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To: Real Man who wrote (1081)1/8/2000 10:46:00 AM
From: Jon Koplik  Read Replies (3) | Respond to of 1301
 
To all - brief NYT piece on heating failure in some Russian villages.

January 8, 2000

Heating Failure in Russia's Far East

Filed at 4:14 a.m. EST

By The Associated Press

MOSCOW (AP) -- Thousands of people in Russia's Far East were without
central heating for a second day Saturday as temperatures hovered around
minus 15 degrees, a news report said.

About 6,800 residents in the village of Ugolnye Kopi lost heating on Friday
because a pump supplying water to the village's central boiler failed, the
ITAR-Tass news agency said.

Another 2,100 people in Mys Shmidta lost heating for the same reason
Saturday, but heating was restored to about half of the people later in the day,
according to the report.

Mys Shmidta is located on the Chukchi Sea coast above the Arctic Circle,
while Ugolnye Kopi is just below the Arctic Circle on the Bering Sea.
ITAR-Tass said people in the villages were using electric heaters in an effort
to keep their apartments warm.

Copyright 2000 The New York Times Company



To: Real Man who wrote (1081)2/8/2000 2:44:00 AM
From: CIMA  Respond to of 1301
 
Herding Pariahs: Russia's Dangerous Game

Summary

Throughout the Cold War, the Soviet Union supported a number of
weak, corrupt states - from Angola to North Korea - in order to
offset the West. When the Cold War ended, Russia no longer needed
or wanted to maintain its global confrontation with the West, and
it cut these allies loose. Now, however, after a decade of
diplomatic and economic silence between Moscow and its former
client states, Russia is reactivating some of its old
relationships. This will ultimately help rewrite the rules of
relations with the West.

Analysis

Despite Russia's social, demographic and economic decline, Russia
under acting President Vladimir Putin is managing to politically
reassert its interests throughout much of the former Soviet Union.
At the recent summit of the Commonwealth of Independent States [
stratfor.com], Putin
demonstrated his ability to lure and cajole the other CIS members
into cooperation. Putin's tough line in Chechnya
[http://www.stratfor.com/CIS/commentary/c0001190220.htm], too, has
earned him fear and grudging respect in much of the former Soviet
Union. Yet the Chechen war has all but ostracized Russia throughout
the West.

As a result, an upcoming trip by Russian Foreign Minister Igor
Ivanov to North Korea illustrates a new decision by Moscow to
change the rules of the larger diplomatic game with the West. No
longer content to dine on the scraps the West deems fit to dispense
from the table of the IMF, the Putin government is attempting to
increase Russia's leverage by re-activating Soviet-era
relationships. In doing so, Moscow is clearly attempting to alarm
Western governments.

Ivanov is set to visit North Korea Feb. 9-10, the first time in a
decade that Russia has significantly engaged the Pyongyang
government. The last major dignitary from Moscow was then-Soviet
Foreign Minister Eduard Shevardnadze in 1990. Like Shevardnadze
then, Ivanov now will discover an economically backwards, corrupt
and teetering regime that has survived by completely separating
itself from the international community. In the Russian government
press, a so-called Treaty on Friendship, Good-Neighbor Relations
and Cooperation, which will be signed, is being trumpeted as an
important event. The Putin government hopes that North Korea will
function as a geopolitical level for Russian influence in a very
dynamic - and very tense - region.

On another front, at least one prominent politician has announced
that another old relationship is being revived: the one between
Moscow and Baghdad. Vladimir Zhirinovsky, head of the ultra-
nationalist Liberal Democratic Party, announced Feb. 7 that he
reached an agreement with Iraqi President Saddam Hussein on the
stationing of Russian warships at Iraqi naval bases. It remains to
be seen whether the Russian government was even aware of
Zhirinovsky's efforts, but the goal appears the same - gaining a
potential diplomatic lever that will complicate every Western
action in the Persian Gulf.

Ivanov is also planning to visit Vietnam Feb. 13-14. Due to a large
population, mineral resources and proximity to trading routes,
Vietnam holds significant promise as a trading partner for Russia.
Politically as well, Vietnam and Russia share a significant
relationship. Vietnam serves as the coordinator of relations
between Russia and the Association of Southeast Asian Nations. This
role, the Moscow-Beijing relationship and Russian membership in the
Asia Pacific Economic Cooperation trade grouping are Russia's three
links to the Pacific Rim. Furthermore, Vietnam's recent decision to
abandon economic reforms has left it looking to old allegiances for
support.

Russia views these states as political chips in a larger game with
the United States. North Korea, Iraq and Vietnam oriented toward
Moscow would grant Russia the ability to apply pressure on three
regions vital to U.S. security.

However, Moscow's attempt to rewrite the geopolitical rules will
not come easily. Iran, despite its past friendly relations with
Russia, will react sharply against any new foreign presence in the
Persian Gulf. China will not take kindly to any Russian attempts to
gain influence either in North Korea and Vietnam.

But the prime target of Russia's change in strategy - the West -
seems oblivious to the change. Europe and the United States are
still holding out the possibility of IMF loans if Russia rectifies
its bad behavior in Chechnya. However, few in the West realize that
Russia no longer cares. After 10 years of nearly terminal decline,
Russia has ceased to play by Western rules.

The new strategy is risky. Putin is hinting at the potential of
confrontation with the West, knowing full well that its choice of
strategies may place Russia against Iran and China as well. But the
Putin government appears to believe that Russia can no longer
remain in its intolerable economic and political limbo. Instead, it
is striking out on tried-and-true methods of global engagement that
worked for the Soviet Union for a half century. Ivanov's trips to
North Korea and Vietnam are but the opening steps.

(c) 2000 WNI, Inc. stratfor.com

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To: Real Man who wrote (1081)3/15/2000 5:21:00 PM
From: CIMA  Respond to of 1301
 
Putin's Friendly Face Will Not Last

Summary

Acting Russian President Vladimir Putin has made a number of
conciliatory statements toward the West over the past few weeks. In
doing this, Putin not only strengthens his already ironclad
election campaign, but also establishes himself as someone with
whom the West can do business. This will not change facts on the
ground. The West has no desire to assist Russia unless it agrees to
conditions that Putin would never accept. The West will refuse to
make any economic or political concessions to Russia, and as a
result Putin and the Russian leadership will become more vitriolic
than ever.

Analysis

The Times of India reported March 13 that Putin suspended the
transfer of sensitive military technology to China. If true, this
apparently pro-Western move marks another step in acting Russian
President Vladimir Putin's tightrope walk between seeking a less
acidic relationship with the West and catering to Russian
nationalist passions. For the next few months Putin will lean
increasingly toward an open rapprochement, knowing full well that
his attempts will fail. But in failing, he will establish in
Western and Russian eyes the need for a powerful - and by necessity
ruthless - leader in Moscow.

Putin's past actions show he is willing to wield a political stick
both at home and abroad in his efforts to establish Russia as a
strong state with a strong regime. The war in Chechnya - atrocities
and all - vividly demonstrates the lengths to which he will go. His
use of less than polite methods of diplomacy in bringing Georgia
and Ukraine to heel grant a glimpse into what he may one day be
willing to do to increase Russian influence over other areas of the
former Soviet world. His willingness to court former Soviet client
states shows he is willing to adopt riskier - and much more
confrontational - strategies should the West seek to isolate
Russia.
stratfor.com
stratfor.com
stratfor.com

But in recent weeks Putin has shown a more congenial face. In late
February, Putin forced the Russian security services to release
Radio Free Europe journalist Andrei Babitsky over the protests of
many in the Duma. On March 5 he startled the world by rather
flippantly stating that there was no reason why Russia could some
day join NATO. His March 11 meeting with U.K. Prime Minister Tony
Blair was all sunshine and compliments. On March 13 the Times of
India - the paper of choice for KGB leaks during the Cold War -
cited a report that Putin had suspended the transfer of sensitive
military technology to China. If true, it would be a policy shift
that would be sure to please the United States. As part of a
carefully calculated strategy, the carrot has supplanted the stick.

This kinder, gentler face serves a number of purposes. First, it
provides an olive leaf to Russia's battered liberals and reformers.
The largely pro-Western liberals were soundly trounced in Russia's
Dec. 19 parliamentary elections and participated in the boycott of
the Duma to protest Putin's embracing of the Communists. Making
pro-Western statements could lure liberals into supporting Putin's
presidential bid in the March 26 elections. Putin is already
expected to garner more than 50 percent of the votes and thus
handily defeat the other 11 candidates without need for a second
round of voting; with liberal support, Putin would win a commanding
mandate to boot. This would strengthen Putin's standing both at
home and abroad.

Putin's statements target an international audience as well. Russia
cannot support its current budget without a new source of funding.
First Deputy Prime Minister Mikhail Kasyanov is appealing to
Western governments and the International Monetary Fund (IMF) to
agree to both debt forgiveness and new loans. By making
conciliatory statements Putin is helping to pave the path.
stratfor.com

After Putin is elected, there will be a flurry of high-level
meetings as Putin and Western leaders size each other up. Russo-
American and Russo-Japanese summits are already in planning. The
crown jewel of these encounters is the Group of Eight meeting in
Okinawa, Japan, June 21-23. Putin's friendlier face is essential in
his attempts to obtain new loans, technology transfers, foreign
investment and a seat for Russia at international tables. These are
all prizes that Russia desperately needs, and Putin is willing to
make sacrifices to achieve them.

Putin's diplomatic overtures will largely fail, and he knows it -
even expects it. The Russian economy, despite having grown slightly
in 1999, remains corrupted and anemic. The lack of a functioning
legal or banking system and ongoing investigations into money
laundering will keep foreign investment - both public and private -
away. Germany, afraid to lose even more money in the Russian abyss,
will refuse substantial renegotiation of Russia's $43 billion in
debt to the Paris Club, a group of governmental lenders. The
European Union and NATO, both preparing to expand further east,
will continue to turn a partially deaf ear to Russian protests.
Even if the West were committed to salvaging Russia, the task is
now so mammoth that the combined economic might of the West could
well prove insufficient.
stratfor.com

But Putin's openness will establish Russia as the party seeking
closer ties, and the West as the party that rejected the hand of
friendship. This rejection will allow Russia's leader to again -
and justifiably - wield the stick from Moscow. In the months after
the G-8 summit - the locale where the West's rejection will be made
clear - there will be subtle splits within the West. Several states
- such as France - will seek to engage the new face of Russia.
Putin will stretch this policy of smiling, rabid nationalism as
long as he can, on one hand building up Russia's military and
preparing for the worst, and on the other continuing a sporadic
dialog with Washington and Brussels and hoping for the best. The
West is mirroring this policy by simultaneously promoting a greater
cooperation while continuing with NATO and European Union
expansion. This partial engagement - and the partially friendly
face of Russia - cannot last long.
stratfor.com
stratfor.com

Putin's support base consists of the military and intelligence
services, covered with a mantle of nationalism. This will certainly
grant Putin the presidency and allow him to carry on the war in
Chechnya, yet neither Putin nor his advisors have managed to
produce a coherent economic plan. Without continued confrontation
and a target for Russian anger, Putin cannot placate the
nationalists. Without economic recovery primed by foreign
investment, he cannot disarm them. Eventually, the nationalist
avalanche Putin started will overtake him, possibly even bury him,
and the West can do nothing to help. The aftermath will feature an
embittered Russia that the West spurned - and a leader with a very
large stick.

(c) 2000, Stratfor, Inc. stratfor.com

__________________________________________________

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Phone: 512-583-5000 Fax: 512-583-5025
Internet: stratfor.com
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To: Real Man who wrote (1081)3/20/2000 1:36:00 AM
From: CIMA  Respond to of 1301
 
Balkan Futures

Summary

Nearing the anniversary of the Kosovo war, it is time to consider
winners and losers. Things are not as clear as they were a year
ago. President Slobodan Milosevic has survived his defeat and the
territorial integrity of the rest of Belgrade's domain appears
intact. The Kosovo Liberation Army (KLA) is eager to establish an
Albanian state in Kosovo but is blocked by NATO. And the alliance -
unable to suppress the guerrillas, unable to withdraw and unwilling
to negotiate with Milosevic - is devoid of options. A year later,
Milosevic seems both secure and hopeful that events are moving his
way. In an odd parallel to Saddam Hussein's experience, being
defeated by the West may open doors rather than close them.

Analysis

It's been almost a year since the beginning of the Kosovo war and
it is time to take stock. In many ways, it is easier to understand
what has happened than what is going to happen, not only because
the future is inherently unknowable, but because the future of the
Balkans is particularly opaque. It is made opaque by three facts.
First, NATO has enabled the Kosovo Liberation Army (KLA) to come
close to its goal of creating an Albanian state in Kosovo. Second,
NATO has failed to break the Serbian nation and to deprive it of
the means to influence events in Kosovo. Third, NATO does not want
to see an Albanian state in Kosovo nor does it want to see Serbian
power re-emerge.

In short, the two national competitors, Serbs and Albanians, remain
in place while NATO stands opposed to both of their national
aspirations. To further complicate matters, since it lacks the
necessary military power NATO is neither in a position to impose
its will, should it actually redefine its policy, nor is NATO in a
position to withdraw. Thus, we are in a three-player game in Kosovo
in which none of the parties will or wishes to abandon the field
and none can prevail. NATO has maneuvered itself into a position
where it threatens the national aspirations of both Serbs and
Albanians simultaneously, yet lacks the force to govern directly.
This is a prescription for chaos.

To fully appreciate the danger of the situation, we need to
understand that both the Albanians and Serbs find themselves in
very similar strategic positions. Both sides have achieved the
underlying preconditions necessary to move from a defensive to
offensive position. Each side is probing the others' (and NATO's)
weaknesses. Thus, each side is daily becoming more aggressive.

A year ago, the Albanians as a whole and the KLA took advantage of
what Serbia was providing, an image of an ethnic population
undergoing massive violations of human rights. The goal of this
campaign was to trigger a NATO intervention against Yugoslavia. The
Albanians had a fairly sophisticated understanding of the
consequences of NATO intervention. NATO's actions would expel
Serbian armed forces from Kosovo, which in turn would force at
least a partial withdrawal of the Serbian population, who would
make one of two assumptions:

1. That NATO was in favor of a Kosovo cleansed of Serbs and that it
was, in effect, a full ally of Albanian national aspirations.
2. That NATO, whatever its intentions, was ineffective in defending
the Serbian population from KLA attacks.

The KLA took advantage of Serbian actions, Western perceptions and
political realities within NATO capitals. NATO intervention allowed
the KLA to lay the foundation for an effective strategy toward some
clear goals.

Let's consider the KLA's strategic goals:

1. Becoming the preeminent political force among Albanians in
Kosovo.
2. The creation of a KLA-dominated government in Kosovo.
3. The unification of Kosovo with Albania proper under a government
dominated by the KLA and its allies.
4. The extension of Albania to all areas populated by Albanians.
5. The creation of an Albanian entity that is secure, regionally
dominant and that controls the primary trade routes from Turkey to
central Europe.

The KLA achieved its first goal when the United States and NATO
were forced to rely on it to enable ground operations in Kosovo.
NATO depended on the KLA for intelligence, to pin Serb ground
forces down during the bombing operation and to enable NATO's
special forces to carry out operations in the region. This
dependency gave the KLA three advantages. First, as a primary
intelligence source for NATO, the KLA was able to shape NATO's
understanding of what was happening on the ground. This, in turn,
shaped NATO operations in favor of the KLA not only in relation to
the Serbs, but also in relation to other, non-KLA Albanian
political forces. Second, by supplying and supporting KLA forces
during the conflict, NATO strengthened the KLA in relation to other
Albanian factions, while providing the KLA with a political
imprimatur as NATO's anointed. Finally, in relying on the KLA for
civil administration after the war, NATO made the KLA the de facto
government of Kosovo.

Having achieved its first goal, the KLA is now engaged in pursuing
its second: the creation of a KLA-dominated government in Kosovo.
This has led to an interesting reversal. NATO, the KLA's enabler
in its first phase, is now the KLA's primary block in achieving its
second goal. NATO cannot tolerate the KLA achieving its second
strategic goal for domestic political and geopolitical reasons.
Domestically, an Albanian state in Kosovo, with the inevitable
ethnic cleansing of Serbs, would provide armed political opponents
of NATO governments. Some of these countries, like the United
States, are currently in the midst of elections that are devoid of
international content. The triumph of the KLA would give George
Bush a weapon that Clinton must deny him.

There is also a deeper geopolitical reason. The creation of an
Albanian Kosovo would inevitably lead to its integration with
Albania proper. It would create the demand for border
rectifications with countries like Macedonia that have Albanian
populations, making Albania a dominant regional power. Although
Albania is one of the most impoverished areas of Europe it must be
remembered that there is a massive throughput of narcotics that
could provide resources for improving Albanian military capability,
if not standards of living. This is not something that other
countries in the region want to see. In particular, Greece and
Italy, both NATO members with important national interests in the
Balkans, would be upset with this evolution. Therefore, NATO,
having helped the KLA achieve its first strategic goal, must now
act to block its second strategic goal.

Complicating the situation dramatically is the fact that the Serbs
themselves now find themselves in a much more favorable strategic
position than they were just a few months ago. Consider Milosevic's
strategic interests:

1. Stay in power in Belgrade.
2. Prevent the further disintegration of the Yugoslavian
Federation.
3. Reclaim lost territories and integrate areas that are
predominantly Serbian.
4. Make Serbia the preeminent power in the Balkans.

It seems clear, a year after the war began, that like Saddam
Hussein, Milosevic is not going to fall. The facile assumptions
made after the war that he could not survive his humiliation by
NATO have proven false. Milosevic was certainly despised by many
factions for leading his country into war and being outmaneuvered
by NATO, but he retained substantial support. NATO's persistent
anti-Serbian policy had persuaded many Serbs that NATO, for some
uncertain reason, meant to obliterate the Serbian nation. Milosevic
was seen as a champion of Serbia and as NATO's victim. He presented
himself as a man who had thwarted NATO's true ambitions by
confining Serbia's defeat to Kosovo.

At the same time, the democratic opposition that NATO had
fantasized about was neither as democratic as NATO believed, nor as
united. Certainly, it was not as powerful as NATO believed.
Whatever bitterness there was toward Milosevic's mishandling of the
war, the opposition was perceived as being opportunists, or worse,
as tools of NATO. His opponents were made to look like traitors.
Therefore, in spite of intense efforts by NATO to topple Milosevic
after the war, all that it achieved was to flush Milosevic's
opposition out into the open, and force it to display its
impotence. This substantially strengthened Milosevic's hand. As
with Saddam, the mere fact that Milosevic survived helped restore
his credibility.

Milosevic then was able to block the further disintegration of
Serbia by outmaneuvering Montenegrin separatists until even NATO no
longer had any confidence in them. Milosevic's ability to sustain
the presence of Federal forces in Montenegro was the first step.
When Montenegro's political evolution led to its remaining inside
the Yugoslav federation, the logic of disintegration was aborted.
Vague discussions of Vojvodina's seceding to Hungary, the entry of
NATO forces into Serbia proper and other territorial fantasies
petered out over the year. The breaking point came recently. When
the KLA tried to generate anti-Serb actions among Albanians still
living inside Serbia, NATO itself was forced to protect the Serb
frontier. During raids carried out last week, it actually struck at
KLA bases along the border. NATO is now protecting the territorial
integrity of the rest of Serbia. The main threat to Serbia's
territorial integrity, NATO's covert and overt operations, has
dissolved. What is left of Belgrade's domain will survive.

That leaves Milosevic with his third goal: reclaiming lost
territories, beginning with Kosovo. Milosevic now sees time on his
side. Milosevic never understood the alliance between NATO and the
KLA. He never understood that there was no deep, geopolitical
community of interest between the two, but that what bound them was
NATO's domestic political situation and the KLA's ambitions. He
did not expect NATO and the KLA to split because he never
understood how shallow the ties were. Milosevic is undoubtedly
delighted by his new understanding of the situation. As the KLA
pressed forward with its second strategic mission, it forced a
split with NATO that directly benefited Serbia.

NATO's entire mission is now based on a rapidly dissolving
foundation. Unless NATO can convince the KLA to abandon any further
strategic ambitions-which is unlikely-it is going to find itself
trapped between the absolutely unforgivable Milosevic and the
utterly ungrateful KLA. NATO cannot withdraw without being made to
look imbecilic and it can't stay without great danger.

From where Milosevic sits, this is an ideal situation. If NATO
leaves, the Serbs still enjoy military superiority over the
Albanians and will be in a situation to intervene. On the other
hand, the longer NATO remains, the less sympathy in the West for
the Albanians. If NATO stays, it will inevitably become dependent,
at least covertly, on Serbs in Kosovo, and perhaps on the other
side of the border as well.

The KLA cannot hold back. They have their own intense credibility
problem. NATO is now clearly going to try to create a non-KLA
political alternative among the Albanians. More important, NATO
has a strategic card to play against the KLA. We give substantial
credence to reports that not only is KLA a critical part of the
global narcotics traffic system, but that it is using Kosovo as a
transshipment point. NATO does not have sufficient forces in
Kosovo to bring peace, but it has sufficient capability to
interrupt parts of the drug trade. If the KLA hangs back it risks
the emergence of new political forces under NATO sponsorship. If
it strikes at NATO, NATO can strike back at a fundamental interest
of the KLA. In either case, the KLA cannot pursue its other
strategic interests while NATO is still there.

The KLA always wanted NATO out, but expected it to destroy the Serb
Army for them. That hasn't happened and that has created a
tremendous dilemma for the KLA. It cannot tolerate NATO in Kosovo
and it is not yet in a position to defend against Serbia. It can no
longer expect NATO to finish off the Serbs and it can no longer
expect NATO to ignore KLA operations. The KLA has been trying to
get NATO to strike across the border, but instead NATO struck at
the KLA.

NATO is desperately signaling the KLA to rein itself in. But if
the KLA complies then its dream of a KLA-dominated Kosovo must be
abandoned and the narcotics trade that finances it will be
vulnerable to NATO pressure. It can't make the deal that NATO has
offered: temporary control over part of Kosovo at the discretion of
NATO. It just isn't enough.

The winner, at this rate, is going to be Milosevic. If NATO and
the KLA come to blows, then time is entirely on his side. Either
NATO will increase its presence in Kosovo in order to crush or cow
the KLA - unlikely - or NATO will have to open lines of
communication or coordination with the Serbs. Alternatively, NATO
can withdraw, in which case the correlation of forces will favor
the Serbs against the Albanians.

A year after the war began, Milosevic remains in power in Belgrade
and time appears to be on his side.

(c) 2000, Stratfor, Inc. stratfor.com

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To: Real Man who wrote (1081)6/22/2000 9:10:00 PM
From: CIMA  Respond to of 1301
 
As a WTO Member, Georgia Gains the Upper Hand

Summary

The Republic of Georgia officially became the 137th member of the
World Trade Organization (WTO) on June 14, joining Estonia,
Kyrgyzstan and Latvia as the only former Soviet states within the
global trading body. Russia, too, is trying to garner membership;
but before Russia can gain entry, it must first obtain approval
from all current members - including its former Soviet republics.
This will allow several of Russia's neighbors to wring considerable
economic concessions out of Moscow - and spark a membership race
for the rest.

Analysis

Georgia joined the World Trade Organization (WTO) as its 137th
member on June 14, a mere four years after submitting its
candidacy. Such membership grants Georgia preferential access to
the markets of all other WTO members - most of the world's largest
and richest - as well as direly needed investment and export
opportunities.

Georgia - along with the other former Soviet states of Estonia,
Kyrgyzstan and Latvia - now has a voice in formulating WTO policy.
More importantly, they can block new applicants from becoming
members - notably, Russia.

Much in the way that the European Union (EU) managed to wring
economic concessions out of China before approving Chinese
membership in the WTO, Estonia, Georgia, Kyrgyzstan and Latvia will
be able to influence Russian economic policies with respect to
themselves.
________________________________________________________________
Would you like to see full text and graphics?
stratfor.com
___________________________________________________________________

In the past Russia has spurned free trade agreements with the
Commonwealth of Independent States (CIS) because they threaten
Russia's mid-term economic and political power. A free trade zone
would sacrifice Russia's current position of preeminence, allowing
other CIS producers to undercut Russian producers in the Russian
market.

However, now Estonia, Georgia, Kyrgyzstan and Latvia will be able
to demand full access to the Russian market. Georgia may even try
to link WTO membership to the removal of Russian troops from bases
in Georgia.

If Russia refuses, it will be barred from the WTO and therefore
continually denied preferential access to most of the global
economy and the large-scale investment that it so desperately
needs.

Once Russia obtains membership, its room to maneuver against its
former colonies will shrink further. All of the former Soviet
states depend upon Russia - to varying degrees - for oil, natural
gas and transportation routes. In the past, when one of the smaller
states engaged in a policy Moscow perceived as against its
interest, Russia has been quick to use its economic levers as
political punishment.
_______________________________________________________________
For more on Russia, see:
stratfor.com

For more on Georgia, see:
stratfor.com
__________________________________________________________________

Once Russia joins the WTO, this behavior will be prohibited. The
WTO structure actually allows states that have been so wronged to
sue the perpetrator. The WTO has even ruled against such major
economic powers as the United States, the European Union and Japan.

However, this adjudication regime is not fool proof - by far. The
process of suing can take up to two years, and in the past large
powers have defied the WTO ruling, as did the European Union with
regard to banana imports.

Russian-Latvian negotiations on sticky issues such as banking,
customs and transport have already begun with the Latvians
gleefully informing Russia of Latvia's "requirements."

Soon Russia will have to face similar humiliating negotiations with
the other three colonies-turned-WTO members. The smaller states
will largely seek what the rest of the WTO members want:
predictable market access and an expansion of rule of law.

Moscow will no doubt find these negotiations galling. But if it
doesn't complete them now, it will present the opportunity for
other former Soviet states - perennially in a position of weakness
vis-a-vis Russia - to join the WTO first.

Russia may find the idea of economic concessions to Estonia and
Georgia annoying, but concessions to the more significant states of
Ukraine and Uzbekistan could cause real damage to Russia's short-
term economic plans. Azerbaijan, Armenia, Belarus, Kazakstan,
Lithuania, Moldova, Uzbekistan and Ukraine have already submitted
applications. Of these, Lithuania is the only shoo-in for
membership.

The WTO will reduce Russia's ability to unilaterally bully those
states of the former Soviet Union that have pursued liberal
economic policies. But that ability cannot be eliminated. Russia
still controls the only feasible export route for Kyrgyz goods, the
only efficient oil supplies for Lithuanian refineries, a main
source of power for Ukraine and a wide array of other economic
necessities.

But negotiations to join the WTO - and WTO regulations themselves -
will provide Moscow's former territories with considerable
leverage. And leverage is something that, until now, they have
utterly lacked.

_______________________________________________________________
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To: Real Man who wrote (1081)7/13/2000 5:18:05 PM
From: CIMA  Respond to of 1301
 
The Dilemma of Russia's Anti-Corruption Campaign

Summary

Russian President Vladimir Putin's campaign to wrest control of the
economy away from the oligarchs is moving along briskly, propelled
by a series of corruption investigations. But this campaign is at
least rhetorically rooted in the rule of law and as a result, the
president's efforts may ultimately snare his own allies in the
government. Soon, the Russian president will confront a choice:
temper his campaign or be labeled a fraud.

Analysis

With tax, corruption and embezzlement investigations against top
Russian corporations proceeding at a blistering pace, President
Vladimir Putin is making great strides in his efforts to rein in
Russia's oligarchs. So far, the government has launched
investigations or filed charges - ranging from fraud to tax evasion
- against 13 major business leaders whose companies include Media-
MOST, LUKoil and Gazprom.

However, as these investigations widen, they are beginning to take
in some of Putin's own associates. The president may be dangerously
close to compromising key political allies in his widening
crackdown on the oligarchs. Putin's own prime minister, Mikhail
Kasyanov, has been under scrutiny for alleged ties to organized
crime. If Putin spares allies like Kasyanov, the president will
lose political legitimacy and be branded an autocrat.

On July 12, investigators from the Russian Federal Tax Police
Service (FSNP) announced the launch of a criminal case against auto
giant AvtoVAZ. Vyacheslav Soltaganov, director of the tax police,
told ITAR-Tass that the company, headquartered in the central
Russian city of Togliatti, had concealed hundreds of millions of
dollars from taxation by producing multiple vehicles with the same
serial number - and then reporting the manufacture of a single
automobile.
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With this case, investigators can snare more than a company set on
a bold scheme; they can also snare two of Russia's most powerful
businessmen. One is Boris Berezovsky, director of LogoVAZ,
AvtoVAZ's sales arm, and most recently a detractor of the
president's. Berezovsky has been named in the most recent criminal
charges. The second man, AvtoVAZ Director Vladimir Kadannikov, said
that the company would appeal the decision and the charges would
not impact a joint production deal to be signed with the American
auto giant, General Motors.

The tax police have simultaneously opened criminal charges against
Russian oil giant, LUKOil, and its director, Vagit Alekperov. Tax
Minister Gennadiy Bukayev told Interfax that the company had
concealed revenue in "especially large amounts." Ironically, the
tax minister himself had praised the company in May, handing it an
award for being a conscientious taxpayer. Bukayev told Interfax
that the company had won the award based on its own tax reports.
Evasion was only discovered in a subsequent investigation.

The sweep of the government's investigation is now expanding
exponentially, snagging the largest names in Russian business. The
Media-MOST empire, which owns banking, broadcasting, satellite
communications and banking interests, has been raided repeatedly.
Gazprom, the country's natural gas giant, and its director, Rem
Vyakhirev, are under investigation for questionable loans to Media-
MOST. The director of LUKOil, Vagit Alekperov, the country's
largest oil concern has been charged with tax fraud.

After years of corruption and crony capitalism, Putin is attempting
to regain control of the Russian economy by imposing the rule of
law. Successful investigations will allow the government to recover
assets that were pillaged while at the same time reassuring nervous
foreign investors that there corruption won't be tolerated in the
Russian economy.
_______________________________________________________________

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__________________________________________________________________

But the success of the crackdown will generate its own logic - and
a dilemma for the president. All the same allegations that are
befalling Berezovsky, Alekperov and Gusinsky could be pinned on
Putin's allies in the Duma. Kasyanov, for one, is under attack in
the Duma for alleged ties to organized crime.

Putin will soon privately grapple to build a firewall between his
allies and his foes. The web of oligarchs extends right to the door
of the president. Putin must now decide whether to let his allies
fall in the name of the law - or protect them and undermine his
campaign and his own authority.

_______________________________________________________________

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To: Real Man who wrote (1081)7/17/2000 12:51:39 PM
From: CIMA  Respond to of 1301
 
Superpower vs. Great Power: Inside the Russian Defense Debate

Summary

A critical debate inside the Russian defense establishment has
burst into public view. Moscow's military and civilian leaders are
weighing continued dependence on nuclear weapons versus a new
conventional focus. Russia is at a crossroads, forced to choose
between a global role and a regional one. At stake are the future
of Russian national security and the fledgling presidency of
Vladimir Putin.

Analysis

Last week, a critical debate that had raged inside the Russian
defense establishment broke into public view. Russian Chief of
Staff Anatoly Kvashnin recommended that Russia's strategic nuclear
force - long a separate branch of the military - be absorbed into
one of the other branches of the armed forces. He also proposed
that spending on nuclear forces be instead directed toward
conventional forces.

On Friday, Defense Minister Igor Sergeyev publicly blasted
Kvashnin's arguments, calling them a "crime against Russia and just
plain madness." President Vladimir Putin was forced to intervene.
Interestingly, he did not intervene on either side; instead, he
demanded that the public battling cease. But clearly, the private
battle will continue.

In a sense, the mere fact that the subject is being debated
represents a major victory for the Russian president. Post-Soviet
Russia has not had a coherent national security policy. Former
President Boris Yeltsin neglected national security on the premise
that building the Russian economy, with the bricks and mortar of
Western investment, took priority. It followed that political and
military confrontation with the West was essential. Both
deliberation and investment in national security were deemed
counter-productive and anachronistic.
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Yet, Russia under Yeltsin grew not only poor but also powerless. In
Kosovo and elsewhere, the West has treated Russian national
security with an indifference bordering on contempt. The explosive
debate in Moscow indicates that the new Russian president is
succeeding in reviving the notion that Russia requires a national
security policy.

The outcome of this debate will define not just policy, but how
Russia views its place in the world. Nuclear weapons constitute
less an instrument of war than a measure of Russia's self-image.
The debate over them and the way that Moscow constitutes its forces
in the coming years will reflect whether Russia intends only to be
a great power or whether it aspires, again, to the status of
superpower.

The definition of each is more complex than it seems at first
blush. The Soviet Union saw itself as a superpower. But unlike the
American definition - projecting power globally - the Soviet Union
relied instead on covert operations in support of wars of national
liberation to influence events.

Another definition of superpower lies in the ability to strike
globally. Although the Soviets had nuclear weapons during the
1950s, they did not have an intercontinental delivery system until
the mid-1960s. Nor did they have facilities close enough to the
United States for basing intermediate range ballistic missiles and
bombers. The United States, however, could strike both from the
continental United States and from bases surrounding the Soviets.
One half of the debate in Moscow carries at least faint echoes of
this bygone era.

Himself a career missile officer, Sergeyev certainly recalls the
era of the big bluff, during the 1950s and early 1960s, when the
Soviets tried to convince the world that they had the ability to
annihilate the United States when, in fact, they had nothing of the
sort. Sergeyev participated in the process where the Soviets first
gained the ability to strike and then achieved parity with the
United States. For Sergeyev, this was and remains the definition of
a superpower. Giving up ground so painstakingly won is unthinkable.
_______________________________________________________________

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__________________________________________________________________

Sergeyev has a case. Washington must calculate the potential threat
posed by those weapons. As important, the mere threat of use can be
a wedge between the United States and its allies. So long as it
enjoys formal nuclear parity Russia can at least lay claim to being
a superpower. Without these forces, Russia is just another vast,
Third World country.

Kvashnin, on the other hand, is confronting Russia's immediate
geopolitical requirements. These consist of four elements:

1. The territorial integrity of the Russian Federation must remain
under the control of Moscow. This means preventing secessionist
tendencies in places like Chechnya. Russia must also be in a
position to defend its frontiers and territorial waters.

2. Moscow must insist on the neutrality of the rest of the former
Soviet Union. Russia cannot afford to have NATO extend its
membership to the Baltics or Ukraine. Nor can Central Asia fall
under Western or Chinese influence.

3. Russia must have military forces sufficient to influence the
calculation of NATO, as well as the strategies of the former Soviet
republics. Beyond a buffer zone, Russia must work to create a
sphere of influence throughout the former Soviet Union and as far
away as Eastern Europe. Forces must be available both to threaten
operations and to execute them

4. Russia must create a force capable of the first two missions
within the constraints of the Russian economy. This is actually a
more complex issue than it appears, since defense spending can
dramatically stimulate economic growth as well as drain resources.
Nevertheless, in the immediate future, there are limits to what
Russia can do.

Ultimately, Kvashnin is arguing for a great power strategy rather
than a superpower strategy. Instead of projecting power globally,
he seeks the ability to project power regionally. A great power can
defend itself from all neighbors and project power along its
frontiers and even, to some extent beyond. Germany and China are
both examples of great powers.

Kvashnin's faction is also arguing that nuclear weapons are, in
general, irrelevant to the actual correlation of forces. The
ability to launch a first strike against the United States is
devoid of meaning, since there is no political circumstance under
which such a strike would be meaningful. Deterring Washington from
a first strike is similarly meaningless. In addition, deterrence
does not require massive capability. A much smaller force, on the
scale of France's or Israel's, is sufficient.

But Kvashnin's argument is really rooted in economics. If he is
smart as this debate unfolds, he can make the economic argument in
two ways. The first is to argue that Russia cannot afford
everything; decision makers must choose the essential strategy,
influencing regional events.

The second approach is to point out the antiquated nature of
nuclear forces: These are technologies that matured more than a
generation ago. Sustaining them doesn't help Russia's contemporary
economy. But spending money on a modern conventional force would
involve developing new technologies in areas like communications,
computing and logistics, all of which would have a major
stimulating effect on the Russian economy. Both the American and
Israeli economies, for example, have been stirred by defense
technologies.

In this debate, Kvashnin holds all the cards, and Putin's
sympathies probably lie with him. Kvashnin is essentially making
the same argument that Yuri Andropov and Marshall Ogarkov made in
the 1980s; Putin is their intellectual and political heir. The
president also shut down the debate after Sergeyev went public -
not when Kvashnin did. The president is setting the stage for a
great power strategy.

Cutting back on the cost of pretending to be a superpower makes
sense, but Sergeyev has the upper hand both psychologically and
emotionally. For older Russians nuclear parity represented an
essential achievement. Whatever else is said about the Soviet
Union, it instilled Russians with great pride, particularly in
their missiles and rockets. That pride is the emotional link
between Russia and its superpower pretenses.

Abandonment means breaking the last link with greatness - and
opening a dangerous window into the future. Russia, after all, is
still an economic cripple. Putin would be open to the charge of
having finally turned Russia into a Third World nation.

In office only a few months, Putin will find himself in a tough
spot in this debate. He needs to move on to a regional great power
strategy. But he does so only by placing himself at risk. Indeed,
one of the themes of the public debate can be found in Sergeyev
accusing Kvashnin of serving U.S. interests. Endorsing Kvashnin
means that Putin will severely weaken his power base among
nationalists. This is a loss the Russian president cannot afford.

So far, Putin has done the one thing he could: He told everyone to
shut up. This is only a political holding action, though. The
Russian leader can contain the debate behind closed doors, but he
can't end it there. If Putin does nothing, Sergeyev wins by
default. If the president acts in favor of Kvashnin, the power base
will crumble.

As a result, Putin is likely to try to have it both ways: contain
the debate and then try to quietly edge toward Kvashnin's solution.
The president, as a result, will run the risk of temporarily trying
to pursue both strategies in an economy that can't really quite
afford one. If that happens, the only solution will be to cut
investment in the civilian sector, focus on defense and hope for
spin-offs. It will also mean the heavy nationalization of the
economy as defense expenditures soar. This is an opportunity for
half-measures where clear-cut decisions will be required.

But this is one of the key issues that will define both Putin's
presidency and Russia's future. Watching him solve this problem -
or not solve it, as the case may be - will tell us a great deal.

_______________________________________________________________

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To: Real Man who wrote (1081)7/18/2000 1:18:26 AM
From: CIMA  Respond to of 1301
 
Russian Reforms: All Shock and No Therapy

Summary

Presidential economic advisor Andrei Illarionov, an economic
ultraliberal, stated July 15 that Russia's economic competitiveness
had decreased by 30 percent since the beginning of the year,
partially due to rising inflation, according to Segovnaya. Analysts
are estimating Russia's year-end inflation could be as high as 35
percent, almost double the 18 percent upon which Russia's budget
was founded. Wrangles between the administration and the Duma are
significantly reducing the probability of economic growth. The
result will be a stagnant economy beset by inflation.

Analysis

Russian economists are sounding warning bells. According to
Segovnaya, presidential advisor Andrei Illarionov claimed that
Russia's economic competitiveness had decreased by 30 percent since
the beginning of the year. Inflation too, is a problem. In the
first six months of the year inflation jumped 9.33 percent -
tripling in the past two months alone. This inflation burst is
directly linked to many of the reform policies of Russian President
Vladimir Putin and Prime Minister Mikhail Kasyanov.

The reform efforts are half of a two part plan, the other half
being foreign investment. Neither effort will succeed without the
other. Foreigners won't invest in a corrupted economy, and painful
reforms will only hurt the public if that investment fails to
materialize. In the coming months, it is unlikely the reforms will
achieve their goal. Instead, inflation will continue to strengthen,
weakening the already tenuous economic hold of the Russian
population.

Most observers are parroting Putin's June 3 statement faulting
increases in Russia's money supply for the inflation. While the
money supply undoubtedly plays a role, the Kremlin's reforms -
which have directly raised prices - are the true culprit. As the
official argument goes, federal law requires exporters to sell 75
percent of their hard currency earnings to the Central Bank in
exchange for rubles. The immediate result is an increase in the
amount of money in the Russian economy. With more money in
circulation, producers can charge more for their limited number of
goods. The result is demand-pull inflation.

Several of Putin's policies reinforce this demand-pull inflation.
Putin has committed his government to paying up all wage arrears,
and the Duma and Federation Council have already agreed to more
than triple the minimum wage percent over the next 12 months. On
July 10 Putin raised the average pension by one-sixth, the third
raise this year, and set the stage for further increases in 2001.
Like the Central Bank's policy on appropriating hard currency,
these moves increase the amount of cash in the economy without
raising productivity: more demand-pull inflation.

But Russia's Central Bank statistics indicate the money supply has
not kept up with the hype. Exports for the first five months of the
year totaled $39.3 billion, or 1.1 trillion rubles. That means 840
billion rubles should have entered the money supply. However,
according to the Russian Central Bank, from January to June the
money supply only increased by 161 billion rubles.

So if the official line is at best only partly correct, what is
actually causing the inflation? Over the past several months the
Putin/Kasyanov administration has scrapped various subsidies and
enacted broad taxes. The results are increased costs for the basic
consumables in Russian society: Electricity prices have soared 55
percent, natural gas 15 percent to 20 percent, vodka 40 percent and
telephone lines 15 percent. This is cost-push inflation, and it
directly affects all Russians.
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Russia has few tools to deal with its inflation. Russia could use
some of its 48.6 billion ruble budget surplus to pay off some of
the government's debt to the Central Bank. This would both improve
Russia's internal debt and mop up a few billion excess rubles,
partially offsetting the demand-pull inflation.

But the only thing that can alleviate cost-push inflation is
stable, broad-based economic growth. Petroleum sales don't count.
The only way Russia can achieve that growth is by increasing worker
productivity. That requires strong managerial skills, new
technology and abundant capital - three things that Russia lacks,
but foreigners have. Simply put, Russia needs foreign investment.

That investment remains elusive. The 1998 ruble crash, combined
with endemic corruption, burned most foreign investors. To lure
those investors back, Putin is implementing two types of reform:
legal and economic.

Under Putin's firm hand, Russia has already taken the first legal
reforms: getting the government out of business, getting business
out of the government and strengthening the rule of law - albeit
through the implementation of a police state. Putin is knocking the
oligarchs down to size as well. The latest target is Anatoly
Chubais, former privatization minister and Yeltsin chief of staff
and currently head of Unified Energy Systems, Russia's electricity
monopoly.

On the economic front, Putin is revamping the tax system and
dismantling price controls. Yet, the economic reforms must be
approved and implemented quickly in order to work without
triggering hyperinflation.

It is difficult to understate the obstacles to progress. While
currently on the run, the oligarchs still control vast tracts of
the economy. Russian culture, traumatized by decades of communism
and previous rounds of shock therapy, lacks the ingrained civic
responsibility - not to mention corruption-free law enforcers -
needed to ground an advanced economy. And regional governors, along
with corrupt government bureaucrats at all levels, are fighting
tooth-and-nail to slow or deflect almost the entire Putin/Kasyanov
reform package.
_______________________________________________________________

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The regional governors have met with some recent success. After
vetoing a law in the Federation Council that would reduce their
power, regional governors managed to convince Duma deputies to
water down many of Kasyanov's new taxes that would shift the burden
away from Russia's beleaguered producers (and onto its beleaguered
consumers). For example, Kasyanov proposed 20, 200 and 600 percent
increases on alcohol, tobacco and gasoline taxes, but the Duma only
approved 5, 50 and 300 percent increases, respectively, according
to the Moscow Times. More importantly, the Duma also voted to keep
one of Russia's odious turnover taxes.

Turnover taxes are perhaps the single most damaging feature of the
Russian economic system. First of all, they apply to every
transaction a business makes: salaries, advertising, sales, rent,
utilities, phone lines, equipment rental, etc. Second, they are
applied cumulatively with all other taxes: payroll, excise, fuel,
profit, etc. Turnover taxes encourage dishonest bookkeeping and
barter trade, which in turn pushes the economy toward the
corruption-prone black market. After all, if there is no
transaction to record and no cash to trace, there is no tax to pay.

Furthermore, the Duma chose to keep the worst of a bad lot: the
road tax. Unlike many other taxes, this one pays into the regions -
not the federal government. According to Putin in an Izvestia
interview, the tax has raised more than $30 billion since 1994, yet
the country has experienced no meaningful road improvement,
implying road tax revenues are going toward the regional governors'
slush funds. The Duma's insistence on the continued existence of an
onerous tax that encourages such widespread, high-level corruption
is exactly the type of action that will discourage essential
foreign investment.

Facing this type of hostility to economic reform, few foreign
companies are returning to Russia. Foreign direct investment in
Russia for the first quarter of 2000 is a mere $853 million. While
this is a 40 percent increase when compared to a year earlier, it
amounts to a paltry $5.80 a person. On a per capita basis, Estonia
garnered 10 times that amount. Most firms view Putin's reforms
favorably, but are adopting a wait-and-see policy before diving
back in, according to the U.S.-Russia Business Council.

If Russia fails to attract foreign investment and continues reforms
that produce inflation, Putin and Kasyanov will have achieved the
worst of both worlds: growth-free inflation. This will erode
Russia's remaining competitiveness while further impoverishing its
citizens. Sadly, this seems to be the direction in which Russia is
heading. Having already signed decrees that will further boost
pensions and the minimum wage - moves that will trigger more
demand-pull inflation - Putin will find it difficult to backtrack.
Meanwhile, reductions in housing subsidies and new taxes on
automobiles are already in the pipe - causes of cost-push
inflation. Russia is brewing a deadly concoction of across-the-
board price increases and chronic inflation that will further lower
the average Russian's already abysmal standard of living.

For the investment to flow, Putin must simultaneously root out
corruption, liberalize prices, rationalize the tax system and slash
government spending. But the Duma's rejection of some of Kasyanov's
tax plans all too vividly shows just how deep the resistance to
change is rooted in the country's financial bedrock. The
Putin/Kasyanov legal and economic reforms threaten almost every
Russian power group on multiple levels. Putin and Kasyanov have
made impressive progress with few tools, but unless they can
destroy the corruption at the heart of Russia's business community,
their reforms are destined to be all shock and no therapy.

_______________________________________________________________

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To: Real Man who wrote (1081)10/27/2000 9:30:40 AM
From: CIMA  Read Replies (1) | Respond to of 1301
 
Russia: Increasing the Risk of Investing in Russian Companies

Summary

Russia's Duma may pass legislation redefining the influence Western
banks have over the market of Russian companies' stock on the New
York Stock Exchange. Western banks have nominal ownership over
issued foreign stocks, allowing them to influence Russian business
practices to a certain degree. The new legislation would curb that
influence, which could present a risk to foreign shareholders.

Analysis

Russia's Federal Commission for the Securities Markets is pressing
the Duma to amend legislation that governs issues of American
Depository Receipts (ADRs) to Western banks. These amendments would
limit the power depository banks have over the ADR market, but
could increase the risks for foreign shareholders trading Russian
stocks.

Foreign companies cannot offer stock directly on the NYSE, so they
place a portion of their shares into a Western bank's holding. The
Western bank, now the depository bank, holds these shares on behalf
of each company and issues certificates, or receipts, on these
shares as ADRs.

Under current Russian legislation, the depository bank is the
nominal holder and owner of the originally issued block of shares.
This nominal ownership clouds an otherwise transparent foreign
market in which Russian companies could know who the actual
registered shareholders of the reissued ADRs actually are.

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_____________________________________________________________

The new legislation would annul the terms of nominal ownership,
enabling Russian companies to account for their registered
shareholders. This, however, would limit the power depository banks
have over the market. With no controlling body to interfere in
company actions, Russian businesses have the tendency to engage in
corrupt practices. The new legislation, therefore, would increase
the risk for American investors trading Russian ADRs.

The Bank of New York (BoNY) has threatened to abandon Russia's
market if the legislation passes, according to an Oct. 20 Banking
and Stock Exchange report. As a depository bank, The Bank of New
York has considerable power and influence over the ADR market. It
controls over an estimated $1.5 billion in ADRs with a daily
turnover of $20 million to $50 million, reported the Banking and
Stock Exchange. BoNY also holds a monopoly over Russian ADRs,
though the bank will not confirm this quantitatively. But, in these
facts alone, it largely controls the reissue of ADRs to American
shareholders, which gives the bank power to influence the daily
turnover of Russian stock.

Apart from the power of reissue, depository banks control the
market through nominal ownership of ADRs. These banks can
discourage shareholders from trading ADRs, refuse to reissue the
stock, or arrest trading of Russia's ADRs altogether. Because
Russian legislation does not provide for registered shareholder
accountability, the Russian companies cannot appeal to shareholders
to resume trading, but must appeal directly to depository banks.
Therefore, the bank somewhat controls the market and influences the
companies that originally issued the stock.
__________________________________________________________________

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_____________________________________________________________

In addition, nominal ownership allows the banks to influence
Russian companies internally. Under Russian law, foreign ADR
holders do not hold any voting rights. Shareholders can circumvent
this law by turning over their voting rights to companies' boards
of directors who then vote on behalf of shareholders. BoNY, as a
nominal owner of blocks of issued stock, has the power to turn over
the collective voting rights on behalf of the bank, though not
necessarily on behalf of shareholders.

Given depository banks' control, Russian companies have to be
somewhat transparent if they expect active and fair trading of ADRs
on the NYSE. If the bank determines a company is corrupt or shady,
it can use the levers it has over the company to hinder ADR trade.
Diminished ADR trade will limit the amount of foreign revenue a
company earns through foreign stock exchange, which typically is
more lucrative than domestic exchange.

If the depository banks lose nominal ownership of ADR issues, then
they lose many of the levers they hold over the market and the
Russian companies. The technical duties would remain the same; they
would still act as depository banks and still reissue stock to
shareholders. However, the Russian companies would know the details
of their registered shareholders and would be accountable to them,
not to the banks. The depository bank would lose the power to act
as if it were a shareholder in control of trading a large block of
Russian stock.

Market influence provided by depository banks provides Russian
companies with an incentive to be somewhat honest. Russia's
oligarchs, known for corrupt business practices and money
laundering, run many of the companies that issue ADRs. The Bank of
New York, through its levers, has the power to intercept or prevent
some of these shady practices, thus ensuring profits and protecting
individual shareholders.

If the bank loses power as a nominal shareholder, the registered
shareholders would have considerably less market and company
control acting as individuals, rather than as a collective.
Everyone would have to decide to suspend trading, and everyone
would have to hand over their ADR rights in complete agreement for
the shareholders to exert the same influence the bank, as an owner,
could exert. Given this improbability, the oligarchs would lose the
incentive to avoid shady business practices.

Russian companies have already begun to register new shareholders,
but the banks' market influence remains, somewhat protecting
shareholders. If the banks' role changes, then foreign investors
would run an increased risk of investing in a Russian business -
and the risk of corruption would likely increase.
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(c) 2000 Stratfor, Inc.

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