N89 - December 15 2008 CO N T E N T S

P. 1-3

Published every two weeks / International Edition

FINANCIAL CRISIS c Alexey

Politics & Government

FINANCIAL CRISIS c Alexey Kudrins Little pieces of paper

c Yuri Volkov, Vladimir Putins

Kudrins Little pieces of paper

Over the last two weeks (and in any case since our most recent issue was published on November 27), the concern expressed by the Russian leadership on the seriousness and breadth of the financial crisis has become more acute. It is now clear that this crisis will have far-reaching consequences on both the political jousting between the two heads of the executive as well as on Russias development choices in the coming years. During the question and answer session with the Russian people on December 4 (or at least with some of its carefully selected representatives), Prime Minister Vladimir Putin first of all confirmed what we wrote in our most recent issue, to wit that the Russian presidential elections will not be brought forward. In fact, we did not believe in the early election scenario that was mooted in some Russian and western publications (which does not mean that it had never been on the cards) because of the increasingly serious situation of the Russian economy. On the macro-economic front the hypothesis of recession is openly evoked. The rate of growth of the Gross Domestic Product in the Third Quarter of 2008 was still 6.2% but taking everything into consideration it appears that the Fourth quarter of 2008 and the First Quarter of 2009 will show negative growth indicating an extremely rapid fall in activity. Two weeks ago the controlled use of Reserve Funds to support business was being mooted as oil prices were hitting the floor week by week. Today, the result that is being envisaged is that in the next few months this Reserve Fund could lose 40-50% of its value. In his replies to the questions of his fellow citizens Vladimir Putin sought to reassure his audience by adopting the posture of a protector or a kindly uncle as he used to do when he was President. But things are not all rosy among the political and economic elite in the corridors of power. One section of Vladimir Putins entourage seeks a clash with Dmitry Medvedev whose speech on the struggle against corruption and reform of the legal system is causing some concern (see page 2 and Russia Intelligence n88 dated November 272008). But for the time being there are no specific signs that the two men are becoming rivals. It is more a case of a movement of tectonic plates caused by the different concepts of how to manage the crisis proposed by the groups around the two men. For the time being there is a general feeling of every man for himself. According to a former economy minister who has his finger on the pulse of the present situation, the level of private debt to foreign banks is more than $500 million - more than the national debt at the end of 2001 when it had reached a record of around $135 billion. And $110 billion of this current debt contracted by private economic entities is due to be renegotiated in 2009 . . . In these circumstances the pressure on the minister of finance, Alexey Kudrin, to loosen the purse strings is huge. Every day Kudrin receives little bits of paper signed by Sechin, Shuvalov and others pleading with him to save this one or that one. The only choice left to the minister is the amount, the former minister said. Knowing the links of the oligarchs to political and governmental circles it is not an exaggeration to simply conclude that the process of bolstering the economy through the Vneshekonombank and the financial backing it is able to grant to corporations is the subject of intense struggles for influence and of networks within the very heart of the governments apparatus. Even if here and there they are becoming increasingly evident, the real questions will come later. Major questions hang over the economic model followed by Vladimir Putin over the last eight years. To bank on the income from energy and mining, increase State control on these resources but leave the corporations revenues and outgoings virtually uncontrolled have proved to be a particularly dangerous way of operating. (Debts are contracted by industrial companies physically operating in Russia, while a part of the liquidity has taken a complex route through networks of structures based offshore). Indeed, the State will probably intervene regarding those assets that long have been targeted (see Norilsk Nickel, page 4). But it is the entire energy and mining sectors that will have to be dramatically reviewed over the next few months if crude and metal rates do not recover. Top executives of Russian oil companies have warned the government that without massive fiscal aid from the State, oil production will probably fall by 2-5% in 2009 and even anticipate a 20% drop by 2013. d

new Mr Anti-Crisis JUSTICE c Is United Russia against Dmitry Medvedev? DIPLOMACY c Russia-India: A strategic partnership running out of steam BEHIND THE SCENE c Kirill and Klement top contenders to succeed Alexis II
P. 4-6

Business & Networks

NORILSK NICKEL c Closing in on Vladimir Potanin FOCUS c Russneft: the End of the Road? ALERT c Big contract for Alstom Transport ENERGY c Caspian Pipeline Consortium: BP negotiates its way out
P. 7-8

Regions & CIS

BASHKORTORSTAN c Interview with Xavier le Torrivellec (INALCO)

c Moscow region: Governor

Gromov on the way out

Next issue: January 15 2009

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RUSSIA INTELLIGENCE
JUSTICE c

Po l i t i c s & G ov e r n m e n t

Is United Russia against Dmitry Medvedev?

In his November 5 address to the Federal Assembly, Dmitry Medvedev insisted heavily on the need to reinforce Russias legal system. The Russian president, who, let us not forget, trained as a lawyer, indicated that humanizing the law, as well as the manner in which it is enforced, was a matter of principle. Medvedevs speech - analyzed extensively in our last issue, and in which the western press saw only the remarks he came out with concerning the deployment of tactical missiles in Kaliningrad in response to the United States military project in Poland - was in fact a very un-Putinian profession of faith, which, of course, did not escape the attention of the prime minister and his advocates. As the economic crisis puts the Medvedev-Putin tandem to the test (Russia Intelligence, special edition, November 19 2008), we are observing what could very well be the first sign of open defiance on the part of the prime ministers advocates towards the president - and precisely in the area he is most specialized in: law. On December 5, United Russia adopted, on first reading at the State Duma, a bill that goes directly counter to the wishes expressed by the head of state. The bill, brought in by Security Commission Chairman Vladimir Vasilev and his deputy Mikhail Grishankov, both of whom come from the ranks of the security services, is aimed at considerably reducing the area of competence of juries. The bill would ban jury trials for cases of terrorism, hostage-taking, espionage, participation in armed groups or for large- scale public disturbances. The initiators of the bill say that several recent incidents in the north Caucasus prove that juries are subject to strong pressure and are not capable of pronouncing judgment on such serious matters (Magomed Salikhov, accused of being behind the Buynaksk attacks in September 1999 was acquitted and released in January 2006. Absent at his appeals trial, he was killed during a special operation by security forces in Makhachkala last November). Juries are blamed, in veiled terms, of being too lax whereas the crime rate remains high. Of course, the underlying problem for Vladimir Putins comrades is the fact that the prosecutor generals office lacks control over juries, as was once again highlighted at the start of the trial of the alleged killers of Anna Politkovskaya. Vasilev and Grishankov are therefore proposing that only professional judges, who have the double advantage of obeying orders and handing out acquittals parsimoniously, should have jurisdiction over heavy criminal cases. Unsurprisingly, the bill was adopted in first reading but it gave rise to sharp debates at the Duma. The Communists, Vladimir Zhirinovskys Liberal Democrats and Sergey Mironovs Fair Russia denounced it in strong terms, and sometimes with a hint of irony, as undermining the voice of the people quite a rare sight in recent years. The presidents representative in the Duma, Alexandre Kosopkin, was noticeably silent during the debate. According to information gathered in Moscow by Russia Intelligence, Vasilev and Grishankovs initiative would appear to be a signal sent by Boris Gryzlov and Putins inner circle to Medvedevs entourage. The principal message is that United Russia is the prime ministers party, and, for that matter, has a majority in parliament. Future debates on the bill should be closely monitored. In the meantime, Dmitry Medvedev continues to place his men in the state apparatus. On December 8 he appointed one of his former comrades from the Leningrad Law Faculty, Nikolay Vinnichenko, as super-prefect in the Ural-Volga federal district, a post that had been vacant since the death of Pyotr Latyshev. d

Yuri Volkov, Vladimir Putins new Mr Anti-Crisis

At the beginning of December it was revealed that a special anti-crisis group had been established at the Duma. Outside the Moscow hive, the decision passed relatively unnoticed but says much about the people who Vladimir Putin places his confidence in this highly charged period. The aim of the group is to speed up the adoption procedures of the various series of measures announced by the Kremlin and the White House the seat of the Russian government. This group, under the chairmanship of Yuri Volkov, will coordonate the activities of the Dumas three commissions: budget and taxes, banking activity and economic policy This old acquaintance of Vladimir Putin hails from Leningrad and like the prime minister and the president is a graduate of the Jdanov State University law faculty. Between 1983 and 1991 he worked at the KGB, leaving with the grade of commander (contrary to information circulating in Moscow, although a German speaker, Yuri Volkov however never worked with Vladimir Putin in Dresden). In 1992-93 he set up several Russian-German joint ventures (Volchok and Go-Ga) registered with the Saint Petersburg City Halls foreign economic relations committee that at the time was under the direction of Vladimir Putin. Then, in1995-96, he worked alongside Viktor Ivanov at the City Hall responsible for relations with special organizations such as the secret services, police, army, legal authorities before his appointment as the Number Two of the Petrogradsky precinct where he came across Pavel Koshelev, one of his former KGB comrades. In the mid-1980s the latter was one of the most zealous advisors of Viktor Cherkesov who at the time, as a member of the KGBs directorate of struggle against ideological deviation was tracking down dissidents. In 2000, Yuri Volkov then joined Viktor Cherkesov at the North West Federal District prefecture. In 2001 Yuri Volkov was called to Moscow where he embarked upon a career as a senator representing successively the Republic of Komi and then the Nenets Autonomous District but was removed from office by the leaders of the two regions for absenteeism, which did not prevent him from continuing his rise. At the end of 2002, the President of the Federation Council, Sergey Mironov, appointed him as his advisor. Then, in March 2003, Yuri Volkov replaced the banker, Sergey Veremeenko as the head of the Executive Committee of United Russia, one of the proPresident partys main bodies (Russia Intelligence No. 88 of 27 November 2008). He occupied this post for two years before his election in September 2005as one of the deputy speakers of the State Duma, replacing Georgy Boos, appointed as Governor of Kaliningrad. It can be seen that in this period of crisis Vladimir Putin is thus relying more and more on his circle of faithful followers who have passed muster via the double filter of the KGB and the Saint Petersburg City Hall. d

Russia Intelligence N89 j December 15 2008

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RUSSIA INTELLIGENCE
DIPLOMACY c

Po l i t i c s & G ov e r n m e n t

Russia-India: A strategic partnership running out of steam

Hardly back from his six-day tour in Latin America in late November, Dmitry Medvedev was in India on December 4 and 5 for an official visit. Surrounded by heightened security measures in the wake of the Mumbai attacks, this visit resulted in the signing of important contracts, notably in the domain of civil nuclear power. Yet the impression left behind is of a bilateral relationship that has reached its limits. Russia, which is being subjected to growing competition from the United States and other western nations - including in its own specialized areas such as the arms market is clearly on the defensive in India despite the traditional strategic partnership stance. The most favorable outcome of the Russian presidents visit was the signing of an agreement between Rosatom and the Indian government on construction of four additional reactors on the Kundankulam site, where Atomstroyexport has been building two nuclear units of 1000 megawatts each since 2002. Coming a few weeks after the United States Congress approved the controversial 2005 Indian-American bilateral agreement, this was Russias reminder to Washington, as well as to Paris, that they will have to reckon with it in Indias civil nuclear power market. The deal is also important from a commercial point of view, as Rosatom will pocket nearly $6 billion. At the same time, TVEL, the company specialized in supplying fuel, signed a $700 million contract. Russia and India also finalized a contract worth over one billion dollars concerning the delivery of 80 Mi-17 helicopters (a preliminary agreement had been reached in March 2007) and agreed to cooperate on space exploration - Moscow plans to send an Indian astronaut into space in 2013, followed in 2015 by a totally Indian-manned space mission. Dmitry Medvedev says these projects will increase the volume of bilateral trade from $7 billion to $10 billion by 2010 (to be compared with the $100 billion in bilateral trade in 2007 between India and the United States). But that is as far as the good news goes for Moscows trade relations with India. Military-technical cooperation, after having been the long-established backbone of bilateral relations since the Soviet era, is going through a rough patch. The most symbolic example of this concerns the Admiral Gorshkov aircraft carrier. It was called the contract of the century in 2004, but it has, since then, turned into a nightmare for the Indian navy. First, Moscow indicated that it could not deliver the ship until 2012, and not 2008 as planned. It then asked for over one billion dollars in extra payment (Russia Intelligence n60, dated 30 August 2008). The matter has not been settled and discussions are due to continue in early 2009 within the context of the commission on bilateral military-technical cooperation, presided on the Russian side by Sergey Ivanov. Another problem area is the Nerpa nuclear attack submarine. It is a known fact that the Indian navy has long intended to rent it from Russia, but its enthusiasm may very well have been dampened after the tragic accident that took place on board in early November, off the coast of Vladivostok. d

Metropolitan Kirill and Metropolitan Klement top contenders to succeed Alexis II

The process of selecting a successor to Alexis II, the patriarch of Moscow and All Russia, is open. Alexiy II died on December 5 and was buried at the Epiphany Cathedral on December 9 in the presence of many Russian and foreign personalities (besides Dmitry Medvedev and Vladimir Putin, other personalities present included Viktor Yanukovich, Serge Sarkisyan, the Ecumenical Patriarch Bartholomew I of Constantinople and Frances Cardinal Roger Etchegaray). The selection process, which brings together bishops, monks and non-religious representatives within a Local Council (Pomestny Sobor), could last up to six months. Two top contenders appear to have emerged. One of them is Metropolitan Kirill of Smolensk and Kaliningrad. A Leningrad native in charge of the external relations department of the Moscow patriarchate, he has a head start since he was elected Locum Tenens by the Holy Synod on December 10 for the transitional period (although this does not guarantee election as head of the patriarchate, as the experience in 1990 proved). Known for his imposing presence and his eloquence, he was in the vanguard on a major issue in recent years bringing the Orthodox Church outside of Russia back into Moscows fold. Moscow observers point out, moreover, that Kirill of Smolensk and Kaliningrad played a decisive role this summer during the commemoration of the 1020th anniversary of the Baptism of Russia in Kiev, by convincing Patriarch Bartholomew of Constantinople that he should not recognize a Ukrainian Church independent of Moscow. However, two factors may play against Metropolitan Kirill: his reputation as a religious liberal, or at any rate as an advocate of the Orthodox Church opening up to society and the world, and according to some reports circulating in Moscow because of information, carefully preserved by his adversaries, related to his alleged role in the Moscow Patriarchates import of dutyfree cigarettes during the 1990s. The other main contender is Metropolitan Klement of Kaluga and Borovsk, the right-hand man of Alexiy II and his closest collaborator. He has been in charge, up till now, of the general affairs of the patriarchate and is therefore totally familiar with the churchs internal bureaucracy, which is obviously important. Most specialists in Moscow believe that he will attract the conservative elements in the Russian church. Two other names going around are Yuvenaly of Kolomenskoe and Filaret of Minsk and Slutsk. Both are 73 years of age and either one may be pulled out of the hat in case there is no clear majority for either of the two favorites. One consideration has been discreetly overlooked in Moscow but could play a key role: the position of the authorities. During Dmitry Medvedevs inauguration on May 7 last, Klement was in the first row, alongside Vladimir Putin, whereas Kirill was further back a small sign that attracted the attention of observers. At any rate, the choice of Alexiy IIs successor will have important political implications, whether on the domestic or diplomatic level, especially when it comes to relations with Catholics. d

Russia Intelligence N89 j December 15 2008

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RUSSIA INTELLIGENCE
NORILSK NICKEL c Closing in on

Business & Networks

Vladimir Potanin
der Vladimir Putin until autumn 2003 when he resigned in protest at the arrest of Mikhail Khordorkovsky. However, this did not bring about a total break between him and the President. Voloshins successor at the Kremlin was none other than Dmitry Medvedev and the two men are apparently very close. Having maintained a good relationship with the liberals in Yeltsins entourage he is very well acquainted with Potanin and Deripaska whom he often came across in the corridors of the Kremlin. It is useful to note that his candidacy as the independent chairman of Norilsk is presented at the same time by both Rusal and Interros, even though it is public knowledge that that he is closer to Deripaska than to Potanin. It is noteworthy that from 2002 to 2008, Voloshin was chairman of the board of RAO UES Two other surprises are expected in the future board. The first is the presence of Mikhail Prokhorov, a former associate of Potanin and the man behind the declaration of war as it was he who sold his 25% shareholding in Norilsk to Oleg Deripaska in exchange for cash and a portfolio of shares in Rusal, for which he became one of the representatives on the board. Potanin opposed his presence on the board but Deripaska had committed to it in writing, this clause being part and parcel of the deal with Prokhorov. Last, but not least, the representative of the Vhneshekonombank will be Sergey Chemezov, the head of the new public industrial holding company, Rosteknologii, established on the basis of Rosoboronexport. It is in fact the Vhneshekonombank that over the last few weeks loaned Rusal $4.5 billion to reimburse a consortium of foreign banks the loan that was made to Deripaska to purchase Prokhorov. Not only does Chemezov have no position at the bank, he is not a member of the board of directors either, nor of its monitoring body whose chairman is none other than Vladimir Putin. But his presence at Norilsk obviously owes nothing to chance. Chemezov has never hidden his intention to build a major world-class mining group around Rusteknologii and recently reiterated these statements even by evoking the Australian group BHP-Billiton as a model. For several months he has been involved with a certain number of Norilsk assets and, at the same time, it would appear he intends to take shares in other Russian mining groups such as Mechel. And it is known that he will be the partner of Alisher Usmanov, the boss of Metalloinvest (who is also a Norilsk shareholder with a few percent of the equity and will probably be represented on the board) in launching operations at the Udokan copper deposit that Usmanov acquired the right to mine in an auction on 10 September (Russia Intelligence n84 of 25 September). In what state will Norilsk Nickel be following the struggles for power that will undoubtedly take place? As things stand at present this is a very difficult question to answer. One thing however seems clear: Vladimir Potanin is no longer really the master of his own house and it is probable that over the coming months the interests grouped against him will seek to further marginalize him. d

It was more-or-less expected that the probably forced reconciliation between Vladimir Potanin and Oleg Deripaska regarding the fate of Norilsk Nickel was also going to involve the States involvement in the matter. On November 25 Potanin and Deripaska publicly announced an end to hostilities for the control of Norilsk in which the former holds 30% of the equity and the latter around 25% (Russia Intelligence n 88 dated November 27). The agreement concluded between the two men provides for a 13-member board of directors comprising four seats for Interros (Vladimir Potanins holding company), four for Rusal executives, one seat for management (to be taken by Norilsks general director Vladimir Strzhalkovsky) one for the representative of the State, and three seats for independent administrators, two of which may be proposed by Interros. As one can see, the balance of power is quite subtle and discussions on the board of directors promise to be all the more Florentine as Potanin and Deripaska, the two main players in the intrigue, have agreed not to take seats. The precise identity of the mining groups administrators will only be revealed at the specially convened Norilsk shareholders meeting on 26 December. It is evident that among them will be Potanins main executives at Norilsk and Interros and Deripaskas top personnel at Rusal. But the main interest in this election resides in the names of the independent administrators that come out of the hat. As we announced in our most recent issue, it is already accepted that Alexandre Voloshin will be one of the independent administrators and that it appears likely that he will become chairman of the Norilsk board. Voloshin, aged 55, was one of the brains of the Yeltsin period and from 1999 served the president as head of his administration, a position he kept un-

ALERT
3 Big contract for Alstom Transport
In its October 9 issue, Russia Intelligences readers were informed of the radiant industrial and commercial prospects in store for Alstoms transport division in Russia, after its main competitor, Canadas Bombardier, and Transmashholding (TMH) failed in their bid for a tie-up. The French company is thus seeing its large-scale projects beginning to materialize. It was confirmed, on December 8, that the Russian railways (RZhD) had chosen Alstom to supply it with 1210 double-decker passenger cars by 2015. Production will be carried out through the TMH-Alstom DV joint venture set up last October. A new production unit will be opened in the region of Tver, where TMH already has a plant (TMZ). These double-decker cars a first in Russia will allow an increase in passenger traffic despite continuing infrastructure constraints. They will be used on the Moscow-Saint Petersburg and Moscow-Sochi lines. According to a recent study, Russias passenger rolling stock fell by 30% between 1992 and 2006. Of the 24,000 units currently in circulation, 10,000 are expected to be put out of service over the course of the next two years. d

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RUSSIA INTELLIGENCE
c Russneft:

Business & Networks

the End of the Road?

(and still has a Russian police arrest warrant out against him). The continuation of the Russneft saga becomes increasingly confused. On 19 September 2007, the general shareholders meeting elected a new board headed by Alexandre Korsik, aged 51, formerly of Sibneft and Itera. Moscow sources believe that initially this was done for Oleg Deripaska who is reputed to have advanced the sum of three billion dollars to Gutseriev, apparently though the Sberbank. The appointment of Alexey Nikonov, formerly of Rusal, to the post of Russneft Vice Chairman gives credit to the thesis of direct or indirect control by Oleg Deripaska (Russia Intelligence No. 71 of 14 February 2008). But in mid-November 2007, Base Element managing director Gulzhan Moldazhanova stated that the discussions with a view to purchasing Russneft were continuing with the new owners, which leads one to believe that Oleg Deripaska was perhaps overtaken by others, since when the situation does not appear to have shifted. The suspension of the protective measures added to the taxation procedures against Russneft being lifted in October opens the way to a change of direction of the group. But major questions remain unanswered. At present nobody knows who really controls the group. Gulzhan Moldazhanova restricted her comments to saying that Russnefts shares were in a safe place. Meanwhile another Russian source close to the matter added that the famous three billion dollars that Deripaska claimed to have spent in 2007 in fact were in the same place. In any case, it appears that Glencore will retain at least 25% of Russneft. In seems that Deripaska intends to take the rest of the capital but, in view of the present financial situation, it is difficult to see how he would finance the deal, unless in effect he paid for it in 2007 - or if Glencore, with which Rusal has a long history of cooperation, advances him the cash.

As we wrote in our previous editions, the present financial crisis serves as a screen for a certain number of operations concerning the more-or-less widespread redistribution of assets in Russia. Now, Russneft joins the cases of Norilsk Nickel (see article page 4) and NPO Saturn (Russia Intelligence No. 87 of 6 November 2008). On 3 December the stock exchange investigation committee confirmed that all the protective measures concerning the oil companys shares taken in the summer of 2007 had been lifted. At the end of November in a separate move, it was learnt that the trader Glencore had passed an application to the German anti-trust authorities with a view to purchasing at least 25% of the groups capital. Even if at this stage numerous questions remain obscure, movements are underway particularly with regard to the role of Base Element headed by Oleg Deripaska. For the record, the issue of Russneft - Russias seventhranking oil company with an annual production of around 14 million tonnes began in the fall of 2006. Three close collaborators of Mikhail Gutseriev who then headed the group were indicted (Russia Intelligence No. 44 of 1 December 2006). The noose then tightened around the oligarch, a native of Ingushetia, in a scenario that brings the Yukos affair to mind. On 30 July 2007 Mikhail Gutseriev resigned at chairman of Russneft. A few days earlier Base Element, Oleg Deripaskas holding company, contacted the anti-trust committee informing it of his intention to acquire 100% of the oil companys equity. But as from 31 July complications set in when, at the request of the Minister of the Interior, a Moscow court sequestered the oil companys entire portfolio of assets for back taxes of 20 billion rubbles (600 million euros). The Sechin-Bogdanchikov clan was suspected of being behind this hitch as Russneft seems to be a good target for Rosneft. Meanwhile, Mikhail Gutseriev whose son lost his life in a car crash under suspicious circumstances left Russia

c Electricity:

E.On obtains guarantees from Vladimir Putin

tricity market. Obviously it is important that all the objectives fixed in terms of liberalization are met including when conditions are complex. Clearly considering the statements of Igor Sechin and the Minister of Energy, Sergey Shmatko inadequate, Wulf Bernotat spoke to Vladimir Putin directly to obtain guarantees. Mr. Prime Minister, it would be important for us to obtain political support your support on this matter. Support was immediately assured by Vladimir Putin: We will achieve all our plans in this sphere. Apparently fearing it could open Pandoras Box, the Russian government therefore is sticking to this line. All the planned power stations are expected to be built, the Deputy Prime Minister Igor Shuvalov said at the end of a discussion with his colleague Igor Sechin on 4 December. Whilst remaining firm on his positions the latter however has not closed the door on the issue of future special dispensations. In any case, the Gazprom subsidiary Mezhregiongaz has already let it be known that there is a one billion dollars shortfall in meeting its commitments for 2009. d

In its most recent edition, Russia Intelligence discussed the uncertainties surrounding the continuation of the reform of the electricity sector. In mid-November Gazprom announced it was engaged in talks with the ministry of Energy regarding a reduction in its investment program. Meanwhile, the oil companies had written to Igor Sechin, the Deputy Prime Minister in charge of energy, asking him to suspend the liberalization of the electricity sector because of the financial crisis. The Russian government wanted to remain firm but this did not completely reassure foreign investors like ENEL, E.On and Fortum who, we pointed out, would not fail to leap to the defense of their interests. This is precisely what has happened. Received by Vladimir Putin on 28 November, the head of E.On, Wulf Bernotat reminded him that in 2007 the group had invested 4.6 billion euros to acquire a majority stake in OGK-4, one of the leading electricity generating companies. Emphasizing that the German side would respect all its commitments, he did not beat about the bush: One of the major parameters that governed our decision to make the necessary investments . . . was the liberalization of the elec-

Russia Intelligence N89 j December 15 2008

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RUSSIA INTELLIGENCE
BEHIND THE SCENE Belgrade approves NIS sale to Gazprom Neft
It was with a feeling of a duty well done that the large Russian delegation, led by Georgy Poltavchenko and Alexey Miller, left Belgrade on December 6. The previous day, Gazproms chief obtained what he had been seeking in vain since the spring political guarantees at the highest level on implementing the oil component of the bilateral energy agreements signed with great pomp at the Kremlin last January 25, in the presence of Boris Tadic and Vladimir Putin (Russia Intelligence n70 dated 31 January 2008). One may recall that the liberal wing of the government, centered around Serbian Economy Minister Mladjan Dinkie, immediately contested Gazprom Nefts purchase of Serbias national hydrocarbons company, NIS. Moscows fears that Serbia might change its mind intensified with the departure of its main backer in Belgrade, former Prime Minister Vojislav Kostunica, who lost the early legislative elections of May 11 (Russia Intelligence n77 dated 13 may 2008). The Serbian parliaments ratification of the bilateral agreement only partly reassured the Kremlin. Indeed, the Serbian side continued to campaign to revise the terms of the sale of NIS. In addition, it was worried over the fact that the launch of the South Stream gas pipeline, initially scheduled for 2013, had been postponed till 2015. The situation was such that nothing could be taken for granted on the eve of Alexey Millers visit to Belgrade on December 5, even though there was some indication that the Serbian side would finally give in on NIS (it was revealed in early December that the 2009 budget for the region of Voivodine, where most of the NISs industrial sites are located, included the 360 million euros it is supposed to receive in accordance to the terms of the contract with Gazprom). According to statements made by Alexey Miller following his meeting with Boris Tadic, all the documents resulting from the January 25 agreements will be signed before the end of the year, probably during the Serbian presidents visit to Moscow scheduled for December 17 and 18. The terms of the NIS agreement s remain unchanged. Gazprom will pay 400 million euros for NIS and an additional 500 million in investments between 2009 and 2012. It should be noted that this announcement coincided with the first session of the Russian-Serbian business forum in Belgrade. Its Russian co-chairman, Andrey Borodin, is president of the Bank of Moscow and has close ties to Yuri Luzhkov. d

Business & Networks

c cFOCUS

Caspian Pipeline Consortium: BP negotiates its way out

Unless there is a last minute surprise the question surrounding the extension of the Caspian Pipeline (CPC) that has been in suspense for several years logically should be settled on 17 December next. While rivalry between Russia, the western states and China for control of the hydrocarbon reserves of the Caspian Sea is at full swing, progress on these matters would give a major boost to Moscow and seal closer relations with Kazakhstan. For the record, the 1,500km oil pipeline links the Tengiz field in western Kazakhstan to the Novorossiysk oil terminal on the Russian side of the Black Sea. The pipeline, which came into service during the autumn of 2001, has an annual capacity of 32 million tonnes and is the only one crossing Russia to export oil that is not under the control of Transneft. The public operator controls only 31% of it (a 24% shareholding that it manages for the Russian State since April 2007 and the 7% belonging to the Sultanate of Oman purchased by Russia at the end of October - Russia Intelligence No. 87 of 6 November 2008). The CPCs other shareholders are the Kazakh government with 19%, Chevron - which operates the Tengiz deposit - with 15%, LUKarco (12.5%), Rosneft Shell Caspian Ventures Ltd and the Mobil Caspian Pipeline Company (each holding 7.5%), Agip International and BG Overseas Holding Ltd (each with 2%) and Oryx, 1.75%. For memory, over the last few years the CPC has been at the heart of the dispute between Moscow, Kazakhstan and most of the private shareholders Russia Intelligence No. 46-47 of 18 January 2007 and No.59 of 12 July 2007). Initially Russia blocked the plans to extend the CPC from 32 million tonnes to 67 million tonnes backed by Astana and the companies mining at Tengiz, linking any agreement to a series of conditions, especially concerning transit rights. These conditions having been accepted by the other members of the CPC, Moscow finally lifted its veto And all the more so that meanwhile, Kazakhstan has given Moscow guarantees to ensure that a part of the supplementary volumes go through the CPC may then be transported onwards to Bulgaria by tankers to supply the future oil pipeline that Transneft is to build between Burgas and Alexandroupolis (Russia Intelligence No, 52 of 16 March 2007). Everything seemed to have been settled until BP - which holds 6.6% indirectly through its shareholdings in joint ventures with Lukarco (a 46% stake with the rest belonging to Lukoil) and Kazakhstan Pipeline Ventures (a 50% holding with the other 50% belonging to the Kazakh national company KazMunaiGaz) - let it be known it did not agree with the financing arrangements for the plans to extend the Tengiz-Novorossiysk pipeline (evaluated at 2.5 billion dollars). The British side favored resorting to a loan while all the other shareholders preferred self-financing arrangements. BP, in fact, is the only CPC member not extracting oil in a Kazakhstan deposit and not therefore having the possibility of financing this investment with future reserves. Over the last few months the tone has risen as the situation becomes more urgent. The technical and financial feasibility studies soon expire and to start procedures again from scratch would require more than 18 months. Besides, the other CPC shareholders suspect BP of playing for time and to have ulterior motives in this matter. The British group in fact is the operator of the Baku-Ceyhan oil pipeline and would have everything to gain if part of the Kazakh crude oil extracted at Tengiz went through this pipeline whose annual capacity could be increased to 80 or even 100 million tonnes from 50 million tonnes now. Infuriated, the other shareholders decided to get on with matters and a memorandum with or without BP will be signed on 17 December and work will begin in April 2009. Transneft and Chevron, which have the most to lose from any delay, reserve the right to take legal action against BP in the United Kingdom in the case of persistent delays (at the beginning of the autumn, the head of Russias public operator Nikolay Tokarev, evoked the possibility of constructing another pipeline parallel to CPC-1). It is however not sure that the situation will come to this. BP has commenced talks with Lukoil and KazMunaiGaz with a view to its withdrawal from the CPC. There are likely to be some difficulties with regard to the price. Russia Intelligence will be watching this question its upcoming issues. d www.russia-intelligence.fr

Russia Intelligence N89 j December 15 2008

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INTERVIEW WITH XAVIER LE TORRIVELLEC c

Regions & CIS

The balance of powers is not in Bashkir President Murtaza Rakhimovs favor

As of the last census, taken in 2002, the Bashkirs (29.75%) are more numerous than the Tatars (24.13%) in their eponymous republic. As Tartar opponents like to remind us, these results are due to fraud, committed by the administrators appointed by the Bashkir president (knowing that it is easy to motivate a kolkhozian who rarely receives his salary in cash). The return to a certain demographic normality gives Bashkirs reason to legitimize the existence of a national territory. But such excesses reinforce the criticism of their opponents, as well of some foreign observers, against the ethnocratic dictatorship of President Rakhimov. The overriding impression is that relations between the ethnic groups are confrontational. Fortunately the reality of the matter is much simpler. The relative rise in the number of Bashkirs indicates that ethnic identification is clearly declining in favor of an identity choice: I am Bashkir because I live in Bashkiria, because my wife is Bashkir, because I want to be. A faster pace of urbanization and acculturation to Russian modernity has ended up breaking down traditional communities based on ethnic identity. Although national languages (Tatar, Bashkir, Udmurt, Chuvash) are still spoken languages in villages nationwide, in urban areas they are limited to the private sphere. Teaching the Bashkir language, which became obligatory on September 1, 2006, has not managed to limit the preference of non-Russian students in Bashkiria for the Russian language. Dropping all references to ethnic identity in Russian passports in 1999 marked a decisive breakthrough in favor of Russian citizenship (Rossijskij).
Certain observers in Moscow are worried that some young Muslims in the Volga basin are becoming increasingly radical. Are we witnessing the birth in Bashkortostan of a movement based on political Islam?

Bashkortostan has been the subject of some talk on Russias regional scene over recent months. Is President Murtaza Rakhimovs succession open?

After ten years of virtual independence under Yeltsin and eight years of progressive expropriation under Putin, the regional state of Bashkiria, like many others, is reflecting upon the conditions needed for its survival. Russian federalism is a type of political arrangement and at the moment the balance of powers does not appear to be in the Bashkir presidents favor, even though he was confirmed in his post in October 2006. The Bashkir Republic, which gets less media coverage but is economically more powerful than Tatarstan, is sought after by many Moscow investors present there. There is a fierce struggle going on to succeed Murtaza Rakhimov (74 years-old) who may leave his post before the legal end of his term in 2011. Gazproms participation in the Bashkir petrochemical complex (BTK, Bashkirskaja Toplivnaja Kompanja), obtained in 2003, has reinforced political pressure. Medvedevs mark is more apparent in the sidelining, on October 20, 2008, of the powerful interior minister Rafael Dibaev (who was blamed for the 2004 events in Blagoveshchensk. He had held the post since 1996) and the nomination on December 1 of a new minister, than in his potential support of Radiy Khabirov (head of the presidential administration, dismissed by M. Rakhimov in July). Having efficiently fought corruption in Karelia, Igor Alyoshin may soon initiate procedures against some high-ranking Bashkir officials. Meanwhile, the resistance is being organized around Rail Sarbaev, who was appointed prime minister in April 2008. He enjoys the administrative resources of the president and is expected to succeed him according to what the local press says. Sarbaev is also the straw man of Ural Rakhimov, the presidents son and director of the BK consortium (Bashkirskij Kapital), who embodies Bashkir resistance against the Russian stranglehold and who did not hesitate in defying his father by backing the April 2005 Bashkir Revolution so that BK may retain control of BTK.
Do you think it likely that a nationalist movement will emerge in Bashkortostan?

The Bashkir nationalist movement, on which the young Rakhimov regime based itself in order to legitimize its demands for national sovereignty, represented a real trend of public opinion relayed by several media intellectuals. As in other autonomous republics in Russia, the movement lost steam as it became more politicized. However, pressure from Moscow could provoke violent reactions amongst the few local activist groups that maintain the illusion of popular nationalism (as witnessed by certain excesses committed by the Union of Bashkir Youth, Sojuz Bashkirskoj Molodezhi). While Moscow considers that its hold on its territory is in response to its former disintegration, Bashkirs elite feels it is an infringement on their national integrity. There is the risk that the nationalist discourse (of the Bashkirs and the Tatars of Bashkiria) will become more radical and may be used politically.
The Bashkirs are in the minority in their republic. What sort of relations do they have with the two other large communities, the Tatars and the Russians?

Contrary to such claims that are aimed at inducing fear on the cheap, there is a rise and a growing diversity of ideological solutions available to individuals. We are witnessing, on a general level, a way of life that is drawing closer to that of western nations. Within this cultural homogenization, political Islam could be one solution in some socially dismantled environments such as certain towns undergoing industrial decline. There is the risk that the economic crisis, by casting doubt on what the new middle class has gained in terms of social stability, may reinforce some tendencies to ideological or religious radicalization. Such subjective choices are all the more important for young urban residents as they appear in a context where the pull of ethnic identity is waning. On August 20 last, the Bashkir security bodies arrested several members of a Bulgarian Jamaat saying they were terrorists linked to Al Qaeda. But knowing the Islamic scholars in charge of examining the documents collected leaves one with some doubts as to the veracity of the accusations. d

Xavier le Torrivellec is lecturer at the National Institute for Oriental Languages and Civilizations (INALCO, Paris) www.russia-intelligence.fr

Russia Intelligence N89 j December 15 2008

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Regions & CIS

Moscow region: Governor Gromov on the way out

him. Another sensitive issue is the plan to build a section of the Moscow-Saint Petersburg highway at Khimki. Approved by Boris Gromov in 2006, it involves cutting down dozens of hectares of theoretically protected forest land on the outskirts of the capital. As in most of the numerous cases throughout the country that are similar to this one, the matter could have remained there, except that it was brought to the notice of Dmitry Medvedev. On the eve of the presidential election, he was handed a petition signed by more than 10,000 Khimki residents. Three days later he ordered the Ministries of Transport, Natural Resources and Regional Affairs to engage verification procedures. Boris Gromov is also making headlines in an apparently more neutral domain soccer. Because of the financial crisis that is hitting the Moscow region very badly (Standard & Poor reduced its rating as of the end of September), the governor announced big cuts in some budgets, including sports. No longer able to subsidize Saturn and Khimki, the regions two clubs, he simply announced their merger. After having lost its forest, Khimki now faces the risk of losing its soccer club - to the very great dissatisfaction of thousands of supporters. Reliable sources believe that it is just a matter of weeks before Boris Gromov leaves his post. Undoubtedly in order to smooth the way, he was decorated at the Kremlin on November 7, his 65th birthday. The name cropping up most often to replace him is that of Sergey Sobyanin the former Governor of Tyumen, and currently head of the governments administration. d

In its most recent issue, Russia Intelligence indicated that a certain number of veterans of the regional political scene were in the sights of the Kremlin and that the Russian government was, in particular, considering a merger of the capital, Moscow, and its region, headed since 2000 by Boris Gromov, a retired general who commanded the Soviet troops in Afghanistan at the moment of their withdrawal in February 1989 and who in December 1994 drew attention to himself by taking a position against the intervention of the Russian army In Chechnya. Although, at the end of November, the governor took pains to deny rumors of his imminent resignation, his future has been looking increasingly bleak for several weeks. Three issues have created difficulties for Boris Gromov. The first concerns his former deputy in charge of finance, Alexey Kuznetsov. Responsible for the management of property belonging to the Moscow region, he had allegedly, over the last few years, approved grants of hundreds of hectares of land for building to the RIGroup, a company under the control of Zhanna Bullok, Alexey Kuznetsovs wife. A criminal investigation for abuse of power was opened by the general prosecutor who was surprised to discover that the former deputy governor was the holder of a U.S. passport, which is contrary to Russian law. And it was to the United States that Alexey Kuznetsov took flight less than 24 hours after having handed in his resignation at the end of July. Boris Gromov maintains that he was unaware of this matter, but there is no doubt that it will be held against

Water in the gas between Moscow and Minsk

received in the Kremlin and, all the more so that at the end of November Russia unfroze the first instalment of its two billion dollar stabilization loan promised at the beginning of the autumn. More fundamentally, Alexandre Lukashenkos overtures to the west (the most recent being the return of Narodnaya Volya and Nasha Niva, two opposition newspapers until now printed in Lithuania to Belarus newsstands) are creating some trouble in the Kremlin. The main consequence of putting off the 1 December meeting is the non-signature of the bilateral agreement on the unification of the anti-aircraft defense system. As far as one can see, the situation between Minsk and Moscow is unlikely to be resolved in the coming weeks. A recent statement by Rosselkhoznador, the health control body for agricultural products in Russia, pinpointing Belaruss deficiencies are a thinly veiled threat of trade sanctions. In a separate move, it has been learnt that on 26 November Vladimir Putin signed a directive concerning the launch of the project for the BTS-2 oil pipeline between Unechi and Ust-Luga (Russia Intelligence No.80 of 3 July 2008). The pipelines anticipated annual capacity is 50 million tonnes with the first section theoretically entering service at the end of 2012 - something that would deprive Belarus of the flows of Russian crude oil transiting through its territory. d

Things are no longer going well between Alexandre Lukashenko and the Russian authorities. In previous editions (Russia Intelligence No.82 of 28 August 2008 and No.86 of 6 November 2008), we analysed the mounting misunderstandings and grievances since the summer and tension now seems to be at a height. The latest incident is the suspension sine die of the session of the Supreme State Council (Vyshchy Gossovet), the highest authority in the Union State of Russia and Belarus. All the more attention is given to this decision as this summit meeting, originally set for 3 November, had already been put off until the beginning of December. The versions differ as to the reasons why the new meeting will not take place between Moscow and Minsk. Belarus wanted the summit to be an important bilateral event with the signature of the constitutional document of the Union State of Russia and Belarus at its center. It would appear that the Kremlins excess of caution convinced Alexandre Lukashenko of the uselessness of travelling to the Russian capital. This version is completely rejected by Moscow where it is considered that the Belarus leadership is seeking every possible pretext for not making progress in this matter. It is well known that Minsks position on the question of the recognition of Abkhazia and South Ossetia was not at all well One Year Subscription
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Russia Intelligence N89 j December 15 2008

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