxes. The VATs are considered mainly responsible for this year’s sizable decline in Russian-Ukrainian trade, particularly in Ukrainian exports to Russia. Second, Yeltsin and Kuchma approved an agreement, freshly drafted by Russian first deputy prime minister Anatoly Chubais and Ukrainian prime minister Valery Pustovoytenko, setting a Russian annual import quota of 600,000 tons of Ukrainian sugar exempt from the 25 percent surcharge imposed last May. Ukrainian sugar in excess of that quota will, however, remain subject to the surcharge and is limited to 1 million tons. Ukraine for its part will lift some customs duties that it currently levies on certain Russian goods, including military items and motor vehicles.

There was no public word on other contentious economic issues that are pending between Moscow and Kyiv, including: Russian import restrictions on Ukrainian alcohol; cutbacks in the purchase of Ukrainian booster rockets for space launches; the division of the former USSR’s assets and debts between Russia and Ukraine; and restitution of Ukrainian deposits held in the ex-USSR’s Vneshekonombank. Kuchma slightly — and perhaps inadvertently — cooled the summit’s afterglow by declaring, on his return to Kyiv, that Ukraine had failed to obtain any significant relief on its arrears for Russian gas. The matter "has been resolved, except one thing: we must pay punctually for the gas," he said. Moreover, even the VAT and sugar agreements seem to be of limited and questionable value. Follow-up talks on VAT renunciation are already leading to wrangles over existing commercial legislation and to bargaining over exemptions. And the surcharge-free sugar quota amounts to less than half of Ukraine’s annual sugar exports to Russia before the surcharge had been imposed.

International and Russian media coverage of the summit tended, perhaps inertially, to focus on its economic aspects. But the presidents were more keenly interested in its political effects. It was with this in mind that they set up a bilateral "strategic team" that would plan long-term Russian-Ukrainian cooperation programs; and they affirmed their intention to prepare a 10-year economic cooperation plan for signing at an official summit, to be held in February in Moscow. The public-relations handling of the meeting was unprecedentedly upbeat, apparently designed by both sides to signal the beginning of a new and more cooperative stage in bilateral relations.

The Political Signals

The significance of this summit lay in its political atmospherics. The rhetoric of the meeting and its televised images in both countries were not only unprecedentedly warm, but oblivious of the recriminations that only weeks earlier were still filling the air between Kyiv and Moscow. This demonstration of amity appeared closely related to Ukraine’s parliamentary election campaign, in which Kuchma himself is indirectly a contender and ultimately perhaps even the main one. The informal summit coincided with the opening of that campaign. The official summit and treaty signing will take place at the height of that campaign, with a decent interval left until the balloting. The timing suggests that Moscow has decided to help Kuchma’s camp in the parliamentary election, and — by implication — to favor Kuchma’s own reelection the following year over his Socialist and Communist opponents.

The embattled Ukrainian president and parties supporting him face an uphill struggle virtually everywhere in the country. This is particularly the case in the populous eastern regions, where pro-Russian and leftist attitudes remain strong, particularly among the Russian or russified population. Because of their demographic weight, it is in those regions that the parliamentary and presidential elections may ultimately be decided. Having run and won as the eastern region’s candidate in 1994, promising close relations with Russia, Kuchma subsequently turned around to become a convinced promoter of Ukrainian national interests. His political rating in eastern and southern Ukraine has since plummeted.

In the country as a whole, the Socialists and Communists have virtually monopolized the role of promoters of good relations with Russia. Consequently, Kuchma and the pro-presidential parties could benefit immensely in the campaign if they were able to reclaim or share that role. It is largely within Moscow’s power to bestow that role on Kuchma through joint scheduling of high-level meetings and management of the political atmospherics. The scheduling of the two Yeltsin-Kuchma summits suggests that Moscow has decided to cooperate with the Ukrainian president in that effort. That, in turn, indicates that the improvement in political relations is likely to be a medium-term rather than a short-term trend.

Yeltsin’s Perspective on Russian-Ukrainian Relations

Yeltsin devoted his weekly radio address on November 21 to the subject of Russian-Ukrainian relations. He described the meeting just held with Kuchma as heralding "a long-awaited change in relations between Russia and Ukraine… Relations are now on the upswing," he declared. In a passage that must have been music to Kyiv’s ears, Yeltsin disavowed "Russian politicians who often go to Ukraine with inflammatory speeches… No one is allowed to pit Russia and Ukraine against each other," the Russian president admonished. He was alluding to Moscow mayor Yury Luzhkov and to Duma ultranationalists, such as Sergei Baburin, who have made a specialty of traveling to Sevastopol to deliver irredentist statements regarding the city and the peninsula.

Yeltsin also made an even-handed reference to the Russian diaspora in Ukraine and the Ukrainian diaspora in Russia; anticipated steady Russian gas supplies to Ukraine this winter; cautioned both peoples against imitating the two characters who destroy their friendship through quarrels, in a story by Nikolai Gogol–a writer claimed by both nations; and in a folksy coda to his speech he urged Russians to root for Ukrainian sportsmen in international competitions, "just as we would root for our own."

But in the same address, Yeltsin urged Ukraine to facilitate the creation of joint Russian-Ukrainian enterprises in the energy sector and other industries — meaning in practice takeovers in Ukraine by Russian capital. This agenda is being pressed by Chubais, who on a visit to Kyiv the preceding week had called for the participation of Russian capital in the privatization of Ukraine’s power-generating and oil and gas sectors. Yeltsin, furthermore, urged Ukraine to "cooperate more actively with Russia in the CIS… to change the very face of the CIS" — a subject on which Moscow and Kyiv hold vastly different views. The Russian president recalled nostalgically that "not so long ago we had a single economic system. Russians and Ukrainians lived as if in a communal apartment. Our separation was painful." Just as "stinging to us" were Ukraine’s recent naval exercises with NATO countries in the Black Sea. Yeltsin went on to disapprove of "some [Ukrainians] who even took it into their heads to divide our common history" — a reproach often heard even from liberal Russians and reflecting a reluctance to accept the reality of a distinctive Ukrainian nationhood.

Detente, Its Limits, and Its Possible Price

The Russian president’s address partly reflected Moscow’s short-term aim to prevent Kuchma’s leftist opponents from playing the Russian card in the electoral campaign. But Yeltsin’s remarks also suggested that economic penetration of, and even a security alignment with Ukraine remain goals of Russian policy beyond the short term. Such inconsistencies illustrate both the reality of the emerging detente and its contradictory nature. It is eloquently expressed in official Moscow’s residual psychological difficulties in accepting Ukraine’s choice to leave the former "communal apartment." Nevertheless, the tenor of official bilateral relations is likely to grow warmer in the runup to the official summit in February and Ukraine’s parliamentary elections in March. The Kremlin would certainly want to prevent a Red victory in the Ukrainian elections, and appears to have decided that it has no choice but to facilitate an electoral success for Kuchma’s camp. This week, Yeltsin pointedly declined to receive Ukrainian parliament chairman Oleksandr Moroz on the latter’s four-day official visit to Moscow. Moroz is an aspirant to Ukraine’s presidency, and his Socialist Party a leading rival of Kuchma’s camp in the parliamentary elections.

All of this opens the question of the political and/or economic price that Kuchma might be asked to pay in return for Moscow’s indirect but crucial electoral support. The answer to this question will perhaps begin surfacing as Ukraine’s electoral campaign unfolds. Last week, however, Kuchma publicly called for turning part of the shares of Ukraine’s idle oil refineries over to Russian companies. The idea is far from new and has encountered political resistance that spans most of the spectrum in the Ukrainian parliament. In one long-pending test case, the executive has been unable to carry out an earlier agreement to permit acquisition by Russian capital of 45 percent equity in the flagship Lisychansk oil refinery. Local observers were quick to comment that Kuchma’s proposal was inconsistent with his own goal of reducing Ukraine’s dependence on Russia for fuel. Could this proposal have represented a first — and if so, then obviously reluctant — recompense for political favors promised by Moscow?


"The Fortnight in Review" is prepared by Senior Analysts Elizabeth Teague (Russia), Stephen Foye (Security and Foreign Policy), Vladimir Socor (Non-Russian republics), and Analyst Igor Rotar.

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