Publication: Prism Volume: 3 Issue: 17

The Fortnight in Review

President Boris Yeltsin emerged triumphant in his latest shoot-out with the Russian Duma, but the victory seemed likely only to defer indefinitely consideration of several of Russia’s key economic and political problems. Moscow did record an economic triumph of sorts, however, when the financier and philanthropist George Soros announced during a visit that he intends to channel millions of dollars into Russia through various humanitarian aid programs. In the diplomatic arena, Yeltsin dropped a bombshell when he announced in Strasbourg that Moscow would support an international landmines convention. But Russia’s dealings with the "far abroad" took a back seat in late October to its relations with the countries of the CIS. The presidents of the four countries comprising the CIS Customs Union met in Moscow on October 22, but efforts to invigorate the poorly-functioning union produced few concrete results.

Yeltsin and the Russian Duma: A Tempest in a Teacup?

The latest stage in the ongoing soap-opera between President Boris Yeltsin and the lower house of the Russian parliament ended on October 21 when the Communist opposition withdrew a vote of no-confidence in the government. The Communists backed down after Prime Minister Viktor Chernomyrdin threatened to resign if the motion was passed, and President Boris Yeltsin voiced a last-minute appeal for the vote to be abandoned. Yeltsin made numerous symbolic concessions, including promising to consult parliamentary leaders on a regular basis and giving the Duma more airtime on state-controlled radio and television. But he made it clear that he would not reshuffle his government or change its economic course; he also ruled out the idea of a constitutional reform that could prevent such conflicts recurring in the future. In a face-saving operation, the Duma first agreed to postpone its vote for one week and finally withdrew it altogether.

The Yeltsin team was quietly triumphant while the opposition, which had come close to tearing itself in two, enthused about a victory for reason and compromise. Only the Yabloko faction deplored the deal and accused both government and opposition of complicity. Like the boy who pointed out that the emperor had no clothes, Yabloko said the truce meant nothing would be done to correct fatal flaws in the government’s economic policies. Privatization Minister Maksim Boiko let the cat out of the bag when he said events were taking place "on two levels." On one level, he said, there was the political crisis sparked by the threatened vote of no-confidence. On the other level, a joint government/parliamentary commission was getting on "calmly, quietly and in a professional manner" with reworking the government’s draft budget and tax code.

Russia Gets International Seal of Approval

Kommersant said it was "probably the most important event of the month or even of the year." The weekly magazine was describing a two-week tour of Moscow and the Russian provinces by billionaire financier/philanthropist George Soros. Soros was in Russia to mark both the tenth anniversary of the launch of his foundation in the country, and the resumption of its activities: last year, he had to restructure the Soros Foundation in Moscow after its officers were discovered diverting funds to Swiss bank accounts. Early this year, Soros attracted wide attention when he published an article saying he was ceasing his activity in Russia because the country had been taken over by an oligarchy of robber barons.

But Soros was back in July, when his Quantum Fund invested nearly $1 billion to enable Russia’s largest financial empire, Oneksimbank, to pull off its winning $1.9 billion bid for a 25-percent stake in Russian telecoms giant Svyazinvest. What changed his mind, he told a meeting in Moscow on October 7, was the appointment in April of Boris Nemtsov to a senior government post. "That signaled a serious dedication to change," Soros said. "Now, for the first time, I can see a realistic prospect of Russia moving in a positive direction, away from robber capitalism and a parody of an open society to a more legitimate kind of capitalism and something like an open society."

Soros admits that assets in Russia are still concentrated in the hands of very few owners, and that a financial oligarchy has emerged which is unhealthy for the economy and the society. But he told a questioner who suggested that his business deals in Russia helped to consolidate the oligarchy that this was in Russia’s long-term interest since the oligarchy would take Russia from "robber capitalism" to "legitimate capitalism." Soros’ involvement was announced only after the controversial deal was concluded. The auction provoked howls of rage from the losing side and ignited the "bankers’ war" whose reverberations are still being felt. Soros said in Moscow this month that the scandal that erupted over the auction had "made it possible for the privatization process in Russia to become more open." The auction marked "a watershed," he said, moving Russia away from "the insider deals of the past," and "showing to what extent this kind of procedure used to be manipulated."

Soros announced plans at the end of this month’s visit to spend $300-500 million on humanitarian aid programs in Russia covering health, education, culture, military reform, the legal system and local government. The main emphasis will be on the regions. "The future of Russia is in the provinces," said Soros, who signed agreements in Novosibirsk and Sverdlovsk but expressed special interest in Tatarstan. This latest gift makes him Russia’s largest philanthropist and individual western investor — bigger even than the United States government which, according to The New York Times, gave Russia $95 million in foreign aid last year.

Windows on the World

Providing Internet access to Russia’s regions is a high Soros priority. Internet centers have been established with the help of his foundation in 32 areas of Russia, and there are plans for many more to come. This aspect of Soros’ visit dovetailed with that of another high-profile guest in Moscow — Microsoft president Bill Gates. Gates spent four hours closeted with First Deputy Prime Minister Anatoly Chubais, playing with the laptop computer that never leaves Chubais’s side. Like Soros, Gates said he detected a Russian revival and professed himself optimistic about the country’s future.

Heading Gates’ agenda was the protection of intellectual property and prevention of software piracy. Until now, Chubais told him, the Russian government has had to concentrate on stabilizing the economy. Now that inflation is under control and the economy is beginning to show long-awaited signs of growth, it can turn its attention to building a legal climate in which intellectual property is protected. Chubais said Russia now has 800,000 Internet users and that the coming generation feels at home at the keyboard. "They are Russia’s hope and future," he said.

A Bombshell in Strasbourg

Yeltsin’s flare for the dramatic on the international stage was in evidence again over the past fortnight as the Russian president on two separate occasions claimed publicly that Russia would sign a convention banning the use of antipersonnel landmines. Yeltsin’s first such announcement came on October 10 during a summit of the Council of Europe in Strasbourg. It appeared to reverse Russia’s long-standing opposition to the landmines convention, which was drafted at an international conference in Oslo last month and is due to be opened for signature in Ottawa, Canada, in December. Russia had not been a participating member of the Oslo conference, and had opposed the ban — which is also opposed by Washington — on the grounds that it would undermine Russia’s national security.

Indeed, within days of Yeltsin’s Strasbourg announcement Russian newspapers were filled with arguments as to why the country could not join the landmine convention any time soon. One high-ranking (albeit unnamed) military officer was quoted as describing Yeltsin’s announcement as pure "populism." He also observed that Russia maintains a stockpile of at least 60 million mines, the destruction of which would be very difficult and expensive, and said that there was no alternative to landmines as a safeguard for nuclear installations and for long sections of Russia’s border. In what was presumably a major understatement, the newspaper Izvestia reported that Yeltsin’s announcement had produced "a slight shock in the Defense Ministry." Despite such reactions, Yeltsin reiterated Russia’s commitment to join the landmines ban during talks with Canadian prime minister Jean Chretien in Moscow on October 20. Yeltsin also said that he is considering a December visit to Canada in order to sign the convention.

Looking to Europe?

Although his public remarks were not as blunt as they had been earlier, Yeltsin also used the Strasbourg summit to repeat his call for a "greater Europe," that is, a Europe with closer ties to Russia and less subject to U.S. influence. In the runup to the summit Yeltsin had complained of Washington’s "interference" in European affairs and had urged a diminished U.S. presence on the continent. Such remarks appeared to form the basis for a claim, made on October 17 by unidentified officials in the Russian president’s administration, that recent "Anti-American" undertones in Yeltsin’s speeches were "not accidental" and reflected rather a reorientation of Russian foreign policy away from the U.S. and toward Europe. The officials suggested that dissatisfaction is growing in the Kremlin over what they claimed has been a failure by Washington to deliver on a number of promises in the area of economic cooperation. It remains unclear whether this new "anti-Americanism" represents a real shift in Russian policy, aimed at least in part at exploiting tensions between the U.S. and Europe on several trade and security issues, or whether it is just a flash of diplomatic opportunism. But it may be noteworthy that it comes amid rumors in the Russian press both of a diminished influence for Russia’s Foreign Ministry in the making of policy, and of a concomitant enlargement of the role played by foreign policy officials in Yeltsin’s own presidential apparatus.

Four Presidents Seek to Revive CIS Customs Union

(Note to readers: The CIS meeting of heads of state took place after Prism’s production deadline and will be analyzed in the next issue of this journal.)

Presidents Boris Yeltsin of Russia, Alyaksandr Lukashenka of Belarus, Nursultan Nazarbaev of Kazakhstan, and Askar Akaev of Kyrgyzstan met in Moscow on October 22 hoping to "break the deadlock" on the four countries’ Customs Union (CU). That was how Yeltsin’s foreign policy coordinator and chief spokesman, Sergei Yastrzhembsky, defined the goal of the CU summit. According to Yastrzhembsky, the Kremlin expected the summit to be "a rather complicated affair" because "a real Customs Union has not yet been achieved." The prediction turned out to be as correct as the diagnosis.

"Only on Paper"

The four presidents form the Customs Union’s Interstate Council, whose October 22 meeting was third since the CU’s creation in March of 1996. The union’s executive organ, the Integration Committee, which is headed by deputy prime ministers, has been meeting more frequently but also to no avail. Russia’s chief delegate to that body, Deputy Prime Minister Valery Serov, admitted on the eve of this third summit that the "the main question is how to breathe life into the union agreements." More tersely, two senior officials of Russia’s State Customs Committee said that the agreements "exist, but only on paper." One of these officials targeted Kazakhstan and Kyrgyzstan for erecting barriers to Russian and Belarusan imports; but the other official conceded that Russia has set the highest customs tariffs within the customs union. Kyrgyz foreign minister Muratbek Imanaliev commented that "the Customs Union is in a frozen state." And his president, Akaev, complained that inordinately high tariffs on Russian railroads and highways make it prohibitive for Kyrgyzstan to trade with the European area of the Customs Union and the CIS in general.

It was Nazarbaev, however, who came to this summit as the most outspoken critic of the CU, having described it as irrelevant to its four member countries and a hindrance to his own country’s trade with CIS countries outside the Union. Underscoring his displeasure, the Kazakh president had not long ago dismissed First Deputy Prime Minister Nigmatzhan Isingarin, notwithstanding the fact that Isingarin is the incumbent chairman of the CU’s Integration Committee; the move demonstratively downgraded Kazakhstan’s participation in the union. According to Isingarin, overall trade turnover among the four member countries — the "internal trade" as it would be termed in a real customs union — dropped by 30 percent in the first half of 1997 compared to the same period last year. Isingarin attributed the drop to differing national legislations, absence of mutually favorable transport arrangements, and the member countries’ failure to coordinate their respective trade relationships with nonmember countries.

Action Program

A set of recommendations on creating a "unitary customs territory" of the four countries was submitted to the CU summit by the Moscow-controlled CIS Executive Secretariat jointly with Lukashenka, incumbent chairman of the CU’s Interstate Council and official co-author of the documents. On that basis, the four presidents signed a framework program on "priority targets in fulfilling the March 29, 1996 treaty" — the founding treaty of the CU; and they decided in principle, without a timetable, to turn the territory of their four countries into one "free trade zone."

The presidents agreed to instruct their governments and the CU central staff to prepare by the end of 1997, for consideration next year, draft agreements on: introducing common customs tariffs of the four countries; unification of national tariff legislations; coordination of nontariff regulations of the four countries’ trade; and a list of goods that would be subjected to such regulations. By the end of this year the four countries should draft a protocol on a common approach to their negotiations with the World Trade Organization for admission to it. Hinting at differences among the presidents, Nazarbaev stated that they need a "time-out" before meeting again on December 18 to resume the discussions.

The desired agreement on common customs tariffs will need to take effect first in order to clear the way for the other agreements. The introduction of a list of goods will, from the outset, limit the scope of common regulations, leaving loopholes for exemptions dictated by individual countries’ interests. The envisaged protocol would by definition be nonbinding. The nature of the proposed agreements, the vague timetable, and the seemingly scant attention to national interest seem to presage the CU’s continuing ineffectiveness. In this, as in any CIS organization, however, ineffectiveness tends to turn into a blessing in disguise, as it leaves member countries free to pursue their own national interests.

Organizational Measures

Nazarbaev succeeded Lukashenka as chairman of the Interstate Council on the Belarusan president’s proposal, "in order to decentralize the integration process" — an indirect jab at Yeltsin. Although required by the alphabetical rotation principle, the succession had been in doubt because some in Moscow had sought a waiver in Russia’s favor. A strong precedent for such a waiver has long existed at the highest level of the CIS, where Yeltsin and Chernomyrdin have monopolized the chairmanships of the Councils of Heads of States and Heads of Government despite the statutory requirement of alphabetical rotation. The four CU presidents failed to agree on who would fill the chairmanship of the Integration Committee. Isingarin remains provisorily in that post despite his earlier loss of status occasioned by his release from the Kazakhstani government. The presidents decided to hold regular Interstate Council meetings on a quarterly basis, specifically on the second Wednesday of each quarter. Such strict planning is needed, according to Yeltsin, in order to prevent scheduling conflicts arising from the presidents’ foreign travels. Moscow has often complained that the presidents of CIS countries tend to give precedence to non-CIS foreign travels over CIS business. At Yeltsin’s initiative that problem figured prominently on the agenda at the meeting of CIS heads of state in Chisinau the next day.

The four presidents further decided to create: a Council of Prime Ministers of CU countries; an interparliamentary body of the four countries for the purpose of coordinating relevant national legislation; and, in each member country, a governmental CIS Customs Union agency, comprised of specialized divisions for foreign trade, customs systems, border control, tariff and nontariff regulation, currency control, and taxation. Such measures would seem to reflect a traditional CIS approach to problems: creating additional bureaucratic structures, which later pass the buck to summits of the presidents or prime ministers, who ultimately pass the buck anew back to the same bureaucracies or create new ones to deal with the same problems.

Russian Concession Welcomed

Lukashenka, Nazarbaev, and Akaev hailed Yeltsin’s consent to a joint decision, effective next January 1, to levy value-added taxes on exports in the country of destination, rather than in the country of origin. The three presidents hope to see a substantial rise in their countries’ exports to Russia as a result of this decision. In a parting shot as outgoing Interstate Council chairman, Lukashenka said that "Moscow had been the main stumbling block" in the path of approving this proposal. Nazarbaev for his part said he expected this decision to reverse the marked drop in Kazakh-Russian trade recorded in the first half of 1997, and which stemmed mainly from a decline in Kazakhstani exports to Russia. This appears to have been the only practical decision with tangible effects reached at this summit, provided it is implemented as envisaged.

Moscow for its part will be able to hold out this concession to certain other CIS member countries as an incentive for joining the Customs Union. However, expanding the CU is essentially a political goal that often conflicts with economic priorities of the Russian government or with the interests of specific economic sectors in Russia. This factor partly accounts for the failure thus far to implement even the existing Customs Union, not to mention its enlargement with other CIS members. Thus far, the sole known — and insistent — candidate for inclusion in the CU is basket-case Tajikistan. Not surprisingly, the four presidents decided to postpone consideration of Tajikistan’s application into next year.

National Interests Prevail

The proposed documents, even if eventually adopted, have a good chance to remain at the level of declarations, just as previous agreements of this type. Russia will want to continue protecting its domestic producers against cheap imports from CU and other CIS countries. Conversely, Russia’s three CU partners will continue invoking the Customs Union when criticizing Russian protectionist measures against some of their "traditional" exports. However, the same countries are not about to privilege Russian goods at the expense of their own domestic producers or of their international trade. With the partial exception of Belarus, these countries and the CIS countries in general have an overriding interest in trading outside the two groupings and in encouraging Western investments. Lukashenka for his part is successfully manipulating his bilateral customs union with Russia by taxing the transit trade bound for Russia via Belarus.

Despite its inherent limitations, the CU is impeding trade between its two Asian countries and European CIS countries that do not belong to the Customs Union. This situation has recently become the source of significant national grievance against the organization. On an official visit to Kazakhstan and Kyrgyzstan two weeks ago, Ukrainian president Leonid Kuchma and his hosts, Nazarbaev and Akaev, jointly and publicly criticized tariff and other barriers erected by Russia, ostensibly in the name of the customs union, against trade between Ukraine and the two Central Asian countries. Akaev said his country wants to import Ukrainian sugar which Russia accepts only in limited quantities (the cause of a major trade dispute between Moscow and Kyiv). And Nazarbaev offered to export substantial amounts of oil to Ukraine and via Ukraine to Central Europe. But all three presidents complained that Russian tariff and transport practices stand in the way of such plans. Kuchma, Nazarbaev, and Akaev described Moscow’s use of the Customs Union for restricting trade as incompatible with normal relations within the CU and CIS and as undermining both organizations. And they implied that Russian restrictions on third countries’ bilateral trade amount to "political pressure" upon their countries. Others share these apprehensions. On the morrow of the CU summit, Uzbek president Islam Karimov stated that Russia will ultimately seek through the CU "to pull the rest of us by the ears into a [new] Union." There was no indication that the CU’s Moscow summit addressed these concerns.


"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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