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Strategies & Market Trends : Investment in Russia and Eastern Europe

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To: Real Man who wrote (1110)11/7/2000 12:47:07 AM
From: CIMA   of 1301
 
Putin's Power Base Deepening, Widening

Summary

Ahead of Russia's gubernatorial elections, incumbent governors have
been banned from running, accused of corruption and brought in for
questioning. The Kremlin is finding excuses to remove governors of
questionable loyalty and replacing them with men loyal to President
Vladimir Putin. In this way, Moscow will gain a stronghold over key
regions, and Putin will control federal administrative bodies such
as the Federation Council and the newly formed State Council.

Analysis

With upcoming gubernatorial elections in 32 of Russia's 89 regions,
Moscow has targeted certain incumbent governors for replacement by
men loyal to President Vladimir Putin. By replacing governors who
have questionable alliances, Putin will indirectly secure control
over some of Russia's most economically and politically lucrative
regions. Furthermore, Putin will directly control the overall
administration of the country.

In the first days of August, several military and security officers
announced they would run for governor of various regions in
upcoming November and December elections. Some Russian newspapers
claimed to have been provided with leaked documents outlining
Putin's support for these officers and listing the incumbent
governors to be replaced: Alexander Rutskoi, Aleksander Nazarov,
Leonid Gorbenko, Ivan Shabanov, Pyotr Sumin, Eduard Rossel, Yuli
Goryachev and Vyacheslav Lyubimov.

The Kremlin has denied any involvement in the gubernatorial
elections. Yet government agencies have targeted at least three of
the listed governors, and one incumbent has already been banned
from participating in the elections.

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The 89 regional governors also make up the Federation Council, the
upper house of Russia's parliament. By January 2002, the governors
will not sit on the Federation Council but will have the option to
join the newly created State Council, chaired by Putin. If Putin's
allies replace his enemies in the gubernatorial elections, he will
effectively control Russia's administration and economy.

In his press to impose order and regain control over the regions,
Putin is using a democratic forum to consolidate his power.

While some regional governors have openly supported Putin and his
initiatives, others have histories or philosophies threatening to
his ability to rein in regional authorities. Governors who do not
support Putin have been subject to tax raids, corruption scandals
and court injunctions in the weeks preceding the gubernatorial
elections.

The targeted governors preside over some of the more important
regions in Russia. For example, Alexander Rutskoi was incumbent
governor of the Kursk region. Kursk sits on one of the world's
largest iron-ore deposits, has eight oil and gas pipelines running
through it and produces one-sixth of Russia's total electrical
power. Rutskoi was banned from running in the Oct. 22 elections on
a technicality failing to register his car.

Rutskoi has a history of disloyalty and a reputation for acting
independently of the Kremlin. As vice president, he staged an
attempted coup against President Boris Yeltsin in 1993. He is also
friendly with Boris Berezovsky, a Russian oligarch and a Putin
enemy.

Since Rutskoi was banned from participating in the elections, Maj.
Gen. Viktor Surzhikov and Alexander Mikhailov participated in the
Nov. 5 run-off to be the governor of Kursk. Surzhikov is an officer
of the Federal Security Service (FSB), successor to the KGB, while
Mikhailov is a local Communist Party leader who is reportedly loyal
to Putin. Mikhailov won the election though Putin, a former KGB
officer, faced a win-win situation in Kursk.

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The Kursk region was the first of several areas targeted in the
upcoming elections. FSB and military officers who are loyal to
Putin and accustomed to taking orders are running against the more
independent incumbents of economically important regions like
Voronezh and the Urals regions.

Putin allies also seek to gain control of regions of strategic
rather than economic importance. Kaliningrad is a geographically
independent region of Russia, west of the Baltics, and secures
Russia's presence in Europe. The Kremlin has blamed Leonid
Gorbenko, Kaliningrad's incumbent governor, for the region's
economic decline and has accused him of corruption. His opponent,
Adm. Vladimir Yegorov, is the Baltic Fleet commander and supported
by Putin.

If Putin's allies gain control of these regions, then Putin will
indirectly control regional policy. By securing gubernatorial
allies, however, Putin also gains direct control over a potentially
powerful federal administrative body, the State Council. The new
Federation Council would consist of regional envoys appointed by
the governors.

In its present form, the State Council is supposed to function only
as an advisory body to the Kremlin. The Federation Council,
however, can vote to change the constitution to transfer functional
power over to the State Council. Several targeted incumbent
governors have been opposed not only to the transfer of powers, but
also to the creation of the State Council entirely.

If Putin can assemble his allies into the Federation Council, he
may be able to change the constitution to give the State Council
real power. Putin, as chairman of the State Council, would have
direct control over the council's proposed powers to review laws
and the federal budget. Putin would also control the governors who
appoint the representatives to the new Federation Council. At that
point, Putin would consolidate his power over two federal bodies
and economically or strategically important regions.

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