The Countries of the Former Soviet Union at the Turn of the Twenty-First Century: The Baltic and European States in Transition (Routledge Studies of Societies in Transition, 22)

The Countries of the Former Soviet Union at the Turn of the Twenty-first Century

Following the highly successful Economies in Transition: A Guide to China, Cuba, Mongolia, North Korea and Vietnam at the Turn of the Twenty-first Century (published in the Routledge Studies in Development Economics series), Eastern Europe at the Turn of the Twenty-first Century: A Guide to the Economies in Transition and The Former Yugoslavia at the Turn of the Twenty-first Century: A Guide to the Economies in Transition, this book is the second of two (following The Caucasus and Central Asian Republics at the Turn of the Twenty-first Century: A Guide to the Economies in Transition) to focus on economic and political events in the countries of the former Soviet Union. The author presents a clear, detailed and accessible breakdown of the developments in the Baltic States of Estonia, Latvia and Lithuania, and in Belarus, Moldova, Russia and Ukraine. This book provides a unique level of coverage of economic and political events of global significance, including differing paths of economic and political transition, the Russian financial crisis, foreign direct investment, the Chechen crisis, NATO/EU membership for the Baltic States, and the reactions of the countries of the former Soviet Union to the 11 September 2001 terrorist attacks on the United States and to the 2003 war in Iraq. It will provide an invaluable source of reference for all those interested in transitional and developing countries. Ian Jeffries is Member of the Centre of Russian and East European Studies at the University of Wales.

Routledge Studies of Societies in Transition

1

The Economics of Soviet Break-up Bert van Selm

2

Institutional Barriers to Economic Development Poland’s Incomplete Transition Edited by Jan Winiecki

3

The Polish Solidarity Movement Revolution, Democracy and Natural Rights Arista Maria Cirtautas

4

5

6

Surviving Post-Socialism Local Strategies and Regional Response in Eastern Europe and the Former Soviet Union Edited by Sue Bridger and Frances Pine Land Reform in the Former Soviet Union and Eastern Europe Edited by Stephen Wegren Financial Reforms in Eastern Europe A Policy Model for Poland Kanhaya L. Gupta and Robert Lensink

7

The Political Economy of Transition Opportunities and Limits of Transformation Jozef van Brabant

8

Privatizing the Land Rural Political Economy in PostCommunist Socialist Societies Edited by Ivan Szelenyi

9 Ukraine State and Nation Building Taras Kuzio 10 Green Post-Communism? Environmental Aid, Innovation and Evolutionary Political Economics Mikael Sandberg 11 Organisational Change in Post-Communist Europe Management and Transformation in the Czech Republic Ed Clark and Anna Soulsby 12 Politics and Society in Poland Frances Millard 13 Experimenting with Democracy Regime Change in the Balkans Geoffrey Pridham and Tom Gallagher 14 Poverty in Transition Economies Edited by Sandra Hutton and Gerry Redmond 15 Work, Employment and Transition Restructuring Livelihoods in PostCommunism Edited by Al Rainnie, Adrian Smith and Adam Swain 16 Environmental Problems of East Central Europe: 2nd Edition Edited by F. W. Carter and David Turnock

17 Transition Economies and Foreign Trade Jan Winiecki 18 Identity and Freedom Mapping Nationalism and Social Criticism in Twentieth Century Lithuania Leonidas Donskis 19 Eastern Europe at the Turn of the Twenty-first Century A Guide to the Economies in Transition Ian Jeffries 20 Social Capital and the Transition to Democracy Edited by Gabriel Badescu and Eric M. Uslaner 21 The Former Yugoslavia at the Turn of the Twenty-first Century A Guide to the Economies in Transition Ian Jeffries

22 The Countries of the Former Soviet Union at the Turn of the Twenty-first Century The Baltic and European States in Transition Ian Jeffries 23 Federalism and the Dictatorship of Power in Russia Mikhail Stoliarov 24 Elites and Democratic Development in Russia Edited Anton Steen and Vladimir Gel’man 25 The Caucasus and Central Asian Republics at the Turn of the Twenty-first Century A Guide to the Economies in Transition Ian Jeffries

Of the few authors sufficiently knowledgeable to write on all the thirty-plus countries moving from central planning to the market, Ian Jeffries is outstanding … Ranging from front-rank EU candidates to barely changed Cuba and North Korea, this short sequence of books promises to be a ‘must buy’ for any university library. Professor Michael Kaser (Universities of Birmingham and Oxford) This massive volume [The Former Yugoslavia at the Turn of the Twenty-first Century: A Guide to the Economies in Transition] … as a reference work … will prove useful to anyone working on ‘post-Yugoslav’ topics … This volume … should find a place in every university library. Sabrina P. Ramet (Europe–Asia Studies, 2003, vol. 55, no. 2, pp. 329–30)

The Countries of the Former Soviet Union at the Turn of the Twenty-first Century The Baltic and European states in transition Ian Jeffries

First published 2004 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group

This edition published in the Taylor & Francis e-Library, 2004. © 2004 Ian Jeffries All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested

ISBN 0-203-64754-8 Master e-book ISBN

ISBN 0-203-67315-8 (Adobe eReader Format) ISBN 0–415–25230–X (Print Edition)

Contents

List of tables Acknowledgements Introduction and overview The Baltic States of Estonia, Latvia and Lithuania: a summary 5 Belarus: a summary 21 Moldova: a summary 27 Russia: a summary 39 Ukraine: a summary 117

xi xii 1

PART I

The Baltic States of Estonia, Latvia and Lithuania

129

1

Estonia

131

Politics The political background 131 Political developments prior to the 5 March 1995 general election 136 The 5 March 1995 general election 137 Political developments after the 5 March 1995 general election 138 The 7 March 1999 general election 140 Political developments after the March 1999 general election 142

131

The economy The economic background 164 Financial policy 164 Prices 166 Privatization 166 Foreign trade 174

164

viii

Contents Foreign direct investment 175 Agriculture 175 Economic performance 178

2

3

Latvia

179

Politics Citizenship 179 The general election of 5–6 June 1993 187 Political developments after the June 1993 general election 188 The general election of 30 September–1 October 1995 188 Political developments after the 1995 general election 190 The general election of 3 October 1998 193 Political developments after the October 1998 general election 194

179

The economy Financial policy 205 Prices 207 Privatization 208 Foreign trade 216 Foreign direct investment 217 Agriculture 219 Economic performance 220

205

Lithuania

222

Politics Citizenship 222 Political developments 223 The general election of 20 October 1996 and 10 November 1996 224 Political developments after the October–November 1996 general election 225

222

The economy The economic background 240 Financial policy 242 Prices 245 Privatization 245 Foreign trade 255 Lithuania and the Russian financial crisis 256 Foreign direct investment 256

240

Contents ix Agriculture 259 Economic performance 261 PART II

Belarus, Moldova, Russia and Ukraine

263

4

Belarus

265

Politics The political and demographic background 265 Political developments 266 The negotiations about the formation of a political, economic and monetary union with Russia 290

265

The economy The economic system 300 Financial policy 301 Prices 305 Privatization 306 Foreign trade 311 Foreign direct investment 319 Agriculture 319 Economic performance 323

300

Moldova

325

Politics The political background 325 Political developments 327

325

The economy Economic background 351 The economic system 352 Financial reform 353 Prices 357 Privatization 358 Foreign trade 364 Foreign direct investment 365 Agriculture 367 Economic performance 371

351

5

x Contents 6

7

Russia

373

The economy Liberalization 374 Privatization in the non-agricultural sectors 398 Agriculture 430 Direct foreign investment 454 Macroeconomic stabilization before the financial crisis of August 1998 464 Foreign debt and aid before the August 1998 financial crisis 479 A chronology of major aid agreements, including debt rescheduling 481 Russia and the Asian financial crisis 482 Economic performance 510

373

Ukraine

511

Politics The political and demographic background 511 Crimea and the Black Sea Fleet 511 Chernobyl 514 Political developments from mid-1995 to the 1998 general election 516 The general election of 29 March 1998 520 Political developments after the March 1998 general election 526

511

The economy The economic background 560 The economic system in the early years of transition 560 Financial policy 561 Prices 567 Privatization 570 Foreign trade 580 Ukraine and the Asian/Russian financial crisis 584 Foreign aid 589 Foreign direct investment 590 Agriculture 591 Economic performance 603

560

Bibliography Index

605 616

Tables

1.1 2.1 3.1 3.2 4.1 5.1 6.1 6.2 6.3 7.1 7.2

Estonia: selected economic indicators 1995–2002 Latvia: selected economic indicators 1995–2002 Lithuania: the general election of 20 October and 10 November 1996 Lithuania: selected economic indicators 1995–2002 Belarus: selected economic indicators 1995–2002 Moldova: selected economic indicators 1995–2002 Russia: the nominal value of the rouble on the Moscow Interbank Currency Exchange Russia: private farms Russia: selected economic indicators 1990–2002 Ukraine: the general election of 29 March 1998 Ukraine: selected economic indicators 1995–2002

176 218 225 257 320 366 393 449 455 520 568

Acknowledgements

The mammoth task of keeping up to date with rapidly changing economic and political events in thirty-five countries would not have been possible without the help of a magnificent library staff, the secretaries in the Department of Economics (Siân Brown, Frances Jackson, Jaynie Lewis and Mary Perman) and the portering/cleaning staff in general. Individuals deserving of particular mention are the following (in alphabetical order): Gwen Bailey (Library); Michele Davies (Library); Simon Davies (Library); Dianne Evans (Library); Barry Howells (Library); Chris Hunt (Library); Ray Jones (Library); Nigel O’Leary (Economics); Lis Parcell (Library); Ann Preece (Library); Paul Reynolds (Library); Kathy Sivertsen (Library); Syed Hamzah bin Syed Hussin (Library); Clive Towse (Library); Ray Watts (Library); Chris West (Library). The earliest possible access to quality newspapers and magazines has, as always, been ensured by the excellent Kays Newsagency, owned and managed by Russell Davies. Professor Michael Kaser and Professor Paul Hare have continually provided external support and encouragement. Armenia Economic Trends, Azerbaijan Economic Trends, Belarus Economic Trends, Georgia Economic Trends, Kazakhstan Economic Trends, Moldovan Economic Trends, Ukrainian Economic Trends and Uzbekistan Economic Trends are invaluable sources of information which have been provided free of charge. My thanks to all those involved in producing and sending them. The staff at Routledge have, as always, provided support of the highest degree and professionalism of the highest standard. My thanks in particular (in alphabetical order) go to Yeliz Ali, Simon Bailey, Amrit Bangard, Oliver Escritt, Tessa Herbert, Alan Jarvis, Liz Jones, Alex Meloy, Alfred Symons, Annabel Watson, James Whiting, Vanessa Winch and Jayne Young. Ian Jeffries Centre of Russian and East European Studies, University of Wales

Introduction and overview

A Guide to the Socialist Economies was published in 1990. Covering fourteen communist countries (accounting, in mid-1988, for 1.6 billion out of a world population of 5.1 billion), the final amendments to the book had been made in early October 1989. The book was fortunate to receive some very generous comments: Jeffries has produced a useful reference guide that will doubtless become a standard in the field and a valuable addition to academic libraries. (Journal of Comparative Economics, 1991, no. 15) The book is a very welcome addition to the library of publications on the socialist world … It is more than a textbook – it is also a reference book and a guide … Jeffries covers a vast area … It is a truly formidable task to catch up with all the changes that are taking place in these countries and the author does it with great success. (International Affairs, 1990, vol. 66, no. 3) In late 1989 communism collapsed in Eastern Europe, followed in late 1991 by the disintegration of the Soviet Union (the largest country in the world by area, covering a sixth of the world’s land area excluding Antarctica, and then a ‘superpower’ able to challenge the USA in terms of military capacity). Yugoslavia also disintegrated and in a generally very bloody fashion. Academics like myself who had invested a lifetime in studying the communist countries saw their intellectual capital mostly vanish overnight. The effort of trying to comprehend profound changes, in many ways unique events and the multiplication of countries (as well as the disappearance of the GDR into a reunified Germany!) has been staggering. My first stab at covering what became known as the transitional economies came in 1993 with the publication of Socialist Economies and the Transition to the Market: A Guide, which includes analyses of the basic features of command economies and the general issues involved in the transition to a market economy plus chapters on the original fourteen communist countries before 1989 and their individual experiences after 1989 (including the disintegration of the Soviet

2

Introduction and overview

Union and Yugoslavia). While most countries opted for the market economy and political democracy, Cuba (initially) and North Korea retained the essential features of the traditional communist economic and political system. China, in contrast, adopted gradual and partial economic reform. Vietnam took note of the Chinese model, although there were speedier elements. Both China and Vietnam, however, remained firmly in the grip of the Communist Party. Some of the more generous comments on the book were as follows: This weighty tome can be unreservedly commended … Students and their teachers can learn a great deal from this book … Excellent! Ian Jeffries has done us all a service. (Europe–Asia Studies, 1993, vol. 45, no. 6) This hefty and well documented volume on socialist economies and the transition to the market is both useful and timely … Despite its shortcomings the book is strongly recommended to general readers, teachers and students. (Journal of Contemporary Asia, July 1995) A personal tour de force by Ian Jeffries. (Economics of Transition, 1994, vol. 2, no. 2) This book will serve as a valuable source of information for anyone with an interest (academic, business or otherwise) in the area. Simply brilliant. (Paul Nunn, Manchester Metropolitan University, Routledge Catalogue) A Guide to the Economies in Transition was published in 1996. Basically a companion volume to (as opposed to a revised edition of) Socialist Economies and the Transition to the Market: A Guide, it covers the period up to the mid-1990s. I am not an economic theorist but the volume includes an overview of the main issues in the transition from command planning to the market (including ‘big bang’/‘shock therapy’ versus gradualism, China as an economic model, and privatization). Although I am mostly interested in how economic and political systems actually change, I discuss the basic economic performance of individual countries. Since I am not an econometrician I simply provide readers with an idea both of broad economic magnitudes and of the difficulties of obtaining meaningful data during the transition. The other chapters are devoted to the major political and economic events in thirty-five countries (including the reunification of East and West Germany): the now fifteen independent countries of the former Soviet Union, the counties of Eastern Europe (broadly defined) and the non-European countries (China, Cuba, Mongolia, North Korea and Vietnam). I am increasing convinced of the artificiality of separating economics and politics. For example, the privatization programmes chosen may be profoundly affected by political factors such as the strength of the central government and

Introduction and overview 3 whether or not to seek foreign debt forgiveness. I am not a political scientist and I am unable to interrelate the two disciplines to a desirable degree. Instead, I do attempt to do two things: (1) provide a basic guide to understanding how all the ‘bits’ fit together, and (2) present a richly endowed ‘quarry’ of up-to-date economic and political information (often presented chronologically where appropriate) to allow the reader to dig out any desired facts and figures. This is not (and is not meant to be) original research but a broad-brush painting of the overall economic and political picture. I make use of a range of secondary sources in English (necessary given the large number of languages involved). Apart from journals and books, the sources include the following: 1

2

3 4

Reports such as the European Bank for Reconstruction and Development’s (EBRD’s) Transition Report, the United Nations’ World Economic and Social Survey, the United Nations Economic Commission for Europe’s Economic Survey of Europe, the United Nations Economic and Social Commission for Asia and the Pacific’s Economic and Social Survey of Asia and the Pacific, the World Bank’s Transition, the IMF’s World Economic Survey and the OECD’s Economic Outlook. Quality newspapers such as the International Herald Tribune (IHT), Financial Times (FT), The Times, the Guardian, the Independent, the Telegraph and the Baltic Times. Weeklies such as The Economist and the Far Eastern Economic Review (FEER). Quarterlies/monthlies/fortnightlies such as Business Central Europe, Eastern Europe (EEN, formerly Eastern Europe Newsletter), The World Today, Asian Survey, Current Digest of the Post-Soviet Press (CDSP, before 5 February 1992 known as Current Digest of the Soviet Press), Transition, Finance and Development, Armenia Economic Trends (ARET), Azerbaijan Economic Trends (AET), Belarus Economic Trends (BET), Georgia Economic Trends (GET), Kazakhstan Economic Trends (KET), Moldovan Economic Trends (MET), Russian Economic Trends (RET), Ukrainian Economic Trends (UET) and Uzbekistan Economic Trends (UZET).

A review in the Times Higher Education Supplement (29 October 1993) kindly referred to my ‘meticulous referencing’, even though detailed referencing has the potential to be tiresome to readers. But since this is not original research and I am deeply indebted to many sources, I feel it necessary to make every effort to acknowledge the material used. It is not always feasible to name the correspondents or contributors, but I try, as far as possible, to ensure that credit goes where it is due. Partly for this reason and partly for accuracy I make extensive use of quotations, although where these include commonly quoted sayings or speeches I leave out specific sources. My task in these five companion volumes was to cover mainly the period from the mid-1990s up to the turn of the century. I once naively thought that things would ‘settle down’ and that the follow-up volume (in the singular!) would be smaller than the 1996 one. Far from ‘settling down’, the amount of economic and political material to be processed has expanded almost exponentially!

4

Introduction and overview

Routledge has kindly supported me in the gargantuan task of writing five separate volumes: 1 Economies in Transition: A Guide to China, Cuba, Mongolia, North Korea and Vietnam at the Turn of the Twenty-first Century This was published in June 2001. The rationale for a separate volume was significantly enhanced by China, North Korea and Cuba on occasion being at the centre of world attention. China’s rapid economic progress has aroused considerable interest worldwide in China as an economic model of gradualism. China is increasingly participating in globalization (witness events such as its prospective entry into the WTO). Its economic progress has enormous implications in terms of international affairs. Hong Kong and Macao have been reclaimed but relations with Taiwan remain edgy. China’s human rights record is often the cause of friction, especially with the USA. The June 2000 summit between the leaders of North and South Korea turned out to be an dramatic event after decades of bitter division. The Elian Gonzalez case and the actions of his Miami relatives had important implications for US policy towards Cuba. Mongolia continues to provide a fascinating case study of continued commitment to market-orientated economic reform despite political squabbling and changes of government. Vietnam’s attitude to economic reform has fluctuated. The Asian financial crisis, for instance, dampened enthusiasm. But in July 2000 the trade agreement with the USA was signed after a year’s delay and greater encouragement has been given to the private sector and foreign direct investment. 2 Eastern Europe at the Turn of the Twenty-first Century: A Guide to the Economies in Transition This was published in February 2002. Part I covers economic and political developments in Albania, Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia. Part II deals with general issues, relating to topics such as ‘big bang’/‘shock therapy’ and privatization. These issues are best analysed in this volume, e.g. Poland in 1990 was the first country to adopt ‘big bang’/‘shock therapy’. The major issues relating to German reunification have already been dealt with in the 1993 and 1996 volumes. The only thing I thought worth including in this volume was privatization in the eastern part of Germany as a revealing case study in privatization. 3 The Former Yugoslavia at the Turn of the Twenty-first Century: A Guide to the Economies in Transition This massive volume … as a reference work … will prove useful to anyone working on ‘post-Yugoslav’ topics … This volume … should find a place in every university library. (Sabrina P. Ramet, Europe–Asia Studies, 2003, vol. 55, no. 2, pp. 329–30)

Introduction and overview 5 This volume was published in May 2002. The countries covered are BosniaHercegovina, Croatia, the Former Yugoslav Republic of Macedonia, Slovenia and the Federal Republic of Yugoslavia (Serbia and Montenegro). The West intervened militarily to protect Moslems in Bosnia and in Kosovo and international military and civilian involvement for the foreseeable future is proving critical in maintaining the peace and rebuilding economies and political structures. The terrible events of 11 September 2001, when terrorists attacked targets in New York and Washington, showed the dangers of allowing states like Afghanistan to fail. International terrorists were given sanctuary by the Moslem fundamentalist Taleban regime. There has been a profound change in the attitude of the administration of President George W. Bush towards US involvement in those countries of the former Yugoslavia affected by ethnic strife. The new president, inaugurated in January 2001, was initially very cool about the involvement of US troops. The Bush administration now sees the vital importance of the United States maintaining a presence (albeit much reduced) in the more unstable parts of the former Yugoslavia. 4 and 5 It was originally intended to include all fifteen countries of the former Soviet Union in one volume. But in order to pay sufficient attention to events of global significance it was decided to publish two separate volumes: The Caucasus and Central Asian Republics at the Turn of the Twenty-first Century: A Guide to the Economies in Transition, and The Former Soviet Union at the Turn of the Twenty-first Century: The Baltic and European States in Transition. The stance taken by all the countries of the former Soviet Union towards the US-led war in Iraq in 2003 is dealt with in the latter volume. But shortage of space means that there is only a summary (albeit a generous one) of Russian political developments. A detailed chronology of political developments up to November 2000 can be found in Jeffries (2002c).

The Baltic States of Estonia, Latvia and Lithuania: a summary Estonia: a summary Estonia’s citizenship and language laws have been substantially amended, criticism from the West being an important factor (especially since Estonia, all going to plan, will become a member of both Nato and the EU in May 2004). It goes without saying that Russia has been highly critical. According to a census published in 2001, the population fell to 1.37 million. Notable facts and figures and developments are as follows: 1

In the 1934 population census, 88 per cent were Estonians and 8.2 per cent Russians. The 1989 census revealed that 61.5 per cent of the population of 1.6 million were Estonians and 30.3 per cent were Russians. Out of

6 Introduction and overview

2

3

4

5

a population of 1.5 million in 1994, official statistics showed that ethnic Estonians accounted for 64 per cent and Russians for 29 per cent. There are about 451,000 non-citizens; some 53,000 residents have chosen Russian citizenship (Baltic Observer, 10–16 November 1994, p. 2). Out of a population of some 1.5 million, 962,000 are Estonians and 436,000 are Russians (Baltic Observer, 26 January–1 February 1995, p. 4). Since 1992 about 100,000 of Estonia’s 500,000 Russian-speakers have obtained citizenship and are able to vote. Half of them lived in Estonia before the Second World War and qualified for automatic citizenship, while the rest passed a language exam and a minimum residence requirement (Baltic Observer, 9–15 March 1995, p. 7). ‘About 172,000 Russian-speaking Sovietera immigrants … do not have Estonian citizenship’ (Baltic Times, 18–24 July 2002, p. 1). ‘Some 19 per cent of Estonia’s 1.4 million people … remain non-citizens, most of them ethnic Russians’ (Baltic Times, 17–23 October 2002, p. 2). Unlike in national parliamentary elections, in local elections non-citizens who hold Estonian residence permits and have lived in their voting districts for at least five years have the right to vote. Roughly 200,000 non-citizens have the right to vote across Estonia, including 87,000 in Tallinn (Baltic Times, 21–27 October 1999, p. 1). Unlike in parliamentary elections, anyone with an Estonian residence has the right to vote in local elections, including approximately 300,000 Russian speakers (Baltic Times, 23–29 September 1999, pp. 1, 7). Narva and Sillamae in the north-east have heavy concentrations of ethnic Russians. Constitutional amendments were passed by parliament on 15 December 1998 and signed into law by the president on 31 December 1998. The language requirements were to go into effect on 1 May 1999. ‘The amendments require all elected officials and candidates for public office, either on the national or municipal levels, to display proficiency in Estonian’ (Baltic Times, 1–13 January 1999, p. 4). ‘Max van der Stoel [the OSCE high commissioner for national minorities] said Estonians who do not speak the state language must retain the right to run for election’ (Baltic Times, 14–20 January 1999, p. 2). On 12 February 1999 amendments to the language law were signed into law, ‘despite heavy criticism from the Russian-speaking minority and questions from OSCE’. The amendments were to be enforced after 1 July 1999. ‘The amendments … require all people who work with the public, including private business people and non-governmental organizations, to be able to speak Estonian’ (Baltic Times, 8–14 July 1999, p. 1). The depth of knowledge depends on the particular job, e.g. a cashier needs to know only basic Estonian (Baltic Times, 18–24 February 1999, pp. 1, 4). The language law specifies that: ‘Public signs, announcements and advertisements shall be in Estonian.’ ‘[On 21 November 2001] in the light of amendments to Estonia’s laws on national and local elections, OSCE announced its remit has been fulfilled.

Introduction and overview 7 The announcement may herald the closure of the mission … On 21 November parliament abolished a requirement, which entered into force in 1998, that candidates for election both to it and to local councils speak Estonian’ (Baltic Times, 29 November–5 December 2001, p. 4). The last Russian troops pulled out on 31 August 1994, although 210 ‘military specialists’ remained to decommission two nuclear reactors, used for training purposes, at the Paldiski nuclear submarine base. The few remaining Russian personnel left the naval complex on 26 September 1995. While rapid and consistent economic reform has placed Estonia among the front runners for EU membership (indeed, Estonia has had to reverse some of its market liberalization to adjust to EU policies!), its political life has not been commensurately stable, with switches between centre-right and centre-left coalition governments (themselves unstable) and sleazy behaviour not uncommon. The former president, Lennart Meri, was more of a help to political stability, being elected by parliament in 1992 and being re-elected (albeit after a lengthy process) on 20 September 1996. Nato was very wary of extending membership to the Baltic States, mainly because of Russia’s particular sensitivity. But the 11 September terrorist attacks in the United States improved relations between the USA and Russia and thus the prospects for Nato expansion. Indeed, on 21 November 2002 formal invitations were extended to seven countries to join Nato with a view to them becoming full members in May 2004: Estonia, Latvia, Lithuania, Bulgaria, Romania, Slovakia and Slovenia. Progress towards EU membership can be traced as follows: 1

2

On 16 July 1997 the European Commission recommended that Estonia, Cyprus, the Czech Republic, Hungary, Poland and Slovenia open negotiations in early 1998 for entry to the EU. The invitation was formally approved at an EU summit on 13 December 1997, formal negotiations for membership beginning on 31 March 1998. Estonia had improved its ability to cope with competitive pressures and market forces ‘in the medium term’ (meaning more than one year from 2000). ‘The European Commission harshly criticized this country’s language laws … The report said the laws are unfavourable to business relationships and they tend to discriminate against minorities … “The adoption of the language law, which restricts access of non-Europeans in political and economic life, constitutes a step backwards and should be amended,” the report said … The European Commission targeted amendments to the law that says business affairs should be conducted only in Estonian … Besides language laws, the report called for a tougher fight against corruption, acceleration in the pace of land privatization and progress in privatizing the oil shale sector … The commission recognized Estonia’s commitment to judicial reform … [but] commented that the number of judges remains low and training is inadequate. Continued administrative reform was also mentioned

8 Introduction and overview

3 4

5

as an idea that Estonia still needs to work on … For the second year, the report found Estonia to be a stable democracy and a functioning market economy with the ability to compete in the EU’ (Baltic Times, 21–27 October 1999, p. 3). The 8 November 2000 EU report was generally positive and confirmed Estonia’s status as a front runner for membership. On 13 November 2001 the EU published its progress reports on the twelve EU applicants for EU membership with which negotiations have begun. There are thirteen applicants in all (including Cyprus, Malta and Turkey), but negotiations have not yet begun with Turkey. Estonia, Latvia and Lithuania received generally very favourable reports, but what was different this time was that the EU indicated that it might admit up to ten new members at once. Günter Verheugen (EU enlargement commissioner): ‘The aim of achieving the first accessions before the European Parliament elections in 2004 remains a demanding one. But it is not a utopian dream; it is a realistic and feasible challenge’ (FT, 14 November 2001, p. 12). Bulgaria and Romania were excluded from early entry. At the EU summit held in Copenhagen on 12–13 December 2002, 1 May 2004 was set as the target date for accession of the ten countries mentioned above (a ratification process being required). The EU progress report on Estonia, published on 9 October 2002, was not free of criticism (e.g. mention was made of unemployment, public administration and naturalization).

Arnold Ruutel, the former chairman of the Soviet-era parliament, was elected the new president on 21 September 2001 (effective 8 October). He replaced the highly popular Lennart Meri, who was barred by the constitution from seeking a third term. Estonia is supportive of the United States over the issue of international terrorism. The government also approved of the US-led war in Iraq in 2003. Owing to factors such as oil shale deposits, Estonia is self-sufficient in electricity production and meets 65 per cent of its total energy requirements (FT, Survey, 19 April 1994, p. 32). Oil shale is by far the most important source of energy, accounting for 63 per cent of primary energy consumption in 1993 (DIW, Economic Bulletin, 1995, vol. 32, no. 2, p. 21). The GDP growth rate turned positive in 1995, the rate being -14.2 per cent in 1992, -8.8 per cent in 1993 and -2.0 per cent in 1994 (EBRD 2001a: 15, and 2001b: 141). Growth was once again negative in 1999, but strongly positive thereafter. ‘The Baltic States have been affected much more severely by the Russian crisis than the other CEE countries, due in part to their closer trade and financial links to Russia’ (EBRD 2000a: 5). In 2001 GDP, as a percentage of the 1989 level, was an estimated 90 per cent in Estonia, 75 per cent in Latvia and 72 per cent in Lithuania (EBRD 2002b: 58). Agriculture has had a hard time in Estonia. The annual inflation rate reached a peak of 1,076 per cent in 1992, but a rate in single figures was achieved by 1998.

Introduction and overview 9 Macroeconomic stabilization has been aided a law which states that the budget must be balanced. Help has also been given by the operation of a currency board. Cash and deposits in kroons at the central bank (base money) qualify for a guaranteed rate of exchange (eight kroons to one DM). Thus the growth of the money supply is linked to the growth of foreign exchange reserves. The kroon is fully convertible. There is full current account convertibility and virtual capital account convertibility (EBRD 1994: 109). ‘Estonia has cleared out all the remaining minor restrictions on capital movements’ (EBRD 2001b: 138). Virtually no restrictions on foreign trade remain (EBRD 1994: 23). The trade regime is among the most liberal in the world (EBRD 1996b: 149). Estonia has not applied any notable tariffs since the mid-1990s (EBRD 1999b: 214). There was a rapid reorientation of foreign trade away from Russia and other CIS countries and towards the West (Finland now being the main trading partner). On 13 November 1999 Estonia became the third former Soviet republic to join the WTO. (Latvia and Kyrgyzstan became members in 1998.) The private sector accounted for roughly 10 per cent of GDP in mid-1990. In mid-2001 the figure was 80 per cent (EBRD 1999b: 24, 216; and 2002b: 20, 144). Small privatization went ahead very quickly. Large privatization has seen priority given to sales, with vouchers and restitution playing subsidiary roles in industry. Large privatization really got under way after August 1993 when the privatization agency was created, modelled on Germany’s Treuhandanstalt and with an emphasis on tenders involving both domestic and foreign strategic investors. In November tenders began to be combined with public share offerings for residual shares. The agency more or less completed its work by the end of 1995. Since then attention has turned to the utilities and other infrastructure monopolies (including the railways). The approach used by the Estonians … [involves] limiting the exchange of vouchers to minority stakes in firms in which a controlling majority share had already been sold to a core investor. This increases the chances of turning a firm over to a good owner that has the incentives to look after and develop the health of the firm’s assets, and it also increases the chances that voucher holders will obtain shares that will maintain or increase their value. Indeed, the Estonians applied this procedure to a small number of the higher-potential firms, further increasing the prospects for the new minority shareholders. (Nellis 2002: 21) In post-communist Eastern Europe only Hungary has attracted more per capita foreign investment … By selling out controlling company stakes without discrimination toward foreigners, Estonia started a trend that its two Baltic neighbours with various success have copied several years later … As in Latvia, tax holidays were taken away in 1994. (Bjorn Linderfalk, Baltic Times, 15–21 August 1996, pp. 14–15)

10

Introduction and overview

On 15 April 1993, however, Estonia became the first republic of the former Soviet Union to allow foreigners to buy land (subject to purchases being part of a major enterprise) (Business Europa, August–September 1993, p. 35). Since April 1993, foreigners have been allowed to buy land, but only in the sense of a particular land use connected with their investment (FT, Survey, 19 April 1994, p. 30). Land privatization has been much slower owing to factors such as restitution (physical restitution where possible, based on the 1940 land register). The proportion of land farmed privately is still only 14 per cent (FT, Survey, 19 April 1994, p. 32). The amount of privatized land rose to about 25 per cent of all agricultural land by May 1999, up from 15 per cent in 1997. The sale of another 25 per cent is expected within the next two years. This would complete the privatization process, since 50 per cent is to remain in public hands (EBRD 1999b: 214). On 31 July 1995 the government agreed to introduce agricultural subsidies in order to placate farmers angry that it had failed to fulfil an election pledge to introduce protective tariffs (Baltic Observer, 27 July–9 August 1995, p. 3). The OECD has praised Estonia for having the world’s most liberalized agricultural policy (Baltic Times, 7–13 November 1996, p. 15). Estonia … did not create a lean farming sector but an uneven playing field with the EU. The EU’s markets are closed to Estonians, yet its subsidized exports flood the country. And as a result a third of Estonian farmland is simply uncultivated. (Business Central Europe, June 1998, p. 5) The government’s new pre-accession economic programme … was presented to the EU last month [May 2001] … The government is reintroducing subsidies for farmers, which were all but eliminated in the early 1990s. (Business Central Europe, June 2001, p. 46) Latvia: a summary Latvia has stayed on a pro-EU, pro-Nato and pro-economic-reform course despite having a succession of coalition governments. On 12 July 1999 the eighth government was formed since regaining independence. That government fell apart on 12 April 2000. On 5 October 2002 ‘Latvians opted for new leaders but old policies’ (Baltic Times, 10–16 October 2002, p. 1). The new prime minister, Einars Repse, was formerly the governor of the central bank. Corruption was a major campaign theme. Progress along the path towards EU membership can be seen from the following: 13 October 1999: the European Commission recommended that EU leaders at the December 1999 meeting in Helsinki allow Bulgaria, Latvia, Lithuania, Malta, Romania and Slovakia to begin accession negotiations in 2000. The

Introduction and overview 11 ‘principle of differentiation’ for entry date would apply to each of the twelve candidates, reflecting differing states of readiness for EU entry. ‘Each country will be able to proceed on merit, including the possibility for those which join the negotiations from 2000 to catch up with the others.’ The EU report highlighted some of Latvia’s main achievements and problems since independence was regained. Latvia has made good political progress but falls short of international standards on the protection of the linguistic rights of minorities. Latvia has made ‘significant and sustained progress’ towards meeting market economy criteria and in regards to its ability to withstand competitive pressures. Latvia has a good chance of catching up with the group led by Hungary, with Lithuania not far behind. Latvia joins Malta and Cyprus, Hungary, Poland, Estonia and Slovenia in having functioning market economies. Lithuania could become a functioning market economy in 2000 if it pushes ahead with promised reforms. The European Commission … ranked Latvia, along with Malta, as one of the best prepared candidates in the second wave of applicants … The EC said the Baltic country can now be considered a functioning market economy that can withstand the winds of competition that blow inside the EU. The report said that prices and trade have been liberalized and barriers to enter and exit markets are few. It also lauded Latvia for continuing to attract foreign investment and for increasing its trade with the EU in the wake of last year’s Russian crisis. Some areas, however, still need work … Latvia’s judicial system must be strengthened with additional judges and training in EC judicial law. Corruption is still a large problem … Latvia must harmonize its legislation in the areas of telecommunications, agriculture and fisheries, data protection, mutual recognition of diplomas, health and safety, and customs policy. Another question mark is the pending language law. (Baltic Times, 21–27 October 1999, pp. 1–2) November 2000: the EU report continued to place Estonia at the front of the Baltic field for future EU membership. 13 November 2001: the EU published its progress reports on the twelve EU applicants for EU membership with which negotiations have begun. There are thirteen applicants in all (including Cyprus, Malta and Turkey), but negotiations have not yet begun with Turkey. Estonia, Latvia and Lithuania received generally very favourable reports, but what was different this time was that the EU indicated that it might admit up to ten new members at once. Günter Verheugen (EU enlargement commissioner): ‘The aim of achieving the first accessions before the European Parliament elections in 2004 remains a demanding one. But it is not a utopian dream; it is a realistic and feasible challenge’ (FT, 14 November 2001, p. 12). Bulgaria and Romania were excluded from early entry. 12–13 December 2002: at the EU summit held in Copenhagen, 1 May 2004 was set as the target date for accession of the ten countries mentioned above (a

12

Introduction and overview

ratification process being required). The EU progress report on Latvia, published on 9 October 2002, was not free of criticism (e.g. mention was made of corruption, administrative capacity and the integration of non-citizens into Latvian society). Nato was very wary of extending membership to the Baltic States, mainly because of Russia’s particular sensitivity. But the 11 September 2001 terrorist attacks in the United States improved relations between the USA and Russia and thus the prospects for Nato expansion. Indeed, on 21 November 2002 formal invitations were extended to seven countries to join Nato with a view to them becoming full members in May 2004: Estonia, Latvia, Lithuania, Bulgaria, Romania, Slovakia and Slovenia. Vaira Vike-Freiberga was elected president by parliament on 17 June 1999. She succeeded President Guntis Ulmanis on 8 July 1999 when he finished his second and final term of office. She was then a little-known Canadian–Latvian academic, but was the first woman elected president in the former Soviet Union. Vike-Freiberga: I think I have moral authority. I think I represent the fact that not everyone can be bought … [An unfortunate by-product of Latvia’s newfound freedom is the idea that] power is money and that everything can be bought and sold, even people … I have spent a great part of my life being part of a minority in this country or that. I know how it feels. (Baltic Times, 1–7 July 1999, p. 7) ‘At the same time as urging ethnic Russians to learn Latvian, she has also announced her intention to learn Russian’ (FT, 9 July 1999, p. 3). Latvia’s citizenship and language laws have been amended, criticism from the West being an important factor (especially since Latvia, all going to plan, will become a member of both Nato and the EU in May 2004). It goes without saying that Russia has been highly critical. But the approach is still a tough one, the basic problem being the high proportion of ethnic Russians in the population. The 1935 census split the population into 73 per cent Latvians and 12.5 per cent Russians. In 1989 only 52 per cent of the 2.7 million population were Latvians, while 34 per cent were Russians. In 1993 the respective proportions in the 2.6 million population were 54.2 per cent and 33.1 per cent. In 2000 the respective proportions were 57.6 per cent and 29.6 per cent. ‘[Some] 22 per cent of Latvia’s 2.35 million [people] remain non-citizens, most of them ethnic Russians’ (Baltic Times, 17–23 October 2002, p. 2). According to a census published in 2001, the population fell to 2.38 million. ‘An unremarkable ceremony in … Skrunda last week marked the symbolic end to Russian occupation of the Baltics … Russia pulled its last handful of soldiers from the Skrunda radar site … The pullout was completed well ahead of the February 2000 deadline’ (Baltic Times, 28 October–3 November 1999, p. 2). An agreement had been reached on 31 August 1998. Latvia has also attracted international criticism for its disparity of treatment as regards the prosecution of individuals from the Soviet era compared with

Introduction and overview 13 individuals from the Nazi era. Latvian Legion anniversaries have aroused controversy because it was a division of the Waffen SS that fought with the Nazis during the Second World War against the Soviet Army. ‘Latvia has been singled out by Russia partly over its treatment of Soviet-era suspected war criminals. Estonia has given them suspended sentences, while Latvia has handed own prison terms’ (FT, 5 May 2000, p. 8). Latvia is supportive of the United States over the issue of international terrorism. The government also approved of the US-led war in Iraq in 2003. Output fell heavily in 1992 (-34.9 per cent) and in 1993 (-14.9 per cent). The GDP growth rate turned positive in 1994. But output fell once again the following year before returning to positive growth in 1996. Thereafter GDP growth was encouraging. ‘The Baltic States have been affected much more severely by the Russian crisis than the other CEE countries, due in part to their closer trade and financial links to Russia’ (EBRD 2000a: 5). In 2001 GDP, as a percentage of the 1989 level, was an estimated 90 per cent in Estonia, 75 per cent in Latvia and 72 per cent in Lithuania (EBRD 2002b: 58). Agricultural output fell heavily in 1996, 1998 and 1999. The annual inflation rate reached a peak of 951.2 per cent in 1992, but a rate in single figures was achieved by 1997. There has been a rapid shift in trade away from Russia and other CIS countries and towards the West, especially the EU. This trend was marked after the August 1998 financial crisis in Russia. On 14 October 1998 the WTO approved entry terms for Latvia, the first Baltic State to achieve this. Membership followed in February 1999. The exchange rate was freely determined on the market until February 1994. The lat has been informally pegged to Special Drawing Rights since February 1994 via central bank intervention in foreign exchange markets. Base money is fully backed by net international reserves. There is complete and effective current and capital account convertibility, with no repatriation or surrender requirements (EBRD 1994: 29, 109; 1996b: 160). ‘Trade policy remains liberal’ (EBRD 2001b: 166). In 1995 a series of financial scandals badly dented the image of the Latvian banking system. The Latvian banking system was highly exposed to Russian assets and this led to further bankruptcies after August 1998. The private sector accounted for roughly 10 per cent of GDP in mid-1990. In mid-2001 the figure was 70 per cent (EBRD 1999b: 24, 240; and 2002b: 20, 172). Small-scale privatization was carried out speedily. But large privatization has proven to be more complex. The 1992–4 period was characterized by the decentralization of decision-making to branch ministries (amid concern about the lack of transparency and insider deals). There was a radical change in 1994 with the introduction of a more centralized and comprehensive privatization policy involving, for example, vouchers and sales. The privatization agency (which handled sales) and the state property fund (which managed the state portfolio) were set up in that year. On 14 January 1994 a British-led consortium took a 49 per cent stake in Lattelekom. This was the first internationally tendered privatization of a state telecommunications company in any country of the former

14

Introduction and overview

Soviet Union. Since December 1994 various tenders have taken place, appealing to both domestic and international strategic investors. Public auctions and offerings are used to sell residual shares. Large privatization is largely complete (although there were delays in 1999 and the privatization of the Latvian Shipping Company proved to be a marathon with political consequences). Privatization has increasingly involved tenders seeking strategic investors for utilities and other infrastructure monopolies. ‘Political tensions and conflicting objectives have delayed large-scale privatizations’ (EBRD 2000a: 64). The privatization of four remaining large-scale enterprises (Latvian Shipping Company, Ventspils Nafta, Latvenergo and Lattelekom) has been consistently delayed. Delays have been due mainly to the influence of rival industrial groups in Latvia that have considerable sway in the domestic political process, the at-times conflicting objectives of retaining domestic control over major enterprises and attracting foreign strategic investors to maximize revenues for the state budget and to enhance enterprise performance. (EBRD 2000b: 182) ‘The privatization of remaining large-scale enterprises has been consistently delayed, due to the conflicting objectives of retaining domestic control and attracting foreign strategic investors’ (EBRD 2001a: 74). ‘Privatization of the remaining large enterprises has had limited success’ (EBRD 2002a: 68). ‘The government … undertakes to complete privatization of the remaining state-owned companies by the end of March 2001’ (Baltic Times, 6–12 July 2000, p. 7). On 3 August 2000 parliament voted to withdraw Latvenergo from the privatization list and to retain it as a single, vertically integrated energy company (Baltic Times, 10–16 August 2000, p. 11). ‘Although the coalition partners agree on the need to sell the handful of big state enterprises still in state hands, the process has been mired in infighting and corruption allegations’ (FT, Survey, 15 June 2001, p. 29). Restitution has played a significant role in agriculture. According to Davis (1997: 1415), by the beginning of 1995 around 80 per cent of agricultural land was either used or managed privately. ‘Latvia’s parliament on 3 April [2003] approved a seven-year ban on foreigners buying rural land in preparation for EU membership’ (Baltic Times, 10–16 April 2003, p. 4). Lithuania: a summary Lithuania’s citizenship law has generally been praised internationally, a situation helped by the preponderance of Lithuanians in the population. The 1923 census split the population into 84 per cent Lithuanians and 2.5 per cent Russians. In 1989, 79.6 per cent of the 3.7 million population were Lithuanians and 9.4 per

Introduction and overview 15 cent were Russians. In 1993 the split was 80.3 per cent Lithuanians and 9.1 per cent Russians. The last census was conducted [in 1989] … The latest census [held in 2001] highlights a disturbing 5 per cent population decline, though this is less than in Latvia or Estonia … Lithuania’s population now stands at 3.48 million … Russian Lithuanians (6.3 per cent of the population) are no longer the second largest ethnic group but the third largest, having been supplanted by Polish Lithuanians, who amount to 6.7 per cent. Ethnic Lithuanians now constitute 83.5 per cent … In contrast to Latvia and Estonia, which both have large populations of resident non-citizens, 99 per cent of Lithuania’s population are citizens. (Baltic Times, 4–10 July 2002, p. 6) The 10 December 1991 citizenship law stipulated that applicants have to prove ten years’ lawful residence and take an oral and written language test. But all residents of the former Soviet republic were given citizenship (Newsbrief, 1993, vol. 13, no. 9, p. 65). Citizenship also requires the signing of an oath of loyalty (Gwiazda 1994: 79). The citizenship law has helped Lithuania’s relationship with Russia, which has generally been the smoothest of the Baltic States. The issue of the Russian enclave of Kaliningrad has been generally well managed. Final agreement was reached on 11 November 2002 as regards transit arrangements after Lithuania’s entry into the EU. Russian troops withdrew from Lithuania by the 31 August 1993 despite some friction over this issue. Nevertheless, Lithuania has firmly pointed itself in a pro-Nato, pro-EU and pro-economic reform direction despite significant changes of government and a general air of sleaziness (such as during the banking crisis of 1995). Quarrels within the shaky coalition government that emerged after the October 2000 general election involved issues such as privatization. Progress along the path towards EU membership can be seen as follows: 1

On 13 October 1999 the European Commission recommended that EU leaders at the December 1999 meeting in Helsinki allow Bulgaria, Latvia, Lithuania, Malta, Romania and Slovakia to begin accession negotiations in 2000. The ‘principle of differentiation’ for entry date would apply to each of the twelve candidates, reflecting differing states of readiness for EU entry. ‘Each country will be able to proceed on merit, including the possibility for those which join the negotiations from 2000 to catch up with the others.’ Latvia has a good chance of catching up with the group led by Hungary, with Lithuania not far behind. Lithuania, it was said, could become a functioning market economy in 2000 if it pushed ahead with promised reforms. The report praised the Baltic country for implementing judicial reforms, increasing trade with the EU countries and continuing ‘to make progress

16

Introduction and overview in establishing a functioning market economy’ … The European Commission … also praised parliament’s decision to shut down the first of the two nuclear reactors … but stressed the second should be taken out of operation by no later than 2009 … Lithuania relies on Ignalina for 80 per cent of its energy … But the report was hardly all praise. Lithuania was told it must cut its fiscal deficit, trim the current account deficit, continue with agricultural reforms and increase efforts in fighting corruption. Lithuania was also ranked slightly behind leaders Latvia and Malta and was criticized for not handling the fallout from last year’s Russian crisis as well as it could have, largely because of Lithuania’s historical trade links with Russia and its dependence on the Russian market. (Baltic Times, 21–27 October 1999, p. 2)

2

3 4

5

‘[The] economy minister … announced on 27 April [2001] that Lithuania will postpone the decommissioning of the Ignalina nuclear power plant … “Lithuania has its own arguments for not closing the second block in 2009, the year that has been suggested to us, and seeking the postponement of this term. This means that it could continue to run until 2012 or 2015” … The minister said he had made his position clear to European Commission officials … In the opinion of the European Commission the second reactor block of the Ignalina nuclear power plant should be closed by 2009. The closure of the first reactor block is scheduled for 2005 … The Ignalina nuclear power plant produces over 70 per cent of Lithuania’s electricity … The West considers Ignalina’s two Soviet-made RBMK-type reactors operating in the plant to be generally unsafe. These are the same type of reactors as the one that exploded at Chernobyl on 26 April 1986’ (Baltic Times, 3–9 May 2001, p. 1). On 11 June 2002 Lithuania and the EU reached preliminary agreement to close Ignalina by 2009. The exact amount of EU financial assistance was left to future negotiations. (Lithuania puts the closure figure at around $2.4 billion, a sum it claims it could not afford on its own.) The November 2000 EU report continued to place Estonia at the front of the Baltic field for future EU membership. On 13 November 2001 the EU published its progress reports on the twelve EU applicants for EU membership with which negotiations have began. There are thirteen applicants in all (including Cyprus, Malta and Turkey), but negotiations have not yet begun with Turkey. Estonia, Latvia and Lithuania received generally very favourable reports, but what was different this time was that the EU indicated that it might admit up to ten new members at once. Günter Verheugen (EU enlargement commissioner): ‘The aim of achieving the first accessions before the European Parliament elections in 2004 remains a demanding one. But it is not a utopian dream; it is a realistic and feasible challenge’ (FT, 14 November 2001, p. 12). Bulgaria and Romania were excluded from early entry. At the EU summit held in Copenhagen on 12–13 December 2002, 1 May 2004 was set as the target date for accession of the ten countries mentioned

Introduction and overview 17 above (a ratification process being required). The EU progress report on Lithuania, published on 9 October 2002, was not without criticism (e.g. mention was made of unemployment, the management of public finances and administrative capacity). On 27 January 1994 Lithuania became the first country of the former Soviet Union to sign a Partnership for Peace agreement with Nato. Nato was very wary of extending membership to the Baltic States, mainly because of Russia’s particular sensitivity. But the 11 September 2001 terrorist attacks in the United States improved relations between the USA and Russia and thus the prospects for Nato expansion. Indeed, on 21 November 2002 formal invitations were extended to seven countries to join Nato with a view to them becoming full members in May 2004: Estonia, Latvia, Lithuania, Bulgaria, Romania, Slovakia and Slovenia. The 71-year-old Valdas Adamkus narrowly won the presidential run-off on 4 January 1998. He had left Lithuania for the USA in 1944 when the Soviet Union reoccupied the country. He had resisted both Nazi and Soviet occupation. But the relationship between president and members of the government has not always been smooth. For example, prime minister Gediminas Vagnorius resigned (effective 3 May 1999). Prime minister Rolandas Paksas resigned in October 1999 because he disagreed with government and presidential support for the sale of a stake in the Mazeikiu Nafta oil refinery to the US oil company Williams International. Adamkus, then 76, won the first round of the presidential election on 22 December 2002. But he surprisingly lost, in the rerun held on 5 January 2003, to 46-year-old Rolandas Paksas. Lithuania is supportive of the United States over the issue of international terrorism. The government also approved of the US-led war in Iraq in 2003. The GDP growth rate turned positive in 1995. Output fell heavily in 1992 (-21.3 per cent) and in 1993 (-16.2 per cent), 1994 (-9.8 per cent) and 1999 (-3.9 per cent) (EBRD 2001b: 173). ‘The Baltic States have been affected much more severely by the Russian crisis than the other CEE countries, due in part to their closer trade and financial links to Russia’ (EBRD 2000a: 5). GDP growth was very encouraging in 2000 and thereafter. In 2001 GDP, as a percentage of the 1989 level, was an estimated 90 per cent in Estonia, 75 per cent in Latvia and 72 per cent in Lithuania (EBRD 2002b: 58). The annual inflation rate in Lithuania reached a peak of 1,020 per cent in 1992, but a rate in single figures was achieved by 1997 and consumer prices were more or less stable by 1999. Lithuanian banks are less exposed directly to the Russian crisis than their rivals in the other Baltic States, notably in neighbouring Latvia. They had just 1.4 per cent of assets in Russia, compared with 8 per cent for Latvia’s banks … Bankers have much greater concern about their indirect exposure to Russia via Lithuanian companies exporting to the country since Russia accounts for a higher percentage of exports than in other Baltic States. (FT, Survey, 25 November 1998, p. v)

18

Introduction and overview The direct damage to banks is limited because, with just 1.4 per cent of assets in Russia, Lithuanian banks were far less active in Moscow than some others in the region. The real concern is about the effect on Lithuanian exports to Russia. Before the crisis Russia accounted for about 20 per cent of total exports, with almost a further 20 per cent going to Ukraine and Belarus, which are also suffering economic difficulties. With total exports accounting for 55 per cent of GDP the numbers paint a grim picture. Roughly a fifth of the economy is in some way dependent on the Commonwealth of Independent States. (p. iii)

‘Russia took 20 per cent of exports last year [1997] but the EU bought more than 30 per cent … And the crisis could force restructuring in an economy which has been slow to modernize’ (p. i). ‘By the middle of 1998 only 36 per cent of 288 cases filed under bankruptcy had been completed’ (p. vi). Following the Russian crisis, import tariffs on refined oil, fertilizer and agricultural products were increased to protect domestic producers in 2000 (EBRD 1999b: 242). On 1 April 1994 Lithuania switched from a managed float to a currency board, with the litas pegged by law to the US dollar (EBRD 1995a: 7). The litas must be fully backed by foreign reserve currencies and gold and is freely convertible at a fixed rate of four litas per US dollar (Steve Hanke, FT, 5 May 1994, p. 24). In June 2001 the central bank announced that it would repeg the currency from the US dollar to the Euro on 2 February 2002. The central bank intends to maintain the currency board arrangement until Lithuania accedes to the EU … The share of trade with the EU and EU candidate members has steadily increased in recent years to almost 75 per cent of total exports. (EBRD 2001b: 170) Lithuania repegged its currency to the Euro … [on] 2 February … The change is part of political and economic integration with the EU and preparation for likely making the Euro Lithuania’s national currency in a few years … Some 80 per cent of Lithuanian exports now go to EU members and accession states. A similar share of imports come from there … Pegging the litas to the dollar in April 1994 accompanied the introduction of a currency board in Lithuania, which required the Bank of Lithuania to hold enough foreign assets to fully cover the base money supply. (Baltic Times, 7–13 February 2002, p. 3) ‘With government approval the Bank of Lithuania issued a decree on 1 February setting the new official fixed exchange rate at 3.4528 litas to one Euro’ (p. 7).

Introduction and overview 19 The currency was repegged from the US dollar to the Euro on 2 February 2002 at 3.4528 Lithuanian litas to one Euro … The Bank of Lithuania intends to maintain the currency board arrangement until the country accedes to the EU and joins the Exchange Rate Mechanism II. (EBRD 2002b: 172) There is virtually full convertibility of the litas on both the current and capital account (EBRD 1995b: 50). Lithuania has not in practice applied capital controls (IMF, World Economic Outlook, May 1997, p. 95). The private sector accounted for roughly 10 per cent of GDP in mid-1990. In mid-2001 the figure was 75 per cent (EBRD 1999b: 24, 244; and 2002b: 20, 176). Small privatization has been rapid. As regards large privatization, in the first phase of voucher privatization preference was given to insiders. Since mid-1995 cash sales have been stressed, including tenders for utilities open to foreign strategic investors. Large privatization accelerated after mid-1995, but Lithuania lagged behind Estonia and Latvia. ‘Large-scale privatization is close to completion’ (EBRD 2001b: 170). On 5 June 1997 parliament passed a law on the restoration of property rights which grants prewar owners the right to property which was nationalized in 1941 by the Soviet authorities (Baltic Times, 12–18 June 1997, pp. 1, 8; and 3–9 July 1997, p. 3). In July 1997 parliament adopted a new restitution law, which, among other things, broadened the application of the previous law to non-resident owners (EBRD 1997b: 184). On 25 June 1998 a Swedish/Finnish consortium was selected to take a 60 per cent stake in Lithuanian Telecom, with a commitment to invest $221 million over the next two years. In May 1999 the government sold its 70 per cent stake in the state insurance company to a Danish company. In 1999, amid considerable controversy, the US company Williams International formally received a 33 per cent stake in the Mazeikiu Nafta oil company (comprising the Birzai pipeline, the Mazeikiu refinery and the Butinge terminal) and the government also handed over operational control to Williams International. Even more controversial, given the wariness about Russian capital in the Baltic States in general, was the increasing involvement of the Russian oil company Yukos (albeit one of the better managed Russian companies). In 2002 Yukos at first bought a 26.85 per cent stake (with Williams International retaining managerial control despite seeing its stake fall to 26.85 per cent). Then Williams International sold out to Yukos, bringing the latter’s stake up to 53.7 per cent and thus gaining managerial control. The state has a 40.66 per cent stake in the Mazeikiu Nafta oil company. Significant progress in large-scale privatization has been marred by the lack of transparency in some transactions, although the recent disclosure of the full terms of transactions is a step in the right direction … In the past year the government privatized a number of large-scale enterprises to foreign strategic enterprises … In June 2000 a 25 per cent stake in the partially

20

Introduction and overview privatized Lithuanian Telecom was sold through a global IPO … The sale leaves the state with a 10 per cent residual holding. (EBRD 2000b: 186–7) Between 1993 and 2001 Lithuania’s cumulative FDI net inflows per capita were one of the lowest among the ten accession countries of the region … The government is taking steps to improve the investment climate … [For example] in January 2002 parliament adopted a national anti-corruption programme. (EBRD 2002b: 174)

Legislation introduced in 1991 allowed former landowners or their heirs the right to receive land expropriated during the Soviet era. The resident citizens were able to claim up to 80 ha of land, of which 50 ha could be arable. The 1940 land register was used as a basis. The non-assets of collective and state farms were privatized (not restituted) by means of a voucher system based on wage and length of service (Davis 1996: 39). Where it has not been possible to return land to previous owners, compensation in the form of special certificates or cash is employed (p. 41). By the end of 1994 Lithuania had privatized 85 per cent of all agricultural land and assets (Baltic Observer, 2–8 March 1995, p. 8). At the end of 1993 individual private farmers, partnerships and households held 80 per cent of agricultural land (EBRD 1994: 30). By mid-1995 the privatization of farmland had been largely completed (EBRD 1995b: 50). ‘Land restitution is close to completion’ (EU’s report on Lithuania, Progress Towards Accession, 8 November 2000, p. 97). ‘A constitutional amendment allowing foreign companies to purchase agricultural land was initiated on 30 October [2001]. The government looks set to win the two-thirds majority necessary to pass the amendment, thus bringing Lithuania into line with the EU’ (Baltic Times, 8–14 November 2001, p. 13). On 23 January [2003] the Seimas adopted an amendment to Article 47 of the constitution, which allows foreign entities and individuals the right to purchase land intended for agricultural cultivation … In a complementary piece of legislation the Seimas passed on 28 January a law outlining the rules for the purchase of land. According to the new laws, nationals of countries that belong to the EU or to Nato will be allowed to acquire agricultural land beginning seven years after Lithuania officially joins the EU. Foreigners who have been living in Lithuania for at least three years will be allowed to buy the land immediately … Only seventy-three such persons exist, farming a total of 1,100 ha of land. The law also sets limits on the amount of land that can be purchased … Right now only 30 per cent of farmers in Lithuania own their own land … Lithuania has yet to complete the sale of state-held land to farmers. (Baltic Times, 30 January–5 February 2003, p. 5) Problems include the small size of private farms.

Introduction and overview 21

Belarus: a summary The authoritarian president Alexander Lukashenko dominates events in Belarus, popular among large swathes of the population but generally reviled in the West. He won over 80 per cent of the vote in the second round of the presidential election held on 10 July 1994 on a platform including anti-corruption/crime measures and populist economic promises. ‘[There is] a belief among many voters that Mr Lukashenko’s economic management style has protected them from the pain of transition felt in neighbouring Russia’ (Andrew Jack, FT, 26 September 2002, p. 9). ‘A cooling of relations could be sensed as soon as Putin replaced Yeltsin … For Lukashenko, who was already imagining himself as president or at least prime minister of the Union State, it was like a cold shower’ (Yekaterina Grigoryeva and Yelena Daneiko, Izvestia, 19 June 2002, p. 4; CDSP, 2002, vol. 54, no. 24, p. 5). Lukashenko has fiercely rejected Putin’s proposal to, in effect, integrate Belarus into Russia. Putin would prefer this or an EU-type arrangement to the idea of working along the lines of the present Union treaty. Indeed, political deeds have always lagged far behind an ocean of words. But economic deeds are more in evidence and the idea of union is a spur to domestic economic reform in Belarus. ‘Compliance with the policy requirements of the Union Treaty with Russia calls for increasing alignment with Russian market regulations, which may give a boost to reforms’ (EBRD 2001b: 118). Western countries and international organizations are deeply concerned by Lukashenko’s actions, which include control of the media, control on the registration of churches (a major aim being to protect the supportive Orthodox Church) and the disappearance of some of those opposing him (even a former governor of the central bank). Although Lukashenko has considerable popular support and does well in elections (as in the 9 September 2001 presidential election) and referenda, much concern has been expressed in the West about the fairness of these tests of public opinion. The referendum on a new constitution held in November 1996 approved an increase in the president’s term of office, an increase in presidential powers and approval of the president’s idea of a bicameral parliament. On 26 November 1996 Lukashenko supporters set up a breakaway parliament and the following day Lukashenko signed a decree creating a new lower house; the first law passed by it terminated the powers of the former Supreme Soviet. Nevertheless, the West was relieved by the sending of all nuclear weapons to Russia by November 1996, slightly ahead of the scheduled end-of-year deadline. Belarus is supportive of the United States over the issue of international terrorism, but was very critical of the US-led war in Iraq in 2003. (The United States had accused Belarus of aiding Iraq in her missile defences.) GDP growth has been positive since 1996: -9.6 per cent in 1992; -7.6 per cent in 1993; -12.6 per cent in 1994; and -10.4 per cent in 1995 (EBRD 2001a: 15).

22

Introduction and overview

In 2001 GDP was an estimated 91 per cent of the 1989 level (EBRD 2002b: 58). Belarus’s heavy dependence on trade with Russia is reflected in the much reduced figure for 1999 following the financial crisis of August 1998 in the latter country. (In 1998 Russia accounted for 65.5 per cent of exports – the CIS as a whole 73.7 per cent – and the EU for 9.2 per cent. The respective figures for imports were 53.8 per cent – 66.9 per cent – and 18.0 per cent: BET, Quarterly Issue, July–September 1999, p. 75. ‘Russia is Belarus’s main trading partner, accounting for 61 per cent of its trade turnover … Ukraine is the second largest trading partner for Belarus’: BET, Monthly Update, August 1999, p. 75. Belarus is continuously struggling to pay off its arrears for energy supplies from Russia, especially gas.) But doubts have been cast on the meaningfulness of the seemingly impressive GDP growth figures in general since 1996: 1

2

3

‘Output has been essentially driven by administrative fiat, backed by access to cheap credit, and bartered for energy debt, thus plugging the financing gap on the balance of payments given lack of external financing’ (BET, Quarterly Issue, January–March 1998, p. 11). ‘The level of inventories as a percentage of industrial production is very high by international standards’ (BET, Quarterly Issue, August 1999, p. 10). ‘Leaps in output [in 1997] partly reflect government directives to increase production, monetary expansion and soft central bank credits to the construction and agricultural sectors’ (Business Central Europe 1997: 48). ‘Most companies remain state-owned, taking their orders from a slew of ministries according to a central plan. Central planning has maintained growing production, though that just means more and more Soviet-era goods, which fewer and fewer people want to buy’ (Business Central Europe 2000: 43). ‘Belarus’s rapid growth has been fuelled by inflationary and unsustainable directed credits to state enterprises’ (EBRD 1999a: 6). ‘Industry is being sustained by state orders and the accumulation of unsold products and energy arrears’ (EBRD 1999b: 194–5). ‘Pervasive directed credits, as well as explicit and implicit subsidies, allow non-viable enterprises to avoid restructuring … Industrial enterprises are heavily dependent on subsidized inputs, particularly energy’ (EBRD 2000a: 42). ‘The phasing out of the system of directed credits as a condition before the [IMF’s April 2001] SMP [StaffMonitored Programme] could be initiated has been a notable positive development. Other important policy steps include the maintenance of positive real interest rates since February 2000’ (EBRD 2001b: 119).

Performance as regards open inflation has been relatively poor. There was even a marked resurgence in 1999, despite pervasive price controls. The inflation rate declined thereafter, but inflation is still a problem. The Lukashenko economy is still heavily regulated by the state, although there are glimmers of change:

Introduction and overview 23 1

‘Firms are constrained from reacting to price signals because they have little incentive to cut costs, shed labour or restructure. The lack of the threat of corporate insolvency or takeover is one constraint – there has been no bankruptcy and only fifteen cases have come to court’ (BET, Quarterly Update, December 1996, p. 64). ‘Not one enterprise has been declared bankrupt under the 1991 bankruptcy law. The government continues to support state enterprises by means of directed credits and budgetary funds to write off arrears’ (EBRD 1998b: 155). In the context of ongoing negotiations with the IMF on a staff monitored programme, the authorities made a commitment to phase out directed lending … There has also been some modest progress in phasing out or easing administrative control mechanisms in many areas, including in business registration. (EBRD 2001a: 50)

2

3

Food rationing for some basic products was introduced in early 1995 (EBRD 1995a: 17–18, 53). Since late 1996 the government has gradually reversed the process of price liberalization, replacing informal controls with administrative measures (EBRD 1999b: 194). ‘The authorities have … resorted to direct administrative controls on most prices’ (EBRD 2000b: 138). ‘Belarus has in place an extensive network of both direct price controls and controls on margins’ (BET, Quarterly Update, December 1996, p. 31). ‘Price and distribution controls are applied to products such as sugar, meat and oil and, where not officially, informally’ (p. 64). After a period of liberalization in 1994 and 1995 price ceilings were introduced in late 1995 and 1996, partially weakened in January 1997 and tightened again thereafter (BET, Quarterly Issue, January–March 1998, pp. 16, 64). Rationing of basic goods was introduced on 10 September 1998 (BET, Monthly Update, September 1998, p. 10). ‘Throughout 1998 the government increased its control over the economy through restrictions on domestic and external trade and through extensive price controls, leading to shortages of goods in domestic markets and the introduction of food rationing in several Belarussian regions’ (EBRD 1999a: 33–4). ‘The scope of administrative price controls was reduced in early 2001 and again under the terms of the IMF StaffMonitored Programme, which began in April 2001’ (EBRD 2001b: 118). Foreign trade has been heavily regulated, foreign exchange controls have been extensive and a multiple exchange rate system has been employed. But some liberalization has occurred. ‘In September 2000 the multiple exchange rate system was abolished and a unified market-based exchange rate was introduced. Since the beginning of 2001 the currency has been pegged to the Russian rouble’ (EBRD 2001a: 50). Following liberalization of the foreign exchange market in late 1999 and early 2000, the National Bank further liberalized the market by

24

Introduction and overview July 2001. The new measures include ending both a ban on foreigners taking part in interbank trade and a $200,000 per month limit on the amount of hard currency that market participants can buy. The export surrender value regime (which does not apply to all exports) remains at 30 per cent, although the effective rate is lower owing to numerous exemptions … In early 2001 the National Bank introduced a crawling peg exchange rate regime, linking the Belarussian rouble to the Russian rouble … The national currency will be permitted to depreciate by 2.5 to 30 per cent per month against the Russian rouble. The band may be adjusted … Under the terms of the Union Treaty, the Russian rouble is to be used as the common currency from the beginning of 2005 and is to be replaced by a common currency in 2008. (EBRD 2001b: 118) Progress in the liberalization of the foreign exchange market made under the IMF’s staff monitored programme in 2001 allowed Belarus to accept some of the obligations of Article 8 (Sections 2, 3 and 4) in November 2001. However, many restrictive practices remain in place, including price controls and a surrender requirement on foreign exchange transactions. (EBRD 2002a: 44)

4

Privatization has been very slow. The private sector accounted for roughly 5 per cent of GDP in mid-1990. In mid-2001 the figure was still only 20 per cent (EBRD 1999b: 24, 196; and 2002b: 20, 124).

Large-scale privatization under the 1993 law began in June that year. A voucherbased programme was launched in July 1994 (for small-scale privatization as well) (EBRD 1994: 18). No property restitution has taken place to date (EBRD 1996b: 140–1). The privatization process stalled in 1997. Most privatizations of large enterprises have been to management and employees. Small privatization has progressed somewhat faster (EBRD 1997b: 155). The privatization of communal enterprises, mainly small and medium-sized enterprises, has been considerably faster than that of republican assets, mainly large industrial and agricultural enterprises … In May 1999 parliament decided that utilities, local infrastructure and energy companies will remain under state control. (EBRD 1999b: 194–5) ‘Under the terms of the Union Treaty with Russia, Belarus has agreed to accelerate large-scale privatization in 2001’ (EBRD 2001a: 50). Progress in privatization remains stalled and there have been no true privatizations this year … Few companies have been truly privatized (defined as a reduction in the state share to less than 50 per cent), with the majority

Introduction and overview 25 having been sold from one state entity to another … In line with [the April 2001] SMP [Staff-Monitored Programme] commitments to the IMF, the government has recently announced its intention to restart the privatization process for small and medium-sized enterprises. However, the government also believes that large-scale enterprise privatization would be premature in the present environment, given depressed asset prices and lack of interest from foreigners … Persistent soft budget constraints for privileged enterprises, little genuine privatization and stifling government controls impede new investment and the restructuring of industry and agriculture. (EBRD 2001b: 119) ‘Privatization remains stalled, although the corporatization of some state enterprises is under way, for example in the petrochemicals sector’ (EBRD 2002a: 44). ‘The government has recently stated that it intends to retain a controlling interest in certain, as yet undefined, strategic enterprises … The investment climate has been weakened by the authorities introducing “golden shares” into enterprises that have already been privatized’ (EBRD 2002b: 122). On 16 March 1999 the minimum statutory fund for company registration was increased. ‘The edict virtually abolishes limited liability as the private property of company founders of limited and joint stock companies can be confiscated in the case of bankruptcy’ (BET, Quarterly Issue, January–March 1999, p. 91). In September 1998 a presidential decree suspended the registration of new enterprises on the grounds that around 17 per cent of registered businesses were idle or used to evade taxes. The new reregistration procedures, adopted in March 1999, oblige all firms and banks to reregister by January 2001 and to increase their statutory capital in accordance with the growth of the minimum wage. The decree holds owners and shareholders of insolvent companies personally liable for corporate debts, practically eliminating the concept of limited liability. (EBRD 1999b: 194–5) ‘The mid-November [2001] repeal of presidential decree No. 40, which empowered the state to confiscate property of individuals and legal entities that cause (undefined) damage to the state, was a further welcome improvement in the investment climate’ (EBRD 2002a: 44). On 1 January 1998 there came into force a decree whereby the state has a veto on the most important questions concerning the development of joint stock enterprises (BET, Quarterly Issue, July–September 1997, p. 11). ‘In effect the decree gives the state total discretion in controlling the management and restructuring of enterprises and any joint ventures, even where nominally the state is a minor shareholder with a 1 per cent share’ (pp. 56, 65–6). A presidential ‘golden share’ decree, effective 1 January 1998, gives state representatives in joint stock companies a veto right on main decisions (EBRD 1998a: 25). As regards agriculture:

26

Introduction and overview

1

Households grow, consume and sometimes sell up to 40 per cent of food on private plots (BET, Quarterly Update, September 1996, p. 33). A presidential decree of 2 September 1998 implied recognition de jure of private land ownership (BET, Monthly Update, September 1998, p. 9). In 1998 state farms accounted for 22.1 per cent of agricultural land, collective farms for 60.2 per cent and private farms for only 0.6 per cent. In 1997 the private sector accounted for 40 per cent of gross agricultural output, compared with a peak of 45 per cent in 1996 (BET, Quarterly Issue, October–December 1998, pp. 63–4). Agricultural production in Belarus continues to remain predominantly within the large state-owned and collectively-owned farms (sovkhozes and kolkhozes, respectively). The share of the private sector in agriculture [output] increased in 1998 compared with 1997 (to 38.5 per cent from 37.4 per cent), though it was significantly lower than the 1996 figure of 48.9 per cent. (BET, Quarterly Issue, January–March 1999, p. 67)

2

Collective farms continue to receive large subsidies (EBRD 1997b: 155). The government continues to subsidize agriculture. Production remains mostly within the large state or collective farms, 40 per cent of which are estimated to make losses (EBRD 1999b: 195). Agricultural producers are heavily subsidized as the government maintains low administered food prices (EBRD 2000a: 42). Private farms accounted for 38 per cent of agricultural output in 1998 despite cultivating less than 1 per cent of agricultural land. A new land code adopted in January 1999 allowed legal and physical entities to acquire property rights on land, subject to case-bycase approval by the president (EBRD 1999b: 195). The presidential decree on private ownership of land signed in February 2000 excludes agricultural land. The agricultural sector remains largely unreformed and production has fallen in recent years, but the president has reiterated that collective farms and state enterprises should remain the foundation of the agricultural sector. (EBRD 2000b: 139)

3 4 5

‘Virtually no changes have been made in the structure and organization of production’ (CDSP, 1999, vol. 50, no. 50, p. 19). ‘In Belarus … only private ownership of household plots is allowed’ (Macours and Swinnen 2002: 377). The share of peasant farms in agricultural land increased from 0.2 per cent in 1992 to 0.7 per cent in 1999 (Spoor and Visser 2001: 888). The share of private farms and household plots in agricultural production increased from 33 per cent in 1991 to 40 per cent in 1998 (p. 890).

Introduction and overview 27 ‘Belarus has the lowest rate of per capita US dollar foreign direct investment among all the countries in transition’ (BET, Quarterly Update, December 1996, p. 75).

Moldova: a summary Moldova is a very poor and heavily indebted country. The Republic of Moldova is an agrarian country with 54 per cent of its population living in rural areas. When allowance has been made for the important food-processing industry, well over 50 per cent of employment in Moldova is, directly or indirectly, dependent upon agriculture. (MET, Quarterly Issue, October–December 1998, p. 11) Politics is deeply coloured by the problem of the Dniestre region (which is economically poor) and by relations with Romania and Russia: 1

2

‘The self-proclaimed Republic of Transdniestre covers about 12 per cent of Moldova. The 600,000 population of the former is divided between Moldovans (40 per cent), Ukrainians (28 per cent), Russians (26 per cent) and miscellaneous (6 per cent)’ (EEN, 1995, vol. 9, no. 12, p. 5). ‘Moldova’s biggest problem is not so much the lingering Transdniestre issue as its own lack of direction … Looking to its past – some of the territory was part of eastern Romania until 1940 and then joined to Soviet Moldavia – Moldova has little idea of precisely what sort of country it really is now, let alone what strategy to follow … Many older citizens, but also a number of young people, look to the West and feel the country should reintegrate with Romania, from which it was torn by a Berlin–Moscow agreement in 1940. Others, most notably in the strong and largely unconstructed Communist Party, which currently holds forty seats in the 101-seat parliament, wants close relations with Russia and the other former Soviet republics … “There is a contradiction about Moldova’s place in the world, which goes to the heart of things here,” said a Western diplomat in Chisinau. He pointed to the current government, which came to power in December [2000], sustained by far rightists (who favour integration with Romania) and the Communists’ (Justin Keay, IHT, 16 June 2000, p. 2). Under a corrupt and incompetent political elite, it [Moldova] is now the poorest country in Europe … Leaving is the obvious way ahead for the country’s brightest and best. By some estimates 600,000 Moldovans – a seventh of the remaining population – have left already … Few people, however, now talk of Moldova joining up with its ethnic big brother, the Romanian government would not want it … Yet Moldova remains surprisingly

28

Introduction and overview orderly. For all their poverty, most people still pride themselves on education, hard work and tolerance. (The Economist, 15 July 2000, p. 51)

‘A third of Moldova’s able-bodied population has emigrated since 1991’ (Business Central Europe 2000: 46). ‘A good tenth of the labour force (some say a fifth) now works abroad’ (The Economist, 15 February 2003, p. 42). In the general election of 27 February 1994 parties favouring union with Romania were decisively rejected. The largest percentage of the vote (43.13 per cent of the vote and fifty-seven seats of the 104 seats) went to the Agrarian Democratic Party, led by Andrei Sangheli and Petru Lucinschi. The party advocated improved relations with Russia and making concessions to the Dniestre region. A new constitution went into effect on 27 August 1994. The official language is Moldovan and autonomy is granted to the Dniestre and Gagauz regions. The Party of Revival and Reconciliation of Moldova was established on 15 July 1995, led by President Mircea Snegur. In June he had resigned from the ruling Agrarian Democratic Party of Moldova. The split was sparked by the president’s proposal to amend the July 1994 constitution (which refers to the language as Moldovan and the people as Moldovans) in order to make Romanian the official state language (EEN, 1995, vol. 9, no. 15, p. 5). On 24 December 1995 the Dniestre region held its own parliamentary elections simultaneously with a referendum (EEN, 1996, vol. 10, no. 1, p. 5). The Dniestre region’s referendum approved the draft of a new constitution, negating Moldova’s description of the region as an ‘autonomous entity with broad powers’ and declaring that ‘the Dniestre Moldovan Republic is a sovereign, independent state’ (CDSP, 1995, vol. XLVII, no. 52, p. 21). Petru Lucinschi won the second round of the presidential election held on 1 December 1996, with 54 per cent of the vote compared with Mircea Snegur’s 46 per cent. Mircea Snegur was the incumbent. He is a populist who is not above exploiting the Transdniestrian dispute to score points with Romanian speakers, two-thirds of the country’s 4.4 million people. His two main rivals for the presidency, Petru Lucinschi, the speaker of parliament, and Andrei Sangheli, the prime minister, are friendlier to Russians. (The Economist, 5 October 1996, p. 55) ‘Snegur, aiming for the support of pro-Romanian opposition parties, has been endorsed by his Party of Revival and Reconciliation of Moldova.’ In order to gain the support of pro-Romanian opposition parties, he promises ‘to enshrine the Moldovan–Romanian identity in the constitution, substitute Romanian for Moldovan as the name of the official language’ (EEN, 18 July 1996, vol. 10, no. 14, p. 4). Snegur advocates cautious economic reform and a separate Moldovan identity (EEN, 12 October 1996, p. 8).

Introduction and overview 29 Lucinschi … promises to sign a memorandum granting autonomy to Transdniestre, to open a Slavic university and to allow minorities more time to learn Romanian … He says Romanian and Moldovan should both be allowed as names for the official language (since both are the same linguistically). (EEN, 12 October 1996, vol. 10, no. 20, p. 8) On 8 May 1997 Moldova and the Dniestre region signed an agreement in Moscow. Russia, Ukraine and OSCE acted as guarantors, the presidents of Russia and Ukraine and a representative of OSCE reaffirming guarantees of the territorial integrity of Moldova as it existed on 1 January 1990. The constitutional status was not specified but the Dniestre region would thus remain part of Moldova. ‘Moldova and the Dniestre region will build their relations in the framework of a common state within the borders of the former Moldavian SSSR as it existed on 1 January 1990’ (CDSP, 1997, vol. XLVI, no. 19, pp. 18–19). In late 1997 the following was reported: ‘Every reform proposal proposed by President Petru Lucinschi is shot down by a parliament dominated by hardliners and supporters of Mircea Snegur, the reform-minded but self-seeking ex-president … Tensions between parliament and president have slowed development down to a crawl’ (Business Central Europe 1997: 50–1). A general election was held on 22 March 1998, but the result was a weak centre-right coalition government. On 1 February 1999 ‘prime minister Ion Ciubuc said Monday [1 February] that he was resigning because his divided centre-right coalition could no longer function as a team’ (IHT, 2 February 1999, p. 6). A referendum was held on the initiative of President Petru Lucinschi. One question was posed: Do you support amending the constitution in order to introduce a presidential form of government in the Republic of Moldova, in which the President of the Republic shall be responsible for forming and leading the government, as well as for the results of the country’s governance? (MET, Monthly Issue, June 1999, p. 3) An advisory referendum on changing Moldova’s system of government has been declared invalid due to low voter turnout. Preliminary returns indicate that about 55 per cent of voters cast ballots, whereas the minimum requirement was 60 per cent. The referendum, undertaken on the initiative of President Petru Lucinschi, called on voters to respond to the question: ‘Do you support amending the constitution in order to introduce a presidential system of rule under which the president of the republic would be responsible for the formation and supervision of the government, as well as accountable for the results of actions taken in ruling the country?’ The preliminary returns indicated that about 60 per cent of those who voted answered in the affirmative. (CDSP, 1999, vol. 51, no. 21, pp. 15–16)

30 Introduction and overview A statement on normalizing relations between Moldova and Transdniestre was signed at a five-side summit in Kiev on 16 July 1999. The document defined the principles of creating a common economic, social, defence and legal area between Moldova and Transdniestre in the framework of a common state (MET, Monthly Issue, July 1999, p. 3). A draft of constitutional amendments prepared by a special commission set up by the president was published on 4 August 1999. The draft claims that the existing system of government leads to instability. The draft recommends giving the president substantial extra powers, e.g. the president would have the right to dissolve parliament if it blocked the passage of any law for more than two months (CDSP, 1999, vol. 51, no. 31, p. 13). Petru Lucinschi sought more power and as a result lost all the authority he had. The Moldovan parliament yesterday [5 July] rejected the president’s bid to expand his powers and abolished presidential elections in the country. Parliament passed the requisite amendments to the constitution, with ninety-eight of 104 deputies voting in favour. In keeping with the amendments Moldova will change from a presidential parliamentary republic to a parliamentary one. The president will henceforth be elected by parliament, not the public. The government will be endowed with additional powers, but in the event of a fiasco the prime minister runs the risk of losing his post, since the cabinet of ministers will henceforth be formed by parliament, not the president … After a second debate the document will enter into force with or without the consent of the head of state … The speaker of parliament will henceforth be the head of state. The prime minister will be the number two figure, while the president will serve as a mere figurehead for the parliamentary regime … The constitutional court approved the draft law proposed by parliament before the vote was held. (Sevodnia, 6 July 2000, p. 3; CDSP, 2000, vol. 52, no. 27, pp. 16–17) In early July President Lucinschi unveiled an initiative to strengthen the powers of the head of state and, at the same time, broaden those of the government. In response the deputies, with rare unanimity – leftist and rightist parties alike closed ranks in this instance – decided to amend the constitution to turn the republic into a parliamentary one and make the president a mere figurehead … The deputies failed to heed the president’s call that they not adopt constitutional amendments too hastily. The day after he issued his appeal to parliament they voted a second time, reiterating their determination to alter the system of government: Moldova was to become a parliamentary republic … By law the president is now required to sign the adopted resolutions and they will take effect. This means that the next president will be chosen by parliament, not the people, by a three-fifths vote … Petru Lucinschi’s term expires on 15 January 2001. (Rossiiskaya Gazeta, 26 July 2000, p. 7; CDSP, 2000, vol. 52, no. 30, p. 14)

Introduction and overview 31 The political temperature starting rising back in May [2000], when the republic’s rightist parties finally came up with a national idea and decided to make admission to the EU their rallying cry … The leaders of twenty rightwing organizations affixed their signatures to a declaration proclaiming this the republic’s number one objective. Among them were former Moldovan president Mircea Snegur, leader of the Revival and Accord Party, and the current parliamentary chairman Dumitru Diacov … The parliamentary leader now controls the Democratic Party, which was born of a split in what was originally the president’s [Petru Lucinschi’s] Movement for a Democratic and Prosperous Moldova … The man who came up with the idea of closely linking Moldova with Romania and Europe [is] Valeriu Matei, leader of the Party of Democratic Forces … The Communists and other leftist parties declined to sign the declaration. Their position is that Moldova should generally orientate itself towards closer ties with the CIS countries, and especially Russia. (Rossiiskaya Gazeta, 26 July 2000, p. 7; CDSP, 2000, vol. 52, no. 30, p. 14) On 20 July 2000 President Lucinschi declined to sign the 5 July constitutional amendment, suggesting a referendum instead. The following day parliament overturned the presidential veto on constitutional amendments, ensuring that the amendments became law (EEN, 2000, vol. 12, no. 24, p. 5). The withdrawal of the Russian Fourteenth Army from Transdniestre began on 16 November 1999 (EEN, 2000, vol. 12, no. 21, p. 5). At the OSCE summit meeting in Istanbul on 19 November 1999 Russia agreed to remove its troops in Moldova completely by the end of 2002. ‘The leader of the breakaway Transdniestre region, Igor Smirnov, dissolves [on 21 July 2000] the local parliament and unilaterally declares the territory under “presidential rule” ’ (EEN, 2000, vol. 12, no. 24, p. 5). ‘Dniestre leader Igor Smirnov announces [9 August 2000] that Russian Fourteenth Army munitions and weaponry can only be withdrawn to Russia with the consent of Transdniestre’ (p. 5). The general election was held on 25 February 2001. Moldova’s dire economic situation was a major factor influencing voting. Corruption was another important factor. Communists have swept back into power … finally recapturing control of one tiny part of their old empire nearly a decade after the fall of the Soviet Union … Never before have they won back power in the name of the onceomnipotent party in any of the fifteen countries formed by the dissolution of the union. (IHT, 27 February 2001, p. 5) ‘[This represents] the first comeback to power by Communists in the former Soviet Union’ (Independent, 27 February 2001, p. 14). ‘Moldova has become the first former Soviet republic to vote the Communist Party back into power’ (Telegraph, 27 February 2001, p. 18).

32

Introduction and overview For the first time since the fall of the Soviet Union, therefore, the Communists will have complete control over the legislative branch and hence the executive branch. (Moldova is a parliamentary republic.) They will be able to appoint the prime minister and government (which requires fifty-two votes, a simple majority). And they will also be able to elect a presidential candidate whom they find acceptable. (That will take sixty-two votes.) Finally, they will have a two-thirds majority, allowing them to amend the constitution. (Kommersant, 27 February 2001, p. 2; CDSP, 2001, vol. 53, no. 9, pp. 15–16)

The Moldovan Communist Party is in favour of joining the Union of Russia and Belarus. Vladimir Voronin, an ethnic Russian and leader of the Communist Party, was elected president. The new government contained people who had been ministers and deputy ministers in the Braghis government. President Voronin appeared to get on well with the leader of the Transdniestre region at first. But basic disagreements remain and personal relations between the two men have markedly deteriorated. On 19 November 2001 the presidents of Moldova and Russia signed a Treaty of Friendship and Co-operation. Russia is in agreement with Moldova that the Transdniestre region should remain within the country. Relations between the central Moldovan authorities and the Gagauz region deteriorated after the general election. Large-scale protests began in January 2002 against the perceived pro-Russia policies of the government, in particular plans to encourage the teaching of Russian and to rewrite history textbooks. Protests were also spurred by plans in late January regarding the reorganization of local government (which was perceived as a move to strengthen the federal government) and the disappearance of an opposition MP in March. In February the government announced changes in its education policies. Moldova is supportive of the United States over the issue of international terrorism. (For the attitude of the CIS countries towards the US-led war in Iraq in 2003, see the summary for Russia.) Only in one year (1997) during the 1990s was the GDP growth rate positive: -2.4 per cent in 1990, -17.5 per cent in 1991, -29.1 per cent in 1992, -1.2 per cent in 1993 and -31.2 per cent in 1994 (MET, Monthly Update, July 1996, p. 3). ‘Moldova suffered a second year of deep recession in 1999, the result both of continued weakness in some of its main export markets and of the slow pace of reform’ (EBRD 2000a: 7). Positive growth resumed only in 2000: ‘[Moldova was] the last country to return to growth after the break-up of the Soviet Union’ (EBRD 2003a: 72). In 2001 GDP was estimated to be still only 37 per cent of the 1989 level (EBRD 2002b: 58). Hyperinflation in 1992 (1,276.4 per cent) was gradually reduced to 788.5 per cent in 1993 and 329.7 per cent in 1994. There was a plunge in 1995 (to 30.2 per cent) and consumer inflation was in single figures by 1998. In 1999, however, there was a significant increase. The inflation rate returned to single figures in 2001. With its lack of energy resources Moldova is almost totally dependent on imports from the countries of the former Soviet Union, especially oil and natural

Introduction and overview 33 gas from Russia and coal from Ukraine. The main economic sectors, agriculture and agricultural processing, are highly dependent on imported inputs such as fertilizers (MET, Quarterly Update, November 1996, p. 5). Moldova suffered one of the worst balance of payments shocks of any individual country in the former Soviet Union (FSU). This was attributable not only to the very close interdependence with other parts of the FSU … but was compounded by an adverse terms of trade effect which was exceptional even by the standards of CIS countries. With its lack of energy resources the country is almost totally dependent upon imports from the FSU … The country’s major economic sectors, agriculture and agricultural processing, are highly dependent upon imported fertilizers and other inputs whose prices rose sharply. In contrast Moldovan major exports of wine and agricultural based products faced generally depressed markets in other CIS countries, the rupturing of the normal market outlets and competition from other suppliers. The position was further exacerbated by the armed conflict in Transdniestria in 1992 and droughts and floods in 1992 and 1994. (MET, Quarterly Issue, August 1996, p. 6) Moldova’s energy resources comprise only two small hydro-stations together with a small amount of wood, supplying under 5 per cent of its total energy requirements. Thus 95 per cent of its energy requirements are imported (p. 66). Moldova has experienced an acute economic crisis since the fourth quarter of 1998 accompanied by rising capital flight, a depreciating exchange rate, rising inflation and external debt payments, critically low foreign currency reserves and budget financing occurring mainly in the form of central bank credits and substantial government payment arrears on wages and pensions. (MET, Monthly Issue, July 1999, p. 12) [The year] 1998 has been a very difficult year for Moldova. By the last quarter of 1998 … an acute economic crisis [occurred] in the country. The crisis was characterized by capital flight, a depreciating exchange rate, international reserves at critically low levels, rising expenditure arrears and budget financing only through central bank credit … The crisis in Russia has not only influenced output by devastating the major export market for Moldova, but also put pressure on the leu causing the annual inflation rate for 1998 to stand at 18.2 per cent and therefore ending the excellent antiinflation record of the previous years. (MET, Quarterly Issue, October–December 1998, p. 3) Moldova has a fairly liberal trade regime (EBRD 1998b: 180). Moldova declared its currency convertible for current account transactions at the end of June 1995 (EBRD 1995b: 51). The country maintains few currency restrictions (EBRD 1999b: 246). There are no restrictions on current account transactions.

34

Introduction and overview

The exchange rate is determined daily at auctions on the Moldovan interbank foreign currency exchange market. The National Bank of Moldova intervenes in the foreign exchange market in accordance with its overall monetary targets and with the aim of smoothing out the fluctuations in the exchange rate (MET, Quarterly Issue, August 1996, pp. 25–6). The central bank is independent of the government (p. 38). There was a downward trend in the nominal exchange rate in early 1997. The lei has been persistently depreciating since August 1997 (MET, Monthly Update, September 1998, p. 11). ‘After six years of negotiations Moldova joined the WTO in June 2001 … According to the agreement, companies operating in Transdniestre will have to observe WTO rules and regulations, including the introduction of new customs rules common to the entire country’ (EBRD 2001b: 174). The private sector accounted for roughly 10 per cent of GDP in mid-1990. The private sector now accounts for 60 per cent of industrial output, 70 per cent of retail trade and 44 per cent of capital construction works and transport. The unofficial economy has grown to an estimated 35 per cent to 40 per cent of GDP (EBRD 1999b: 24, 248). In mid-2001 the private sector accounted for 50 per cent of GDP (EBRD 2001b: 12, 176). The March 1993 large privatization plan envisaged the privatization within two years of about 1,600 enterprises (accounting for 40 to 45 per cent of state assets), mostly through the distribution of ownership vouchers to the whole population. The programme also includes 124 medium-sized and large enterprises under the control of the ministry of privatization and state property. Some state corporations are to remain in state ownership, including some utilities, scientific institutes and large food-processing companies. The sale to private entities of small units began in September 1993 with the first, relatively modest auctions. No property restitution for pre-communism owners has taken place (EBRD 1994: 30). The target of privatizing 35 per cent of the total value of state-owned assets by the end of 1994 was not achieved. But by then four public auctions had been organized to privatize around 700 medium-sized to large state enterprises, 408 of which passed into private hands (EBRD 1995a: 61). In 1995 the pace of privatization accelerated further. The 1995–6 programme envisaged the privatization of virtually all small enterprises (EBRD 1995b: 51). The first voucher-based part of the programme was completed by November 1995 (with the sale of about half of all state holdings in enterprises; p. 23). But the planned cash privatizations have not so far met expectations. The first international tender (in the tobacco sector) was initiated in December 1995. Other tenders, partly aimed at international investors, are being prepared, with the aim of selling (for cash) some forty strategic enterprises in various sectors (including the state telecommunications company). Workers, former workers and management own majority stakes in 186 medium-sized and large enterprises (EBRD 1996b: 163). Cash privatization of larger enterprises via tenders has virtually stalled, e.g. negotiations for a tobacco enterprise were cancelled in January 1997. ‘Privatization and enterprise restructuring have not yet produced effective corporate governance’ (EBRD 1997b: 187). A privatization programme for 1997–8 was finally agreed in September

Introduction and overview 35 1997 and covered practically all productive assets left in the hands of the state (EBRD 1998a: 39). In March 1998 parliament approved a plan to consolidate the gas industry into one company (Moldovagas), comprising the Moldovan and Transdniestre region distribution networks and a pipeline joint venture with Russia’s Gazprom. The new company would be owned 50 per cent by Gazprom (in a debt-for-equity swap), 36 per cent by the government and 14 per cent by the Transdnistria region. The Gazprom stake only partially settled Moldova’s gas arrears and in June 1998 supplies were cut in half. There was little further progress during 1997 and the first half of 1998, when only a fraction of the small enterprises offered in cash auctions were actually sold and not one large enterprise was privatized. Foreign interest has been low, following cancellation of the tender for the state tobacco company in 1996. ‘Dispersed share ownership gives a high degree of insider control, which stands in the way of enterprise restructuring … Some restructuring is taking place through the state agency for enterprise restructuring which works with large firms heavily indebted to the state’ (EBRD 1998b: 180–1). ‘Dispersed ownership and the lack of governance provided by investment funds have limited restructuring in privatized companies’ (EBRD 1999b: 246–7). Trade sales have accelerated following improvements in the tendering process. Parliament’s failure to approve the privatization of the wine and tobacco industries in April 2000, however, has delayed the resumption of the IMF programme. In February 2000 a Spanish strategic investor concluded an agreement to purchase three of the five power distribution companies, having won the tender at the end of 1999. Following the removal of restrictions on majority foreign ownership of insurance companies, the largest insurance company in Moldova (Asito) was acquired in September 1999 by an Australian strategic investor (EBRD 2000a: 68). With the essential completion of the small and medium-scale mass privatization, the government has continued with the policy of selling shares in larger enterprises for cash under the privatization programme for 1999–2000 … Restructuring among privatized companies has been limited … [A] survey revealed that the main constraints on the development of small and medium-sized enterprises remain high taxes, conflicting legislation and arbitrary bureaucratic administration of taxes and regulations. (EBRD 2000b: 190–1) Privatization results in 2000 were disappointing, with only a few of the planned 120 sales completed. However, the recent adoption of legislation that allows the privatization of five strategic wineries and all tobacco companies through open tender, and the successful privatization of the energy sector are encouraging … Substantial progress in reforming the energy sector was made in 2000, in terms of privatization and the creation of an independent regulator … Significant [energy] tariff increases occurred recently. (EBRD 2001a: 29)

36

Introduction and overview

(On 19 October 2000 parliament voted in favour of the privatization of the wine and tobacco industries: EEN, 2000, vol. 13, no. 1, p. 7.) ‘Privatization advances’ (EBRD 2001b; 174). ‘Implementation of the privatization programme is moving slowly’ (EBRD 2002b: 179). The mass privatization programme was completed by the end of November 1995. Two-thirds of the non-agricultural sector has now been privatized. In total 2,235 enterprises (1,137 large or medium-sized and 1,098 small) have been privatized under the programme. National Patrimonial Bonds were issued to 3.5 million citizens. Of the total shares subscribed under the programme, only 20 per cent were from individual investors and 80 per cent were from either fiduciary or investment funds. Investment funds are important even in the case of small enterprises. The privatization of housing is close to completion (MET, Monthly Update, July 1996, pp. 27–9). ‘Workers, former workers and managers only own direct 186 of the large or medium-sized companies, or around 16 per cent. Ownership very largely rests with the investment funds and trust companies’ (MET, Quarterly Issue, August 1996, p. 49). The government has started to privatize for cash (MET, Monthly Update, September 1996, p. 15). The government has selected forty-one enterprises which it expects to sell for cash via tender (MET, Quarterly Update, November 1996, p. 37). The 1997–8 privatization plan was passed by parliament at the end of June 1997. This permitted the sale of enterprises for cash (MET, Quarterly Issue, August 1997, pp. vi, 49). Objects included in the third programme were to be sold only for cash. Progress in respect of the forty-one enterprises to be sold by tender has been disappointing (MET, Quarterly Issue, July–September 1997, p. 65). The 1998 plan assumes the effective privatization of large enterprises (such as Moldtelecom) and of those spheres in which the state plays a major role (such as air and road transport, energy and tobacco). Damage was caused by the cancellation of the tobacco tender. There have also been other failures to sell (MET, Quarterly Issue, January–March 1998, pp. 66–7). ‘During the first nine months of 1998 … only 9 per cent of all offered objects [were] sold. Poor interest by foreign investors is the main obstacle’ (p. 5). Moldova is heavily dependent on agriculture and agricultural processing. In 1997 agriculture, hunting and fishing alone accounted for an estimated 28 per cent of GDP. When allowance is made for the important agricultural processing industry, well over 50 per cent of employment is directly or indirectly dependent on agriculture (p. 10). Agriculture and related industries are the basis of the economy, accounting for almost 40 per cent of GDP and 75 per cent of exports. Over half of the population live in the countryside. Around 46 per cent of the labour force is directly engaged in primary agricultural production (Davis 1998: 89). Under the first stage of agricultural reform the size of household plots was increased and the tenure changed from use right to ownership. This stage was completed by 1995 and encompassed 13 per cent of agricultural land. Of the remaining agricultural land, 1.9 million ha was designated as subject to privatization. These transfers proceeded slowly but accelerated in late 1993 and 1994.

Introduction and overview 37 A number of state farms and collectives have been transformed into joint stock companies. Groups of farmers are allowed to leave and become private farmers (MET, Quarterly Issue, August 1996, p. 54). The 1 million or so household plots, producing largely for subsistence, are thought to account for 36 per cent of agricultural output. The number of private farmers and farmers working through small-scale associations is quite small (around 43,000). Their share of total agricultural output is probably above the 2 per cent originally estimated, but still remains modest. The major part of output continues to come from the existing and former state farms and collectives. Although these farms have been turned into joint stock companies, they are still in an early stage of restructuring (p. 11). Among the major constraints on private sector activity have been the validity of land title and the restriction on the sale of land until 2001 (MET, Quarterly Update, November 1996, p. 40). The major part of agricultural output is still contributed by existing and former state farms and collectives. The share of joint stock companies and co-operatives continues to rise and that of collectives to fall, but in January 1996 over half of agricultural land remained under collective farms. Individual farms and farmers’ associations cultivated 3.7 per cent of agricultural land in January 1995 and 4.4 per cent in January 1996 (MET, Monthly Update, February 1997, p. 10). By January 1997, 9.4 per cent of the land area was under private farms (6 per cent) and farmers’ associations (3.4 per cent) (MET, Quarterly Update, May 1997, p. 48). Agriculture, which is the main economic resource of the country, is still in the early stages of restructuring. It is currently faced with semi-monopoly positions in the supply of its inputs of fertilizers and fuel and similarly largely unrestructured marketing outlets. Further liberalization of these is envisaged under the proposed 1997–98 privatization programme. Under current conditions, with its heavy indebtedness, agricultural enterprises are unlikely to be able to take advantage of this possibility. (MET, Monthly Update, June 1997, p. 6) In July 1997 parliament passed amendments to the land code. All citizens of Moldova and Moldovan legal entities without foreign participation would be able to buy land, although resale would be allowed only five years after purchase. Foreigners would not be able to buy agricultural land (MET, Quarterly Issue, August 1997, p. 49). Under a law published in September 1997 all citizens of Moldova, both physical and legal, have the right to buy a land plot. Foreigners can buy non-agricultural land. All land plots are sold through land auctions (MET, Quarterly Issue, July–September 1997, pp. 5, 67). In 1997 individual farmers and householders produced around half of agricultural output, including 66 per cent of animal production (MET, Quarterly Issue, October–December 1997, p. 13). The year 1998 has been declared the final year of agrarian reform. Land titles are to be given to every citizen having the right of land ownership (MET, Monthly Update, March 1998, p. 4). The share of agricultural land under individual farms and farmers’ associations rose from 9.9 per

38

Introduction and overview

cent in January 1997 to 14.7 per cent in January 1998 (MET, Quarterly Issue, January–March 1998, p. 4). The share of agricultural land under private ownership increased from 77.75 per cent in January 1995 to 95.64 per cent in January 1998. But private ownership does not mean individual ownership. Most of the privatized land remains in collective ownership … This is reflected in the growth of co-operative forms of agricultural land ownership … The figure represents a complex set of changes, including some of the old kolkhozes and sovkhozes, which have only nominally changed into enterprises with private ownership, and later formed into co-operatives … In 1997 large-scale former state-owned and collective farms still dominated the farm structure. (p. 12) Newly emerging peasant farms face severe difficulties, e.g. inadequate inputs, machinery and equipment, skills, information, finance and marketing. With World Bank assistance encouragement is being given to the development of savings and credit associations (p. 15). In 1998 the share of individual farmers and households in agricultural output was 61 per cent (MET, Quarterly Issue, October–December 1998, p. 12). The average area of a land plot belonging to one farm is 1.9 ha (p. 64). Land privatization has been slow. In the first stage of land privatization household plots of an average size of 0.3 ha were distributed to the population. The second stage was initiated in 1992, suspended the same year and resumed in 1995. Land certificates are being distributed to collective farm members. By the end of 1995, 10 per cent of the total land of the country (13 per cent of agricultural land) had been privatized. Excluding land held by individuals that continue to be part of collective farms, ‘true’ private farming is estimated to cover only 3.7 per cent of agricultural land. The land code forbids trading of land until 2001, but this ban has been lifted for small plots and urban land (EBRD 1996b: 163). Progress in land privatization has been slow. In July 1997 parliament approved a law allowing the sale and purchase of land (EBRD 1997b: 187). Individual private farms accounted for about 10 per cent of total farmland at the beginning of 1998, while most land is owned by collective farms, joint stock companies with state ownership and co-operatives (EBRD 1998b: 180). Some 80 per cent of agricultural land is owned by either the state or collective farms. ‘Although collective farms are nominally private, they continue to operate along the lines of the old state enterprises.’ In July 1999 parliament adopted a legal framework for the breakup of large collective and state farms (EBRD 1999b: 247). By the end of 1999 almost 900 of the 961 state or collective farms at independence had either been privatized or were going through the process. Land titles have now been distributed to 1 million farmers and it is estimated that some 60 per cent of agricultural output is now produced by farmers either in the private sector or on collectives that are being trans-

Introduction and overview 39 formed into private farms. Important progress has also been made with the land registration programme … During the first half of 2000 … a severe flood resulted in a 10 per cent fall in agricultural output. (EBRD 2000b: 190) ‘[The] registration of land advances’ (EBRD 2001b: 174). ‘Consolidating small parcels into larger farms on a voluntary basis has only just begun’ (Transition, 2001, vol. 12, no. 1, p. 10). The share of peasant farms in agricultural land increased from 0.0 per cent in 1992, to 0.1 per cent in 1993 and to 5.8 per cent in 1999 (Spoor and Visser 2001: 888). The share of private farms and household plots in agricultural production increased from 24 per cent in 1991 to 61 per cent in 1998 (p. 890). Very little direct foreign investment has been attracted.

Russia: a summary Introduction The Soviet Union was the world’s largest country in terms of land area, occupying a sixth of the earth’s land surface excluding Antarctica. Stalin and his successors succeeded in making the Soviet Union one of the world’s two ‘superpowers’ in terms of conventional and nuclear military capacity. The USSR (Union of Soviet Socialist Republics) comprised fifteen republics (based on the most populous nationalities). In 1990 the population was 290.1 million, the world’s third largest after China and India. Russia dwarfed the other Soviet republics, e.g. its population of 148.5 million in 1990 represented 51.2 per cent of the Soviet total. Russia may be still nearly twice the size of the United States, but it is a quarter smaller than the Soviet Union. Of its present territorial extent … less than 10 per cent is arable … The United States population of 264 million people is nearly 80 per cent larger than the 148 million population of today’s Russia … In the Soviet Union only 55 per cent of the people were ethnic Russians. In today’s Russia that figure is 81.5 per cent, with less than 20 per cent of the population belonging to fourteen acknowledged minority nationalities. It has not been so homogeneous since the eighteenth century. (William Pfaff, IHT, 22 April 1998, p. 9) Late 1989 saw the momentous and unexpected collapse of communism in Eastern Europe. Soon afterwards (late 1991) the Soviet Union disintegrated. It was truly ironic that the abortive August 1991 coup in the Soviet Union (against Mikhail Gorbachev, who resigned as Soviet president on 25 December 1991), designed to preserve the country, put the final nail in its coffin. ‘Communism’ (more formally ‘socialism’) had thus lost the Cold War battle against ‘capitalism’,

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Introduction and overview

although President Boris Yeltsin more accurately described it as a victory for both sides: ‘The winners in this war were all those who opposed totalitarianism and defended democracy – in West and East’ (speech in London given on 10 November 1992). The fact that the Soviet Union disintegrated in a relatively peaceful manner is truly remarkable. This is not to underestimate the bitter conflicts, for example in Tajikistan, in Georgia (over Abkhazia, for instance) and between Azerbaijan and Armenia (over Nargorno-Karabakh). The potential for strife in a Soviet Union armed to the teeth with nuclear weapons was frightening: some 65 million of the former Soviet citizens lived outside their ethnic republics; 25 million of these were Russians stranded in the ‘near abroad’ (the Russian early term for the other former Soviet republics). Russia itself, of course, has not been free of strife. Yeltsin dissolved parliament on 21 September 1993 and literally blasted the ‘White House’ into submission on 4 October, while the first invasion of Chechnya, colossally destructive in human and material terms, began on 11 December 1994 and did not effectively end until August 1996. The need to ensure the lumbering and weakened giant’s successful transition to democracy and the market is of paramount importance. The very word ‘giant’ needs qualification. Here is what Russia currently looks like on the world map: it accounts for 11.5 per cent of the world’s land mass, 2.32 per cent of the world’s population, 1.79 per cent of total world GDP calculated in terms of purchasing power, and 1.1 per cent of GDP calculated on the basis of comparable exchange rates. (Andrei Illarionov, economic adviser to President Vladimir Putin, Izvestia, 19 December 2002, p. 1: CDSP, 2003, vol. 54, no. 52, p. 9) The question about how to handle the transition in Russia has, not surprisingly, led to immense controversy and problems. It is little wonder that Russia can produce such contrasting views. (For example, the decision to release most prices in ‘big bang’ fashion in January 1992 was immensely controversial, as were many aspects of privatization.) It is remarkable how Russia has arisen relatively peacefully from the ashes of the Soviet Union and how its people have taken readily to relatively free parliamentary and presidential elections after a history of oppression and servitude. The Soviet (and Tsarist) legacy was a weakly developed civil society. Russia is still a country held back by crime, corruption and bureaucracy. A ‘financial oligarchy’ quickly became unimaginably wealthy in ways which largely did not involve creating wealth. The small number of ‘financial oligarchs’ quickly accumulated both immense economic wealth and considerable political power (enhanced by media ownership). The financial crisis after August 1998 took its toll, but some fared better than others. Boris Berezovsky’s fall from his position of influence within presidential circles was spectacular. Equally spectacular was his (temporary) comeback! As regards the Putin era, Berezovsky was instrumental in helping set up a new, pro-Putin party (Unity), which did so well in the December

Introduction and overview 41 1999 general election. But Berezovsky fell from grace during the summer 2000 offensive against some of the oligarchs and now lives abroad for fear of being prosecuted at home. Throughout he has remained immensely wealthy and outspoken (including attacks on government policy on Chechnya). Vladimir Gusinsky was eventually deprived of control over NTV, the only independent nationwide television station. He also lives abroad, despite attempts by Russia to extradite him. (See section on Putin, the oligarchs and the media, p. 62ff.) Among the causes of crime and corruption (the abuse of public office for personal gain) is the continuing weakness of central government in certain respects (such as ensuring the rule of law) coupled with often copious (though declining) regulations in other respects (such as licences). Other causes include a poorly developed civil society. President Putin soon vowed to institute a ‘dictatorship of the law’, but there is a long way to go. Anders Åslund provides some startling statistics. A small group of businessmen enriched themselves and then corrupted many of Russia’s politicians and officials. They have conspired to stymie economic reforms, which would stimulate growth and help the overall population, because reform threatens their domination. Russia suffers not from too free a market but from corruption thriving on their excessive regulations erected by a large and pervasive state. (Åslund 1999b: 64) Russia’s elite started making their fortunes in the Soviet Union’s last years, mostly from three sources: commodity exports, subsidized credits and food imports. The best way of making a killing between the late 1980s and 1993 was to buy commodities such as metals or oil at low, state-controlled prices in Russia and then sell them abroad at world prices … [Managers] extracted export licences and quotas from corrupt officials, and sold the oil abroad at the market price … In 1992 the Russian price of oil was still 1 per cent of the world market price. A few state enterprise managers, government officials, politicians and commodity traders amassed no less than $24 billion, or 30 per cent of Russia’s GDP, in this peak year of gains from commodity trading … Business elites had an alternative way of making money in the early 1990s: cheap credits from the Russian central bank … A third way of making big money in the transition period was through food-import subsidies … Altogether, the gains from these three parasitic business activities amounted to no less than 79 per cent of GDP in 1992 … The managers of companies … in total obtained at most 4 per cent of GDP from privatization, a trifle compared with the profits made through regulated exports, subsidized credits and import subsidies. (pp. 65–8) ‘Today the Russian bureaucracy, government, parliament and regional governments are deeply corrupt’ (p. 70).

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Introduction and overview

Many ill-gotten gains found their way abroad, a large part of ‘capital flight’ being illegal. Capital flight is declining, but is still a problem. On 7 April 2001 President Putin signed into law a money-laundering bill after experiencing considerable international pressure. On 11 October 2002 the OECD task force on money laundering removed Russia from its blacklist of offending countries. On 16 December 2002 President Putin signed a law on copyright and trademarks. Grotesque inequalities in income and wealth have thus arisen. While the financial oligarchs have become obscenely rich and powerful in the ways described, vast numbers of Russian citizens (especially many older people) have become pauperized and demoralized. Factors such as the stoicism of a longsuffering people and the weakness of civil society (including trade unions) help explain the lack of a violent reaction. (A separate section in the summary is devoted to Putin and the oligarchs. See p. 62.) Russia’s political transition Chechnya The origins of the second Chechen war have usually been traced to the invasion of the neighbouring province of Dagestan by large numbers of Islamic extremists (mostly Chechens but also some foreigners) on 7 August 1999, especially when an independent Islamic state was proclaimed three days later (without the support of many of the local Dagestanies, who were, in fact, overwhelmingly against the extremists). (Vladimir Putin became acting prime minister on 9 August 1999 and his extraordinarily rapid ascent to the top thereafter is largely attributed to the second Chechen war.) But periodic clashes between Russian forces and Chechen rebels had occurred well before August 1999. In January 2000 former prime minister Sergei Stepashin said that a plan had been discussed in March 1999 to invade Chechnya, with the aim of establishing a buffer zone along the Terek river north of Grozny. The second war is also generally seen as an act of revenge by Russian generals humiliated by the first one. Many civilians lost their lives in bomb attacks in Russia proper (on 2, 4, 9, 13 and 16 September 1999). The authorities blamed (without ever providing convincing evidence) Chechen extremists. (There was another bomb explosion in Moscow on 8 August 2000, but this time Putin warned against jumping to conclusions regarding Chechens.) On 30 September 1999, large numbers of Russian troops invaded Chechnya. Most remaining rebels fled Grozny (with heavy loss of life) on 1 February 2000. Lessons had been learned not only from the first Chechen war but also from the 1999 Nato attack on Serbia. Massive bombing preceded the movement of Russian ground forces. Russia used the media in a propaganda war, with independent journalists and international organizations kept at arm’s length. The Russian journalist Andrei Babitsky, a critic of the war, became internationally known as a result of his poor treatment at the hands of the Russian authorities. The EU, for example, has expressed

Introduction and overview 43 ‘deep concern’ at Russia, which the EU claims is responsible for such things as ‘forced disappearances, extrajudicial, summary or arbitrary executions, torture, ill treatment as well as alleged violations of international humanitarian law’ (IHT, 17 April 2003, p. 8). International condemnation (especially muted after the 11 September 2001 terrorist attacks on the United States) of Russia centred on the disproportionate and indiscriminate use of force, which led to the deaths of many civilians and to colossal destruction within Chechnya: 1

2

The first Chechen war lasted from 1994 to 1996. ‘The US State Department estimates that 35,000 civilians have been killed’ (Independent, 10 August 1996, p. 11). ‘The most careful scholarly analysis to date puts the number of actual deaths at roughly 35,000’ (Lapidus 1998: 6). On 2 September 1996, General Igor Rodionov, the Russian defence minister, said that ‘at least 2,837 Russian soldiers had been killed’ (The Times, 4 September 1996, p. 13). ‘Human rights groups estimated that 4,300 Russian troops died’ (IHT, 23 August 2002, p. 5). On 3 September 1996 (the late) Alexander Lebed made the following statement about total casualty figures since December 1994: ‘There are conflicting data, but one can speak about 80,000 killed, give or take 10,000.’ According to the interior ministry, losses totalled 18,500 people (CDSP, 2000, vol. 52, no. 31, p. 6). At least half of the 1 million population (of Chechnya) has been displaced (IHT, 29 March 1996, p. 6). About 500,000 people have been displaced (FT, 23 May 1996, p. 3). ‘If you accept the Russians’ own figures, more than 15,000 fighters (2,700 of their own men and about 13,000 Chechen guerrillas) have been killed since the second war began fifteen months ago, and that does not include the thousands of civilians who have died. Unofficial lobbies, such as the Russian Committee of Soldiers’ Mothers, put their boys’ body-count at 6,500’ (The Economist, 10 February 2001, pp. 51–2). ‘The official [Russian] casualty figures so far are 3,433 dead since 1999 and 10,160 wounded; many believe the real numbers are higher’ (The Economist, 14 July 2001, p. 45). [Official figures claim] that from 7 August 1999 to 22 July 2002 the joint group of forces in the North Caucasus lost 4,249 men … The Committee of Soldiers’ Mothers reported in January of this year [2002] that, according to its figures, the federal forces had lost 6,500 men in Chechnya in the slightly more than two years of the second war … No one is keeping any official count of the number of deaths among the civilian population. (Noviye Izvestia, 24 July 2002, pp. 1–2: CDSP, 2002, vol. 54, no. 30. p. 6) In 2002 4,739 Russian servicemen were killed in Chechnya … and twentynine were listed as missing, the Itar–Tass news agency quoted military officials as saying Monday [17 February 2003] … The defence ministry issued an official denial of the report. Soon thereafter Itar–Tass dropped the story … offering the same toll as the ministry: 4,572 servicemen killed … between the war’s beginning in the autumn of 1999 and 23 December 2002

44

Introduction and overview … The Soldiers’ Mothers of Russia group … estimates that about 11,000 servicemen have been killed … During the previous Chechen war, from 1994 to 1996, 14,000 died, according to the group’s estimates, considerably more than … the official toll of 5,500 dead and 700 missing. (IHT, 18 February 2003, p. 2) [According to the Russian defence ministry] the losses suffered by the military, security and police forces … from 1 October 1999 through 23 December 2002 come to 4,572 dead … The day Russian troops were sent to Chechnya [1 October 1999] has long been used as the starting point for the casualty count. Fatalities during the events in Dagestan in August and September 1999 are not taken into account … even though the counterterrorist operation is in fact considered to have begun in August 1999. Almost 300 people were killed before troops were sent to Chechnya … The Committee of Soldiers’ Mothers claimed back in August 2002 that 11,000 servicemen had been killed during the second Chechen campaign. Official structures have never reacted to these statements in any way … Not once in almost three and a half years have official sources even offered approximate figures for casualties among the civilian population. (CDSP, 2003, vol. 55, no. 7, p. 14)

‘Independent observers talk about up to 80,000 deaths since 1999, including federal troops, Chechen rebels and civilians. That is perhaps twice as many as in the previous conflict’ (FT, 25 October 2002, p. 9). The Russian general staff acknowledged back in 2000 that at the start of the second Chechen campaign Russian troops faced 26,000 rebels. According to Sergei Yastrzhembsky [in October 2002], ‘10,000 to 13,000 rebels fighters have been killed in Chechnya in the past three years’ and only about 2,000 remain. (CDSP, 2002, vol. 54, no. 42, p. 6) A total of 14,316 rebel fighters have been killed since … October 1999, a source at the headquarters of the Joint Group of Forces in the North Caucasus … [said] on 23 December [2002]. At the start of the second Chechen war the number of rebel fighters in Chechnya was estimated at 12,000 to 15,000. If we are to believe the official information, then, the rebels have been essentially wiped out. So who are we fighting? (Noviye Izvestia, 24 December 2002, p. 1; CDSP, 2003, vol. 54, no. 52, p. 14) ‘In more than eight years of conflict at least 7,500 Russian soldiers and up to 100,000 Chechen civilians have died’ (The Times, 1 January 2003, p. 14). The worst single incident for Russia in the second Chechen war occurred on 19 August 2002, when Chechen rebels shot down a huge military helicopter near Grozny, with the loss of 116 lives (one more than the Kursk total on 12 August

Introduction and overview 45 2002). (The final death toll was 127: IHT, 8 May 2003, p. 3.) ‘The previous worst day in the war was in February 2000 when eighty-four paratroopers were ambushed and killed while fighting in the Argun Gorge’ (IHT, 21 August 2002, p. 4). (The blowing up, by suicide bombers, of the headquarters of Chechnya’s pro-Russian government in Grozny on 27 December 2002 also led to massive loss of life, with a final death toll of seventy-two.) The United Nations Office for the Co-ordination of Humanitarian Affairs estimated in November [2001] that there were a total of 150,000 war refugees in Ingushetia and another 160,000 in Chechnya … The number of refugees has changed little since the peak of the war two years ago. (IHT, 28 December 2001, p. 5) There have been many complaints about the behaviour of marauding Russian troops (including that during periodic sweeps), allegedly involving such things as executions, rape and looting, extortion and smuggling. Criticism has also been aimed at so-called ‘filtration’ camps (detention centres or internment camps meant to filter rebels from civilians), where allegations included torture, rape and killings. But the seriousness of the concern has not been matched by commensurate action by the international community, no doubt owing to factors such as general acceptance of Russian sovereignty over Chechnya and of the importance of nuclear-armed Russia in wider terms. This is not to underestimate the importance of the actions taken by the Council of Europe on 6 April 2000 (even though Russia’s response was sufficient to avoid suspension) and by the United Nations Human Rights Commission on 25 April 2000. On 25 January 2001 the Council of Europe adopted a motion expressing ‘grave concern’ about human rights abuses in Chechnya. But the assembly still voted to restore Russia’s voting rights. There was significant public disapproval of the government during the first Chechen war. Public opinion (and the Russian Orthodox Church) was initially highly supportive of the second. But the continuing losses among Russian troops in the guerrilla war that followed early Russian successes have taken their toll. A respected Russian polling firm says that 62 per cent of Russians support entering into negotiations with the Chechen resistance, a dramatic turnaround from just two years ago, when only 22 per cent favoured talks and 72 per cent supported continuation of the war. (Zbigniew Brzezinski, Alexander Haig and Max Kampelman, IHT, 25 June 2002, p. 6) ‘Support for Russian military action in Chechnya fell from 67 per cent to 47 per cent from January 2000 and January [2001]’ (The World Today, 2001, vol. 57, no. 7, p. 11). Polls conducted regularly by the Public Opinion Foundation show a steadily decreasing level of approval of the Russian military’s actions in Chechnya.

46

Introduction and overview According to studies conducted in late August [2002], currently less than a third of Russia’s citizens (30 per cent) consider these actions appropriate, whereas in June of last year [2001] the figure was 42 per cent, and in September 2000 it was 53 per cent. Now almost half of Russian citizens – 48 per cent – say they do not agree with what the military is doing in Chechnya. In June of last year 46 per cent felt that way, and two years ago (September 2000) the figure was 34 per cent. (Noviye Izvestia, 6 September 2002, p. 1; CDSP, 2002, vol. 54, no. 36, p.10)

‘While the war has not much dented Putin’s approval, support for continuing it dwindled from 70 per cent in February 2000 to 34 per cent this September [2002], according to a poll by the All-Russian Public Opinion Centre’ (IHT, 26 October 2002, p. 4). Popular backing for the operation in Chechnya peaked in March 2000 at 73 per cent of survey respondents. As of June 2002, however, only 33 per cent of Russians favoured continuing the war, and 59 per cent thought Russia should begin peace negotiations. (Treisman 2002: 68) President Putin’s overall popularity, however, remains remarkable high. Indeed, the second Chechen war is by far the most important single factor explaining the meteoric rise of Vladimir Putin from relative obscurity to president. Russians overwhelmingly accept the official explanation that Chechen rebels were responsible for the September 1999 bombings on Russian soil which led to the loss of many civilian lives. Chechen ‘independence’ proved to be an anarchic affair, with the lawless province associated with banditry and kidnapping. Hostage-taking became a high earner of hard currency and international aid organizations were increasingly forced to give Chechnya a wide berth. ‘Chechen bands have taken about 1,300 hostages since 1996 and about 700 have been released’ (The Times, 27 November 1999, p. 16). Hostages have also been murdered. All these events reinforced the prejudice against ethnic Chechens in the minds of many ethnic Russians. But there are claims that the bombings were the actions of the Russian secret services to forward Putin’s career. [On 14 December 2001 Boris] Berezovsky accused Russia’s secret services of organizing the Moscow apartment explosions in 1999 which triggered the second Chechen war and helped Mr Putin win the election as president. He had in previous interviews said he had no evidence of any such link. (FT, 18 December 2001, p. 14) [On 1 February 2002] Boris Berezovsky [in London] says that he is just weeks away from laying out documentary evidence that Russia’s security

Introduction and overview 47 services were involved in apartment-house explosions in September 1999 that killed more than 300 people … He said his investigation of the bombings, for which separatists in Chechnya were blamed and which triggered a full-scale invasion [of Chechnya] … was the reason Nikolai Patrushev, Russia’s intelligence chief, accused him last week of providing financial support to Chechen ‘terrorists’ … Mr Patrushev said … that his bureau had information that Mr Berezovsky was involved in financing Chechen rebels … Though dozens of arrests were made no one has been convicted of direct complicity in the unsolved bombings. (IHT, 2 February 2002, p. 2) Boris Berezovsky [in London] … said Tuesday [5 March 2002] that President Putin knew that the country’s special services were involved in the bombing of apartment houses in Moscow and other cities in September 1999 in which nearly 300 people died … [But] he offered extremely sketchy and circumstantial evidence suggesting that the authorities were behind the bombings to get Putin elected. (IHT, 6 March 2002, p. 5) Boris Berezovsky: I am sure the bombings were organized by the FSB [federal security service]. It’s not just speculation. It’s a clear conclusion. I am not saying Mr Putin gave an order to blow up those buildings. I’m saying that at least he knew the FSB was involved … At a minimum he knew, he was aware of the FSB’s participation. (Guardian, 6 March 2002, p. 16; IHT, 6 March 2002, p. 5) At a block of flats in Ryazan [in 1999] … a resident alerted police after seeing three suspicious people unloading bags into a basement a few days after the first explosion in Moscow. The next day the interior minister said the police had defused a timing device after finding explosives in the bags. But when the new FSB chief said the bags contained sugar and had been planted as a drill to test police vigilance, the hunt for suspects was called off … Officials say they know who carried out the bombings and maintain they were ‘Chechen terrorists’, but the only two suspects to come to court are non-Chechens. They were acquitted last year [2001]. (Guardian, 6 March 2002, p. 16) ‘No one has been convicted for the attacks, but suspicions of an official coverup were raised after … [the Ryazan incident]’ (The Times, 6 March 2002, p. 20). 30 April 2003: [On 30 April 2003] the office of the Russian prosecutor-general unexpectedly closed its investigation into the three apartment bombings in

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Introduction and overview September 1999, which killed 243 people … The prosecutor’s office announced that nine Russian and foreign Islamic fighters carried out the bombings – two in Moscow and one in the southern city of Volgodonsk … None of the accused appeared to be Chechens. Rather, they were Moslems from other regions … While dozens of arrests were made and suspects identified, no one has yet to be tried, let alone convicted of direct complicity … Five of those accused Wednesday [30 April] are already dead, including a Jordanian-born leader known as Khattab, who was killed in Chechnya last year [2002], reportedly by a poisoned letter sent by the Russian security service … The announcement … will do little to answer accusations – never substantiated – that the bombings were carried out by Russia’s security service, the FSB. (IHT, 2 May 2003, p. 6)

President Aslan Maskhadov of Chechnya (democratically elected in a generally free and fair election on 27 January 1997) was unable to control extremists (whether criminal, Islamic or both). Russia did next to nothing for Chechnya after the 31 August 1996 Khasavyurt agreement signed by Alexander Lebed and Aslan Maskhadov. (The agreement effectively made Chechnya independent, although a referendum was to establish its final status in a referendum to have been held in December 2001. Putin has repudiated the agreement.) ‘The tragedy of the Russians’ ham-fisted brutality is that they might have attracted the support of most Chechens had they tried to work peacefully with Mr Maskhadov to expel the extremist groups’ (Anatol Lieven, IHT, 1 December 1999, p. 8). Yeltsin refused Maskhadov’s offers to negotiate after the second war started, while Putin laid down conditions for direct personal talks with Maskhadov (such as handing over the Islamic extremists or at least joining with Russian forces to capture them) that the Chechen president cannot possibly fulfil. On 8 June 2000 Putin imposed direct presidential rule over Chechnya. In January 2001 President Putin announced plans to reduce the number of security forces in Chechnya and to turn control over operations to the Federal Security Service. But the loss of Russian servicemen and collaborating ethnic Chechens goes on unabated. Further bombings have taken place. On 24 March 2001, for example, three nearly simultaneous car bombs in southern Russia caused over twenty fatalities. Russia blamed the rebel leader Khattab. Many other bombings have taken place in southern Russia, but even the Russian authorities do not automatically point the finger at the Chechen rebels since (criminal) gang warfare may be to blame on occasion. But President Putin is hypersensitive to criticism at home and abroad. Critics of Putin draw a distinction between the legitimate aims of the elected Chechen president, Aslan Maskhadov, and terrorists such as Khattab (who was killed in March 2002 after opening a poisoned letter). President Putin saw the 11 September 2001 terrorist attacks on the United States as further justification for his policy in Chechnya, placing the Chechen conflict in a global context of a war against international terrorism. (Although

Introduction and overview 49 not ruling out any links, critics of Putin see this as a classic example of hijacking the global war to suppress internal demands for autonomy or independence.) The attacks transformed relations between Russia and the United States in particular, and Western criticism about Russia’s actions has been toned down in the interests of the wider war against international terrorism. Russia stresses the link between Osama bin Laden, the Moslem fundamentalist who is the USA’s number one target, and rebels in Chechnya (such as the late Khattab). Even President Putin is aware that not all Chechen rebels are linked to international terrorists. President Putin (24 September 2001): Events in Chechnya cannot be viewed out of the context of international terrorism. At the same time we realize that these events have their own unique causes and background. I believe that there may still be people in Chechnya who took up arms under the influence of false and misguided values. At a time when the civilized world has taken a stance on terrorism, each individual has to determine where he stands. This opportunity must also be given to those who have yet to lay down their arms in Chechnya. (CDSP, 2001, vol. 53, no. 39, p. 1) The first official talks with a representative of Aslan Maskhadov during the second Chechen war started in September 2001. But nothing came of these limited engagements. Over fifty Chechen rebels, heavily armed and threatening to use explosives, took over a 1,100-seat theatre in Moscow from 23 to 26 October 2002, demanding the withdrawal of Russian troops from Chechnya. Nearly 800 were in the audience. There followed a pre-dawn attack by Russian special forces on Saturday 26 October An initially unrevealed sedative gas was used to flood the theatre before the attack. (It was not until 30 October that it was officially revealed that the gas was an opiate-based narcotic used as an anaesthetic.) Five hostages were killed by gunfire (including one woman who tried to enter the theatre after the siege started). The rest of the 129 hostages (including eight foreigners) who did not survive died because of the effects of the gas. The 646 hostages who were rescued were hospitalized and even doctors were not initially told the name of the gas. The hostages were kept in seclusion. Forty-one rebels (including nineteen women) were killed, but several were captured or escaped. The surviving rebels did not detonate their explosives. No members of the Russian special forces were killed. Although popular opinion in Russia generally rallied strongly around President Putin, there was criticism about the use of the gas (especially in such vast quantities), the initial secrecy surrounding the exact type of gas used, the seeming lack of medical preparedness to treat those affected, and the danger that the rebels would still have had time to use their explosives if they so wished. Much of the criticism … has centred on the secrecy around the use of the gas and the failure to have enough of a proven antidote ready. All the

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Introduction and overview ambulances carried the drug, called Naloxone, but were soon overwhelmed by the number of victims. (IHT, 2 November 2002, p. 2) While many in the theatre were put to sleep immediately, some surviving hostages have said they noticed a smell or a mist at least a minute or so before passing out. That would mean that the guerrillas had enough time to detonate their explosives but did not. (IHT, 1 November 2002, p. 3)

There was also the issue of how such a large band of rebels was not detected before they reached the Moscow theatre. President Putin (24 October): ‘[The incident was planned by] foreign terrorist centres … The same people planned the terrorist act in Moscow [i.e. those who planned the terrorist acts in Bali – Indonesia – and the Philippines recently]’ (FT, 25 October 2002, p. 1; IHT, 25 October 2002, p. 10). President Putin thanked international leaders for ‘support in the fight against our common enemy – international terrorism’. Putin blamed all the Chechen rebels for the siege and ruled out negotiations with any of them, including Aslan Maskhadov (who denied responsibility and condemned attacks on civilians). President Putin (on 10 November): ‘Those who choose Maskhadov choose war. Instead of talks he has chosen the path of terror’ (Guardian, 11 November 2002, p. 15). Shamil Basayev assumed responsibility for directing the theatre raid and claimed the attack was planned without the knowledge of Maskhadov. But Putin even asked first Denmark and then the United Kingdom to extradite Maskhadov’s envoy Akhmed Zakayev to Russia. The courts in both countries turned down the request. Critics felt that Western leaders generally gave Putin an easy time of it because of Russia’s stance on international terrorism after 11 September. Critics of Putin pointed out the history of Chechnya, arguing that there would be a problem in Chechnya even if organizations such as al-Qaeda never existed. Critics also stressed the need to negotiate with moderates like Maskhadov. The war between the Russians and the Chechens has been going on since 1783, when Catherine the Great proclaimed the Caucasus to be Russia’s, and Russian troops began to try to enforce that claim in what until then had been a region of tribal societies and tribal authority … The Chechens and their Ingush minority were Catherine’s most ferocious opponents. They fought conquest until 1859 … [and] fought Russian occupation until 1917. (William Pfaff, IHT, 31 October 2002, p. 5) On 1 November 2002 the State Duma approved on third reading tough new media curbs during ‘anti-terrorist’ operations (the changes having been submitted well before the hostage crisis). (Putin vetoed the bill after appeals by media executives. He set up a committee, including journalists, to draw up a new

Introduction and overview 51 law. Critics expressed doubt that any substantial changes would be made. On 16 January 2003, Boris Jordan, a US citizen who was director-general of NTV, was dismissed. His independent editorial line, including coverage of the Moscow theatre siege, antagonized the Kremlin. Jordan surprised many by keeping to his promise of maintaining editorial independence.) On 3 November 2002, Sergei Ivanov, the defence secretary, said that Russia was temporarily suspending plans to cut its military presence in Chechnya: ‘From today the group of forces in Chechnya has launched broad-scale, tough and targeted special operations in all Chechnya’s regions’ (Independent, 4 November 2002, p. 8). Defence minister Ivanov announces [on 3 November] a halt to troop cutbacks … [and] the start of a new republic-wide ‘special operation’ … All told, according to the official figures, the federal forces in the Chechen republic number 70,000 to 80,000 men. The true number could actually be as high as 100,000. (CDSP, 2002, vol. 54, no. 45, p. 1) President Vladimir Putin has insisted as recently as this summer that Russia’s three-year war in Chechnya was essentially won and that the government could soon begin turning over peacekeeping duties to local forces … By most estimates about 75,000 to 80,000 Russian forces are in Chechnya, facing a guerrilla army of 2,000 or more. The Kremlin has announced plans to withdraw so-called surplus troops at least three times in the last two years, but the number of federal forces has remained essentially unchanged. (IHT, 4 November 2002, p. 10) ‘[The State Duma] rejected two proposals to create an independent commission to investigate the [theatre] siege’ (IHT, 14 November 2002, p. 1). There was concern (beginning in November 2002) that Chechen refugees in Ingushetia were being moved back to Chechnya against their will. ‘[On 28 February 2003] the [US] State Department … after months of discussion … designated three Chechen militant groups as terrorist organization subject to American sanctions’ (IHT, 1 March 2003, p. 5). A referendum held in Chechnya on 23 March 2003 on a new constitution and elections for parliament and president was severely criticized internally and externally (such as by the Council of Europe). Criticisms include the lack of meaningful consultation with the people of Chechnya. Aslan Maskhadov, the elected president of Chechnya, was not involved at all. Critics argued that the Russian government should have had negotiations with important figures like Maskhadov aimed at ending the fighting before holding a referendum. But official figures showed a high turnout and a high level of support for all three questions. The details of this and subsequent developments are as follows:

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Introduction and overview 23 March 2003: The average level of support for all three questions that were put to a vote (concerning the constitution and laws on parliamentary and presidential elections in Chechnya) was around 95 per cent … On Sunday [23 March] as of 6 p.m. 79.63 per cent of those eligible to vote had cast their ballots … The referendum was monitored by fifty observers, twenty-eight of them foreigners. (CDSP, 2003, vol. 55, no. 12, p. 12)

‘What they [ordinary Chechens] want – above all – is peace and security. That is why, despite the flaws, many were willing to support the referendum: any chance of positive change seems better than none’ (Andrew Jack, FT, Survey, 1 April 2003, p. vi). ‘Many people hope that the adoption of a constitution and the creation of a legal framework will in fact put a stop to lawlessness and restore peace to the republic’ (Bakhtiyar Akhmedkhanov, Vremya MN, 25 March 2003, pp. 1–2: CDSP, 2003, vol. 55, no. 12, p. 11). ‘Nearly 90 per cent of voters turned out for a referendum on a new constitution and over 95 per cent of these backed it. So official sources said’ (The Economist, 29 March 2003, p. 8). The authorities declared that 477,000 people turned out … That would have been 88 per cent of registered voters … Chechnya’s voters (or their phantoms) overwhelmingly approved laws for electing the president and parliament … Last October’s census [2002], according to preliminary figures, found nearly 1.1 million people in Chechnya – a shade more than when the war began – but in the same month the Danish Refugee Council, the aid agency most active in Chechnya, which does regular population surveys, estimated 785,000. (pp. 43, 46) ‘Chechens [were] drawn by promises from President Putin of compensation for lost homes and handouts to young mothers’ (The Times, 24 March 2003, p. 16). ‘Mr Putin has promised the prospect of financial compensation, amnesties for rebel fighters and significant autonomy’ (FT, 24 March 2003, p. 9). ‘The government suggested that an amnesty for some fighters might be possible’ (IHT, 24 March 2003, p. 7). ‘Some 540,000 people were registered to vote in Chechnya and camps in Ingushetia, including 28,000 of an estimated 80,000 troops stationed in the republic’ (FT, 24 March 2003, p. 9). Only adult Chechens registered within the republic … which officials of … Akhmed Kadyrov, the Kremlin-appointed president of Chechnya … put at just over 500,000 … will vote. This excludes refugees and the diaspora in

Introduction and overview 53 other parts of Russia, but includes more than 20,000 Russian soldiers ‘permanently’ stationed in Chechnya. (FT, 28 January 2003, p. 8) ‘An estimated 110,000 Chechens are still in … refugee camps in Ingushetia, only about half of whom were eligible to vote … according to the Chechen election commission’ (Independent, 24 March 2003, p. 15). ‘Internally displaced persons’ are now facing a new problem: obtaining documents … A large proportion of refugees simply do not have them – none of any kind. People had to leave their homes so quickly that they were unable to grab and take along their [internal] passports or documents that could be used to get new ones issued – birth certificates, for example … They will not be able to participate in the referendum because they do not have documents proving their identity … The issuing of documents … is done at their place of permanent residence, i.e. in the Chechen republic … Residents of refugee camps [are] the people who are the most dissatisfied with the authorities. (CDSP, 2003, vol. 55, no. 6, p. 13) ‘The Chechen diaspora in Russia are unhappy … In their opinion … the [proposed] referendum arrangements … mean that only people living in the republic would be able to vote’ (CDSP, 2003, vol. 55, nos 1–2, p. 12). A deputy Russian defence minister … said that a ‘maximum of 20,000’ troops would cast ballots … A Putin aide, Sergei Yastrzhembsky, said last month [February] that 37,000 Russian soldiers whose units are permanently stationed in Chechnya would be entitled to vote in the referendum, making up about 7 per cent of Chechnya’s approximately 538,000 eligible voters. (IHT, 7 March 2003, p. 5) [The new constitution] envisages a federal-style presidential system, in a republic of rival clans … [There have also been criticisms of] the speed with which the constitution has been drafted and the refusal to grant even the degree of autonomy given to some of Russia’s other ethnic republics. (FT, 28 January 2003, p. 8) ‘The new constitution has automatically excluded any figures with separatist inclinations’ (FT, Survey, 1 April 2003, p. vi). ‘The proposed constitution offers Chechnya “wide autonomy” … [but] “The territory of the Chechen republic is indivisible and is an integral part of the territory of the Russian Federation” ’ (Independent, 24 March 2003, p. 15). The draft republic constitution … would for the first time officially establish the republic’s name as Chechnya. It declares Russian and Chechen to be the

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Introduction and overview official state languages. The highest institution of government would be the People’s Assembly. The republic’s highest official would be a president, elected for a maximum of two five-year terms … Some 13,200 signatures were collected in support of the referendum. (CDSP, 2003, vol. 55, nos 1–2, p. 12) [The] new constitution declares it [Chechnya] once more an ‘autonomous republic’ of the Russian Federation … [but] the Kremlin will have the right to dismiss Chechnya’s president at any time, unlike those of other autonomous republics … Memorial, a Russian human rights organization … has refused to legitimize it [the referendum] by sending observers; so too have OSCE (though it will send a small group of ‘fact finders’) and the Council of Europe … There have been press reports of people being forced to register to vote, on pain of losing food aid … Aslan Maskhadov … has called for a boycott. (The Economist, 22 March 2003, p. 44)

‘The new constitution allows the Russian president to sack the Chechen one without giving a reason’ (The Economist, 29 March 2003, p. 46). The foreign minister of … [the] rebel government, Ilyas Akhadov, unveiled an alternative peace plan last week in Washington, which would defer the republic’s quest for statehood until genuine peace was achieved. The rebel plan calls for international peacekeeping troops to take over security functions from Russian troops, on the model of recent UN-backed operations in Kosovo and East Timor. (Independent, 24 March 2003, p. 15) 3 April 2003: ‘The Council of Europe has demanded a Hague-style war crimes tribunal set up by the UN to prosecute key Russian and Chechen leaders as war criminals responsible for systematic murders and disappearances in Chechnya’ (Guardian, 4 April 2003, p. 13). 8 April 2003: European nations formally submitted a resolution to the United Nations Human Rights Commission in Geneva yesterday [8 April] accusing Russia of violations in … Chechnya. The resolution, put forward by the fifteen EU members and seven other nations, cites forced disappearances, summary executions and torture. (Independent, 9 April 2003, p. 11) 11 April 2003: ‘The [US] State Department said Friday [11 April] that it would break with past practice and decline to sponsor a resolution criticizing Russia when the Chechnya conflict comes before the UN Human Rights Commission this week’ (IHT, 15 April 2003, p. 9).

Introduction and overview 55 16 April 2003: The fifty-three-country UN Commission on Human Rights … rebuffed a bid by the EU to censure Russia for alleged violations in Chechnya. The EU had urged the annual meeting to express ‘deep concern’ at the reported violations, which it said included ‘forced disappearances, extrajudicial, summary or arbitrary executions, torture, ill treatment as well as alleged violations of international humanitarian law’ by Russian forces in Chechnya. But the resolution, which was backed by the United States, was rejected by fifteen votes in favour to twenty-one opposed, with seventeen countries abstaining. A similar motion in 2002 failed by one vote … The United States-based Human Rights Watch, which says that the situation in Chechnya is getting worse, accused the EU of having backtracked on earlier tougher demands for an international investigation into allegations of abuses. (IHT, 17 April 2003, p. 8) 17 April 2003: About 300 Russian servicemen are under investigation for their part in the ‘disappearances’ of hundreds of people amid guerrilla fighting in Chechnya last year [2002], Chechnya’s prime minister said Thursday [17 April] … But Anatoli Popov, the Moscow-appointed prime minister, added that he was unaware of an official document reportedly tabled before the Russian government saying 1,132 civilians had been killed in Chechnya in 2002 and that seventy-six people were murdered and 126 abducted in the first two months of 2003. (IHT, 18 April 2003, p. 5) 12 May 2003: a suicide attack (involving a lorry packed with explosives) on a government complex in Znamenskoye (near Chechnya’s northern border) kills sixty people. ‘Russian officials blamed the attack on Monday [12 May] on Abu Walid, a Saudi-born warlord thought to be a follower of the fundamentalist Wahhabi school of Islam, which is a powerful force in Saudi Arabia’ (The Times, 15 May 2003, p. 21). 14 May 2003: another suicide bombing takes place, this time at a religious (Moslem) festival organized by United Russia and held in a village east of Grozny. The festival was attended by Akhmed Kadyrov, the pro-Moscow head of Chechnya’s local administration and apparent target. He escaped injury but eighteen died. ‘Foreign-born militants were also blamed [by Russian officials] for yesterday’s [Wednesday’s] attack’ (p. 21). ‘Russian security officials alleged that a Saudi citizen, Abu Walid, had trained suicide bombers in Chechnya. His involvement in yesterday’s [Wednesday’s] – or

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Introduction and overview

Monday’s attack – however, had yet to be determined, they added’ (Guardian, 15 May 2003, p. 14). 16 May 2003: President Vladimir Putin on Thursday [15 May] proposed granting amnesty to Chechen separatists who agreed to lay down their arms by 1 August, but the offer would exclude anyone accused of murder, rape, kidnapping or other crimes … The amnesty would cover any fighters who rebelled against Russia beginning in August 1993, a year before the first Chechen war began … Amnesty would be granted to neither Aslan Maskhadov … nor any commanders suspected of organizing suicide bombings or other terrorist acts … A few thousand Chechen rebels, at most, are believed to remain active in or near the republic, fighting beside an unknown number of foreign mercenaries … The remaining fighters, however, have only intensified their attacks since the March referendum … Unable to control territory or fight Russian forces head-on, they have also increasingly resorted to suicide attacks. (IHT, 16 May 2003, p. 4) The amnesty … would not cover foreigners or Russian citizens who were guilty of murder, kidnapping, rape or other grave crimes. The amnesty also denies pardon to all those who made an attempt on the lives of federal police officers and servicemen – the provision that makes it meaningless, according to critics. (IHT, 21 May 2003, p. 5) ‘The amnesty … also applies to Russian troops in Chechnya … The amnesty does not pardon rebels or Russian soldiers who have committed particularly grave crimes – such as premeditated murder, rape and hostage-taking – or foreigners’ (IHT, 7 June 2003, p. 2). ‘Guerrilla leaders have rejected the amnesty as a ploy to clear scores of Russian soldiers who face punishment for crimes and human rights abuses’ (IHT, 6 June 2003, p. 3). 5 June 2003: in North Ossetia a suicide bomb attack on a bus travelling to an airbase results in twenty deaths (including civilians). 6 June 2003: the State Duma approves President Putin’s offer of a limited amnesty. 5 July 2003: Two female suicide bombers allegedly from Chechnya blew themselves up at the gates to an open-air rock festival at Tushino airfield on the outskirts of Moscow … Most suicide bombers appear to be women, often the widows of Chechen fighters and victims of violence committed by Russian military forces. (FT, 7 July 2003, p. 6)

Introduction and overview 57 (The final death toll was seventeen, including the two suicide bombers.) 10 July 2003: ‘A security agent was killed early Thursday [10 July] while defusing a bomb that had been carried by a woman identified as a [would-be] suicide bomber from the northern Caucasus’ (IHT, 11 July 2003, p. 4). (The woman was arrested.) 25 July 2003: A Russian military court yesterday [25 July] sentenced an army colonel to ten years in prison for the murder of a Chechen woman [on 27 March 2000]. Colonel Yuri Budanov, the highest-ranking Russian officer to face charges for abuses in Chechnya … was initially let off on an insanity plea. (IHT, 26 July 2003, p. 6) 27 July 2003: ‘A woman died of wounds she suffered in a suicide bombing that the authorities said had been aimed at the son of Chechnya’s administration chief ’ (IHT, 29 July 2003, p. 6). 29 July 2003: ‘Russia moved control of the Chechen military campaign from the security services Tuesday [29 July] and handed it to the regular police … [transferring] power from the federal security service to the interior ministry’ (IHT, 30 July 2003, p. 8). 1 August 2003: a suicide attack on a Russian military hospital in Mozdok (North Ossetia) involving a vehicle packed with explosives led to a death toll of at least fifty. The Yeltsin era The reformers did badly in the general election of 12 December 1993 and ensured that friction between the constitutionally weak parliament and the powerful president continued. But the fact that there was a good turnout for a reasonably fair election in which generally embryonic parties participated was a remarkable achievement in itself. In the December 1995 election for the State Duma the big winner (as expected) was the Communist Party of the Russian Federation, profiting from the pain of transition experienced by large sections of the population. Zhirinovsky’s Liberal Democratic Party did much better than expected but worse than in the 1993 election. Grigori Yavlinsky’s liberal party (Yabloko) did worse than expected. Prime minister Chernomyrdin’s new party (Our Home is Russia) performed disappointingly but still ended up as the second largest party in parliament. Alexander Lebed’s Congress of Russian deputies did much worse than expected. (Alexander Lebed died in a helicopter crash on 28 April 2002.) Friction between parliament and president continued. But both the general election of 1995 and the presidential election of 1996 seemed to show that there was no going back for the Russian people. What the majority seemed to want was a fairer, more protected, more gradual, more orderly and less corrupt transition to a new system.

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Introduction and overview

The draft of the new constitution was published on 9 November 1993, providing for a strong presidency and a weak parliament. This followed the violent dénouement of President Boris Yeltsin’s quarrel with parliament in the shape of the literal blasting of the ‘White House’ into submission on 4 October 1993. But Yeltsin continued to be generally at odds with parliament. Given the power of the presidency, Yeltsin’s recurrent illnesses and erratic (at times even bizarre) behaviour caused considerable concern both at home and abroad. Even a successful quintuple heart-bypass operation on 5 November 1996 did not end Yeltsin’s health problems and frequent absences and his unpredictability. Out of the blue, for example, he dismissed the long-time prime minister Viktor Chernomyrdin and the entire cabinet on 23 March 1998. Yeltsin had great difficulty in getting the State Duma to accept as his candidate for prime minister the young, little-known and reformist Sergei Kiriyenko (made acting prime minister on 23 March 1998 but not approved until 24 April 1998). He, in turn, was dismissed on 23 August 1998 but Yeltsin failed altogether in his attempt to persuade the State Duma to reinstate Viktor Chernomyrdin to his old position. It took a long time before it became clear that Yeltsin would not run for a third term as president. Before his health took a decisive turn downwards he chopped and changed his statements, one minute saying he would run again for a ‘third’ term as president and the next minute saying he would not. (Only two terms are allowed, but there was the constitutional problem of whether Yeltsin was eligible to run again, since he was elected for the ‘first’ time when Russia was still part of the Soviet Union. On 5 November 1998 the constitutional court ruled that Yeltsin could not seek a third term as president, but the court did not actually examine the issue of whether he had a legal right to run for election again.) The State Duma considered five impeachment charges against Yeltsin, namely illegally conspiring to destroy the Soviet Union in 1991, overthrowing the constitutional order and violently dispersing the elected parliament in 1993, illegally unleashing the (first) war in Chechnya, undermining national defence by ruining Russia’s armed forces, and committing ‘genocide’ against the Russian people by pushing market reforms that led to falling birth rates, shortened life expectancy and widespread poverty. But the State Duma failed (on 15 May 1999) to get the required minimum number of votes (300) for any charge, including what was generally considered to be the most likely to succeed (the one referring to Chechnya) which received 283 votes. Yeltsin did not succeed in getting the Council of the Federation to accept the dismissal of the chief prosecutor, Yuri Skuratov (who had, for example, been keen to tackle alleged corruption by Kremlin officials). (President-elect Vladimir Putin did succeed, and quickly, on 19 April 2000.) The assassination of the reformist politician Galina Staravoitova in St Petersburg on 20 November 1998 shocked even the more cynical interpreters of the Russian scene. But Yeltsin was generally seen as reliable and predictable in certain regards. First, there was a ‘honeymoon’ period with the West despite Russia’s humiliation at the precipitous decline in the latter’s international status. Friction over issues such as Nato expansion brought this period to an end and there was inter-

Introduction and overview 59 national concern over Yeltsin’s twofold use of force in Chechnya (as has already been discussed). But Yeltsin was still viewed in the West as someone who was broadly a ‘friend’ and as someone who could be relied to keep Russia broadly on track as regards political democracy and economic reform. (Jack Matlock, a former US ambassador to the Soviet Union: ‘In a meeting in Moscow last December [1999] Mr Yeltsin’s spokesman told me that his boss was determined to go down in history as the person who made the restoration of communism impossible’: IHT, 29 March 2000, p. 8.) At home he comfortably won the 1996 presidential election (albeit with the media/economic help of the financial oligarchs – see the scandalous ‘shares-for-loans’ privatization scheme – and with the help of extravagant gestures/promises) on a platform of looking forward not backwards, and was seen as the only alternative to a president of the extreme left or right. Despite harsh criticism of Nato’s decision to start bombing Yugoslavia on 24 March 1999, Yeltsin promised that Russia would not intervene or even provide arms to Slobodan Milosevic. In fact he appointed Viktor Chernomyrdin as his special envoy on the crisis and Russia played an important mediating role. The crisis over Kosovo was in fact brought to an end with the aid of Russian diplomacy. When Nato started bombing the Federal Republic of Yugoslavia on 24 March 1999, relations between Russia and Nato sank to their lowest level since the disintegration of the Soviet Union. Russia suspended co-operation with Nato and participation in the Partnership for Peace programme and did not accept the invitation to attend the fiftieth anniversary of Nato (on 23 April 1999). But Yeltsin, despite harsh words, ensured that the arms embargo (imposed by the UN Security Council on 31 March 1998) was not broken and the peace plan drawn up by Russian special envoy Viktor Chernomyrdin and Finnish president Martti Ahtisaari was accepted by the Federal Republic of Yugoslavia on 3 June and by the UN Security Council on 10 June 1999. The role of and command structure relating to Russian troops in the international peacekeeping force in Kosovo was seemingly resolved after considerable discussion and extra tension brought about by Russia’s success in getting some of its troops into Kosovo ahead of Nato forces, taking control of Pristina airport on 12 June. Relations between Russia and Nato then improved rapidly and Yeltsin himself attended the final days of the G8 meeting on 18–20 June 1999. But soon afterwards further prickly discussions took place. It was not until 5 July 1999 that an announcement was made, although not all details were revealed. At any rate Russian troops began to be deployed in Kosovo, welcomed by ethnic Serbs there but given a generally hostile reception by ethnic Albanians, who see Russia as an ally of Serbia. Second, until Vladimir Putin came along, Yeltsin was generally seen as obsessed with holding on to power. (He also liked to take credit when things went right and blamed members of the government when things went wrong.) Until Vladimir Putin (seen as strong enough to ensure Yeltsin’s post-retirement immunity from corruption charges), Yeltsin dismissed anyone perceived as a real rival and played off one individual or group against another so that he could act as ultimate arbiter. Yeltsin personally went into steep decline during the financial

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crisis (although he bounced back after Nato began to bomb Yugoslavia on 24 March 1999). In such a powerful presidential system this was potentially extremely destabilizing, but the practical running of the country was left largely in the pragmatic hands of Yevgeni Primakov. He became acting prime minister on 10 September 1998 and gained State Duma approval (on the first vote) the following day. Primakov gained broad approval across the political spectrum and provided essential political stability. Even so, Yeltsin on occasion hinted that even Primakov was not indispensable and actually dismissed the prime minister on 12 May 1999, allegedly on the grounds of slowness as regards economic reform. Factors explaining the slowness of a comprehensive economic package included a broad cabinet containing members with significantly different views. The government was faced with the problem of reconciling priorities such as payment of wage and pension arrears with avoiding hyperinflation through an over-reliance on printing money to finance the budget deficit (and so regain access to international aid and finance). Next in the merry-go-round of prime ministers was Sergei Stepashin, who was made acting prime minister on 12 May 1999 and approved by the State Duma on 19 May on the first vote. But Yeltsin clearly did not see him as likely to win the next presidential election or strong enough to protect Yeltsin and members of his family from any corruption charges. The failure to prevent the Fatherland–All Russia bloc turning into an opposition centre of power was also a commonly listed reason for Stepashin’s dismissal. The Putin era Yeltsin dismissed Sergei Stepashin on 9 August 1999 and nominated the almost unknown Vladimir Putin as prime minister (the post being approved by the State Duma on 16 August in the first round of voting). Vladimir Putin’s meteoric rise from relative obscurity to president (elected on 26 March 2000) is truly remarkable. A new party (Unity), based almost entirely on support for Putin, came second only to the Communist Party in the party list seats in the 19 December 1999 election for the State Duma. Yeltsin saw him as his successor and a man strong enough to protect the Yeltsin family after the presidential election. This manufactured succession succeeded despite Yeltsin’s rapidly declining popularity. (‘In the wake of the August [1998] financial crisis Mr Yeltsin’s approval rating fell to just 2 per cent’: FT, Survey, 10 May 2000, p. i.) It succeeded in large part because of the popularly supported Chechen war. Putin was born on 7 October 1952 and became a middle-ranking KGB agent in the Soviet era. He worked in the GDR and learned to speak German. In the new Russia he became first deputy mayor of St Petersburg under Anatoli Sobchak, a leading reformer whose reputation was later sullied by corruption allegations. (Sobchak died on 20 February 2000.) Among Putin’s important duties was the attraction of foreign investment. On 25 July 1998 Putin was appointed head of the Federal Security Service and on 29 March 1999 he also became secretary of the ‘security council’.

Introduction and overview 61 Boris Yeltsin unexpectedly announced his resignation as president at around midday on 31 December 1999. Prime minister Vladimir Putin became acting president (as of midday) until the holding of a presidential election. Putin immediately signed a decree entitled ‘On guarantees to the President of the Russian Federation after he leaves office and to the members of his family’: After leaving office the President of the Russian Federation enjoys immunity. After leaving office the President of the Russian Federation may not be prosecuted on criminal charges, subjected to administrative penalties, detained, arrested or subjected to search, interrogation or personal inspection. The immunity enjoyed by the President of the Russian Federation after he leaves office extends to his places of residence and of work, the vehicles and means of communications he uses, all documents and baggage belonging to him and his correspondence. (On 24 January 2001 the State Duma passed a law granting immunity from prosecution for former presidents except in the case of a ‘grave crime’.) The presidential election was held on 26 March 2000. There were eleven candidates, but the only thing in doubt was whether prime minister and acting president Vladimir Putin would win in the first round. In fact he did, with 52.64 per cent of the vote. Gennadi Zyuganov (leader of the Russian Federation Communist Party) came second with 29.34 per cent. Grigori Yavlinsky (leader of Yabloko) came a distant third, with 5.84 per cent. Vladimir Zhirinovsky (leader of the Liberal Democratic Party of Russia) was fifth, with 2.72 per cent of the vote. (Zhirinovsky ran in the general election as leader of Zhirinovsky’s Bloc because of trouble registering with the electoral commission. ‘Vladimir Zhirinovsky … has supported the Kremlin on crucial votes’: IHT, 21 December 1999, p. 6. ‘Mr Zhirinovsky … has proved to be Mr Yeltsin’s unfailing parliamentary ally’: FT, 21 December 1999, p. 6.) Vladimir Putin was sworn in as president on 7 May 2000. Putin: For the first time in all of Russian history supreme power is being handed over in the most democratic and simplest possible way – through the will of the people, legitimately and peacefully … The peaceful transfer of power is a crucial element of the political stability that you and I have dreamed of, that we have striven for and tried to achieve. Putin nominated Mikhail Kasyanov as prime minister. (‘The leaders of Mr Primakov’s All-Russia movement, including the presidents of Tatarstan [Mintimir Shaimiev], Bashkortostan [Murtaza Rakhimov] and Ingushetia [Ruslan Aushev], and the governor of St Petersburg [Vladimir Yakovlev], said they had unanimously decided to support Mr Putin’: FT, 6 January 2000, p. 1. On 4 February 2000 Yevgeni Primakov announced that he would not run in the presidential election. On the opening day of the new parliament last month [January] a pro-Putin party known as Unity allied itself

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with the opposition Communists and took control of the parliament’s top leadership positions. One goal of the manoeuvre, analysts say, was to block Mr Primakov from being elected speaker’: IHT, 5 February 2000, p. 5. Unity’s parliamentary start was not smooth. Members of various other parties were so upset by an agreement between Unity and the Communist Party over the election of a speaker and control over most committees that they started a boycott of the State Duma. The boycott lasted from the opening session on 18 January 2000 to 9 February 2000. In April 2002 the Communist Party lost committee headships and thus influence in the State Duma. The following month three leading members, including Gennadi Seleznyov, the speaker of the State Duma, were expelled from the party for refusing to give up their positions. On 1 July 2002 the New Communist Party was set up by Andrei Brezhnev, grandson of Leonid Brezhnev.) Although Putin did not formally campaign, he received a great deal of publicity in the media. In preliminary findings released yesterday [27 March] an observation team from OSCE concluded that it had seen no evidence of significant fraud that would have affected the outcome. In a more critical report the European Institute of the Media attacked the disproportionately large and favourable coverage given to Mr Putin on television and in newspapers. (FT, 28 March 2000, p. 10) Apart from the general popularity of the second Chechen war, Putin was commonly seen as the strong leader needed to combat the high degree of corruption and crime in Russia and to strengthen Russia’s international status. Other factors working in his favour were an improving economic situation and a generally pro-reform stance. President Putin has consistently remained very popular among the general population, not least because he seems to embody the longed-for greater stability. Putin, the oligarchs and the media Putin’s attitude towards the oligarchs has aroused considerable interest. There have been moves (some later reversed) against a number of the oligarchs and/or the companies that they represent. The public reaction was a mixed one, however. Although the moves were generally popular in Russia because of the typically poor reputation of the oligarchs, concerns were expressed about threats to media freedom because of the control over important sections of the media exercised by oligarchs critical of Putin. The president singled out Vladimir Gusinsky and Boris Berezovsky for attack, but seems to have made it clear to the other oligarchs that they would be left alone provided that they paid their taxes, ran their companies (which they would be allowed to retain) properly and refrained from trying to influence government policy. (There are more general concerns about Putin’s attitude towards the media, e.g. his signing, on 12

Introduction and overview 63 September 2000, of a new information security doctrine, which critics consider to be a possible threat to media freedom.) On 13 June 2000 Vladimir Gusinsky (president of Media-Most) was arrested for alleged fraud. The formal charge was ‘large-scale embezzlement’ of state funds. The loss to the state was said to amount to about $10 million and was related to the privatization at a low price of a St Petersburg television company (Channel 11). The following day seventeen leading businessmen signed an open letter condemning the arrest. The seventeen included Vladimir Potanin (Interros), Anatoli Chubais (UES), Mikhail Friedman (Alfa Group), Pyotr Aven (Alfa Bank), Mikhail Khodorkovsky (Yukos), Rem Vyakhirev (Gazprom) and Vladimir Yevtushenkov (Systema). Among those who did not sign were Boris Berezovsky, Roman Abramovich and Vagit Alekperov. Gusinsky was released from prison on 16 June and then went to Spain. In late July 2000 it was announced that the case against Vladimir Gusinsky was to be dropped, owing, prosecutors say, to ‘lack of the fact of a crime’. The Russian prosecutor’s office said Tuesday [19 September 2000] it had begun investigating a claim that the country’s biggest independent media group was trying to back out of a takeover agreement with the Gazprom natural gas monopoly. The investigation … comes at Gazprom’s request … Gazprom is demanding that … Vladimir Gusinsky … honour a July agreement to yield control of his company [Media-Most] to settle debts to Gazprom. Mr Gusinsky says the agreement was forced on him at ‘gunpoint, so to say’ and under pressure from the Kremlin. He has vowed not to sell out … One of the provisions of the 20 July agreement, disclosed for the first time in documents made public Monday [18 September], suggests that the Kremlin was prepared to make a deal with Mr Gusinsky under which he would not be subject to prosecution as long as he remained silent and did not criticize the government … In late July charges were dropped and Mr Gusinsky was permitted to leave the country. He has not returned to Russia [from Spain] … Gazprom, which is 38 per cent owned by the state … has made a $211 million loan secured by 20 per cent of Media-Most shares, and another loan, for $262 million, due next summer, is backed by another 20 per cent of the company … Media-Most … includes radio, print and a pay television system, as well as NTV. Mr Gusinsky’s news magazine, Itogi, is a partner of Newsweek … On 20 July Mr Gusinsky signed a deal to settle all debts with Gazprom for $773 million, which comprised forgiveness of the outstanding $473 million in loans, plus an additional $300 in cash from Gazprom. But just two days earlier Mr Gusinsky made a sworn statement saying that he was being forced to make a deal by the press minister, Mikhail Lesin, a point man for the Kremlin. (IHT, 20 September 2000, p. 13) ‘The president, like prime minister Kasyanov, considers Mr Lesin’s actions “unacceptable” ’ (CDSP, 2000, vol. 52, no. 39, p. 5).

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‘Russian prosecutors began a criminal embezzlement investigation Thursday [28 September] against the heads of companies belonging to Media-Most … The prosecutors were acting on accusations that Media-Most had hidden assets abroad to avoid having them seized by Gazprom’ (IHT, 29 September 2000, p. 4). The deputy prosecutor said yesterday [28 September] that the fraud charges were made because Media-Most shares used as security for the [Gazprom] loan had been moved to offshore funds … Mikhail Kasyanov, the prime minister, said yesterday that Mr Lesin [the press minister] has ‘acted improperly in signing a document on relations between the two for-profit companies’. (Independent, 29 September 2000, p. 14) The prosecutor general’s office has instituted criminal proceedings in response to an appeal by Gazprom–Media. The company complained that this April nearly all of Media-Most’s assets were transferred out of the holding company, leaving it no longer in possession of controlling stakes in its constituent companies. Meanwhile, Gazprom still holds 40 per cent of Media-Most as collateral for two loans to the company, one of $211 million, the other of $275 million. Gazprom executives contend that the withdrawal of assets has devalued its collateral and damaged its interests. (CDSP, 2000, vol. 52, no. 39, p. 5) Media-Most … yesterday [18 October] said it had reached an outline agreement with Gazprom … in a deal that would preserve its independence from the state. The vaguely worded statement … also hinted that the heavily indebted Media-Most was in talks with a significant international investor. (FT, 19 October 2000, p. 11) Vladimir Gusinsky … and Gazprom have agreed that Mr Gusinsky can pay off his debt to the monopoly in a way that will allow his media group to remain independent, according to officials on both sides. The deal means that Mr Gusinsky will be allowed to use company stock to settle his $211.6 million debt, plus interest of $36.9 million, as the two parties had originally envisioned. (IHT, 20 October 2000, p. 8) Russia’s general prosecutor yesterday [1 November] … summoned … Vladimir Gusinsky and Boris Berezovsky … who are currently outside Russia … to appear in Moscow on 13 November, with the threat of prison and international arrest warrants if they failed to show up … for questioning about alleged criminal business dealings … The general prosecutor’s office said it now had sufficient proof [in the case of Boris Berezovsky] to bring charges of large-scale theft … in relation to alleged embezzlement

Introduction and overview 65 from the state airline Aeroflot … Separately it accused Mr Gusinsky of ‘deceit and abuse of trust’ and embezzlement in securing more than $300 million in loans from Gazprom. (FT, 2 November 2000, p. 12) (In January 2003 Boris Jordan, the American financier who had been appointed to run the NTV television network, was dismissed, seemingly for his independent editorial line.) Russian prosecutors yesterday [13 November] issued an arrest warrant for Vladimir Gusinsky … as news emerged of a debt agreement which would see Mr Gusinsky lose control of key parts of his empire. Under a deal signed on Saturday [11 November] Gazprom … will emerge as the largest single shareholder in NTV, Russia’s leading private channel, with 46 per cent of the company’s shares. An additional 19 per cent in NTV will be sold to outside investors. (FT, 14 November 2000, p. 9) ‘[Gazprom] on Tuesday [14 November] suddenly backed out of … [the] agreement’ (IHT, 15 November 2000, p. 15). ‘Boris Berezovsky yesterday [15 November] refused to attend a Moscow court to face charges of embezzlement’ (The Times, 16 November 2000, p. 19). (Berezovsky, like Gusinsky, was still out of the country.) Media-Most … yesterday [17 November] said it had signed an agreement to swap its debt for equity with Gazprom. The deal … would give him [Gusinsky], Gazprom and an outside investor yet to be found blocking stakes … A Media-Most executive said the deal … paved the way for a restructuring of the group’s debts while preserving its independence from the dominance of any of the shareholders. (FT, 18 November 2000, p. 10) On 12 December 2000 Vladimir Gusinsky was arrested in Spain on an international warrant issued by Russia via Interpol and on the grounds that he had misrepresented his assets when obtaining a loan from Gazprom. Russia requested his extradition (which was refused). NTV continued to be harassed by various means (e.g. frequent tax audits). On 25 January 2001 Gazprom claimed to have gained effective control of NTV after a court had frozen the voting rights of some of the shares held by Gusinsky’s Media-Most. On 3 April Gazprom declared control and appointed a new management team. Most staff and journalists resisted, occupying the building (until removed on 14 April) and requesting a court hearing to challenge what they saw as an illegal move by Gazprom. There were public rallies in support of the rebel journalists, the issue being seen in terms of press freedom. Gazprom was seen as a means of indirectly securing state control of the only independent nationwide television station and one willing to be critical

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of the president and the government. Mikhail Gorbachev strongly supported the rebel journalists. The Gusinsky media empire was subsequently eroded in other ways, e.g. the daily newspaper Izvestia ceased publication on 16 April 2001. (By way of contract, the prosecutor’s office announced on 13 December 2000 that it had decided to close the case – on the ground of insufficient evidence – against those such as Pavel Borodin who were alleged to have accepted bribes from Swiss companies involved in renovating Kremlin buildings. Pavel Borodin was formerly head of the Kremlin’s vast property empire until he was demoted on 10 January 2000 and appointed secretary to the Russia–Belarus Union. On 17 January 2001 he was arrested in the USA and extradited to Switzerland on 7 April. But he was granted bail (paid for by the Russian government) on 12 April and the next day he flew to Russia. Although the Swiss legal authorities resolved to continue with the charge of money-laundering in connection with the alleged bribes, they made it clear that without Russian assistance they faced ‘insurmountable obstacles’. Critics accused members of Russia’s elite of being afraid of what Pavel Borodin might reveal if he were to be put on trial. On 6 March 2002 Swiss authorities found Borodin guilty of money-laundering.) On 26–27 November 2001 a Moscow court ordered the dissolution of TV-6, the last major independent television station. The suit, claiming bankruptcy, was filed by Lukoil’s pension fund, a minority shareholder. On 29 December 2001 a federal court overturned the lower court’s decision and returned the case to the lower court for reconsideration. By the time the case was reheard the bankruptcy law underpinning the case was changed. But this did not make any difference. On 11 January 2002 the Moscow Higher Arbitration Court ordered TV-6’s liquidation. Claims of politically inspired moves to suppress freedom of the media were rife. TV-6 was ordered by a court to stop broadcasting at midnight on 21 January. A group of influential Russian businessmen, discreetly backed by the Kremlin, yesterday [27 March 2002] won a bitterly contested battle over the broadcasting licence of TV-6 … Media-Sotsium … [beat] twelve other competitors to take over TV-6’s frequency … Yevgeni Primakov, the former prime minister and head of the Russian Chamber of Commerce, joined the bidding group at the Kremlin’s behest … Media-Sotsium is headed by Yevgeni Kiselyov … Its other leaders included Anatoli Chubais, head of UES, the Russian power company, Oleg Deripaska, head of Russian Aluminium, Roman Abramovich, the principal shareholder in the Sibneft oil group and Arkady Volsky, head of the Russian Union of Industrialists and Entrepreneurs … Yesterday Mr Kiselyov rejected any idea that the Kremlin in any way supported his bid and called the results a victory for the free press. (FT, 28 March 2002, p. 8) Media minister Mikhail Lesin said that an alliance comprising the TV-6 team in partnership with … Yevgeni Primakov had won a tender for the frequency on which the old TV-6 channel had broadcast … Local media said Primakov

Introduction and overview 67 was part of the Kremlin’s solution to its dilemma about how to calm concerns about media freedoms while keeping an eye on TV-6’s independent journalists. (IHT, 28 March 2002, p. 5) ‘Some of the financial backers Chubais recruited are well known for their Kremlin ties, including Roman Abramovich, the wealthy governor of the far eastern region of Chukotka, and Alexander Mamut, a bank owner’ (IHT, 27 March 2002, p. 5). ‘Media-Sotsium [is] the non-profit partnership established by Yevgeni Primakov and Arkady Volsky that was joined by Yevgeni Kiselyov’s team of journalists’ (CDSP, 2002, vol. 54, no. 13, p. 5). Other major events as regards the oligarchs are as follows: 1

On 21 June 2000 a lawsuit was launched against Norilsk Nickel. Masked and armed police yesterday [28 June] raided a Siberian company controlled by two of Russia’s influential business oligarchs … TNK, an oil subsidiary of the Alfa group owned by Pyotr Aven and Mikhail Friedman … The action was related to an investigation concerning the sale in 1997 to a subsidiary of Alfa of shares in TNK previously owned by the state … Legal action was launched in Moscow last week against the Russian commodities group Norilsk Nickel … A Moscow court [decided] to question the legality of the … privatization of Norilsk Nickel, controlled by Vladimir Potanin. (FT, Thursday 29 June 2000, p. 10) ‘The conduct of my company Interros is now being questioned by the Moscow prosecutor’ (Vladimir Potanin, FT, 29 June 2000, p. 27).

2

3

‘Yesterday [11 July] Russian authorities … accused the chairman of Lukoil, the country’s largest oil company, of tax evasion … Prosecutors yesterday also targeted Vladimir Potanin, chairman of Interros, the financial holding company that controls … Norilsk Metal. They said Mr Potanin must pay $140 million to make up the amount they said he underpaid for a 38 per cent stake in the enterprise … The case against Media-Most involves charges ranging from invasion of privacy by security guards to financial skulduggery. Authorities are especially interested in the links between the television company and Gazprom’ (FT, 12 July 2000, p. 10). ‘Russian authorities yesterday [12 July] launched their third big criminal tax investigation in a month, fresh evidence that President Vladimir Putin is mounting a serious attack against the country’s most powerful businessmen, or oligarchs. The probe into an alleged $600 million tax fraud at Avtovaz, Russia’s largest car maker, follows investigations into the tax affairs of Media-Most and of Vagit Alekperov, chairman of Lukoil, the country’s biggest oil company … The probe at Avtovaz is significant because the

68

Introduction and overview company has in the past been linked with Boris Berezovsky … Yesterday Mr Berezovsky said he had ended his links with Avtovaz and denied claims by industry analysts that he retained control’ (FT, 13 July 2000, p. 10). The prosecutor general of Russia on Thursday [3 August] unexpectedly halted a criminal investigation into illegal business practices by senior executives at Russia’s largest automaker, Avtovaz … Avtovaz … is run by a former first deputy prime minister, Vladimir Kadannikov, while its cars are distributed through the Logovaz network set up by Boris Berezovsky … Tax officials on 7 July began an investigation … Tax officials alleged that Avtovaz had hidden the sales of about 200,000 cars by assigning them all the same identification number. But the prosecutor’s office told Interfax that an inquiry had shown that the tax police did not have sufficient evidence to begin a criminal inquiry. (IHT, 4 August 2000, p. 5)

4

5

The Audit Chamber, a parliamentary watchdog, announced on 14 July 2000 that it was to investigate whether UES (Unified Energy System), the electricity monopoly headed by Anatoli Chubais, had illegally sold more than 15 per cent of its shares to foreigners in 1992. The Audit Chamber is headed by Sergei Stepashin (The Times, 15 July 2000, p. 16; Guardian, 15 July 2000, p. 16; FT, 15 July 2000, p. 12; IHT, 17 July 2000, p. 4). On 28 July 2000 Putin met twenty-one leading businessmen. Boris Nemtsov conceived the idea. Among those not invited to attend were Boris Berezovsky, Roman Abramovich and Vladimir Gusinsky. Anatoli Chubais was in Finland on business. Putin said: I only want to draw your attention straight away to the fact that you have yourselves formed this very state through the political or quasipolitical structures under your control. So perhaps what one should do least of all is blame the mirror … We have to discuss what is to be done so that relations [between business and government] can be democratic, absolutely civilized and transparent. Kommersant was told by a participant in the meeting that the president said everything they had expected him to. That it is necessary to strengthen the right of private ownership. That law enforcement agencies do not and will not have orders to harass businessmen, and that they are supposed to fight crime, not business. And, finally, that there has not been, nor will be, any revision of the outcomes of privatization … [Putin] ‘Are you prepared, right now, to renounce the idea of installing your own people in government agencies?’ … Virtually the only guest he criticized personally was Sibneft president Yevgeni Shvidler. ‘Why is Sibneft paying so little in taxes?’ (Kommersant, 29 July 2000, p. 1: CDSP, 2000, vol. 52, no. 31, p. 8)

Introduction and overview 69 6

On 10 August 2000 tax police raided the headquarters of the oil company Sibneft and took away some documents. The action seemed to be a direct blow against Roman Abramovich, who has a controlling interest in Sibneft and has been named frequently by the Russian press as both a close confidant of the family circle of former president Boris Yeltsin and of those around Mr Putin. (FT, 11 August 2000, p. 6)

7

Boris Berezovsky (in an open letter to President Putin on 4 September 2000): Last week a high-ranking official on your staff issued me an ultimatum: to place under state management the block of shares in ORT [Russian Public Television] that I control, or to follow in the footsteps of Gusinsky – to all appearances Butyrka prison was meant … If I accept the ultimatum Russia will cease to have television news and in its place will have television propaganda controlled by your advisers … Building on the idea of creating a civil society I have decided to place the block of ORT shares that I control under the management of journalists and other members of the creative intelligentsia. I feel certain that a similar step by the state, an initiative that you could take, would enable our country’s number one television channel to completely respond to its name – ‘Russian Public Television’. (CDSP, 2000, p. 52, no. 36, pp. 1–3) (On 7 September Berezovsky revealed that the official was the president’s chief of staff, Alexander Voloshin: p. 5.) ‘Mr Berezovsky … controls 49 per cent of the network … ORT is the most watched television channel … The state owns 51 per cent of it’ (IHT, 5 September 2000, p. 4). Boris Berezovsky named ‘creative intellectuals’ Thursday [7 September] to whom he would give control over his … 49 per cent share in ORT … He proposed turning them over in trust for four years to a committee of what he called creative intellectuals. Most of those on Mr Berezovsky’s list worked at ORT or at newspapers he controls, although the list also included an employee of the US-funded Radio Liberty and a novelist. (IHT, 8 September 2000, p. 8; details are to be found in CDSP, 2000, vol. 52, no. 36, p. 4) But this came to nothing and on 5 February 2001 it was announced that Boris Berezovsky had sold his 49 per cent stake in a deal organized by Roman Abramovich. Gazprom took control.

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There are continuing concerns over President Putin’s sensitivity to criticism and his moves to exercise control over the media. Vladimir Gusinsky and Boris Berezovsky are still in the cold politically and out of the country physically. (On 5 November 2002 Russia formally sought the extradition of Boris Berezovsky from Britain. On 28 March 2003 Britain turned down his request for political asylum. On 17 April 2003 Sergei Yushenkov, who had a reputation for honesty, became the second co-chairman of the Liberal Party, originally financed by Boris Berezovsky, to be assassinated. The first to be murdered was Vladimir Golovlyov in August 2002. Berezovsky was expelled from the Liberal Party in October 2002 because he wanted to collaborate with the Communist Party to dent the proPutin vote in the December 2003 general election. Yushenkov was a firm opponent of Putin’s policy in Chechnya. ‘Sergei Yushenkov was the tenth Russian Duma deputy to be murdered since 1994 and the second leader of the Liberal Russia Party to die in a hail of gunfire in less than a year. He had just won the right of his liberal opposition party to take part in Russia’s upcoming parliamentary elections … Russia’s central electoral commission continued – until last Thursday [17 April] – to deny the party the vital recognition needed to participate in the parliamentary elections in December … Yushenkov and a few supporters attempted – and failed – to pass a Duma resolution demanding a full investigation into evidence that the FSB security service might have played a role in the … series of devastating apartment bombs … in the autumn of 1999 … Like all past killings of Duma deputies, Golovlyov’s murder has never been solved’: Independent, 19 April 2003, p. 22.) In April 2001 the prestigious daily newspaper Sevodnia was closed down. In May 2001 Gazprom attempted to gain control of Ekho Moskvy (an independent radio station) and in July succeeded. Critics see Gazprom as a means of indirectly securing state control over those parts of the independent media critical of the president and the government. (‘The sole country-wide independent television channel was taken off the air yesterday [22 June 2003] … The press ministry said it closed TVS, where many reporters worked after two other channels were closed, because it was mired in a financial and management crisis. Journalists said the move threatened objective reporting of politics’: Independent, 23 June 2003, p. 9. ‘Critics allege that the government had unilaterally shut down the remaining outlet for criticism of the Kremlin’: Guardian, 23 June 2003, p. 13. ‘One of Russia’s two main private television stations was taken off air … TVS, whose reporting irritated the Kremlin, was replaced by a sports channel’: FT, 23 June 2003, p. 9. ‘The press ministry closed the last independent television channel, TVS, citing a prolonged financial crisis that left many of its employees unpaid for weeks … Complaining that salacious and dishonest journalism threatened to pervert the democratic process … the State Duma voted overwhelmingly last week to amend Russia’s campaign laws to allow the authorities to shut down news organizations for campaign coverage deemed to be biased … Critics … said the new restrictions would allow the government … to stifle aggressive but critical coverage’: IHT, Monday 23 June 2003, p. 3. ‘TVS was the last independent national network … The

Introduction and overview 71 channel was due to go off the air the very day that the press ministry pulled the plug … The week before parliament passed a law restricting the media’s ability to pass comment on political candidates and parties or their platforms’: The Economist, 28 June 2003, p. 50. ‘On Wednesday [25 June] the upper house passed a bill that banned media from carrying “electoral propaganda”. The vague wording of the bill has media watchdogs worried. They fear it may be used to close any media outlet critical of the Kremlin’: Telegraph, 27 June 2003, p. 15.) ‘The tycoons have reasserted themselves in Russia’s eighty-nine provinces, using their money and clout as major employers to wield effective control over politics in [them]’ (Michael Wines, IHT, 29 May 2003, p. 2). In July 2003 Yukos, which has gained a reputation as a relatively well-run and transparent oil company, began to be targeted by the prosecutor-general’s office. On 2 July Platon Lebedev, the chairman of the board of directors of Menatep (the company that owns about 61 per cent of Yukos) was arrested in connection with the privatization of a fertilizer company in 1994. (Lebedev was later accused of tax evasion in a separate case.) Yukos was subject to a tax investigation, and enquiries about other Yukos people and subsidiaries even involve allegations of murder and assassination attempts. Mikhail Khodorkovsky (who was questioned) is the chief executive officer of Yukos (and its largest shareholder) and critics see the moves against the company as a warning to Khodorkovsky (and oligarchs in general) to stay out of politics. He is generally seen to have political ambitions of his own and, for example, he had begun to donate money to opposition parties like Yabloko and the Union of Rightist Forces. He is thus seen as a threat to Putin. Critics point out that the way privatization has been conducted in Russia means that any number of oligarchs could be potentially be targeted and so the moves against Yukos must be politically driven. In addition, property rights are threatened. Among those concerned about the potential adverse effects on the business climate (including that for foreign investment) was the prime minister, Mikhail Kasyanov. (He is seen as a member of the part of the political elite known as the Yeltsin ‘family’, as opposed to that part comprising ex-security/St Petersburg people appointed by Putin.) The stock market was hit initially and the Yukos–Sibneft merger was delayed by the antitrust commission until 14 August. Forbes magazine lists seventeen billionaires in Russia. Only three nations have more billionaires. Mikhail Khodorkovsky (number one in Russia and twentysixth in the world) is worth over $8 billion; Roman Abramovich (whose interests include Sibneft and Russian Aluminium) is number two in Russia and forty-ninth in the world; he is worth $5.7 billion. Third in Russia is Mikhail Friedman of Tyumen Oil, worth $4.3 billion. Fourth in Russia is Viktor Vekselberg of Tyumen Oil, worth $2.5 billion. Fifth in Russia is Vladimir Potanin of Norilsk Nickel, worth $1.8 billion (The Times, 18 July 2003, p. 18; Independent, 9 July 2003, p. 18). Boris Nemtsov: ‘The Kremlin hates it when the oligarchs try to privatize the Duma. Besides, in a country with seventeen billionaires and 40 million poor, bashing the oligarchs is always a popular occupation, particularly before the [parliamentary] elections in December’ (FT, 28 July 2003, p. 6).

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Putin’s way of thinking in general At first attention was focused on Putin’s statements to discover the drift of the new president’s general way of thinking. But more concrete policies began to emerge: 1

Putin released a policy statement on 28 December 1999: Russia will not soon become, if it will ever become, a second edition, say, of the USA or England, where liberal values have deep historical traditions. A strong state is not an anomaly for Russians, and not something that must be fought against, but on the contrary the source and guarantee of order, the initiator and main engine of any change … [Russia] wants a restoration of a guiding and regulatory role of the state … Our state and its institutions have always played an exceptionally important role in the life of the country and its people … [There is need for] a comprehensive system of state regulation of the economy … [Russians] are not ready to abandon traditional dependence on the state and become self-reliant individuals … Russia has reached its limit of political and socio-economic upheaval, cataclysms and radical reforms … [There will be no resort to] experiments … radicalism … revolutionary extremism … [There is need for a long-term strategy of] market and democratic reforms implemented only by evolutionary, gradual and prudent methods … Everything depends on us, and us alone, on our ability to see the size of the threat, to pool forces and set our minds to hard and lengthy work … [Russia’s decline has been caused by] our mistakes and miscalculations.

2

Putin published an open letter on 25 February 2000: The stronger the state, the freer the individual … [What is needed is] dictatorship of the law … It [the state] must set equal rules and comply with them … The essence of [economic] regulation is not to stifle the market and extend bureaucratic control into new branches – but quite the contrary … Our priority is to protect the market against illegal intervention, both bureaucratic and criminal. (FT, 26 February 2000, p. 5; and 28 February 2000, p. 22; IHT, 3 March 2000, p. 5; Business Central Europe, April 2000, p. 44)

3

A statement was released by Putin on 31 March 2000: The West misunderstands our thesis about a strong Russian state. It interprets it as an increase in the use of force, the law enforcement agencies and the security services. We have something completely different in mind, an effective state. It is a state which does not just stick to the rules of the game but is able to guarantee the same rule for

Introduction and overview 73 everyone … What we are talking about is a strong state where rules are secured by laws and their observation is guaranteed … Strengthening the state and continuing market reforms are the principles on which the work of the government will be based … Pro-market professionals [will be brought into government]. 4

President Putin (his first state of the nation speech given on 8 July 2000): Only a strong … an effective and democratic state can protect civil, political and economic freedoms … The key role the government should play in the economy is, without a doubt, the protection of economic freedom. Our strategic policy is as follows: less administrative bureaucracy and more entrepreneurial freedom – freedom to produce, trade and invest … The government’s task is to co-ordinate the operations of state institutions that ensure the functioning of the market. We won’t achieve stable development without genuinely independent courts and an effective system of law-enforcement agencies … It won’t be possible in the immediate future for the state to cease its involvement in the development of some sectors of our economy … such as the defence-industry complex. The state will continue to keep strategically important branches of the economy under its constant attention … Protection of ownership rights must be ensured … A second area is ensuring equal conditions for competition … A third area is freeing entrepreneurs from administrative oppression … A fourth area is reducing the tax burden … The customs system must be radically simplified and the duties on goods must be made uniform … The fifth area is the development of the financial infrastructure … The sixth area is a realistic social-welfare policy … We are insisting on one kind of dictatorship – dictatorship of the law. (CDSP, 2000, vol. 52, no. 28, p. 6)

5

6

On 1 July 2002 a new Criminal Procedural Code began to be introduced. The aim was to phase in a Western-type system to replace the generally inefficient and corrupt one based on the 1960 code. For example, an adversarial process is established, anyone accused of a crime must now appear in court within forty-eight hours and jury trials (experimented with in nine of the eighty-nine regions since 1994) would eventually be required for all serious crimes. In June 2000 the government adopted a decidedly market-orientated economic reform programme. Comprising both short-term and long-term elements, the programme was drawn up by the Centre for Strategic Studies under its head (and subsequently minister of economic development and trade) German Gref. Putin has stressed the need to preserve the cohesion of the federation and to revise past generous treaties with members. For example, on 22 March 2000 he said:

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Introduction and overview Experience has shown that at the time that treaty [with Tatarstan] was the right solution, and maybe even the only viable one … [But] the constitution stipulates that all Federation members are equal … [and] Tatarstan … understands that … [We have to] bring everything in conformity with the constitution. (CDSP, 2000, vol. 52, no. 12, p. 3) ‘ Russia was founded as a super-centralized state from the very start. This is inherent in its genetic code, traditions and people’s mentality,’ Mr Putin said before the presidential elections. (FT, Survey, 10 May 2000, p. v).

On 13 May 2000 President Putin issued a decree organizing Russia into seven administrative districts, each to be overseen by a presidential representative. ‘[The decree says that its aims are] to facilitate the Russian Federation president’s exercise of his constitutional powers, increase the effectiveness of federal bodies of state power and improve the system for monitoring compliance with their decisions’ (CDSP, 2000, vol. 52, no. 20, p. 1). ‘[Existing] envoys rely on local leaders for housing, favours and even jobs for family members’ (Michael Wines, IHT, 15 May 2000, p. 7). ‘Under Mr Yeltsin both the envoys and many federal agencies became willing captives of the governors, who supplied the favours the Kremlin could or would not provide’ (Michael Wines, IHT, 22 May 2000, p. 7). (‘Five of the seven “super governors” are military, police or security service officers … Sergei Kiriyenko … [is the president’s representative] in the Volga region … That left Leonid Drachevsky as the only civilian besides Mr Kiriyenko’: Independent, 20 May 2000, p. 16. ‘Mr Putin has tapped the military and security services for five of the seven super-administrators’: IHT, 20 May 2000, p. 1. On 11 March 1993 Viktor Cherkesov was replaced as the president’s representative to the north-west district by Valentina Matvienko, the minister for social affairs. Cherkesov was appointed head of a new narcotics committee.) Doubts have been cast as to the effectiveness of the presidential representatives. It was clear that the decree was intended to create the basis for a much broader recentralization of power. A few days later Putin addressed the nation on the subject and the Kremlin submitted four bills to the State Duma … The authority leakage of the 1990s was largely a consequence of the Kremlin’s weakness – of Boris Yeltsin’s unpopularity and his need for regional support in battles with parliament. The situation is now reversed … His successor is now acting with the Duma to bring the regions to heel. (Tompson 2000a: 14–16) ‘Regional bosses in particular have proved remarkably resilient in the face of his [Putin’s] drive to reconstruct the so-called “vertical of power”. Only limited headway has been made in reversing the regionalization of politics’ (William Tompson, The World Today, 2003, vol. 59, no. 6, p. 16).

Introduction and overview 75 On 17 May 2000 President Vladimir Putin proposed to revise the composition of the Council of the Federation. Putin (in a television address): The bills being submitted to the Duma continue the line that was begun by my 13 May decree establishing federal districts. This line is aimed at strengthening the unity of the state … First is a proposal to change the principles for forming the Federation Council … [which] is made up of representatives of the executive and legislative branches of government. But the constitution does not say that these representatives necessarily have to be the top officials of a region – the governors, republic presidents and heads of regional governments. Yet that is precisely how things are today. I believe that regional leaders should focus their energy on the specific problems of their own regions … And they should have representatives who engage in lawmaking, but on a regular and professional basis, not once a month, the way things are now … The second significant proposal involves introducing procedures for removing regional leaders from office and dissolving legislative assemblies that adopt acts that conflict with federal laws … The third proposal … [is that] if, under certain conditions, the head of a region can be removed by the country’s president, then the regional leader should have a similar right with respect to lower-ranking authorities. (CDSP, 2000, vol. 52, no. 20, p. 5) The Kremlin submitted four bills to the State Duma. The first would change the mechanism for forming the Federation Council. The constitution says only that each member of the federation has two representatives, one each from its executive and legislative branches. An ordinary federal law has made the chamber an assembly of governors and speakers of regional legislatures … The law before the Duma would require the regions to appoint individuals to represent the executive and legislature in the council. This would reduce the governors’ power and status – and deprive them of parliamentary immunity … The second bill would empower the president to ask the supreme court to remove a governor guilty of two or more violations of federal law or the constitution. He would be able to ask the State Duma to dissolve the legislature of a federation member on the same grounds … The bill would allow him to suspend those under investigation for legal violations even without the supreme court’s approval. Governors suspended by the president or removed by the court would be replaced by ‘temporary’ presidential appointees … A third bill would extend similar powers to the governors over the municipal and other lower-level authorities … The president would be given analogous powers over sub-regional governments … The new federal districts, not coincidentally, correspond with the country’s major military districts. (Tompson 2000a: 14–15)

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‘Mr Putin unexpectedly went on nationwide television Wednesday evening [17 May] to announce that and other initiatives he said were aimed at “strengthening and cementing Russian statehood” ’ (IHT, 18 May 2000, p. 5). ‘On Wednesday he proposed to evict all eighty-nine governors and the leaders of their legislators from their guaranteed seats in the Federation Council’ (IHT, 22 May 2000, p. 7). Mr Putin’s plan would remove the governors and other regional leaders from the Federation Council and replace them with regional representatives of lesser prestige and power. Half would be chosen by the regional parliaments and half would be chosen by the governor or regional executive. The governors would lose their immunity from prosecution as well as their parliamentary seats. (IHT, 24 June 2000, p. 2) ‘Right now governors and chairmen of province legislative assemblies automatically become deputies to the upper house of parliament. The president has proposed that instead the governors and province deputies choose the senators … The governors would lose their deputy’s immunity’ (CDSP, 2000, vol. 52, no. 20, p. 6). [On 23 June 2000] the State Duma passed the bill on new procedures for forming the Federation Council on second and third (final) readings. The governors suffered defeat in almost all key areas; the deputies rejected the majority of their amendments … Regional leaders will have to clear their protégés [i.e. their nominees for executive branch representative in the Federation Council] with their regional legislatures (a procedure similar to the State Duma’s confirmation of the prime minister). The second senator from a region will be elected by the local legislators on the basis of a nomination by the chairman of the house. In addition, an alternative senate candidate may be nominated by one-third of the deputies to a legislative assembly or province Duma … Under the law the election of all members of the Federation Council must be completed by 1 February 2001. (CDSP, 2000, vol. 52, no. 6, p. 1) Even the Council of the Federation eventually passed the bills. The vote on 26 July 2000 was 119 votes to eighteen. President Vladimir Putin said Thursday [31 August 2000] that he would include regional officials in a new council [the ‘state council’] as consolation for losing their seats in the Federation Council … but stressed that it would only be an advisory body … saying: ‘Today these powers can only be consultative. What will happen in the future we will think over and decide with regional leaders’. (IHT, 1 September 2000, p. 7)

Introduction and overview 77 President Vladimir Putin inaugurated Russia’s new ‘state council’ on Wednesday [22 November] and warned the long-powerful regional bosses who sit on the advisory body not to challenge the authority of his government … Mr Putin created the council on 1 September … The council has eighty-nine members plus the president … [Putin]: ‘The state council can set the direction of the country, but it must not replace parliament or the government … The most important part of our joint work is reinforcing the chain of command. That means control from the federal centre and effective feedback’ … Political analysts say the new ‘state council’ is a toothless body whose main role is to reconcile regional chiefs to their loss of influence by giving the appearance of having the president’s ear four times a year. (IHT, 23 November 2000, p. 2) President Putin signs [on 4 September 2000] a decree on the establishment of the new ‘state council’. The council will include governors and leaders of the regions and will be headed by the president. The council will include governors and leaders of the regions and will be headed by the president. The presidium of the council will consist of the governors of the seven new federal areas and will be renewed every six months. (RET, 2000, vol. 9, no. 3, p. 77) The presidium of the ‘state council’ opens [on 29 September] … [and] will be formed in accordance with the rotation principle … Putin stresses that the best option in current circumstances is for the ‘state council’ to act as a consultative body. (p. 81) In June 2001 a commission was set up to look at the delimitation of power between the federal, regional and local levels. Local elections have generally been supportive of President Putin. In November 2000 Bashkortostan introduced a new constitution, one in line with federal laws. Putin used the severe energy crisis in the Far East to help secure the resignation of Yevgeni Nazdratenko, governor of the Maritime region, in February 2001 (although the latter was first given the post of chairman of the state fisheries commission and then, on 1 May 2003, he was appointed deputy head of the state ‘security council’). The constitutional court … issued a ruling whereby October 1999 will be considered the starting point of governors’ first terms … From now on, in those Federation members whose parliaments could serve as of the date of the adoption of the 19 October 1999 law … the legislative assemblies will be free to decide for themselves whether an incumbent governor may or may not be elected to a third term … In other Federation members … if the next election is held before October 2003 the regional leader may be elected to two more terms; if it is held later than that he may have one more term.

78

Introduction and overview Consequently, almost all of the heavyweight governors will potentially be able to keep their jobs until 2008, and some until 2010 or 2011 … This is compensation for the ‘persecution’ that the governors have been and will continue to be subjected to: they were forced to accept cuts in the share of taxes earmarked for Federation members’ budgets; they were deprived of road funds; they are about to lose the sales tax; and they have lost their lobbying platform in the form of membership of the Federation Council … The constitutional court’s decision is an enormous success for such regional leaders as [Sverdlovsk province governor Eduard] Rossel, [Tatarstan’s President Mintimir] Shaimiev and [Moscow mayor Yuri] Luzhkov … Altogether there are ten people who have been running their regions for ten years or more. At present only five regional leaders have been re-elected to third terms: Shaimiev; [Valeri] Kokov [Kabardino-Balkaria], [Yegor] Stroyev [Orel province], [Sherig-ool] Oorzhak [Tuva] and Nikolai Fyodorov, the head of Chuvashia … They can [now] run for election one more time. (Izvestia, 10 July 2002, pp. 1–2: CDSP, 2002, vol. 54, no. 28, pp. 9–10)

On 11 March 2003 the FSB (the federal security service, the domestic intelligence agency), which had been weakened in the Yeltsin era, was buoyed up with some of the duties of the dismantled federal agency for government communications and information (whose remaining functions were being allocated to the defence ministry). The FSB also gained the federal border service. These changes were made by presidential decree. Putin’s ideas about the economy President Vladimir Putin stresses economic growth as a fundamental aspect of enhancing Russia’s general standing in the world. This stress is an important factor in explaining his foreign policy. (There was, for example, friction with the United States over Russia’s trade links with Saddam Hussein’s Iraq. Friction over Iran continues.) In his 3 April 2001 state of the nation speech President Putin emphasized the need for economic and legal reforms. It seemed as though he had been concentrating more on accumulating power than implementing such reforms. But notable economic reforms have now been enacted, including tax reform, legislation relating to the sale of non-agricultural land (approved by the State Duma in September 2001) and the Land Code relating to the sale of agricultural land (approved by the State Duma in June 2002). President Putin has set Russia firmly on the path of economic reform in the context of a much more stable political environment and a more law-based society. Relations with the West dramatically improved after the 11 September 2001 terrorist attacks on the United States and Putin, in his domestic pronouncements, has used the opportunity to continually stress the need to improve the living conditions of ordinary Russians. In his 18 April 2002 state of the nation speech President Putin stressed the need for higher rates of economic growth and attacked the bureaucracy: ‘Our

Introduction and overview 79 country’s tremendous capabilities are stymied by an unwieldy, sluggish and inefficient government bureaucracy … The way the operation of the government is currently organized breeds corruption’ (CDSP, 2002, vol. 54, no. 16, pp. 1–6). In his 16 May 2003 state of the nation speech President Putin said: Our economic foundation, although it has become noticeably stronger, is still shaky and very weak … The state apparatus is still inefficient and most sectors of the economy are uncompetitive … In the next ten years we need to at least double our GDP. (IHT, 17 May 2003, pp. 1, 4; FT, 17 May 2003, p. 6; CDSP, 2003, vol. 55, no. 20, pp. 1–4) On 29 May 2002 the EU said it would recognize Russia as a market economy by the autumn of that year. The United States gave recognition on 6 June. On 27 June 2002 Russia became a full member of the G8 countries. The 1999 general election and party consolidation President Putin has a far smoother relationship with the State Duma, as a result of the general election of 19 December 1999, than Yeltsin ever did. Half of the 450 seats in the State Duma were allotted on the basis of party lists. The other members were directly elected from 225 constituencies (although there was no constituency election in Chechnya because of the war there). Six (out of twentysix) parties won enough seats in the party list section to enter the State Duma. The percentage of the vote and the number of seats won (225 in total) were as follows: 1 2 3 4 5 6

Russian Federation Communist Party (led by Gennadi Zyuganov), 24.29 per cent and sixty-seven. Unity, 23.32 per cent and sixty-four. Fatherland–All Russia, 13.33 per cent and thirty-seven. Union of Rightist Forces, 8.52 per cent and twenty-four. Zhirinovsky’s Bloc, 5.98 per cent and seventeen. Yabloko, 5.93 per cent and sixteen.

A total of 441 deputies were elected to the Duma, 225 from federal party lists and 216 in single-seat districts (CDSP, 1999, vol. 51, no. 52, pp. 5–6: results as of 29 December 1999). The distribution of the 216 deputies in single-member districts was as follows: Russian Federation Communist Party, forty-seven; Unity, nine; Fatherland–All Russia, twenty-nine; Union of Rightist Forces, five; Zhirinovsky’s Bloc, zero; Yabloko, four; other parties, seventeen; independents, 105. A second round of voting was scheduled for the eight single-member district seats where the majority of the electorate voted against all the candidates on the ballot paper. Elections were not held in Chechnya, the ninth vacant seat (Sakwa 2000: 101).

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Although the Communist Party remained the largest single party in the State Duma, there was a dramatic ‘last-minute’ increase in support for Unity and the Union of Rightist Forces: 1

The Unity governors’ bloc, headed by emergency situations minister Sergei Shoigu, was formed on 24 September 1999. ‘The new association is clearly the Kremlin’s final attempt to get a “party of power” of its own into the running’ (CDSP, 1999, vol. 51, no. 39, p. 13). ‘It was created only three months ago and has not even published a party programme’ (FT, 17 December 1999, p. 20). ‘Unity is three months old and has no political programme or regional infrastructure’ (Guardian, 18 December 1999, p. 15). Prime minister Putin endorsed Unity in late November 1999 (IHT, 22 December 1999, p. 6). Boris Berezovsky, who was instrumental in helping to set up Unity, won a seat in Karachayevo-Cherkessia in the north Caucasus (thus gaining immunity from prosecution). The surprise winners of the election were two parties [Unity and the Union of Rightist Forces] … that emerged out of the political wilderness in the last few months, boosted by their backing of a popular war in Chechnya and supported by a ferocious propaganda campaign waged by the Kremlin and its allies. (Celestine Bohlen, IHT, 21 December 1999, p. 1) The big victor from the poll was undoubtedly Vladimir Putin, the prime minister, whose ruthless prosecution of the war in Chechnya has won him a dramatic rise in popularity. The bloc he invented, known as Unity, has emerged with almost as many votes as the Communist Party, despite having no policy platform, and no regional organization. It is simply the Kremlin’s party. (FT, editorial, 21 December 1999, p. 18)

2

The Union of Rightist Forces was formed on 24 August 1999. It is led by Sergei Kiriyenko (New Force), Boris Nemtsov (Young Russia) and Irina Khakmada (Common Cause). (Voice of Russia, headed by Samara province governor Konstantin Titov, agreed to form a bloc with it.) Other important figures include Yegor Gaidar and Anatoli Chubais. (‘Mr Putin … said last week that he could agree with parts of the economic platform of the rightist party. Leaders of the Right Forces, who publicly have supported the prime minister’s tough conduct of the Chechnya war despite the misgivings of some of their backers, have returned the compliment by endorsing Mr Putin for president’: IHT, Tuesday 21 December 1999, p. 1.) Both Unity and the Union of Rightist Forces were overtly supported by prime minister Vladimir Putin, himself experiencing a rapid rise from obscurity to widespread popularity as a result of what was generally perceived to be a justified and successful prosecution of the war in

Introduction and overview 81 Chechnya. He was widely perceived to be exercising strong leadership and restoring national pride. The prospering of Unity and the Union of Rightist Forces mirrored the decline in the fortunes of Fatherland–All Russia. Mr Putin and his Kremlin allies showed great skill in destroying political opponents … [Fatherland–All Russia] was widely expected just four months ago to lead at the polls. Under withering attack it won only third place … The Kremlin used its control of the two leading television stations to smear Mr Luzhkov and his allies relentlessly with charges of corruption and murder, based on half-truths and outright fabrications. The government’s tax authorities harassed media outlets which refused to hew the line. To be sure, Mr Luzhkov responded in kind, but it was an unfair battle. His media and financial resources pale compared with the Kremlin’s. (Thomas Graham, IHT, 22 December 1999, p. 6) ‘In the campaign both Mr Luzhkov and Mr Primakov were pummelled by a steady stream of negative, sometimes vicious, broadcasts on national television channels controlled by the Kremlin and its allies’ (IHT, 21 December 1999, p. 1). ‘The media was strongly opposed to the Fatherland–All Russia alliance’ (FT, 21 December 1999, p. 18). ‘The first and second television channels unashamedly favoured the Kremlin’ (Independent, 21 December 1999, p. 10). (The Fatherland–All Russia bloc is led by Yevgeni Primakov and Yuri Luzhkov. ‘A left-of-centre party is now coalescing around the Our Fatherland is All Russia bloc founded by Yuri Luzhkov, Moscow’s mayor, and several regional governors’: FT, 13 August 1999, p. 2. ‘Mintimir Shaimiev [president of Tatarstan] leads the regional governors allied to Mr Luzhkov’: The Economist, 14 August 1999, p. 14.) Ironically, the war in Chechnya hardly registered as a debating point during the election, although Yabloko suffered from Grigori Yavlinsky’s call on 9 November 1999 for peace talks and a halt to the massive offensive, albeit subject to strict conditions. (Sergei Stepashin joined forces with Yabloko on 24 August 1999.) Economic issues were also sidelined by war in Chechnya. ‘The great issues facing Russia – in particular how to extricate the country from its prolonged socio-economic depression – were not even debated’ (Thomas Graham, IHT, 22 December 1999, p. 6). But the war was not the only factor accounting for the muting of economic issues. The economy had returned to positive growth much more quickly than generally predicted after the crisis of August 1998, helped by the huge depreciation of the rouble (which improved the competitiveness of Russian products) and the marked increase in world oil prices. In addition, there had been a narrowing of views on economic policy. ‘A study of the economic programmes of the main parties, conducted by the Carnegie Moscow Centre, found that there had been a notable convergence of thinking about the main economic challenges facing Russia and how to address them’ (FT, 17 December 1999, p. 20).

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‘International observers assessed the electoral campaign positively, while noting that state-run television had proved “very biased” … Their biggest criticism was reserved for the Russian media’ (FT, 21 December 1999, pp. 1, 6). Party consolidation has been taking place. On 12 April 2001 Unity and Fatherland–All Russia announced that they were to merge in November of that year. Other parties announced they would like to join the new party. In May 2001 the Union of Rightist Forces party was formed, to be led by Boris Nemtsov. The combining parties concerned included Nemtsov’s Young Russia, Yegor Gaidar’s Russia’s Democratic Choice and Sergei Kiriyenko’s New Force. In June 2001 a bill was approved by the State Duma aimed at reducing the number of political parties. Among other criticisms was the claim that it would be difficult to form regional parties. On 29 June 2001 the Council of the Federation approved the bill. Parliamentary elections in December 2003 and presidential elections in March 2004 [In Moscow] on May Day [1 May] thousands gathered to hear a leading figure of the Kremlin’s wholly owned-and-operated political party, United Russia, denounce President Vladimir Putin’s government as a tool of business moguls and its economic and social policies as ‘a disgrace’ … The mayor of Moscow, Yuri Luzhkov, a founder of one United Russia faction, charged that the government had ignored the economy but was ‘serving the oligarchs’, a tiny and widely detested coterie of billionaire industrialists With crucial parliamentary elections in December [2003] signs are emerging that the Kremlin’s handpicked party is in trouble … Putin’s overwhelming popularity – roughly three-quarters of Russians approve of him – shows no signs of ebbing. But in opinion polls this spring [2003] United Russia has taken a beating, with its approval rating falling from nearly 30 per cent last summer [2002] to the low twenties. The Communist Party meanwhile has racked up small gains, generally matching or beating United Russia’s rating. Its strategists insist that the party is gaining support among the young and among intellectuals who have been the mainstays of Putin’s free-market, generally pro-Western policies … Today United Russia is the dominant party in the powerful lower house of parliament, with 152 of its 450 seats. The Communists have eighty-two. (Michael Wines, IHT, 3 May 2003, p. 4) The second congress of United Russia opened on 29 March 2003. The chairman of the party’s supreme council, Russian minister of internal affairs Boris Gryzlov, began his report to the congress with praise for the president … The minister followed Putin’s behest to ‘separate the flies from the cutlets’ – in this case the government from the president … There is nothing sensational about the minister’s statement, and everyone has long

Introduction and overview 83 been aware of United Russia’s main gripes against the government: rising electricity rates, low pay for employees in the budget-funded sectors, and problems in agriculture. Moreover, Putin himself authorized criticism of the cabinet of ministers during his recent meeting with United Russia’s leaders. ‘You spotted the weakness of certain of the government’s proposals and intervened in time,’ the president told party leaders two days before the congress. Gryzlov unexpectedly took a swipe at the oligarchs as well. ‘Under our constitution the party that wins an election does not form the government. Because government in our country is not party-based, influence groups linked with big capital have acquired an excessive role, appropriating political functions for themselves. But we need parties that function like corporations, not corporations that act like parties.’ The topic of party affiliation for Category A government officials is a major sore point for United Russia. A bill permitting government ministers to hold executive positions in political parties has been floating around the Duma for a long time, but so far it has failed to win the 300 votes needed to pass a constitutional law. So Gryzlov and other United Russia bigwigs are having to go all this time without party membership cards. (Vemya Novostei, 31 March 2003, p. 1; CDSP, 2003, vol. 55, no. 13, p. 10) President Putin (state of the nation speech given on 16 May 2003): Based on the results of the upcoming elections to the State Duma, I believe it will be possible to create a professional and efficient government that will have the support of a parliamentary majority … [There is need to] strengthen the role of parties in public life, based on the outcome of the upcoming elections to the State Duma. (IHT, 17 May 2003, pp. 1, 4; FT, 17 May 2003, p. 6; CDSP, 2003, vol. 55, no. 20, pp. 1–4) Military and foreign affairs The Russian armed forces are still in generally pretty poor shape and yet more painful decisions have to be taken about their size and configuration. The loss of the nuclear-powered submarine Kursk and its entire crew of 118 on 12 August 2000 and the bungled domestic rescue attempt seemed to epitomise the state of the armed forces. (In February 2002 it was admitted that the Kursk sinking was not caused by a collision with a foreign vessel or with a Second World War mine. ‘[On 19 June 2002] Ilya Klebanov, the trade, science and technology minister, chairman of an official investigation into the disaster … said … “There remains only one version … a torpedo blast. The commission discounted a collision and a mine” ’: Independent, 20 June 2002, p. 11. ‘The final report … said Monday [1 July] that a torpedo fuel leak caused the explosion … Ilya Klebanov said the Kursk was destroyed after a second explosion set off parts of the armaments stored in the first compartment’: IHT, 2 July 2002, p. 4. ‘Ilya Klebanov … said

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that investigators had made their findings after key elements from the torpedo bay were raised from the bottom of the Barents Sea last month [June]. “A thermal explosion of the class 298A PV torpedo caused the disaster. It happened as the result of a leak of hydrogen peroxide and the ignition of materials in the torpedo tube” … he said’: FT, 2 July 2002, p. 7. In August 2002 there were revelations about general negligence contributing to the sinking. In September 2002 the Russian navy began to blow up the front section of the vessel, the rest having been earlier raised from the seabed.) The loss of the Kursk did not do Putin’s reputation for decisiveness any good, either (a tarnishing that was enhanced by Putin’s belated recognition of Vojislav Kostunica’s win over Slobodan Milosevic in the first round of the 24 September 2000 presidential election in Yugoslavia). But this proved to be only a blip and Putin’s popularity at home has remained remarkably high, despite the continuing loss of life in the second Chechen war. Performance in the first Chechen war was disastrous. But a much improved military performance in the second one is still turning out to be costly in human terms as the promised early end to the conflict proved to be predictably false, Chechen fighters adopting guerrilla tactics and suicide bombings. Coupled with the rush to expand Nato eastwards, the decline of conventional military capacity has driven Russia into increasing dependence on nuclear weapons. A new national security doctrine was decreed on 10 January 2000 by the then acting president Vladimir Putin. In December 1997 Yeltsin’s strategy declared that nuclear weapons would only be used ‘in the case of a threat to the very existence of the Russian Federation as a sovereign state’. The new doctrine states: The Russian Federation considers it possible to use military force to guarantee its national security according to the following principles: the use of all forces and equipment at its disposal, including nuclear weapons, in case of the need to repel armed aggression if all other means of resolving the crisis have been exhausted or proved ineffective. The general election of December 1999 and the presidential election of March 2000 proved to be a catalyst in security matters. The State Duma ratified the Start 2 treaty on 14 April 2000. The ratification was conditional, e.g. on the USA not withdrawing from or violating the 26 May 1972 Anti-Ballistic Missile Treaty. In this regard, Russia rejected the US proposal to set up a national missile defence (NMD) system, a missile shield to defend the whole of US territory against a small number of strategic (intercontinental) nuclear missiles from what are now called ‘states of concern’ (formerly ‘rogue states’) such as North Korea, Iran and Iraq. Russia suggested collaboration with Europe and the USA to jointly develop a programme using theatre anti-missile systems allowed under the 1972 ABM treaty to shoot down missiles just after launching (in the so-called ‘boost phase’). The USA says that this system would be too slow in setting up and would involve US anti-missile systems outside US territory. President Clinton left the question about deployment

Introduction and overview 85 of the NMD to his successor. President George W. Bush (whose term of office began on 20 January 2001) is a staunch advocate of the NMD system. In March 2001 there was a substantial USA–Russia tit-for-tat expulsion of diplomats for alleged spying. The State Duma ratified the Comprehensive Test Ban Treaty on 21 April 2000. Also on 21 April 2000 the ‘security council’ approved a new security doctrine. In May 2001 the Russian Academy of Sciences issued instructions requiring its scientists to report any contacts with foreigners. In June 2001 the State Duma approved a plan to import spent nuclear fuels. On 16 July 2001 the Good Neighbourly Treaty of Friendship and Co-operation was signed with China. Very little of the border remains in dispute (e.g. some islands in the Amur river). On 13 December 2001 President Bush announced that the USA had given the required six months’ notice of withdrawal from the ABM Treaty. President Putin thought this a ‘mistake’ but did not make a fuss. The United States and Russia said Monday [13 May 2002] that they had agreed to slash their strategic nuclear weapons stockpiles by roughly twothirds and would sign a binding agreement when President George W. Bush visits Russia on 24 May [the visit beginning on 23 May] … The deal … essentially codifies nuclear weapons reductions that the Pentagon had already decided to make and that Russia could not afford in any case to put off … Each side [will be allowed] to ‘warehouse’ some of their decommissioned nuclear arms and launchers rather than dismantle them … The new accord … calls for both sides to reduce their arsenals of active nuclear warheads by 2012 from their current levels of about 6,000 to between 1,700 and 2,200 … The two sides will verify that the reductions are taking place … The treaty would allow each side flexibility in deciding how it would lower its strategic nuclear arsenal to meet new ceilings … The reductions [are] in the form of a treaty, which requires the approval of two-thirds of the [US] Senate. (IHT, 14 May 2002, p. 1) At that point [2012] the treaty is set to expire, leaving each side free to have as many weapons as it would like unless the accord is extended … Each side can withdraw on three months’ notice … The Russians will be free to employ new land-based missiles with multiple warheads, such as the three-warhead version of the SS-27, and to keep old ones like the SS-18. (IHT, 15 May 2002, p. 5) ‘Either side can give only ninety days’ (instead of six months’) notice of withdrawal’ (The Economist, 18 May 2002, p. 53).

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The agreement concerns the 7,295 warheads that the United States has and the 6,094 that Russia has. Under the terms of the treaty both sides will be allowed to reduce their nuclear arsenals on their own terms … suggesting that each side had the flexibility to keep the majority of the 4,000 warheads to be taken off its weapons in storage … That freedom gives both sides latitude to hold warheads in reserve and continue producing nuclear weapons … A US official said some weapons would be placed in deep storage and some would be stored as ‘operational spares’ and the Pentagon was working on the numbers … A new bilateral commission will be established to ensure a transparent inspection process, including on-site inspections … The treaty would cover only the countries’ strategic nuclear arsenals – those capable of striking the other’s territory. It ignores an estimated 8,400 tactical nuclear weapons that the Russians are estimated to have that they could use in the battlefield … The Centre for Strategic and International Studies … [estimates] that both countries have an inventory of close to 31,000 warheads between them, though those in day-to-day deployment may only amount to 2,000 to 3,000. (FT, 14 May 2002, pp. 1, 8) ‘Mr Bush was originally seeking … [an] informal oral agreement … In this way he would have circumvented ratification by the Senate’ (Independent, 14 May 2002, p. 2). The treaty, called the Treaty of Moscow (Treaty on the Reduction of Strategic Offensive Potentials), was signed in Moscow by Presidents Putin and Bush on 24 May 2002. (It was ratified by the US Senate in March 2003 and by the State Duma on 14 May 2003.) The two presidents issued a joint declaration, which included co-operation in areas such as security, counter-terrorism and energy. On 14 May 2002 the foreign ministers of Nato countries and Russia agreed to form the new Russia–Nato Council to replace the Nato–Russia Permanent Joint Council (set up in 1997). The agreement was signed on 28 May by President Putin and Nato heads of government. Russia will for the first time become an equal partner at the table for joint discussions and actions on a range of issues – including non-proliferation, military co-operation and civil emergency planning, and other topics as agreed to in the future by the nineteen [Nato] member nations. But those nineteen nations … will preserve full control over membership in the alliance and core military decisions and use of allied troops … The two-day meeting [14–15] also continued Nato’s review of requests for new membership from nine nations in Eastern Europe, and added a tenth applicant, Croatia, to the list. Foreign ministers repeatedly declined to signal which candidates were favoured for membership, but in their final communiqué

Introduction and overview 87 agreed that nations invited to join the alliance at a planned meeting in Prague this fall should all come in at once. (IHT, 15 May 2002, p. 1) ‘Up to seven of these [ten East European states] are expected to receive an invitation to join the nineteen allies when Nato holds its next summit meeting in Prague in November’ (IHT, 16 May 2002, p. 8). The declaration [by foreign ministers] covers nine policy areas for joint decision-making: counter-terrorism, crisis management (which includes peacekeeping), non-proliferation, arms control, theatre missile defence, search and rescue at sea, military-to-military co-operation and defence reform, civil emergencies and new threats and challenges. (The Times, 15 May 2002, p. 16) ‘The agreement leaves Nato’s core functions of mutual defence, military action and membership issues untouched. Full Nato members also reserved the right to withdraw from decision-taking by the Nato–Russian council should things go awry’ (Guardian, 15 May 2002, p. 1). ‘Any member can take an issue off the Nato–Russia agenda at any time, for any reason’ (IHT, 30 May 2002, p. 6). Thus arrangements have been made to discuss common security matters. But Russia has no veto on Nato decisions and vice versa. One day after the United States formally abandoned the 1972 Anti-Ballistic Missile Treaty [on 13 June 2002], Russia… [said that] it was no longer bound by the 1993 Start 2 accord that outlawed multiple-warhead missiles and other especially destabilizing weapons … The US Congress did not approve Start 2 until 1996 and refused a protocol that would have extended its implementation deadline. Russia’s parliament approved the treaty and the new deadline in 2000, but only on condition that the United States did not abandon the anti-ballistic missile accord. (IHT, 15 June 2002, p. 5) President George W. Bush visited Russia on 22 November 2002, the day after Nato had formally invited seven more countries to join as full members in May 2004. The seven were the Baltic States of Estonia, Latvia and Lithuania, Bulgaria, Romania, Slovakia and Slovenia. President George W. Bush said Tuesday [17 December 2002] that he would begin deploying a limited system to defend the United States against ballistic missiles [the initial part of the so-called Missile Defence System] … The plan calls for ten ground-based interceptor missiles at Fort Greely, Alaska, by 2004 and an additional ten interceptors by 2005 or 2006 … Bush said the ‘initial capabilities’ would also include sea-based interceptors and sensors

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Introduction and overview based on land, at sea and in space … Bush’s announcement came six days after the latest test of the system failed when an interceptor rocket did not separate from its booster rocket and destroy a Minuteman-2 intercontinental missile as planned. Three of eight tests [since 1999] of the interceptors have been judged failures by the military. (IHT, 18 December 2002, p. 1) The Russian foreign ministry issued a statement the following day: Moscow with regret follows the activation of the attempt by the United States to create a so-called ‘global anti-missile defence’. Now, after taking a political decision to deploy in 2004 several strategic interceptors with support from space, the realization of these plans has entered a new destabilizing phase … Consigning its principles to oblivion can lead only to the weakening of strategic stability, a new senseless arms race in the world, including the spread of weapons of mass destruction, and diverting resources to counter today’s real challenges and threats, above all, international terrorism. (IHT, 19 December 2002, p. 5)

Relations between Russia and the USA after 11 September 2001 President Vladimir Putin and President George W. Bush (inaugurated in January 2001) first met on 16 June 2001. Even before 11 September 2001 President Putin seemed to get on well personally with President George W. Bush. But the terrorist attacks on the World Trade Center in New York and on the Pentagon in Washington on 11 September 2001 proved to be something of a watershed in relations between Russia and the USA. President Putin immediately condemned the attacks and was actually the first international leader to telephone President Bush. Problems such as national missile defence and Nato expansion (which included the Baltic States of Estonia, Latvia and Lithuania at the November 2002 Nato meeting in Prague) have been sorted out more amicably than generally anticipated. Putin is aware of the overwhelming economic and military power of the United States and the determination of the Bush administration to use it. Putin is popular enough at home to combat resistance to his US policy emanating from domestic sources such as elements of the military. But Putin’s stress on factors helping the Russian economy causes friction with the United States. Russia’s trade links with Saddam Hussein’s Iraq have already been mentioned and Russian help with Iran’s nuclear power plant programme is a cause of particular concern to the United States. The USA took the war on international terrorism to Afghanistan. Bombing started on 7 October 2001 and on 19 October US special forces began the ground phase of the war in Afghanistan. The USA considered the Taleban regime to be harbouring terrorists, notably the Moslem fundamentalist Osama bin Laden and his al-Qaeda (‘the base’) forces. The combination of US bombing and the ground attacks of anti-Taleban forces, especially the Northern Alliance,

Introduction and overview 89 was successful in a surprisingly rapid fashion. The Taleban regime was essentially beaten by November 2001 and a new temporary Afghan government of national unity was in place by December 2001. US–Russian relations essentially entered a new phase after 11 September. Russia offered to share information, use of airspace for humanitarian purposes and help in search and rescue operations. Russia already supported the Northern Alliance. In November 2001 a team was sent to Kabul from the ministry of emergency situations. The use by US forces of facilities in the Central Asian republics did not harm relations between the United States and Russia. Forms of assistance to the United States included the following: 1

2 3 4 5 6

Uzbekistan was the first to offer assistance. The USA was allowed to use air bases for military attacks against the Taleban regime and the al-Qaeda terrorist network in Afghanistan. Tajikistan offered the use of airspace and bases for military operations. Kazakhstan offered airspace and bases for military activity. Kyrgyzstan offered airspace and bases for military activity. Turkmenistan was the Central Asian state which did least to help the United States as regards Afghanistan. Ukraine, Azerbaijan, Georgia and Ukraine offered the use of airspace.

(For details, see the entry for 11 September 2001 in the chapter on Tajikistan in the companion to this volume, The Caucasus and Central Asian Republics at the Turn of the Twenty-first Century: A Guide to the Economies in Transition.) (‘A summit [held on 7 October 2002] transformed the CIS collective security system into the Collective Security Treaty Organization (CSTO), consisting of Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan. The accords are aimed at establishing a mechanism for mandatory consultations in the event that any CSTO member country intends to allow a third party that is not a member of the organization to have a military presence on its territory’: CDSP, 2002, vol. 54, no. 41, p. 14.) The US-led war in Iraq in 2003 The United States started its attack on Iraq on 20 March 2003, aided principally by British troops, without submitting a second resolution to the UN Security Council (thus saving Russia from having to make a formal decision about whether to use its threatened veto). Australia and Poland also sent troops into action. (‘Poland has sent fifty-six troops’: IHT, 3 April 2003, p. 4. ‘Poland … has fifty-four soldiers involved in ground operations in Iraq’: Baltic Times, 10–16 April, p. 2. ‘Poland is to send 1,500 soldiers there [to postwar Iraq] to keep peace and will command one of the four occupation zones: IHT, 30 May 2003, p. 5.) The United States insisted on referring to ‘coalition’ forces. The Saddam Hussein regime effectively collapsed after three weeks, US troops entering the centre of Baghdad on 9 April, although some fighting continued.

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The action of the United States deeply divided world opinion, including Nato itself. France and Germany were leading critics of the United States, suggesting that UN inspectors should have been given more time to complete their task. Russia and China (the latter less vehemently) were broadly in agreement with France and Germany. China issued a statement on 20 March: We strongly urge relevant countries to immediately stop military action. They ignored the opposition of most countries and peoples of the world and went around the UN Security Council to begin military action against Iraq … The norms of international behaviour [have been violated]. (IHT, 21 March 2003, p. 3; Telegraph, 21 March 2003, p. 8) But both countries remained on relatively good overall terms with the United States. Nevertheless, relations between Russia and the United States were aggravated by two issues in particular: 1

US accusations that Russian companies were providing weapons to the Saddam Hussein regime. The United States said Monday [24 March] that it had ‘credible evidence’ that Russian companies had sold Iraq banned equipment, including anti-tank missiles, night-vision goggles and equipment to jam Global Positioning System devices … that the coalition forces use to guide bombs, military aircraft and even troops on the ground … [The United States] said the alleged sales had been a matter of concern ‘over the past year’ …[The United States] said Putin promised to look into the matter. But earlier foreign minister Igor Ivanov … said that Russian experts had examined the matter ‘meticulously’. He said US inquiries had begun in October [2002], that Russia had repeatedly responded as recently as 18 March and that nothing illicit had been found. (IHT, 25 March 2003, p. 3) Moscow has denied that Russian companies have been selling military equipment to Iraq … Last night [25 March] the Kremlin gave its version of the conversation between [Bush and Putin] … in which Mr Putin insisted no such sales had taken place. (Independent, 26 March 2003, p. 7) The United States … has provided new evidence to support its case … In addition to providing banned technology Washington alleges that personnel from the Russian companies have been operating the equipment on the ground in Iraq … Igor Ivanov, Russian foreign minister, yesterday [26 March] repeated denials that any transfers had taken place. (FT, 27 March 2003, p. 5)

Introduction and overview 91 2

Russian concern about US spy planes using Georgian airspace (the United States claiming that the flights were for the purposes of combating terrorism). ‘[Russia] has complained about American spyplanes flying over Georgia’ (The Economist, 5 April 2003, p. 44). ‘Russia criticizes US spy plane movements over Georgia’ (FT, 4 April 2003, p. 4). (The flights were near the Russian border, the first being on 27 February: CDSP, 2003, vol. 55, no. 12, p. 5.) Eduard Shevardnadze: ‘Georgia’s support for the United States will mean active future involvement by that country, along with Russia and other states, in resolving the conflict in Abkhazia’ (CDSP, 2003, vol. 55, no. 11, p. 7). [On 1 April] the Georgian defence minister said … that Georgia is prepared to provide the United States with ‘any form’ of assistance in the operation against Iraq … In March the Georgian parliament ratified an agreement under which the Georgian side undertook to put its military installations at the Americans’ disposal and gave them permission to cross the border without visas and to import any kinds of weapons duty free. (CDSP, 2003, vol. 55, no. 13, pp. 17–18)

The following were significant developments: President Putin (17 March): ‘The Russian leadership continues to believe that an expansion of armed conflict is a mistake. Twenty million Moslems live in Russia. We cannot ignore their views’ (CDSP, 2003, vol. 55, no. 11, p. 1). President Putin (20 March): The United States launched military action against Iraq today … These military operations are being conducted contrary to world public opinion, and contrary to the principles and norms of international law and the UN Charter. Nothing can justify this military action, be it charges that Iraq has supported international terrorism – we have never had any information to that effect – or a desire to change the political regime in that country, something that is in direct violation of international law and is a matter that only the citizens of that country can decide. Finally, there was no need for military action to answer the main question directly posed by the international community, namely this: does Iraq have weapons of mass destruction? And if it does what must be done to destroy them and according to what timetable? Moreover, at the time the operation began, Iraq did not pose any danger to either its neighbours or other countries and regions of the world, since the country is weak both militarily and economically, especially after a ten-year embargo. And especially since international inspectors were working there. On the contrary, their efforts had recently led to significant positive changes … [UN] Resolution No. 1441 … did not authorize the use of force… The military action against Iraq is a big political mistake. I have already mentioned the humanitarian aspects of the matter. But the threat of collapse of the

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Introduction and overview established security system is of no less concern. If we allow international law to be supplanted by the law of ‘might makes right’ … then one of the basic principles of international law – the principle of the inviolable sovereignty of states – will be called into question … The vast hotbed of instability that arose today will grow and have negative consequences in other regions of the world … The central role in resolving crisis situations in the world, including the Iraqi situation, should belong to the UN Security Council. (p. 5) President Vladimir Putin on Friday [28 March] called the US-led war against Iraq the most serious crisis since the end of the Cold War and warned that it threatened global stability. [Putin said] the war is ‘in danger of rocking global stability and the foundations of international law … The only correct solution to the Iraqi problem is the immediate end to military activity in Iraq and resumption of a political settlement in the UN Security Council’ … Russian officials have expressed concern that Russian companies, which have signed numerous contracts to develop the Iraqi oil industry, may be replaced by American companies after the war. Russia is also concerned over $8.5 billion in Soviet-era debt that is owed to Russia by [Iraq]. (IHT, 29 March 2003, p. 4)

‘Baghdad’s Soviet-era debt stands at around $8 billion and at some $16 billion if interest payments are included’ (IHT, 12 April 2003, p. 3). (‘The total value of Russia’s oil contracts with Saddam Hussein is somewhere around $30 billion. Iraq owes Russia about $8 billion’: CDSP, 2003, vol. 55, no. 13, p. 9.) ‘Fewer than 5 per cent of Russians supported military intervention in Iraq’ (FT, 8 April 2003, p. 21). ‘All the opinion polls show that roughly 10 per cent of Russian citizens do support the United States’ (CDSP, 2003, vol. 55, no. 13, p. 5). Recent polls show a drop in the number of Russians who hold a positive view of the United States, while 75 per cent see it as an ‘aggressor’ … [Some] 71 per cent of Russians cite the United States as the main threat to world peace. (CDSP, 2003, vol. 55, no. 11, p. 6) The State Duma [on 18 March] … postponed ratification of the Russian–American Treaty on the Reduction of Strategic Offensive Potentials … [which requires] Russia and the United States to reduce and limit their strategic nuclear warheads … The deputies had planned to ratify the treaty today [19 March]. (p. 18) (The treaty was not ratified by the State Duma until 14 May 2003.) ‘[On 21 March] Putin told officials of the CIS … that the Iraq war could destabilize their nations. “The war against Iraq is a decision that might trigger

Introduction and overview 93 unpredictable consequences, including increased extremism,” he said’ (IHT, 22 March 2003, p. 3). The two top leaders of Russia’s Moslems split Thursday [3 April] over the question of whether to proclaim a jihad against the United States. Supreme Mufti Talgat Tadzhuddin, the leader of an Islamic council claiming to represent all Russia, announced that the council’s twenty-nine Islamic departments had voted unanimously by fax to declare a holy war … While declaring a holy war, he did not say in detail what the council was asking ordinary Moslems to do, beyond contributing money for Iraqi war relief and weapons purchases. At the same time the Chief Mufti of Russia, Ravil Gainutdin, rejected any call for a holy war: ‘Jihad against the United States has been declared by Saddam Hussein. This is enough’ … Gainutdin’s Russian Council of Muftis controls nineteen Islamic departments, fewer than Tadzhuddin’s, but is said to claim roughly as many adherents. The two Muftis are rivals in a long-running contest for leadership of Russia’s Moslems … Russia’s justice ministry issued a statement saying that as long as the Mufti was calling on Russian Moslems to offer aid and moral support to Iraqis, ‘there is nothing blameworthy’ in the appeal. ‘If attempts are made to hire mercenaries, buy weapons and transfer them to Iraq, this is a crime,’ a senior ministry official [said] … The number of Moslems in Russia is only roughly known. Informed estimates place the figure as between 14 million and 20 million, mostly in central Russia and in the south-western Caucasus Mountains region. (IHT, 4 April 2003, p. 3) (President Putin: ‘Twenty million Moslems live in Russia. We cannot ignore their views’: CDSP, 2003, vol. 55, no. 11, p. 1). Talgat Tadzhuddin [said that] … Russian Moslems … would raise money ‘to buy armaments for fighting Americans and food for the people of Iraq’ … The last time jihad was declared by Russia’s Moslems was in 1941 against the Germans … Ravil Gainutdin said that Mr Tadzhuddin represented only a tiny proportion of Russia’s Moslems. Mr Gainutdin and Mr Tadzhuddin enjoy equal popularity in Russia, but represent only a small number of Moslems … There are 3,600 registered mosques in Russia and Mr Tadzhuddin speaks for Muftis from only twenty-nine of them, but who represent several thousand Moslems. (The Times, 4 April 2003, p. 2) [Tadzhuddin declared] a jihad against the United States and Great Britain. This is just the second time Russia’s Moslems, who are loyal to Russia, have declared jihad in their entire history. In 1941 Moslem leaders in the USSR declared jihad against Hitler. Tadzhuddin did not call for overt military attacks. Russia’s Moslems, he said, have other means of waging jihad and using the money to buy arms for the struggle against America and food for

94 Introduction and overview the Iraqi people … He wields influence on only a third [of Moslems] … A sizeable number of adherents of Islam in Russia are affiliated with alternative ‘non-Tadzhuddinist’ ecclesiastical administrations … [A] statement from the Russian justice ministry said: ‘If he [Tadzhuddin] is referring to providing moral and financial support to his co-religionists, then nothing prejudicial is at issue here. But if attempts are made to recruit mercenaries or to buy arms and send them to Iraq, then these actions are subject to prosecution under criminal law’ … Gainutdin responded with a ‘counter-declaration’ in which he called on Russia’s Moslems to remain peaceable and wage war on no one. (CDSP, 2003, vol. 55, no. 13, p. 7) Talgat Tadzhuddin … [is] chairman of the Moslem Spiritual Board, based in the city of Ufa, in Bashkortostan … Neither they [Tadzhuddin and Gainutdin] nor anyone else can claim to speak for Russia’s Moslems … No one imam has widespread appeal … Moslems number anywhere from 11 million to 25 million, or 7 per cent to 17 per cent of the population, including those who are culturally Moslem but do not practise the religion … Wahhabism is a purist form of Islam founded in the eighteenth century and now prevalent in Saudi Arabia. The Soviet authorities first used the term to label all enemies in the Afghanistan war in the 1980s and it was later applied to radicals in Chechnya and other parts of the North Caucasus, whatever their religious sect. Wahhabism and extremism do exist there; but both are imports … Radicalism has only appeared in the Caucasus in the past five years, according to Galina Yemelianova … The desperation after years of war and poverty, she says, made some people receptive to the preaching of missionaries from the Middle East and itinerant mujahidin from Afghanistan. In other areas, she says, it is a tiny phenomenon. (The Economist, 10 May 2003, pp. 38–9) The prosecutor of Bashkortostan issued an official warning yesterday [4 April] to Talgat Tadzhuddin … against making statements that ‘foment religious discord’ … Bashkortostan’s prosecutor … noted that his declaration of a Moslem holy war ‘foments religious discord’ and cautioned him against violating the federal law ‘On countering extremist activity’ … Meanwhile, the Russian prosecutor-general’s office warned the leadership of the Central Ecclesiastical Administration of Moslems of Russia that any further steps along the lines of the Mufti’s declaration of jihad against America would lead to the organization’s dissolution. (CDSP, 2003, vol. 15, no. 14, p. 5) ‘Talgat Tadzhuddin … has been labelled a false prophet and apostate. This was the reaction his call for a holy war drew [on 14 April] from the Council of Muftis of Russia, chaired by Tadzhuddin’s long-time opponent Ravil Gainutdin’ (CDSP, 2003, vol. 55, no. 15, p. 20).

Introduction and overview 95 President Vladimir Putin called Friday [11 April] for a leading role for the United Nations in postwar Iraq as the leaders of France, Germany and Russia met in St Petersburg … UN general-secretary Kofi Annan cancelled his plans to attend earlier in the week. And prime minister Tony Blair of Britain … also turned down an invitation from Putin to attend the gathering … President Putin: ‘The main task is to urgently return the Iraqi settlement process to within the framework of the United Nations … [We] must do everything to preserve the stability of the system of international law, which is based on the supremacy of the United Nations … It is good that the Saddam Hussein regime has fallen. We said for a long time he had to be brought down. We did not defend him, we said it should not be done by force … Even in its dying throes the regime did not use weapons of mass destruction. We still do not know that it had any.’ (IHT, 12 April 2003, p. 3) President Putin (29 April): Until clarity is achieved over whether weapons of mass destruction exist in Iraq, [UN] sanctions should be kept in place … No weapons have [yet] been found … Sanctions can only be removed if there is no suspicion, which should be subject to a Security Council vote … It is only the Security Council that is in a position to lift those sanctions; after all they introduced them … The question is, where is Saddam [Hussein]? Where are his arsenals of weapons of mass destruction? Perhaps Saddam is still hiding somewhere in a bunker underground, sitting on cases of weapons of mass destruction and is preparing to blow the whole thing up and kill hundreds of thousands of people. We do not know what the situation is. What we want is to ensure that there is no ambiguity and that the threat has been eliminated … Perhaps their plan is to transfer these weapons to terrorist organizations. We simply do not know. Until we get answers to these questions we cannot feel safe and secure … If something is found there, some empty barrels, then the UN inspectors could be summoned … If decisions are being made by just one member of the international community and with other members being required just to subscribe to those decisions, that is something we would not find acceptable. (FT, 30 April 2003, p. 1; Telegraph, 30 April 2003, p. 4; Guardian, 30 April 2003, p. 1) On 22 May 2003 the UN Security Council approved a slightly modified US/UK resolution on the governance of Iraq by the occupying powers and the lifting of economic sanctions on the country. The strongest CIS support comes from Uzbekistan, seen as tacitly seeking quid pro quo in the form of help against internal Islamic radicalism … [The United States listed thirty countries worldwide giving it] ‘unconditional

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Introduction and overview support’ … [The list includes] three CIS countries – Azerbaijan, Georgia and Uzbekistan; the three Baltic States – Latvia, Lithuania and Estonia; and the former East bloc countries of Bulgaria, Hungary, Poland, Romania, Slovakia and the Czech Republic. (CDSP, 2003, vol. 55, no. 11, p. 7)

Belarus was very critical of the US-led war against Iraq. President Lukashenko (16 April 2003): [The] armed US and British invasion of Iraq [is] in contravention of international norms … What America wanted was not Saddam Hussein, not Iraq and not even its oil, but the establishment of a new world order that gives the sole superpower special rights to use military force as it sees fit. From now on the norms of international law can no longer protect the integrity and sovereignty of a state … The Russian press and the foreign press are asking: ‘Who is next in the axis of evil?’ And they point to Belarus … Today Belarus is the only faithful and battleworthy ally of the Russian Federation. (CDSP, 2003, vol. 55, no. 15, p. 21) (‘Last spring [2002] the [US] State Department accused it [Belarus] of training Iraqis in the use of S-300 surface-to-air missiles’: IHT, 21 November 2002, p. 6. ‘Belarus is accused of training Iraqis in the operation of air defence missiles’: IHT, 9 November 2002, p. 4. ‘Belarus has been accused of training Iraqi military officers’: Independent, 16 November 2002, p. 14. ‘Ukraine and Belarus have both denied providing weapons systems or sensitive technology to Iraq in violation of United Nations sanctions … Officials in Minsk disputed assertions that Belarus had helped Iraq reconstitute its anti-aircraft defences and fuelled dual-use materials and technology that could help Saddam Hussein develop weapons of mass destruction’: IHT, 26 September 2002, p. 6.) A few hours after the war began Ukraine’s Supreme Council dispatched to Iraq a [550-man] special battalion trained to deal with radioactive, chemical and biological contamination … The decision … did not come easily …The country’s president [Leonid Kuchma], who initiated the action, emphasized that ‘Ukraine will not participate in the military action … [The battalion] will provide assistance in protecting the civilian population within the area of hostilities.’ (CDSP, 2003, vol. 55, no. 11, pp. 7–8) Parliament yesterday [5 June] agreed to commit more than 2,000 peacekeepers to Iraq … [as] part of a Polish-led force of at least 7,000 troops due to go to Iraq in July to help stabilize the region between Basra and Baghdad … Although Ukraine still opposes the US-led coalition’s decision to disarm

Introduction and overview 97 Mr Hussein by force, Kiev asked to be included in the coalition in late March, during the second week of the war. (FT, 6 June 2003, p. 7) (‘Relying on an analysis of clandestine tape recordings … in which a voice believed to be Kuchma’s was heard discussing smuggling the radar system to Iraq …the United States has concluded that President Leonid Kuchma personally approved a plan in July 2000 to sell Iraq an advanced radar system that can detect approaching aircraft without their pilots’ knowledge. Although there is no definitive proof that the sale was made, the government has “some indications” that the radars are now in Iraq … The American conclusion … led the government to suspend a $55 million-a-year aid programme to Ukraine this month, pending a review of American policy … Other crucial assistance – for example, aid to help Ukraine dismantle its Soviet-era nuclear programmes – is unaffected by the suspension … Over the last five years Ukraine has become the world’s sixth-largest arms supplier’: IHT, 25 September 2002, p. 8. ‘Ukraine and Belarus have both denied providing weapons systems or sensitive technology to Iraq in violation of United Nations sanctions’: IHT, 26 September 2002, p. 6. ‘The United States said yesterday [24 September] … [that it had concluded] that the Ukraine president had personally approved the sale of air defence radars to Iraq … [and that] it was suspending aid to Ukraine’s central government, worth $54 million a year … [But] the United States would continue aid to local and regional governments, as well as the private sector and non-government organizations … US officials said they had concluded that a tape recording of Mr Kuchma approving the sale of radars to Iraq for $100 million was authentic’: FT, 25 September 2002, p. 3. ‘The report released Tuesday [26 November] by a team of US and British experts said a Ukrainian contract to sell the sophisticated equipment to China might have been altered to allow its resale to a third country. The experts who visited Ukraine last month [October] ruled out a direct transfer of the Kolchuga systems to Iraq. But they left open the question of whether Ukraine covertly sold the equipment to Baghdad, saying Ukrainian officials had been unco-operative and evasive’: IHT, 27 November 2002, p. 4. ‘An investigating team … concluded that no direct sale had been made, but raised the possibility that an intermediary had been used, possibly China … The investigators said they had been unable to track four “missing” radar systems … The experts said Ukraine accounted for only seventytwo radars … British and American experts said there was no evidence that Ukraine had sold the radar systems to Iraq “under openly declared contracts”, but concluded that “covert or illegal arms transfers, particularly with the complicity of third parties, remained a credible possibility” ’: Telegraph, 27 November 2002, p. 16. ‘American and British experts have criticized Ukraine for failing to provide conclusive proof that Kiev did not sell an aircraft detection system to Iraq in breach of UN sanctions’: IHT, 6 November 2002, p. 3.) Kyrgyzstan has become the only country in post-Soviet Central Asia where large-scale, well-organized protest demonstrations against the war in Iraq

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Introduction and overview have been held … Bishkek’s official view remains unchanged: the situation should be put back in the hands of the UN as quickly as possible. (CDSP, 2003, vol. 55, no. 15, p. 22)

Prior to the actual war in Iraq, Ariel Cohen analysed the positions of the CIS countries. Kazakhstan and Kyrgyzstan are the two states that pay most attention to their great power neighbours [Russia and China] and take an anti-war stance … [although] President Nursultan Nazarbayev has called on Iraq to follow Kazakhstan’s experience in destroying weapons of mass destruction … The Caucasus states have cast their lot with the Anglo-American coalition. Georgia and Azerbaijan consider Washington their main protector and benefactor. So does Uzbekistan. All three countries view Russia with suspicion … The United States did not submit a request to Azerbaijan for the use of aerodromes which would house American airplanes should a military operation in Iraq be launched … Azerbaijan also took pains to co-ordinate its position with Moscow … Armenia has traditionally excellent ties with the Arab countries and a thriving diaspora in Lebanon and Syria. Armenian foreign policy is also viewed as pro-Russian. Nevertheless, the statements of the Armenian foreign minister sound surprisingly pro-American. (Ariel Cohen, Rusi Newsbrief, 2003, vol. 23, no. 3, pp. 29–30) The Commonwealth of Independent States (CIS) In terms of its size, as reflected in the absolute level of GDP measured at purchasing-power parities, Russia’s economy is about double the size of the rest of the CIS taken as a whole and about equal to the aggregate of eastern Europe (including the Baltic States). (United Nations Economic Commission for Europe, Economic Survey of Europe, 2002, no. 1, pp. 69–70) ‘Russia … accounts for about three-fourths of the region’s GDP … Russia is the main export market for almost all CIS countries, absorbing on average over 25 per cent of their total exports’ (IMF, World Economic Outlook, 2002, p. 47). At first the Commonwealth of Independent States (CIS) seemed to be merely a way of allowing a ‘peaceful divorce’. After 1993 Russia’s military and economic dominance (especially its supplies of energy and raw materials) gave it a temporary boost. Political and economic desperation drove the more reluctant countries to become members and only the Baltic States of Estonia, Latvia and Lithuania refused to join. Each of the twelve CIS countries now has its own currency. Belarus is the keenest on economic and political union with Russia, while at the other extreme are countries such as Azerbaijan and Georgia. Overall the CIS is a failing organization.

Introduction and overview 99 The CIS has failed to integrate the Soviet successor states in any meaningful sense. Although on paper it has been a forum for several ambitious projects of co-operation, in reality the CIS has been gradually emptied of responsibility and has been witness to a diminishing base of collaborative activities. (Sakwa and Webber 1999: 379) ‘Whereas in 1991 trade between the current members of the CIS constituted 21 per cent of their combined GDP, today this has fallen to around 6 per cent’ (p. 407). ‘The CIS provides a forum for diplomacy, informal discussions and the voicing of grievances … Yet it is clear that the achievements of the CIS are few in number’ (p. 408). The presidents of Russia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan – the countries of the customs union – have held a meeting in Minsk. An attempt was made at the meeting to accelerate the establishment of a free trade zone, which is being held back by the Russian position … Russia is the only one that has not ratified the free trade treaty. This is because if the treaty takes effect the Russian Treasury will lose millions in revenue from transporting energy resources abroad. (Kommersant, 24 May 2000, p. 11: CDSP, 2000, vol. 52, no. 21, p. 21) We are becoming economic strangers to one another. The customs union has been in an embryonic state for more than four years now, its five members [Russia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan] in no hurry to fully co-ordinate their trade legislation. Furthermore, all of these countries are trying to gain admission to the WTO, and Kyrgyzstan has already joined it. Yet the WTO has completely different rules. Restoring all production relations within the framework of the Soviet division of labour is not realistic. And the hard currency the post-Soviet republics need so desperately cannot be earned by trading with one another – everyone in the CIS is poor. (Semyon Novoprudsky, Izvestia, 17 June 2000, p. 1: CDSP, 2000, vol. 52, no. 25, p. 16) The new Russian government will not have a ministry for CIS affairs, which has been abolished by presidential decree. The ministry’s functions will be transferred to the foreign ministry and the ministry of economics … This is the second time the commonwealth ministry has been abolished. The first time was in April 1998 … Six months later, however, the commonwealth ministry was re-established … True, economic ties with the CIS countries were none the better for it … Overall management will be the [Russian] security council’s job. Putin’s new plan accords priority to bilateral ties, with all integration efforts to be based on security. (Kommersant, 25 May 2000, p. 11: CDSP, 2000, vol. 52, no. 21, p. 22)

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(Other agreements between CIS countries are dealt with in individual chapters in this volume and its companion volume, The Caucasus and Central Asian Republics at the Turn of the Twenty-first Century: A Guide to the Economies in Transition. The frailty of the CIS encouraged a number of regional groupings, some clearly meant to distance members from dominant Russia.) Russia’s economic transition There is increasing recognition among analysts of transitional economies in general that the institutional basis of a market economy takes a long time to put in place. Just think how long it has taken the Western countries to develop appropriate political, legal and economic institutions and attitudes (including informal codes of behaviour such as ‘gentlemen’s agreements’). And yet even today massive financial scandals, for example, arise periodically. In transitional economies there is a vital need for an efficient and honest legal system to enforce contracts and property rights. The vacuum that exists when the state is too weak to fulfil these vital functions is quickly filled by organized crime. What is particularly disturbing about countries like Russia is the common occurrence of links between the mafia and corrupt officials. It is widely believed that a liberal economy is inconsistent with a strong government. But in fact a liberal economic system needs a strong government. It needs one because a liberal economy presumes laws and rules that are the same for everyone, and the only way to ensure such uniformity is through a strong government. One that tolerates no exceptions. One that cannot be bought. One that is capable of meting out punishment. (Pyotr Aven, the president of Alphabank and former minister of foreign economic relations in Russia, CDSP, 1999, vol. 51, no. 7, p. 5) Key institutional foundations … [include] an effective judicial and law enforcement system, the creation of a healthy commercial banking system, and a coherent policy for changing the structure of incentives so as to encourage entrepreneurship and fixed investment rather than rent-seeking and asset stripping. (United Nations Economic Commission for Europe 1998a: 10) Among the most damaging of the mistaken conclusions that were drawn early on in the transition process, both by Western advisers and by policy makers in Moscow, was that the Russian state remained too strong. The need to scale back inefficient spending … is a necessary task for which a strong public administration is required; but this is a quite different task from restructuring the state so that it is strong enough and capable to perform the functions required to support a market economy. (p. 9)

Introduction and overview 101 ‘Russian public administration is infamous for its lack of transparency and corruption’ (p. 34). The European Bank for Reconstruction and Development stresses the importance of institutional change in the next phase of transition in general. Some aspects of a market economy can and have been created quickly in transition economies, in particular through market liberalization and privatization. However, developing the institutions and business practices required for a well-functioning market economy takes much longer. (EBRD 1998b: iv) The imbalance has continued to widen between the earlier successes of privatization and liberalization and the more difficult structural and institutional challenges of the next phase of transition. These challenges include corporate governance and enterprise restructuring, financial sector reforms, infrastructure reform, and fiscal and social reforms … The challenges of the next phase … require a substantial and constructive role of the state at a time when its capacity is still underdeveloped and subject to capture by powerful economic interests. (pp. vi–vii) Privatization Privatization of the non-agricultural sectors of the economy has been very rapid. But the gigantic task has been undertaken in ways which have been controversial and at times downright scandalous. Even the first stage of privatization (1 October 1992–1 July 1994) has been severely criticized, e.g. the favouring of ‘insiders’ (existing workers and managers), leading to problems such as a lack of enterprise restructuring and of corporate control, and asset-stripping by owner-managers. The main argument put forward in support of ‘insider’ privatization was that speedy privatization was necessary to make the reform process irreversible and thus a weak central state (in a society not generally enamoured with privatization) had to ‘bribe’ the ‘insiders’ in general and the powerful managerial lobby in particular. Critics felt that a rapid and more equitable first stage of privatization could have been achieved by means of a more conventional and thus more extensive voucher (mass) privatization programme in order to gain public support. (In such a programme all eligible citizens are allotted vouchers, for free or at nominal cost, which can be used to buy the bulk of shares in the enterprises on offer.) Well-regulated investment funds could help overcome the problems of corporate governance, while a small percentage of shares distributed for free or on favourable terms to ‘insiders’ would have been adequate as an incentive to efficiency. Gaddy and Ickes (1998a) comment generally on marketization and industrial privatization in the context of what they call a ‘virtual economy’.

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Introduction and overview Most of the Russian economy has not been making progress toward the market or even marking time. It is actively moving in the other direction. Over the past six years Russian companies, especially in the manufacturing sector, have indeed changed the way they operate, but to protect themselves against the market rather than join it. What has emerged is a new kind of economic system with its own rules and its own criteria for success and failure. The new system can be called Russia’s virtual economy because it is based on an illusion about almost every important parameter: prices, sales, wages, taxes and budgets … It is the real cause of the web of wage, supply and tax arrears from which Russia cannot seem to extricate itself. (pp. 53–4) Although Russia formally has privatized most of its industrial sector, the pace of economic restructuring is still grossly inadequate to ensure stable economic growth … Enterprises continue to trade with one another without the use of money – either by not paying each other at all or by using non-monetary means, such as barter or promissory notes, called vecksels … What explains the failure of Russian enterprises to restructure? … The environment induces them [managers] to postpone or avoid restructuring … Formal activities of enterprises … are reflected in official statistics and result in the cash payment of taxes. But below the surface Russian enterprises engage in informal activities, as a means of survival and as a response to the structure of taxation and the weak system of corporate governance. Informal activities involve non-monetary transactions: the ‘soft’ goods are sold against promissory notes such as vecksels or exchanged for other goods and services (barter). These transactions – including taxes paid in kind – occur outside the formal monetary system and consequently are much less observable, contrary to ‘hard goods’ that are produced and sold through monetary transactions (for cash) in the formal economy … Initially, barter was seen as a natural response by some enterprises to the high inflation that prevailed in Russia after prices were liberalized. But the use of barter has increased despite financial liberalization. This could be explained by the shortage of liquidity, as high interest rates made it hard for enterprises to borrow. The impetus to barter, however, often comes from the seller. This suggests other motivations for the widespread use of barter, including its usefulness in beating Russia’s onerous tax system. (pp. 2–3) Tax offsets fundamentally change the set of choices available to Russian enterprise directors. By allowing enterprises to pay taxes in ‘soft goods’ (that is, output for which there is no effective demand), tax offsets provide an incentive to avoid restructuring. (p. 3)

Introduction and overview 103 Hard goods sold for cash yield monetary tax liabilities as well as income that must be paid to shareholders and other stakeholders … On the plus side, high-effort goods are easier to translate into cash, which may be needed to procure important inputs … Russia appears to be generating a dual economy. Alongside a modernizing private sector [there exists] a paternalistic, unrestructured industrial sector. (p. 5) Privatization has not eliminated ‘soft budget constraints’. In an attempt to understand why economic reform has failed in Russia we looked at the performance of ten representative sectors … In Russia the more productive companies are often the least profitable. Thus, more productive companies are not gaining market share and not pushing less productive firms out. In nine out of the ten sectors the direct cause of low economic performance is market distortions that prevent equal competition. The distortions come from attempts to address social concerns, corrupt practices and lack of information. In the manufacturing sectors regional governments channel implicit federal subsidies to unproductive companies. Such subsidies take the form of lower tax and energy payments, and are allegedly intended to prevent companies from shutting down and laying off workers [distortions can also take forms such as different import tariffs and differential access to government-controlled export infrastructure: p. 19]. This puts potentially productive companies at a cost disadvantage, blocking investments and growth on their part … We found the other often mentioned reasons for Russia’s economic problems to play a much smaller role (e.g. poor corporate governance and lack of a transport infrastructure). (McKinsey Global Institute 1999: 8–9) It is difficult not to agree with Jeffrey Sachs’s view of privatization in sectors such as oil and gas: When the economic reforms got underway in 1992 Russia’s vast natural resources provided unparalleled opportunities for theft by officials. Oil, gas, diamond and metal ore deposits were nominally owned by the state and thus by nobody. They were ripe for stealing – or for ‘spontaneous privatization’ as Russians cynically call it … When natural resource enterprises were privatized the system was often skirted or compromised by ad hoc decrees and hidden arrangements … It is hard to know who owns Gazprom, the partly privatized natural gas giant, whose first chairman was Viktor Chernomyrdin, the prime minister. (IHT, 6 December 1995, p. 10)

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The 1995 ‘shares-for-loans’ scheme was simply a scandal. Valuable assets were in effect transferred cheaply into the hands of the financial oligarchs, encouraged by factors such as collusion among the permitted potential bidders (foreigners being typically excluded from bidding). The most blatant cases were the ones where the eventual purchaser was the (legally permitted) organizer of the auction! A political quid pro quo has been detected in the shape of the massive, self-interested help (financial and via their extensive media) given by the oligarchs in the successful campaign to re-elect President Yeltsin in 1996 (after being very low in the polls earlier on). Dmitri Vasiliev, who resigned on 15 October 1999 as head of the federal securities commission, stated: ‘Not much was done to ensure the protection of investors … It is absolutely clear that we have not received the full support of other state bodies concerning investor problems.’ The difficulties of protecting property rights and enforcing contracts can affect even big international players, as, for example, BP Amoco found in late 1999. As regards privatization, there has been greater transparency in sales (although the sale of a 75 per cent stake in Slavneft in December 2002 caused concern). Small business is still held back by factors such as bureaucracy, corruption, crime and lack of bank loans (although there is a large black economy). The climate has improved for private activity in general, however. An important factor is tax legislation. At the start of 2001 a flat rate 13 per cent income tax was introduced. As from 1 January 2002 the corporate profit tax fell from 30 per cent to 24 per cent. The elimination of tax exemptions is an important anticorruption step and an important step in the direction of a less arbitrary tax system. In July 2001 approval was given for an increase in excise taxes and for the introduction of a new law on the taxation of mineral resources. On 1 July 2002 a unified state registration agency for small enterprises was instituted. Other measures include a reduction in the number of activities requiring licences. There have been reports of improvements in corporate governance (e.g. FT, 18 September 2001, p. 21). President Vladimir Putin has seemingly allowed the financial oligarchs to retain their often dubiously gained wealth in return for paying taxes and ceasing to try to interfere in government. This has encouraged a more long-term business outlook and thus greater attention to factors such as reinvestment and an improved attitude to small shareholders (including dividend payments). ‘A bill protecting companies from spurious bankruptcy proceedings passed its formal reading yesterday [1 July 2002] in the Duma’ (FT, 2 July 2002, p. 7). ‘The bankruptcy law is intended to protect enterprises from hostile takeovers via bankruptcy’ (RET, Monthly Update, 15 July 2002, p. 2). In mid-2001 the private sector as a whole accounted for roughly 70 per cent of GDP (EBRD 2002b: 20, 192). ‘Today 90 per cent of Russian industry … is privatized’ (Anders Åslund and Peter Boone, FT, 9 October 2002, p. 19).

Introduction and overview 105 Direct foreign investment Direct foreign investment in Russia is tiny compared with that in China. (See Table 6.3, p. 455.) There was a significant increase in 1996, but the financial crisis soon knocked the recovery on the head. The value of direct foreign investment can be illustrated in the case of banking. The drawbacks of shielding generally weak, poorly regulated and even corrupt domestic banks from the competition provided by foreign banks were clearly illustrated when the financial crisis hit Russia in August 1998. Depositors need to have confidence in banks and loans have to be allocated with profitability rather than cronyism in mind. Cited factors deterring direct foreign investment in general include heavy, arbitrary and erratic taxes, the weakness of property rights and contract enforcement, the slowness in approving production-sharing agreements in the oil sector, and the extraordinary degree of crime and corruption. Oil and natural gas have always been among the strongest magnets for direct foreign investment. The rapid recovery of the economy from the financial crisis of August 1998 was greatly helped by the high world price of oil. In turn this considerably enhanced the attractiveness of the energy sector. Other sectors have also benefited. The picture as regards foreign direct investment is improving. But it is still a comparatively small figure, especially in per capita terms. ‘The total … [of] inward foreign investment … since 1991 amounts to only $22 billion – half the figure for Poland’ (The Economist, Survey, 21 July 2001, p. 17). In 2000 foreign direct investment per person was as follows: Russia, $2.7; USA, $316.5; China, $39.0; Poland, $9.6 (p. 5). The announcement in February 2003 of a massive investment by BP in the Russian oil industry was taken as a vote of confidence of some significance given BP’s earlier troubles. But Russia seems reluctant to allow foreign companies too much influence in the oil sector. Agriculture The privatization picture in agriculture contrasts starkly with that in industry. Although the private plot has rapidly grown in importance, progress with private (peasant) farms has been very slow. Hindering factors included the conservatism of the countryside, the uncertainty of life in the new market economy and resistance from many Soviet-era managers. But regional variations are apparent, with areas such as Nizhny Novgorod more go-ahead as regards agricultural reform. President Yeltsin and the State Duma could not agree on a new Land Code, the main sticking point being the question of land sales. In the absence of a federal code a number of provinces (such as Saratov and Samara) have passed their own laws on land sales. The more cordial relations between the new State Duma (elected in December 1999) and President Vladimir Putin (elected in March 2000) augured well for more rapid progress on issues such as the Land Code. Legislation relating to the sale of non-agricultural land was approved by the State Duma in September 2001, but it took until June the following year for the agricultural Land Code to be so approved (with significant amendments of the government’s draft).

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Introduction and overview

Macroeconomic stabilization There was hyperinflation in 1992. It took three attempts to bring inflation under control. Yeltsin admitted on 16 February 1995 that ‘Two serious attempts were made to curb inflation in the years of reform … The third attempt must be a success.’ The two earlier attempts led to tortuous negotiations with the IMF and a huge decline in the nominal exchange rate of the rouble against the US dollar. Inflation had fallen to relatively low levels by 1997, despite the fact that interenterprise arrears weakened monetary policy. The currency reform of 1 January 1998 was a success, lessons having been learned from the mistakes of earlier reforms such as that in July 1993. But the financial crisis of August 1998 exposed Russia’s fundamental weaknesses. The Russian government defaulted on domestic debt and was forced to allow the rouble to float. The Russian government was forced to devalue the rouble on 17 August 1998; it also announced a unilateral rescheduling of most of its short-term debt into long-term securities and the imposition of a ninety-day moratorium on payments by Russian banks and enterprises on much of their foreign debt. (United Nations 1999: 57) An aspect of globalization was the financial turmoil which affected many emerging market economies (a term which includes the transitional economies) and which became known as the Asian financial crisis. Mexico was hit in 1994, but attention was centred on events after July 1997 when the currency of Thailand came under speculative attack. The panic spread to other Asian countries (such as Indonesia). As regards the transitional countries, it is interesting to ask why Russia was devastated by the Asian financial crisis while China and former communist countries such Hungary and Poland escaped relatively unscathed. On 17 August 1998 Russia itself actually became the cause of further financial turmoil. This happened despite the fact that Russia is now considered to be a minnow in world economic terms. ‘Russia’s economy … is about the size of Switzerland’s’ (The Economist, 31 October 1998, p. 108). ‘Russia’s economy [is] smaller than that of the Netherlands’ (The Economist, 18 December 1999, p. 13). The main point to make is that the countries most adversely affected suffer from fundamental weaknesses, weaknesses cruelly exposed by the Asian financial turmoil. In Asia, for example, there is the phenomenon of ‘crony capitalism’ (such as incestuous links between government and companies and between banks and ‘their’ companies in the allocation of capital funds). Let us analyse what has happened to Russia. Ironically, Russia seemed to be turning the corner in 1997, e.g. the economy grew (although only barely) for the first time since 1989, inflation was modest (after hyperinflation in 1992), direct foreign investment was markedly higher than in 1996 and the balance of payments on current account was still in surplus. Thus it should not be forgotten that events outside Russia (including

Introduction and overview 107 falling world market prices for oil and gas, which are vitally important exports) played a part in its recent demise. The chilling effects of the Asian financial crisis were kept at bay in the autumn of 1997 and the spring of 1998, albeit at the expense of dramatic rises in interest rates. So what went wrong on 17 August 1998 when the Russian government defaulted on its domestic debt and was forced to allow the rouble to float? What are the fundamental weaknesses of the Russia economy which have dramatically distanced it even further from the economies of, say, Hungary and Poland? Russia’s inability to raise sufficient tax revenue to finance the central (federal) government’s essential activities is crucial to gaining an understanding of the crisis. On 23 June 1998 Sergei Kiriyenko (prime minister 23 March–23 August 1998) stated: ‘If the state does not learn to collect taxes it will cease to exist.’ Deputy finance minister Mikhail Kasyanov said Wednesday [10 February 1999] that the IMF wanted Russia to double its tax collection … ‘The IMF considers that the revenues of the federal budget should be 17 per cent to 18 per cent of GDP,’ said Mr Kasyanov. (IHT, 11 February 1999, p. 13) Russia’s inability to collect taxes is rapidly becoming the greatest threat to its economic and political stability. The current government cannot raise the revenues needed to run a modern state. Since economic reforms began in 1992 federal tax revenues have fallen from about 18 per cent of Russia’s GDP to less than 10 per cent in 1997 – compared with about 31 per cent in Austria, 27 per cent in Germany and 18 per cent in the USA. (Treisman 1998: 55) It is important to note the stress on the federal level. The concern is not that the government does not collect enough taxes. In fact, it collected 32 per cent of Russia’s GDP last year [1997], the same proportion that the United States does. The problem is rather that Russia has no actual tax system. In practice, taxation is a free negotiation between the ubiquitous tax inspectors and taxpayers, meaning that the strong win and small entrepreneurs are chased out of business. (Anders Åslund, IHT, 29 April 1998, p. 10) ‘The problem is an arbitrary tax system, with excessively high rates and ruthless government officials’ (Anders Åslund, The World Today, July 1998, pp. 185–6). ‘The tax system must be simplified and tax rates reduced. The current system stifles growth, penalizes honesty and encourages evasion’ (James Gwartney, FT, 9 May 2000, p. 27). (Other important factors hindering tax collection are the weakness of the tax ethic – the ‘social contract’ being eroded because of the central government’s poor record in providing social services in return for taxes – and the widespread use of barter.)

108 Introduction and overview Features of the Putin tax reforms, introduced in and after 2000, include the following: the overall tax burden was reduced; the share of the tax burden borne by businesses was lowered at the expense of the consumer; the tax system was simplified in order to increase transparency, equality of treatment and willingness to pay (e.g. a flat rate personal income tax, a lower corporate profit tax rate, a unified employers’ social security tax and simplifying/easing the tax burden on small enterprises). A budget deficit occurs when a government spends more than it raises in tax revenue. The size of the budget and the way it is financed have a crucial bearing on the control of inflation. The budget deficit can be financed by (1) increasing the money supply, (2) borrowing from the private sector of the economy and/or from foreigners, or (3) some combination of (1) and (2). (‘When government spending exceeds tax revenues the difference is financed by selling government bonds. If these are sold to the public then the net effect on the money supply is zero. But if they are purchased by the central bank the money supply rise that accompanies the deficit is not offset: this is known as “printing money” or “monetizing the deficit” ’: The Economist, 20 November 1999, p. 142.) (It is now the federal budget, rather than the consolidated state budget, which includes the regions, which is now the central focus of debate: RET, 1994, vol. 3, no. 2, p. 9. Unlike local budgets the federal budget can be financed by money creation: RET, 1994, vol. 3, no. 3, p. 10. Note also the increasing stress on the ‘primary’ federal budget deficit or surplus, i.e. excluding the snowballing state debt servicing.) Russia conquered the hyperinflation which occurred in 1992 when a massive budget deficit was financed entirely by printing money. By 1997 inflation was at a relatively modest level. This was achieved by gradually reducing reliance on the printing press to finance persistently high (though generally declining) budget deficits. The federal budget deficit in 1995 was financed almost entirely by bond sales and external credits (RET, 1995, vol. 4, no. 4, p. 5). The federal budget deficit remained stubbornly high, though, with problems on both the tax and spending sides (despite, as regards the latter, delays in the payment of state wages and pensions, a policy which is non-sustainable in the long run). The federal budget deficit (according to the IMF definition) was 7.9 per cent of GDP in 1996, 7.0 per cent in 1997 and 5 per cent in 1998 (RET, Monthly Update, 20 January 1999, p. 24, and 10 February 1999, p. 10). (The federal budget deficit was 5.8 per cent in 1993, 9.8 per cent in 1994 and 5.2 per cent in 1995: RET, 2000, vol. 9, no. 1, p. 118.) (IMF definition: ‘Privatization receipts and net sales of state gold reserves are counted as deficit financing’: RET, Monthly Update, 10 February 1999, p. 24. The EU’s Maastricht criterion as regards the budget deficit is a maximum of 3 per cent of GDP.) The Russian financial crisis of August 1998 Despite the overcoming of hyperinflation, heavy dependence on short-term borrowing ultimately proved to be unsustainable. Servicing the national debt took

Introduction and overview 109 up an increasing proportion of government expenditure and investors became increasingly unwilling to roll over their loans. The crunch finally came. The Russian authorities have been forced to attract increasing amounts of foreign funds to finance the deficit: by selling Treasury bills to foreigners and by borrowing from the international financial markets. This has resulted in an increase in the exposure of Russia to volatile short-term foreign capital. (United Nations Economic Commission for Europe 1998b: 24–5) ‘Russia’s most immediate problem is that it has too large a short-term government debt in comparison with international reserves’ (Anders Åslund, Transition, 1998, vol. 9, no. 3, pp. 10–11). ‘The current crisis in Russia arose largely from a failure of the state – its inability to collect taxes, to enforce laws, to manage its employees and to pay them’ (EBRD 1998b: iv). ‘At the root of Russia’s macroeconomic problems have been persistently high federal budget deficits’ (p. 14). The fundamental causes of the budget deficit were political: an inability to rein in government spending, weak tax discipline among politically influential firms and an excessive devolution of revenue to regional governments … Politicians have been unwilling to draw sharp distinctions between public and private property or to impose hard budget constraints on large enterprises, both out of fear of the unemployment implications and to preserve rent-seeking opportunities for powerful vested interests. (pp. 14–15) From 1995 the federal government financed much of its deficit by issuing short-term (less than one year) rouble-denominated Treasury bills (GKOs) and longer-dated coupon-bearing bonds (OFZs). Foreigners rushed into the high-yielding Russian debt market and, by the end of 1997, held an estimated 33 per cent of the total stock of GKOs and OFZs. (p. 13) Foreign investors in the GKO market were at first obliged, and many later chose, to hedge themselves against the risk of devaluation by buying dollar forward contracts with Russian banks. The hedge contracts increased the exposure of the Russian banking system to declines in the rouble (p. 14). A word or two may be in order about the controversies surrounding exchange rate regimes and controls on capital flows. After mid-August 1998 the nominal rate of exchange of the rouble against the US dollar quickly plunged from over six to over twenty. There was a vociferous debate prior to 17 August 1998 about the policy of defending the rouble on the foreign exchange market.

110

Introduction and overview A devaluation in Russia would be catastrophic … The greatest achievement of the reformers has been to bring low inflation and financial stability. If they cannot even do that they will lose all credibility … A devaluation would lead to an immediate increase in inflation and, even worse, to bank failures. And bank failures would lead to bankruptcies of enterprise. Unemployment would rise on a massive scale … Without the Asian débâcle, there would be no crisis now in Russia. The G7 nations need to put together a stabilization fund of at least $10 billion which would be available for the Russian government. (Richard Layard, Independent, 29 May 1998, p. 23) Devaluation is not necessary because the rouble is not overvalued. Last year Russia had a huge trade surplus of $20 billion and it has had similar trade surpluses for years … Devaluation would undermine what little remaining confidence there was in the rouble and the exchange rate would drop by 80 to 90 per cent. (Anders Åslund, Transition, 1998, vol. 9, no. 3, pp. 10–11; Åslund was an early adviser to the Russian government)

Jeffrey Sachs, who was an economic adviser to the Russian government from December 1991 to January 1994, thinks the opposite. He believes that exchange rates should generally float. It is neither worthwhile nor feasible to twist monetary policy to soothe panicky investors, especially at the cost of internal depression. The only real exception to floating rates comes at the start of stabilization from extreme inflations, when exchange rate targeting is more efficient than monetary targeting. (The Economist, 12 September 1998, p. 24) ‘Emerging market currencies should be allowed to float, since countries with pegged currencies too often run out of foreign reserves’ (Jeffrey Sachs, Independent, 1 February 1999, p. 11). My own view is that is makes no sense to use vital foreign exchange reserves to try to defend the exchange rate of a currency under attack in a deregulated world of massive and highly mobile private capital flows. There is an inherent weakness with adjustable peg exchange rate regimes, since private speculators are on an essentially ‘one-way bet’. All that is at risk is relatively modest transactions costs, since a currency under heavy attack is not going to strengthen. (Britain found this out to its cost when it was forced to leave the Exchange Rate Mechanism of the European Monetary System in September 1992 and George Soros, for example, made a fortune.) Thus much IMF aid to Russia was wasted in a futile defence of the currency. It would be far better, for example, to use what should be generous Western aid to strengthen the legal and regulatory system and to encourage the development of civil society (the self-organization of individuals in society).

Introduction and overview 111 Proponents of ‘big bang’/‘shock therapy’ have always recommended rapid current account convertibility of currencies in transitional economies. But the Asian financial crisis has reinforced the view that capital account liberalization ought to be a much slower and selective process. ‘Premature liberalization of capital markets … was one cause of the current crisis … Developing countries should impose their own supervisory controls on short-term international borrowing by domestic financial institutions’ (Jeffrey Sachs, The Economist, 12 September 1998, p. 24). Naturally, there is considerable debate about the merits of imposing controls on short-term capital flows. Critics argue, for example, that such controls are not very effective and that it would be better to concentrate on basic problems such as regulation. The effects of the financial crisis on Russia were profoundly adverse at first in terms of output. After GDP grew (by 0.8 per cent) in 1997, the economy returned to negative growth the following year. (See Table 6.3, p. 455.) The financial crisis led to sharp declines in real incomes and savings, a rise in the proportion of the population in poverty, increasing shortages and difficulties in gaining access to bank deposits. (Social unrest, however, continued to be very limited. ‘Wage arrears have ceased to be a macroeconomic problem and are only a cause of tension in a few industries in a few regions. This conclusion is supported by data on strike activity, which has remained negligible since 2000’: RET, Monthly Update, 15 July 2002, p. 7.) But the rebound was surprisingly rapid (see Table 6.3). There was a sharp fall in imports of consumer goods immediately following the mid-August 1998 crisis, but rouble devaluation against the US dollar led to substantial import substitution by the then more competitive domestic producers. GDP rose 3.2 per cent [in 1999] … thanks largely to a surge in industrial output [which rose by 8.1 per cent]. While a boost in world oil prices contributed usefully, the main gains came from import substitution prompted by the 80 per cent decline in the rouble’s international value. Exports stayed roughly constant, but imports dropped by more than a third. (FT, Survey, 10 May 2000, p. ii) The 1998 financial crash seems to have been a catalyst for more profound change. By imposing tough budget constraints the crash convinced many Russian businessmen that they could no longer live off the state but had to make real money in the market. Meanwhile the much-publicized barter economy is dwindling. (Anders Åslund, IHT, 19 January 2000, p. 8) ‘By destroying the government debt market and devaluing the rouble the crash has forced companies to look for investment opportunities’ (Business Central Europe, May 2000, pp. 35–6). (‘Business surveys show that the use of barter and other non-monetary means of payment continue to decline in favour of money-based transactions, and the

112 Introduction and overview share of cash in enterprise payments is well above 70 per cent. However, the share has stayed at roughly the same level for some time already. That points to serious structural problems due to lack of restructuring of enterprises, which is hampering further decline in the share of non-monetary forms of payment’: RET, Monthly Update, 17 September 2001, p. 1. Arrears have declined significantly as well.) There were fears that hyperinflation would return as a result of a massive increase in the money supply. This did not happen, although the monthly inflation rate rose noticeably at first. The current debate revolves around the extent to which Russia’s impressive GDP growth rate since 1999 can be sustained in the long run. The benefits of rouble devaluation (nominal and real) against the US dollar is being eroded by rouble appreciation in real terms and concern is expressed about Russia’s dependence on high world prices for oil and natural gas. One vital test of President’s Putin’s economic reform measures is whether they can achieve sustainable economic growth. Many concerns have been expressed about Russia’s long-term prospects since many economic weaknesses remain: 1

2

‘The rouble is rising against the dollar. Coupled with [rising] inflation this erodes the competitiveness that Russia has enjoyed since devaluation. So the economy remains acutely vulnerable. Its fragility is a result of the lack of structural reform since the financial crisis … Investment, though up a bit on the pitiful levels of last year [1999], is still paltry when set against Russia’s modernization needs’ (The Economist, 8 July 2000, p. 125). (In 1999 investment in fixed assets rose by 1 per cent: CDSP, 2000, vol. 52, no. 11, p. 17.) Stanley Fischer, acting managing director of the IMF (6 April 2000): The good macroeconomic performance since early 1999 cannot be sustained without a broad-based acceleration of structural reforms … The sustained growth that is needed will require an acceleration in economic reforms to spur investment and strengthen exports as well as comprehensive tax and expenditure reforms. (FT, 7 April 2000, p. 10; IHT, 7 April 2000, p. 15)

3

President Vladimir Putin (8 July 2000): Russia’s economic weaknesses continues to be another serious problem. The widening gap between the advanced countries and Russia is pushing us into the ranks of third-world countries. The figures showing current economic growth should not put our minds at ease … The current growth has very little to do with the revamping of the economic mechanism. It is largely the result of favourable foreign economic conditions. (CDSP, 2000, vol. 52, no. 28, p. 5)

Introduction and overview 113 President Putin (16 May 2003): ‘Our economic foundation, although it has become noticeably stronger, is still shaky and weak … The state apparatus is inefficient and most sectors of the economy are uncompetitive’ (IHT, 17 May 2003, pp. 1, 4; FT, 17 May 2003, p. 6). 4

Prime minister Mikhail Kasyanov: While Russia’s economic performance has improved significantly since the financial crisis of August 1998 much of the improvement is the result of one-off events. The challenge for Russia today is to implement extensive structural reforms that will ensure long-term economic growth and macroeconomic stability. (FT, 20 July 2000, p. 23)

5

6

‘There is a strong consensus that in order to attain sustainable economic growth further progress must be made in the area of structural reforms’ (RET, 2000, vol. 9, no. 1, p. 4). ‘For sustainable growth to be achieved, Russia will have to make significant progress in improving the investment climate, in enterprise restructuring and in eliminating barter, non-payments and arrears’ (EBRD 2000a: 3). ‘Russia has thus far done little to meet the key challenge of economic diversification. Such diversification is necessary to enhance Russia’s medium- and long-term growth prospects and to reduce its vulnerability to oil price movements’ (EBRD 2003a: 3).

Other effects of the financial crisis were as follows: 1

2

3

4

5

The Asian financial crisis had an initially devastating effect on stock markets, but these (with fluctuations) have recovered. (See the main section on Russian economic reform, p.000.) Russia’s gold and foreign exchange reserves, already low, continued to fall. (For this and their subsequent buildup, see the main section on Russian economic reform.) The regions of Russia began to adopt policies (in some cases unconstitutional) which weakened federal control. These policies (in many cases temporary) included refusal to send funds to the central government, price controls and restrictions on the transport of food to other regions of Russia. Antisemitism was stirred up by individuals like Albert Makashov (a communist member of parliament) seeking scapegoats for the increasing misery. The crisis gave further ammunition to previous attacks on the Jewish financial oligarchs. ‘Six of the seven oligarchs are Jewish’ (David Hoffman, IHT, 9 April 1999, p. 5). Deep-seated commercial banking problems were severely exacerbated by the events of mid-August 1998.

114

Introduction and overview Facing substantial margin calls and refusal of creditors to roll over their liabilities, Russian banks bought foreign exchange to repay debts, in the process drying up their liquidity and creating interbank loan defaults. (Desai 2000: 51) Government attempts to free up the jammed payments system have included several attempts to offset debts and liabilities with the aid of central bank loans. Some bank deposits have been transferred to the reliable state savings bank, Sberbank (which holds around 80 per cent of retail deposits. (RET, Monthly Update, 11 November 1998, p. 2)

6

Bank mergers have been encouraged. But there has been no fundamental restructuring of the commercial banking system, a real weakness in the Russian economy. Russia’s credibility in international financial circles was severely dented. Funding by the IMF became even more necessary for any significant funding from other international sources. Direct foreign investment fell sharply.

Detailed negotiations with banks about rescheduling domestic debt have not helped, since the terms of the final deal have been essentially forced upon creditors. Various estimates have been made, implying more or less confiscatory terms. ‘The whole package is worth about 4 cents on the dollar’ (FT, 18 December 1998, p. 4). ‘The ministry’s current derisory, restructuring offer would leave debt-holders with about 5 cents in the dollar’ (The Economist, 20 March 1999, p. 109). ‘Bondholders are now contemplating a restructuring deal worth – at best – one solitary cent in the dollar’ (The Economist, 24 April 1999, p. 99). ‘Russia made a return to the domestic debt market in February [2000] as the government issued a modest 2.5 billion roubles in new short-term GKOs. This is the first issue since the August 1998 crisis’ (RET, Monthly Update, 10 March 2000, p. 16). Russia has also at times effectively (though not formally) defaulted on its sovereign debt, disguised by payment delays and formal reschedulings. Defaults (in effect) have not only applied to Soviet-era debt. Rolled over IMF loans have on occasion avoided formal defaults (which the IMF is not permitted to condone) on loans the institution has made since 1992. In early 2001 Russia tried to pressure the Paris Club of creditor nations into formally rescheduling debt. But this tactic did not succeed, especially given Russia’s healthy growth of output and foreign exchange reserves in 1999 and 2000. The budget was amended in February 2001 to provide funds. ‘Russia has paid off nearly $1 million in debt ahead of schedule to the IMF’ (IHT, 20 October 2001, p. 16). [In 2001] most of the budget surplus was used for external debt repayments. The financial reserve formed from the rest of the surplus is to be used for

Introduction and overview 115 covering future debt repayments … Russia gained much international goodwill in the autumn [of 2001] when it started repaying its debts to the IMF ahead of schedule. Also the timely redemption of Russia’s first Eurobond, which matured in November [2001], was appreciated internationally. (RET, Monthly Update, 21 January 2002, p. 2) Russia’s record of fulfilling IMF conditions has been poor and there is a debate about whether some funds have been used corruptly. Another criticism often heard is that some Western countries (especially the USA) twist the IMF’s arms behind the scenes to continue funding for broader political reasons. Russia’s prowess as a military (especially nuclear) power in the world far outstrips its economic importance, and funding has in fact continued after various delays and adjustments. ‘[In 2000] for the first time in post-Soviet history the federal budget ran a surplus, due to high revenues related to increased exports and rapid economic growth. Budget revenue exceeded targets by almost 40 per cent’ (RET, 2000, vol. 9, no. 4, p. 5). In 2000 the federal budget surplus was 2.5 per cent of GDP (the primary budget surplus being 5 per cent of GDP) (p. 53). In March [2001] the Russian Federation turned down a one-year stand-by arrangement proposed by the IMF. While the deal would not have provided Moscow with fresh infusions of cash, it might have helped the government reschedule about $40 billion in debt with the Paris Club of creditor nations … The IMF’s offer involved no money, unless the Russian economy took a sharp turn for the worse, but the accord would have required the Russian government to charge market rates on central bank loans to the government and release more information about the operations of the Russian central bank and the state-run savings bank, Sberbank. IMF and World Bank economists have noted that Russia has done little to reform its banking sector since the country’s 1998 financial blowout … The IMF last lent money to Russia in the summer of 1999, when it disbursed $640 million as part of a $4.5 billion package. That aid programme was put on hold. (Transition, 2001, vol. 12, no. 1, pp. 37–8) Economic performance GDP growth rates were negative from 1990 to 1996 inclusive. (See Table 6.3, p. 455.) (Note that the official figures for output tend to overstate the contraction to some degree owing to factors such as the generally improving quality of products, greater reliability of statistics, and the inadequate account taken of the contribution of the expanding private sector, much of it in the black economy). There were a number of false dawns before 1997, the year when (modest) positive growth returned. The Asian financial crisis (which began in July 1997) in general and the Russian financial crisis of August 1998 in particular sent the economy into reverse in 1998. In 1999 (in contrast to early forecasts) GDP

116 Introduction and overview growth turned decidedly positive owing to such factors as the large (nominal and real) depreciation of the rouble against the US dollar and rapidly rising world oil prices. In 2001 GDP was an estimated 64 per cent of the 1989 level (EBRD 2002b: 58). The hyperinflation of 1992 was conquered but the annual inflation rate is still not in single figures. The balance of payments on current account has typically been in surplus. There have been profound structural changes in the Russian economy, such as the growing importance of services at the expense of manufacturing industry. But the overall investment record has been abysmal, greatly hindering restructuring, despite more encouraging signs of late. (See Table 6.3.) The relatively low rate of unemployment, even using standard international definitions, are arousing considerable interest. One factor, it is argued, is the flexibility of the market, which allows real wages to fall. The demographic picture in modern Russia is depressing. Between the end of 1992 and the end of 2001 the population of Russia had fallen from 148.6 million to an estimated 144.8 million. Male life expectancy fell from a peak of 65 years in 1987 to a low of 57.6 years in 1994. In 1998 the figure was 61.8 years, only to fall once again to 59.8 years the following year. The 1989 census counted 119,865,900 ethnic Russians in the Russian Federation (81.53 per cent of the population). From 1989 through 1998 deaths among Russians exceeded births by 4,622,800 while the number of Russians who immigrated to the Russian Federation exceeded the number who emigrated from it by 2,640,400. Thus Russians decreased in number by 1,982,400 over the ten-year period, dropping to 117,883,500 (80.58 per cent of the population). (CDSP, 2001, vol. 53, no. 31, p. 4) Emigration during the Soviet period is divided into three waves. [In] the first wave (1917–38) … some 3.5 million to 4 million people left … During the period 1939–47 the USSR lost 8 million to 10 million people to emigration … [During the period 1948–90] … 1.1 million people [left the USSR] … Today we are seeing a fourth wave of emigration … Over an eleven-year period (1990–2000) approximately 1.1 million people left Russia … Over an eight-year period (1993–2000) 293,000 Germans, 223,000 Russians and 83,000 Jews left … Compared to the overall population, the migrant population – both emigrants and immigrants – is usually higher in ‘quality’ … People who are older, less educated and less skilled are afraid to leave their familiar surroundings … The brain drain situation is actually much worse than it appears to be from the figures … regarding the educational level of emigrants. Emigration statistics include only people who have left to live abroad permanently, but such people actually constitute a minority of the highly skilled Russian specialists who go work abroad. Russia’s scientific and scholarly diaspora living abroad on a permanent basis is 30,000 people, but another 120,000 are working abroad under temporary contracts … Very

Introduction and overview 117 often it is not the miserable pay that drives a true scientist out of the country; it is the impossibility of doing any work when there is no way to get the necessary chemical reagents, compounds, equipment etc. Even worse is when political oppression rears its ugly head again, even though today there are no objective reasons for it … [e.g.] Grigori Pasko [the military journalist] was convicted not for actually passing along classified information, but for having an intention to do so. (Noviye Izvestia, 5 July 2002, pp. 1, 6: CDSP, 2002, vol. 54, no. 28, pp. 7, 20) (Pasko was released from prison on 23 January 2003.)

Ukraine: a summary President Leonid Kuchma’s balancing act has involved getting closer to the West without causing offence to Russia. Kuchma would like his country to eventually join Nato and the EU, but Ukraine is heavily dependent on Russia for energy supplies and, more recently, for capital investment. But President Putin’s warmer relations with the United States after the 11 September 2001 terrorist attacks have made things easier for Kuchma in terms of foreign policy and even, arguably, in terms of internal politics (namely the regional split between the more Europeorientated western Ukraine and the more Russia-orientated eastern Ukraine). Kuchma’s relations with opposition parties continue to be generally poor, as have relations with the West. But Ukraine is supportive of the United States over the issue of international terrorism and, although the United States accused Ukraine of selling an advanced radar system to Iraq in 2000, Kuchma was generally supportive of the United States during the US-led war in Iraq in 2003. (See the summary of Russia for details of the reactions of the CIS countries towards the war in Iraq.) On 1 June 1996 Ukraine announced that the last nuclear weapons had been returned to Russia. The Crimea has not become a serious source of friction between Ukraine and Russia and agreement has been reached on the Black Sea Fleet. The question of Western aid to help close down the Chernobyl nuclear power plant and to provide alternative sources of power was a sore one. It was not until a visit by US President Clinton on 5 June 2000 that President Kuchma announced that the last and only operating unit (out of the original four) would be closed on 15 December 2000. (This was done on schedule.) The original concrete tomb (sarcophagus) encasing the ruined reactor has long been a cause of great concern. The extra funding needed to build a new concrete sarcophagus was almost entirely covered at a donors’ conference on 5 July 2000. Ukraine’s international reputation is sullied by its reputation as a deeply corrupt and criminalized country. ‘Ukraine’s economy is characterized by corruption and the dominance of a few well-connected tycoons, called oligarchs … They make their money from simple scams protected by their political connections’ (Business Central Europe, April 2001, p. 59).

118

Introduction and overview

Kuchma first became president on 10 July 1994. Friction between president and parliament has been a factor (as will be discussed below) in hindering economic reform. Kuchma has been re-elected, winning the second round of the presidential election (held on 14 November 1999) more comfortably than anticipated. His rival, Petro Simonenko (head of the Communist Party), was perceived as too inclined to state regulation of the economy and too close to Russia. Nevertheless, OSCE expressed considerable concern about the way Kuchma ran his campaign, e.g. the use of the state to manipulate the media. The general election of 29 March 1998 did not result in a sea change in the balance of forces in parliament: leftist forces remained the strongest but without a majority; a substantial centre persisted; nationalist forces, however, weakened somewhat. Parties have generally been strengthened. Kuchma hoped for a more constructive relationship with parliament and for a less geographically split country. The appointment (in December 1999) of the reformist governor of the central bank, Viktor Yushchenko, as prime minister augured well for accelerated economic reform. Even so, the central bank (at a time when he was governor) has been accused of exaggerating the size of Ukraine’s foreign reserves and thus misleading the IMF. The IMF statement (14 March 2000): It appears that a number of transactions in 1996–8 gave the impression that Ukraine’s reserves were larger than was actually the case. The view of the IMF staff is that Ukraine appears to have received disbursements from the IMF on three occasions in late 1997 and early 1998 that it would not have done if the true state of Ukraine’s reserves had been known at the time. An independent audit confirmed the IMF’s fears. ‘A parliamentary alliance of Communists, oligarch-led parties and supporters of President Leonid Kuchma voted overwhelmingly [on 26 April 2001] to dismiss the reformist prime minister, Viktor Yushchenko, and his government’ (IHT, 27 April 2001, p. 1). But parliament itself is still generally deeply divided. On 19 January 2000 a pro-Kuchma parliamentary majority walked out in protest at speaker Alexander Tkachenko’s refusal to resign and assembled in another building. The centreright deputies removed Tkachenko and elected People’s Democratic Party leader Ivan Plyushch as speaker. A plenary session of parliament was held on 8 February 2000 but there was still friction. On 16 April 2000 Kuchma received public backing in a referendum on increasing the powers of the president over parliament. Kuchma’s staying power is illustrated by the way he has to date ridden out allegations of involvement in the disappearance of an investigative journalist in September 2000. Georgy Gongadze was particularly concerned with corruption. On 4 October 2001 a Ukrainian missile accidentally (during a military exercise) brought down a Russian airliner. The Ukrainian military at first denied it was their fault.

Introduction and overview 119 A general election was held on 31 March 2002. In terms of broadly pro- and anti-Kuchma forces (although this crude distinction has been questioned), the result was not conclusive. But the former did well enough to retain control of the government and parliament. President Kuchma made much of a pact signed on 7 December 2002 between the government and the narrow pro-Kuchma majority in parliament. ‘Ukrainianization’ is a term the country would sooner forget, the country earlier combining hyperinflation and rapidly falling output. Ukraine is unique among transitional economies in that GDP fell continuously throughout the 1990s. It took until 2000 to achieve a positive figure for GDP growth. Prior to the figures for 1995 onwards, GDP growth was -4.0 per cent in 1990, -8.7 per cent in 1991, -9.9 per cent in 1992, -14.2 per cent in 1993 and -22.9 per cent in 1994 (UET, Quarterly Issue, March 2000, p. 14). It has been estimated that in 2001 GDP was just 46 per cent of the 1989 level (EBRD 2002b: 58). There was hyperinflation in 1992 (1,210 per cent) and 1993 (4,743 per cent). Consumer price inflation fell sharply in 1994 (891 per cent) and the inflation rate reached single figures in 2002. Ukraine was relatively badly affected by the Russian financial crisis for the sort of reasons Russia itself was affected, e.g. large amounts of short-term debt used to finance large budget deficits. Debt rescheduling has been handled much more effectively than in Russia, but inverted commas are typically placed around the word ‘voluntary’ in Western reports of rescheduling! Economic reform has often been slow and inconsistent. The IMF has periodically delayed disbursement of loans. There are signs of improvement, e.g. a decrease in barter and payments arrears. The private sector accounted for roughly 10 per cent of GDP in mid-1990. In mid-2001 the figure was 65 per cent (EBRD 1999b: 24, 280; and 2002b: 20, 212). Small privatization is virtually complete. But large privatization has been much slower and more erratic. Friction between President Kuchma and parliament is one explanatory factor. The programme of small privatization had been ‘substantially completed’ by the end of June 1996. Since the beginning of 1995 the main method of large privatization has been the issuing of shares, as opposed to the leasing contract used earlier. Reportedly, shares have been allocated in many cases through preferential sales and buy-outs by management and employees … The limited success of certificate privatization is probably due to the fact that the most attractive enterprises, namely those of oil, chemical and metallurgy industries, have so far not been on offer. (UET, Quarterly Update, October 1996, pp. 68–70) The privatization process was initiated in 1992. The ongoing privatization programme is largely based on the presidential decree of November 1994. Property certificates were issued to citizens in January 1995. Compensation certificates have been issued since February 1996 as compensation to holders of

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Introduction and overview

savings deposits, state insurance and government bonds whose purchasing power was eroded by high inflation. Preferential treatment may have included selling shares to workers at a discount and providing a packet of shares to the management (up to 5 per cent) which was either free or at a discount. Until 1995 most of the enterprises were privatized by leased buy-outs with the minimal involvement of outsiders (UET, Quarterly Update, June 1997, pp. 82–8). ‘There is substantial agreement among economists that there has been little change in the behaviour of the typical enterprise in Ukraine (p. 80). In December 1994 parliament lifted its moratorium on mass privatization, but replaced it with a list of 6,147 enterprises in the transport, communications and energy sectors that were to be excluded from privatization. The list was extended in March 1995 by ninety enterprises in the oil refining, defence and food processing industries. Although parliament rejected the 1995 privatization programme in April 1995, its decision was overruled by a June presidential decree (EBRD 1995b: 61). By mid-1996 the majority of sales had taken the form of preferential sales, share transfers and buy-outs by management and employees. In August 1996 the government approved a list of over 200 enterprises to be sold via international tender. The main method of privatization has been management and employee buy-outs. But increasing use of auctions has been made since September 1995. There has been no restitution to former owners of nationalized property. Enterprise budget constraints have remained soft (EBRD 1996b: 180–1). The vouchers are often exchanged for shares in investment funds. The pace of large privatization slowed in the first half of 1997 (EBRD 1997b: 208). The 1998 privatization programme has been approved by the president. This includes the completion of the mass privatization programme by the end of 1998 and gives greater emphasis to the sale of larger enterprises for cash. At the beginning of 1998 the government announced its intention to privatize a number of large enterprises in the energy, transport and financial sectors, as well as to break up and eventually privatize the main state enterprises in the telecommunications and the grain marketing/distribution sectors. The decision to focus on sales to strategic investors reflects both the need for fresh capital and the need to raise revenue for the budget (EBRD 1998a: 43). By mid-1998 only forty of the 200 largest enterprises had been privatized (via open tender for cash or via investment tender to strategic investors). ‘The dominant role of insiders in newly privatized firms coupled with persistent weaknesses in financial discipline and in the enforcement of bankruptcy law have contributed to the slow pace of industrial restructuring’ (EBRD 1998b: 196). At the beginning of 1999 it was estimated that over 9,500 medium-sized and large enterprises (of which about half are agro-industrial enterprises) had been privatized, such that private ownership exceeded the 70 per cent target set by the government … At the beginning of the year the president approved the 1999 privatization programme, designed to promote cash privatization … and to attract strategic investors. (pp. 45–6)

Introduction and overview 121 Over a quarter of the 200 larger enterprises originally identified for case-bycase privatization through open tender have been privatized, although relatively few strategic investors have participated owing to a lack of transparency of procedures (EBRD 1999b: 278). ‘The government’s current privatization programme promotes cash sales for large enterprises and agro-industrial enterprises, in contrast to the previous emphasis on sales via tender and through local stock exchanges’ (EBRD 2000a: 84). Voucher-based mass privatization was concluded in 1999. However, initial attempts to sell shares of larger enterprises via open tenders were less successful owing to a lack of transparency … In 1999 over 1,930 enterprises were more than 70 per cent privatized (taking the total to 11,450 enterprises from 1995) … Fiscal pressure and the need to promote large-scale privatization led the government to propose a more radical approach to privatization for the period 2000–2, which was approved by the Rada in May 2000. The emphasis will be on sales of state shares in some of the largest enterprises in major sectors of the economy, including metallurgy, energy and chemicals. The sales will be to strategic investors and for cash. (EBRD 2000b: 222–3) Large-scale privatization has proceeded but receipts fall short … During the year the state property fund has sold stakes in larger companies through tenders, cash auctions and via the stock exchange. A number have been purchased by Russian companies, especially in oil refining … Majority stakes in six power distribution companies were sold to strategic investors in April 2001. (EBRD 2001b: 206) ‘Large privatizations [have been] delayed … Small-scale privatization has continued … The small business sector has continued to develop’ (EBRD 2002b: 210–11). Corruption has raised considerable concern. There is … the offshore Ukraine, off-budget Ukraine, a ‘shadow’ economy … possibly the largest such economy in the world and one which is estimated by many experts at 60 per cent of total GDP … Through the shakhmatka [chessboard] system Ukraine’s cabinet of ministers divides stateowned factories, mines and collective farms between a few well-connected trading companies, which skim off the profits … mainly realized by bartering energy on very disadvantageous terms to the factories. In a country where the banking system is virtually non-existent these energy trading companies are the main source of working capital. Many traders are now replacing barter with pocket banks that lend cash to the enterprise at 80 per cent to 100 per cent interest rate, which is then used to buy inputs from the trader … [For example, the former] United Energy Systems [was]

122 Introduction and overview linked to Pavlo Lazarenko, the former prime minister, whose extradition from the USA to Switzerland is being sought [on money-laundering charges] … It is alleged that in 1996 and 1997 decrees by Lazarenko gave UES an exclusive monopoly on supplying natural gas to many of Ukraine’s prime industrial regions. The profits were transferred through Swiss banks, much winding up in Mr Lazarenko’s accounts … New traders have stepped in to fill UES’s shoes … Another method … of making money from Ukraine’s state enterprises … is the use of off-budget funds set up by Ukraine’s ministries and local administrations. Contributions to these offbudget funds are often counted as costs on the balance sheets of state enterprises … Meanwhile, for firms close to the government, tax-paying is optional. (Charles Clover, FT, Survey, 10 November 1999, p. vi) Analysts estimate that Ukraine may have the largest ‘grey’ economy in the world, worth 50 to 100 per cent of its GDP … Leonid Kuchma, the Ukrainian president, has ordered the government to declare an amnesty for an estimated $20 billion of ‘grey capital’ – money kept offshore by Ukrainian businessmen in order to evade taxes. The decree [was signed] on Friday [31 March 2000]. (FT, 3 April 2000, p. 8) A new law, authorized by President Leonid Kuchma but still to be adopted by parliament, will grant an amnesty to shadow capital, allowing Ukrainians to legalize any assets they have been hiding from the taxman. They simply have to declare the money to the tax authorities, transfer it from any foreign bank account to a Ukrainian one and pay a 10 per cent tax on it. Then it is legal and they can spend it freely … Analysts estimate that about a half of Ukraine’s economy is not reflected in the government’s books. (Business Central Europe, September 2000, p. 46) Ukraine is heavily dependent on imports of fuel from countries such as Russia and Turkmenistan, especially gas (with payments arrears a common problem). Metals and minerals are important exports. A unified exchange rate was introduced in October 1994 (EBRD 1996b: 181). On 12 May 1997 Ukraine accepted Article 8 of the IMF, thus guaranteeing unrestricted convertibility of the grivna for all current account transactions (UET, Quarterly Update, June 1997, p. 4). On 1 September 1997 the cabinet of ministers and the national bank adopted a joint resolution which officially introduced a currency corridor for the grivna and limited the fluctuation of its exchange rate against the US dollar within the range 1.7 to 1.9 until the end of 1997 (UET, Monthly Update, October 1997, pp. 2–3). The currency bands have been subsequently widened to reflect a depreciating grivna. There has been reference to ‘pervasive exchange controls’ (UET, Monthly Update, November 1998, p. 4).

Introduction and overview 123 As part of the authorities’ package of anti-crisis measures in response to the Russian crisis the national bank of Ukraine introduced various restrictions in the foreign exchange market, including a ban on foreign exchange trading in the interbank market and the reintroduction of a 50 per cent export revenue surrender requirement. (EBRD 1999a: 45) High tariff and non-tariff barriers remain a significant obstacle to trade, despite the removal of the temporary import surcharge … At the beginning of 2000 the temporary 2 per cent was removed and some preferential import duties were lowered … Despite some recent reductions in tariff barriers, licensing requirements still hamper foreign trade … The resort to certification procedures and other non-tariff barriers to protect domestic industry has slowed progress. The maintenance of the export duty on sunflower seeds and a recent presidential decree on intervention in the grain market have also raised concerns that production will be adversely affected … When the grivna moved out of its then band (4.6 to the US dollar) in November, and with only limited reserves, the National Bank of Ukraine let it float, a policy that was confirmed in February 2000. (EBRD 2000b: 222) There has been only a limited shift to private farms in terms of land area. But the private sector (including private plots) is much more important in terms of its contribution to agricultural output. The legal organization of agriculture did not change very much until 1995. In 1992 a new type of agricultural enterprise had been created, collective farms being allowed to transform themselves into ‘collective agricultural units’ (whose status was similar). Ownership transformation was very slow. ‘Few country people used their newly granted individual property right on land and assets to transform into private farmers’ (UET, Quarterly Update, August 1996, pp. 76–7). Land ownership is as follows: 60.2 per cent state; 36.6 per cent collective; 3.2 per cent private (UET, Quarterly Update, October 1996, p. 4). The land owned by 35,353 farmers is just 1.9 per cent of the total area of agricultural land. On average one farm household possesses 23 ha of land (p. 68). The share of the private sector in agricultural output increased from 32.8 per cent in 1991 to 59.9 per cent in 1999. The basic constituent of the private sector is subsidiary household plots. Private farms do not play an important role in the development of the agricultural sector … Private farms use … 2.8 per cent of all agricultural land … As of 1 January 2000 one private farm on average had 32 ha of agricultural land. (UET, Quarterly Issue, March 2000, p. 9) The private farm does not yet play a significant role in the agricultural sector in Ukraine. Using about 5 per cent of arable land private farmers

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Introduction and overview produce about 4 per cent of total agricultural production. The bases of the private sector are the household land plots, which produce about 56 per cent of total agricultural production. (UET, Quarterly Issue, June 2000, p. 15) Uncertainty of the legal status of land certificates hampers the process of transfers of rights on land share (average size of a land share is 4.3 ha). Due to existing restrictions land certificates cannot be actually purchased or sold. The main form of their utilization is leasing. Almost half of land used by farms is leased property. (UET, Quarterly Issue, December 2000, p. 17) By 1 September 2000 the former CAE [collective agricultural enterprises] had been restructured into 13,266 agricultural enterprises, of which 6,152 (or 46.4 per cent) were limited liability companies, 3,376 (or 25.4 per cent) were agricultural production co-operatives, 2,800 (or 21.1 per cent) were private and private-leasing enterprises and 938 (or 7.1 per cent) constituted private farms. [Around] 72 per cent of these enterprises are still run by former CAE managers, who have failed to improve management methods and to run enterprises appropriately as the agricultural production co-operative differs far too little from the CAE. There is barest necessity now to restructure these co-operatives into private farms. Numerous restrictions on the right of rural citizens to obtain private ownership of land, which are quite often imposed by local governments and managers of newly created farms, must be eliminated. Private households account for almost 65 per cent of gross agricultural output … [In the first] nine months of 2000 households produced more than two-thirds of meat, milk and eggs. Sales of their own agricultural products provide rural citizens with money. The lion’s share of salaries is paid by agricultural enterprises to their workers in kind (mainly in goods and occasionally in services). It is possible to get rid of widely spread barter transactions by means of introducing transparency into the agricultural market … [The 29 June 2000 presidential decree] paves the way for the sale of grain for cash through a transparent market infrastructure (commodity exchanges, auctions and trading houses). Additionally, mortgaged-based grain purchases were introduced. This mechanism determines grain purchases from agricultural producers at mortgage prices during the harvest season while guaranteeing producers the right to sell their grain again at market prices if these exceed mortgage prices. (UET, Quarterly Issue, September 2000, p. 9)

By the end of 1992 there were 14,400 private farms, with an average of 20 ha (CDSP, 1993, vol. XLV, no. 5, p. 22); they accounted for 0.7 per cent of total agricultural land (United Nations Economic Commission for Europe 1993: 206). Workers now own certificates as proof of their share of the enterprise and

Introduction and overview 125 can split away, receive the title to their share of land and become private farmers. But only 4 per cent of land is privately farmed (FT, Survey, 5 May 1998, p. v). In 1996 private household plots occupied only about 12 per cent of agricultural land but produced over 47 per cent of agricultural output. The majority of farms have been officially transformed into joint stock companies called collective agricultural enterprises (as of 1 January 1997, 75 per cent of state farms and 99 per cent of collective farms). But ‘they have undergone little change in management, production choices or resource allocation’. Those who choose to exit the collective agricultural enterprises receive a plot of land. ‘Few chose this option, perhaps due to the high degree of risk involved’ (Britta Bjornlund, Transition, October 1997, vol. 8, no. 5, pp. 20–2). Individual farmers own just 2 per cent of Ukrainian land (The Economist, 11 September 1999, p. 44). The 13 million private smallholders satisfy 25 per cent of food consumption (FT, 23 February 1993, p. 18). In 1995 roughly 40 per cent of all food output came from privately held land, including weekend garden plots (FT, 13 March 1996, p. 35). In 1993 individuals held only 11 per cent of all agricultural land, yet they produced 43 per cent of all livestock and 37 per cent of crops (Daniel Kaufmann, Transition, 1994, vol. 5, no. 7, p. 5). About 14 per cent of arable land is held as private subsidiary plots, but it is not tradable. Private land produces about half of agricultural output, with the 86 per cent in collective and state hands producing the other half (Daniel Kaufmann, Transition, 1997, vol. 8, no. 2, p. 6). The first decree presented to President Leonid Kuchma for signature following his re-election [on 14 November 1999] essentially introduced private land ownership. The certificates that farmers received after the land had been divided into shares acquired legal force and now constitute documents of ownership. Plots may now be leased to other parties on a contractual basis, passed on to their heirs or used for any type of agricultural activity at the owner’s discretion. For the first time foreigners are allowed to lease land for a period of fifty years. (CDSP, 1999, vol. 51, no. 52, p. 16) On 4 December 1999 Kuchma signed a decree allowing for the purchase and sale of land by private individuals or interests (EEN, 2000, vol. 12, no. 21, p. 7). Following a recent presidential decree on land reform, the first stage was completed in April 2000 with the transfer of ownership of collective farms to private entities or co-operatives. The next stage will be to develop land ownership, enabling farmers to use their land as collateral. (EBRD 2000a: 84) A presidential decree of December 1999 allows former members of collective farms to leave with their share of land and property. Although land

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Introduction and overview cannot currently be sold, leasing to private operators has increased. By April 2000 11,000 collective farms had been transformed into private ownership or co-operatives. In July the Rada approved the Land Code at first reading. If the Land Code is adopted it would allow farmers to trade land and use it as collateral, which should lead to an increase in finance for agriculture. However, higher agricultural output will also depend on reduced state interference in the sector. (EBRD 2000b: 223) Approval by the Rada (parliament) of the draft land code would complete the process of land reform begun last year [2000] with the abolition of collective farms. This measure would introduce a land registration system and help to develop a land market. However, the lack of a mortgage law would still limit the ability of farmers to receive credit against the value of land and other fixed assets. (EBRD 2001a: 94) The new land code, which took effect at the beginning of 2002, allows for the sale of agricultural land from 2005 … One of the main benefits of the new land code will be to allow the use of land as collateral … By July [2002] 42 per cent of land owners had completed the formal registration of ownership of their plots. (EBRD 2002b: 210) [On 23 November 2000 the president] vetoed the law ‘on agreements on land shares’, which was adopted by parliament on 2 November 2000. According to this law, all agreements, other than inheritance (legal succession), giving to citizens the ownership rights on land shares, shall be considered invalid. The president believes that this law does not comply with the constitution. (UET, Monthly Update, November 2000, p. 3) The Law of Ukraine dated 18 January 2001 … deprived the owner of a land interest of his right to freely dispose of his land share. The law provided that, until procedures for realization of the rights of individuals and legal entities in these land plots (interests) have been spelled out by the Land Code of Ukraine, it shall be prohibited to enter into agreements for the sale and purchase, donation and pledge of land interests. Land shares may be alienated only by transfer into an inheritance and in the case of buyouts of land plots for state and community needs … A new Land Code is in the course of being considered by parliament. (UET, Quarterly Issue, June 2001, pp. 10–11)

‘The leasing of agricultural land has become an important means for increasing the amount of land used by private farms’ (p. 16)

Introduction and overview 127 [On 29 January 2001] the president of Ukraine signed an order … [which] envisages the certification of rights to own property shares by issuing property certificates to former members of collective agricultural enterprises. The share ownership right may be leased, sold, purchased, granted as a gift, exchanged and inherited. In the case of leasing the rental fee must not be less than 1 per cent of the share value. (UET, Monthly Update, January 2001, p. 3) ‘The decree of the president dated 30 May 2001 … is supposed to ensure the acceleration of the completion of land reform’ (UET, Quarterly Issue, June 2001, p. 11). A Land Code providing for private land ownership was passed on third reading by the Ukrainian parliament [on 25 October 2001] … Ukrainian legislators decided that farmers should have the right to acquire land free of charge, provided that ‘they are Ukrainian citizens and hold a degree in agriculture or have agricultural experience’. (Nezavisimaya Gazeta, 27 October 2001, pp. 1, 5: CDSP, 2001, vol. 53, no. 43, p. 16) On 15 November [2001] the law was signed by President Kuchma … entered into force on 1 January 2002, and replaces the old Land Code from 1992 … It finally establishes a legal foundation for private land ownership … Private and legal persons are prohibited to sell or otherwise transfer their land plots or land shares or transfer them to company capital until January 2005. Furthermore, private and legal persons’ purchase of ownership of agricultural land is limited to a maximum of 100 ha up until 1 January 2010 … Anyone purchasing agricultural land must have agricultural education or experience, or be involved with commodity agricultural production … The right to private ownership of land covers Ukrainian as well as foreign private and legal persons with two important exceptions: foreign private and legal persons are not allowed to own agricultural land or other land outside built-up areas. Land which is not agricultural land and which is situated outside built-up areas may be purchased if they own or plan to purchase property, e.g. a factory, belonging to the land. Land may also be leased to foreign private or legal persons. (UET, 2002, Monthly Update, January 2002, pp. 29–35) ‘The average size of land plot is 4.1 hectares’ (UET, Monthly Update, April 2002, p. 2). State farms are being privatized, with each collective farm worker receiving about five hectares of land. A fifth of agricultural land has already been privatized this way, with the rest due to go soon … There are still some problems, though. In particular, farmers are not allowed to sell their land … But … the left-leaning parliament … has agreed to discuss land sales later

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Introduction and overview this year. Such reform urgency marks a big shift from previous, failed, attempts at land reform. Farmers were actually given privatization certificates back in 1995, but few of them ever received any land because the certificates failed to specify a location. As a result, state farm managers and regional officials simply scuppered deals, to protect their own positions. The problem has now been dealt with. Already there are signs that farmers are thinking more commercially … The change has as much to do with ending state intervention last year, as with land privatization. For years Ukrainian farms were trapped in a vicious circle. The state paid for their fuel and fertilizers in the spring, but then took away their crops later in the year. So there was no incentive to increase production. (Business Central Europe, May 2001, p. 47)

‘The distribution system is in the hands of a government monopoly’ (The Economist, 2 September 1995, p. 41). ‘The government remains the largest buyer and about the only supplier of seeds, fertilizer and so on’ (The Economist, 11 September 1999, p. 44). ‘The government is still controlling the supply of a large quantity of strategic inputs’ (UET, Monthly Update, April 2000, pp. 4–5). The share of peasant farms in agricultural land increased from 0.1 per cent in 1992 to 2.5 per cent in 1999 (Spoor and Visser 2001: 888). The share of private farms and household plots in agricultural production increased from 30 per cent in 1991, to 37 per cent in 1992 and to 60 per cent in 1999 (p. 890). Agricultural producers have responded to a number of incentives, including the initial privatization of 11,000 collectives (which were transformed into more than 15,000 private farms), the government’s decision to stop providing commodity backed loans and, from the beginning of this year [2001], the removal of the ban on the bankruptcy of agricultural enterprises. (EBRD 2001b: 207) Direct foreign investment has been relatively small, although Russian companies showed considerable interest when the Russian economy began to recover from the 1998 financial crisis. ‘Flows of foreign direct investment … remain low. The extent of regulation, the tax burden and the difficulties of enforcing contracts remain the main obstacles, according to most surveys. However, the passage in 1999 of the laws on production sharing and on concessions could provide investors with incentives to invest in natural resources and in infrastructure respectively. In addition, in February 2000 a law was adopted introducing the concept of national treatment between domestic and foreign-owned enterprises with respect to tax and currency regulations. (EBRD 2000b: 223) Critics of Western aid policy include Jeffrey Sachs, who argues that much more should be done to help Ukraine (FT, 17 February 1995, p. 17).

Part I

The Baltic States of Estonia, Latvia and Lithuania

1

Estonia

POLITICS

The political background Citizenship In the 1934 population census 88 per cent were Estonians, 8.2 per cent Russians, 1.7 per cent Germans, 0.7 per cent Swedes and 0.4 per cent Jews (Henn-Juri Uibopuu, The World Today, June 1992, p. 109). The 1989 census revealed that 61.5 per cent of the population of 1.6 million were Estonians, 30.3 per cent were Russians and 3.1 per cent were Ukrainians (Gwiazda 1994: 77). Only 14 per cent of Russians have mastered the Estonian language (p. 79). Many Russians, Ukrainians and Belarussians living in the Baltic States regard the countries as their home. They (about 30 to 35 per cent) too voted in the referenda for the independence of the Baltic republics and they now feel betrayed by their Estonian, Latvian and Lithuanian fellow citizens. The native people of the Baltic countries, however, remain distrustful of the Russian minority. (p. 78) Out of a population of 1.5 million in 1994, official statistics showed that ethnic Estonians accounted for 64 per cent. Russians accounted for 29 per cent, Ukrainians 2.7 per cent, Belarussians 1.6 per cent and Finns 1 per cent. Estonia is home to some 3,000 Jews and 3,600 Tatars (Baltic Observer, 7–13 December 1995, p. 5). ‘Estonia’s population has dropped … to 1.37 million, according to a census published last year [2001]’ (Baltic Times, 4–10 July 2002, p. 6). As of 1 October 1994 there were 52,411 Russian citizens of Estonia (Baltic Observer, 13–19 October 1994, p. 6). There are about 451,000 non-citizens; some 53,000 residents have chosen Russian citizenship (Baltic Observer, 10–16 November 1994, p. 2).

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Estonia

Unlike in national parliamentary elections, in local elections non-citizens who hold Estonian residence permits and have lived in their voting districts for at least five years have the right to vote. Roughly 200,000 non-citizens have the right to vote across Estonia, including 87,000 in Tallinn (Baltic Times, 21–27 October 1999, p. 1). Unlike in parliamentary elections, anyone with an Estonian residence has the right to vote in local elections, including approximately 300,000 Russian speakers (Baltic Times, 23–9 September 1999, pp. 1, 7). On 21 June 1993 a new nationality and citizenship law was introduced according to which non-citizens (citizens being those with that status on 16 June 1940 or their descendants) had to register and apply for citizenship (which required two years’ residence from 30 March 1990, a language test and the taking of an oath of loyalty) or residence permits within two years. (Fewer than 3 per cent of ethnic Russians had attained Estonian citizenship by July 1993: Business Central Europe, November 1993, p. 74.) On 27 June 1993 the new nationality and citizenship law was suspended until the Council of Europe and the CSCE had been consulted. The president signed the amended law on 12 July 1993. There were a number of clarifications about residence, e.g. pensioners and those lawfully employed in the civilian sector were protected, while soldiers and criminals were not (The Economist, 31 July 1993, p. 41). Now residence permits would be denied only to people who posed a threat to security, people who had been sentenced to lengthy terms but amnestied before completing them, and active-duty officers of foreign armies and members of their families (CDSP, 1993, vol. XLV, no. 28, p. 24). On 19 January 1995 a new citizenship law was adopted, establishing six years as the period of residence required prior to naturalization instead of three years. The previous law stated that applicants for citizenship had to have lived in Estonia for two years and could become naturalized citizens one year after submitting the application. The new law replaced the two-plus-one-year scheme with a five-plus-one-year scheme. As of December 1994 the number of people who had been granted citizenship was 48,000. As of October 1994, 52,000 people had received Russian citizenship. Out of a population of some 1.5 million, 962,000 are Estonians and 436,000 are Russians (Baltic Observer, 26 January–1 February 1995, p. 4). Since 1992 about 100,000 of Estonia’s 500,000 Russian-speakers have obtained citizenship and are able to vote. Half of them lived in Estonia before the Second World War and qualified for automatic citizenship, while the rest passed a language exam and a minimum residence requirement (Baltic Observer, 9–15 March 1995, p. 7). Non-citizens who had failed to apply for work and residence permits by 12 July 1995 would be given a chance to apply late (Baltic Observer, 29 June–5 July 1995, p. 1). There are 400,000 non-citizens. Over 73,000 have chosen Russian citizenship since the collapse of the Soviet Union (p. 3). Estonia has an estimated 300,000 non-citizens (Baltic Observer, 18–24 January 1996, p. 1). In November 1995 the UN Committee on Human Rights stated that ‘a substantial segment of the population, especially the Russian-speaking minority, is unable to obtain Estonian citizenship because of strict requirements for

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knowledge of the language and because there is no possibility … of challenging administrative decisions that deny naturalization’ (CDSP, 1995, vol. XLVII, no. 48, p. 26). Applicants for citizenship and the vote must pass an exam on the laws and constitution, in Estonian … Government statistics show that only 90,000 people of a possible 500,000 have been naturalized by this process since 1992. Some 100,000 have opted for Russian citizenship, while the remainder must make do with two- or five-year residence permits and an alien’s passport. (Guardian, 11 January 1997, p. 14) On 12 July 1998 a start was made on accepting applications for permanent residence permits from non-citizens who had previously obtained only temporary permits. About 250,000 people were eligible to apply, i.e. those residents who had lived in Estonia with a fixed-term permit for at least three years during the past five years. Those excluded from consideration were non-citizens who had been issued temporary residence permits for a period of study, former Russian military and persons with a valid court sentence of one year or more in detention (Baltic Times, 9–15 July 1998, p. 4). On 8 December 1998 parliament voted to ease the naturalization requirements for nearly 6,000 Russian-speaking children. Children born in Estonia to stateless parents after 26 February 1992 and who do not have citizenship of another country would be allowed to apply for citizenship without passing an Estonian language test. The law was to go into effect on 12 July 1999 after being signed by the president (Baltic Times, 10–16 December 1998, pp. 1, 4). Constitutional amendments were passed by parliament on 15 December 1998 and signed into law by the president on 31 December 1998. (Constitutional amendments require at least fifty-one votes in the 101-member parliament, whereas regular laws need only a majority of those present.) The amendments were approved despite objections from OSCE. The language requirements were to go into effect on 1 May 1999 and would not affect the March 1999 general election. The amendments require all elected officials and candidates for public office, either on the national or municipal levels, to display proficiency in Estonian … As it stands now, candidates for office must sign a declaration that they know Estonian, but the requirement is not enforced and there is no standard for what constitutes ‘knowledge’ of the language. The amendments define proficiency as being able to take part in Estonian discussions and being able to understand all legal acts written in the state language. The law is not expected to affect local government elections, especially in heavily Russian areas, in which non-citizens may vote. Franchise is limited to Estonian citizens in parliamentary elections. (Baltic Times, 1–13 January 1999, p. 4)

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Estonia Max van der Stoel [the OSCE high commissioner for national minorities] said Estonians who do not speak the state language must retain the right to run for election. ‘It is up to the voters to decide whether they want to elect to parliament somebody who is not fluent in the Estonian language,’ van der Stoel said … Van der Stoel said the amendments are neither in accord with Estonia’s constitution nor with Estonian international obligations and commitments. The amendments require members of parliament and elected officials in local and municipal government to prove efficiency in the Estonian language so that they can participate in debates and understand the contents of legal acts. (Baltic Times, 14–20 January 1999, p. 2)

On 12 February 1999 amendments to the language law were signed into law, ‘despite heavy criticism from the Russian-speaking minority and questions from OSCE’. The amendments were to be enforced after 1 July 1999. ‘The amendments … require all people who work with the public, including private business people and non-governmental organizations, to be able to speak Estonian’ (Baltic Times, 8–14 July 1999, p. 1). In February 1999 parliament adopted controversial language law amendments requiring people offering services to conduct their business in Estonian. The president promulgated the amendments on 12 February. The amendments state that business people, public servants and local government workers must know Estonian to a level required to promote their goods and services and carry out their responsibilities. People who serve clients are affected, such as shop assistants, teachers, doctors and waitresses. The depth of knowledge depends on the particular job, e.g. a cashier needs to know only basic Estonian (Baltic Times, 18–24 February 1999, pp. 1, 4). The language law specifies that: ‘Public signs, announcements and advertisements shall be in Estonian.’ The national language board has interpreted this to mean ‘only in Estonian’. This excludes translations into other languages. For example, political advertisements in Russian and even in both Estonian and Russian have been removed. The law prohibiting public signs in foreign languages pertains only to advertisements and announcements on ‘recognized advertising media’ such as billboards and posters. Signs placed in the windows of a private home and printed campaign materials (such as brochures and newspaper ads), for example, are not covered by the law (Baltic Times, 23–29 September 1999, pp. 1, 7). The Estonian government on 23 October [2001] officially passed a bill to abolish language proficiency requirements for national and local election candidates … Requirements … currently mandate candidates to have a toplevel command of spoken and written Estonian … OSCE has been pointing to the issue for some years. (Baltic Times, 25–31 October 2001, p. 4)

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[On 21 November 2001] in the light of amendments to Estonia’s laws on national and local elections, OSCE announced its remit has been fulfilled. The announcement may herald the closure of the mission … On 21 November parliament abolished a requirement, which entered into force in 1998, that candidates for election both to it and to local councils speak Estonian. (Baltic Times, 29 November–5 December 2001, p. 4) ‘The OSCE mission … said yesterday [22 November 2001] that new changes to the state election law meant its mandate in the country was complete. Estonia’s parliament on Wednesday [21 November] abolished controversial language requirements for election candidates’ (FT, 23 November 2001, p. 12). ‘About 172,000 Russian-speaking Soviet-era immigrants … do not have Estonian citizenship’ (Baltic Times, 18–24 July 2002, p. 1). ‘Some 19 per cent of Estonia’s 1.4 million people … remain non-citizens, most of them ethnic Russians’ (Baltic Times, 17–23 October 2002, p. 2). More than a decade after independence, attempts to get non-Estonians to speak the official language have been ineffective and certain groups of Russian speakers still do not care about having things done in Estonian, according to the Emor survey released last week. According to the official census carried out in 2000, there are about 439,800 non-Estonians living in Estonia, which is almost 30 per cent of the population. (www.baltictimes.com, 9 January 2003) Russian troops in Estonia Fewer than 17,000 Russian troops (out of a total of 145,000 in 1991) remained in the Baltic States (none in Lithuania and most of the remainder in Latvia) (IHT, 13 November 1993, p. 2). The Times (18 March 1994, p. 13) put the numbers at around 12,000 in Latvia and less than 2,000 in Estonia (2,300 according to IHT: 7 April 1994, p. 5). 10 July 1994: at the G7 (‘political G8’) meeting, Yeltsin rules out the removal of all remaining Russian troops by 31 August because of the dispute over the citizenship and housing of retiring Russian military officers. But he agrees to meet the Estonian president. 26 July 1994: Presidents Yeltsin and Meri sign an agreement. A statement was issued: The presidents of Russia and Estonia signed an agreement today that the rights of the Russian military pensioners would be respected equally to the rights of Estonian citizens. They also signed an agreement in accordance with which Russian troops are withdrawn from Estonia before 31 August. Retired military servicemen will be denied a residence permit only if they are a threat to national security. (The most generally given figure for the number of

136 Estonia troops remaining was about 2,000 and that for retired/retiring Russian officers was about 10,000. The equality of treatment was not exactly clear in some respects. Pensions would be awarded, but it seemed that citizenship would not be offered to those below the usual retiring age.) 31 August 1994: the last Russian troops pull out (although 210 ‘military specialists’ will remain for about a year to decommission two nuclear reactors, used for training purposes, at the Paldiski nuclear submarine base). The few remaining Russian personnel left the naval complex on 26 September 1995.

Political developments prior to the 5 March 1995 general election The 20 September 1992 general election produced a five-party coalition (‘Fatherland Coalition’) of conservatives and Christian Democrats led by prime minister Mart Laar. Parliament elected Lennart Meri as president. 25 June 1993: Russia cuts off gas supplies (for several days, allegedly because of non-payment). 17 July 1993: two heavily Russian-dominated towns in north-eastern Estonia held a referendum on local autonomy (‘a territorial autonomous entity within the Estonian Republic’). The turnout was relatively low, but a large ‘yes’ was given by those who did vote. The respective turnouts for Narva and Sillamae were as follows: 57.4 per cent and 61.5 per cent; the respective ‘yes’ votes were 97 per cent and 98.6 per cent. (Note that foreign non-citizens can vote in local elections. Candidates did well in the elections held in September 1993. Candidates have to be citizens, but the Estonian government granted that status to about thirty-five Russians to allow them to stand: IHT, 13 November 1993, p. 2.) 13 August 1993: the National Court annuls the referendums. 10 September 1993: the Pope visits Estonia. 18 September 1994: the Estonian Social Democrats decide to leave the coalition government. 26 September 1994: prime minister Mart Laar loses a vote of no confidence in parliament on the grounds of ‘improper conduct of affairs of state’ (e.g. there were allegations that old rouble notes had been sold improperly, perhaps to Chechnya; note that this was in violation of the agreement with Russia). (One report talked of political in-fighting, charges of financial impropriety and discontent with the high cost of reform: Baltic Observer, 13–19 October 1994, p. 1.) 28 September 1994: the ferry Estonia sinks with massive loss of life. (The ferry belongs to a joint venture between a Swedish company and the state-owned Estonian Shipping Company.) 13 October 1994: parliament rejects President Meri’s candidate for prime minister (central bank governor Siim Kallas). 27 October 1994: environment minister Andres Tarand is appointed prime minister. He belongs to no party, but does support the Green movement. 23 November 1994: President Yeltsin visits the disputed border area and vows never to give it up. (The area was considered to be part of Estonia in the 1920 Tartu Peace Treaty, but it was annexed by the Soviet Union in 1945.)

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The 5 March 1995 general election There were 1,256 candidates for the 101 seats. Sixteen parties/coalitions contested the election and nine failed to reach the 5 per cent threshold. There was a decisive swing to centre-left parties. Reasons included the economic pain of transition (felt especially by groups such as the elderly and farmers) and the desire for greater political stability. The government had been accused of financial impropriety (see above). The young, inexperienced, fractious, free-market radicals were swept aside. There was general agreement among the parties broadly to go ahead with economic reform, but the more left-leaning parties stressed a gentler transition to capitalism (with stronger social guarantees), slower progress towards the EU and closer ties with Russia. The turnout of the nearly 800,000 eligible voters was 67 per cent. Below is the resulting distribution of votes and seats in the 101-member parliament: Coalition Party/Rural Union: (32.3 per cent of the vote; forty-one seats). This centre-left grouping was formed in January 1995. The leader of the Coalition Party is Tiit Vahi, who was a state enterprise director in the Soviet era, caretaker prime minister in 1992 and currently chairman of the Tallinn City Council. He supports a market economy, but one with a stronger social safety net (e.g. increased pensions were promised). The leader of Rural Union is Arnold Ruutel, who was Estonian president from 1983 to 1992. The party favours increased support for the rural sector. Reform Party: (16.3 per cent of the vote; nineteen seats). The leader of this rightwing party is Siim Kallas, the governor of the central bank. The party favours fast reform and believes that the country cannot afford higher social spending. Centre Party: (14.2 per cent of the vote; sixteen seats). The leader of this broadbased coalition is Edgar Savisaar, who headed the last government of the Soviet era. Fatherland Party/Estonian Independence Party: (7.1 per cent of the vote; eight seats). Moderates: (6 per cent of the vote; six seats). The leader is the current prime minister, Andres Tarand, who is pro-reform but sees the necessity of social guarantees. Our Home is Estonia: (5.9 per cent of the vote; six seats). This is the party of ethnic Russians, Russian–Estonian citizens being allowed to vote for the first time in a parliamentary election. The platform is mildly left, advocating slower privatization and greater social guarantees. Support for Estonian independence is tempered by support for closer ties with Russia. Right Wingers: (5.1 per cent of the vote; five seats). Led by former speaker of parliament Ulo Nugis.

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Political developments after the 5 March 1995 general election 31 March 1995: Coalition Party/Rural Union and the Centre Party agree to form a coalition government. 12 April 1995: Estonia and the EU initial an associate membership agreement (which was signed on 12 June 1995). 16 April 1995: the government takes office, with Coalition/Rural Union having ten ministers and the Centre Party five (including Edgar Savisaar as interior minister; the other ministries are economics, transport and communications, social affairs, and culture and education). Prime minister Tiit Vahi promises to continue with the policies of the previous government, but has made commitments to help farmers (with low-interest loans and tax concessions) and old-age pensioners. 24 May 1995: Estonia and Ukraine sign a free-trade agreement. 11 October 1995: prime minister Tiit Vahi tenders his resignation, having dismissed interior minister Edgar Savisaar the previous day for being linked to ‘scandals that were too big’. (The scandal concerned the secret taping of talks to form the new government. Savisaar later quit politics.) 6 November 1995: Tiit Vahi’s new coalition government is sworn in, with six ministerial positions awarded to the Coalition Party, three to Rural Union and six to the Reform Party. 17 November 1995: the head of the Russian delegation declares that Estonia has renounced its territorial claims, stemming from the peace treaty of 1920 (involving 2,000 square kilometres of land in Pskov and Leningrad provinces) (CDSP, 1995, vol. XLVII, no. 46, p. 14). 22 February 1996: the Patriarch of Constantinople, Bartholomew I, announces that his church has ‘accepted, as a tender-hearted mother, the free and unanimous request of its children and recognized the Church of Estonia as autonomous’. Constantinople thus grants the wish of the Estonian Apostolic Orthodox Church to restore its prewar status (agreed in 1923 after the Bolsheviks arrested the Patriarch of Moscow) under Constantinople’s jurisdiction. The officially registered and recognized Estonian Apostolic Orthodox Church descends from a congregation formed in Stockholm in 1947 by exiles who fled Estonia after the Soviet occupation. The other branch of the Orthodox Church, loyal to Moscow, has not registered. It fears that if it registers under another name it will lose whatever claim it might still have over church property. (Patriarch Alexei of Moscow retaliated by removing Bartholomew from the list of churchmen for whom prayers are offered at Russian services, i.e. suspending relations with Constantinople.) (Baltic Observer, 29 February–6 March 1996, pp. 1, 4; FT, 2 March 1996, p. 2; The Economist, 23 March 1996, pp. 117–18.) 13 March 1996: six of the sixteen Centre Party MPs set up a new liberal–centrist faction in parliament, led by Andra Veidemann. They have announced that they will form a new party at the end of May 1996 (Baltic Times, 16–22 May 1996, p. 4).

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30 March 1996: Edgar Savisaar is elected chairman of the Centre Party. 16 May 1996: the synods of the Moscow and Constantinople Patriarchates, meeting simultaneously in Moscow and Istanbul, decide to recognize the right of Estonian parishes to choose which church they wish to be subordinate to (CDSP, 1996, vol. XLVIII, no. 21, vol. 21). 26 August 1996: in the first round of the presidential election neither candidate receives the minimum parliamentary votes (two-thirds or sixty-eight out of 101) to win. Incumbent president Lennart Meri receives forty-five, Arnold Ruutel thirty-four, and there are twenty-two abstentions. 27 August 1996: two rounds of voting take place. Meri receives forty-nine and fifty-two votes respectively, while Ruutel receives thirty-four and thirty-two respectively. The vote will now be taken on 20 September by an electoral college comprising the 101 MPs and 273 representatives of local government. Estonia’s failure to elect a president in the three rounds of voting should not have come as a surprise to those who followed the bizarre nomination of two separate candidates by the governing coalition more than a month ago. In July Tiit Vahi’s Coalition Party sided with Reform Party choice Lennart Meri, while the Rural Union supported Arnold Ruutel. (leader comment, Baltic Times, 29 August–4 September 1996, p. 23) 16 September 1996: Estonia becomes the first country to cease to be a recipient of US Eastern European aid (Baltic Times, 19–25 September 1996, p. 3). 20 September 1996: it takes the electoral college two rounds of voting to choose a president. In the first round there were five candidates and no one received the minimum 188 votes needed for a simple majority. In the second round (the fifth in total) Meri won with 196 votes to Ruutel’s 126. There were forty-four abstentions, six invalid votes and two absentees. (Relations between the president and parliament have not always been easy. After the election, responding to concern about exceeding his powers, Meri said: ‘I am prepared to admit that in the first period of my office I might have taken too seriously the principle of balanced separation of powers. It seems to me that a president should not make the work of legislators his business and I intend to follow the principle in future’: Baltic Times, 26 September–2 October 1996, p. 4.) 21 November 1996: the Reform Party leaves the government coalition. Six ministers resign, including foreign minister Siim Kallas (who objects to what he sees as closer links to Russia at the expense of integration with the West). The immediate cause of the resignations was the co-operation pact between the Coalition Party and the Centre Party, allegedly signed without informing the Reform Party. 26 November 1996: preliminary agreement is reached between the Coalition Party and the Centre Party. 1 December 1996: Coalition Party/Rural Union (with forty-one out of the 101 seats in parliament) opt for a minority government, with the help of some nonparty ministers. (The following day prime minister Vahi agreed to discuss the

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possibility of introducing tariffs on imports of those agricultural products also produced in Estonia, as advocated by Rural Union: Baltic Times, 5–11 December 1996, p. 8.) 10 February 1997: prime minister Tiit Vahi narrowly survives a vote of no confidence. 15 February 1997: Vahi submits his resignation and announces that he intends to resign as soon as a fresh candidate is agreed. ‘Vahi … announced that he would resign in order to defend himself against accusations of insider trading and the possible illegal privatization of his daughter’s flat in the centre of the Estonian capital, Tallinn’ (Baltic Times, 20–26 February 1997, p. 1). 25 February 1997: Vahi resigns. 27 February 1997: Mart Siiman (Coalition Party) is named as prime minister and asked to try to form a government. 12 March 1997: the Mart Siiman cabinet is approved by parliament. The minority government comprises five Coalition Party MPs, two agrarian (Country People’s Party) ministers, six non-partisans and one Progressive (Baltic Times, 20–26 March 1997, pp. 3–4). 16 July 1997: the European Commission recommends that Estonia, Cyprus, the Czech Republic, Hungary, Poland and Slovenia open negotiations in early 1998 for entry to the EU. (The invitation was formally approved at an EU summit on 13 December 1997, formal negotiations for membership beginning on 31 March 1998. Slovakia, Latvia, Lithuania, Bulgaria and Romania were to be given special EU aid to help them meet the conditions necessary for membership negotiations to begin.) 16 January 1998: the presidents of the USA, Estonia, Latvia and Lithuania sign a Charter of Partnership in Washington. Without pledging the USA to the defence of the three Baltic countries, the charter embodies a moral and political commitment by the USA to their independence, sovereignty and territorial integrity. The charter does not promise Nato membership but commits the USA to support their efforts and to do everything possible to prepare them for membership. The USA refused to recognize the Soviet annexation of the Baltic States which followed the 1939 Nazi–Soviet pact and preserved their embassies in Washington (IHT, 13 January 1998, pp. 1, 6). The charter puts on record the USA’s ‘real, profound and enduring interest’ in the independence and security of the Baltic countries. The three countries commit themselves to working toward good relations with all their neighbours, including Russia (IHT, 16 January 1998, p. 6).

The 7 March 1999 general election Twelve parties contested the 101 seats. The turnout was 57 per cent. ‘All the main contenders are billing themselves as centre or centre-right … Estonia’s farmers [are] unprotected by tariffs and barely subsidized … The current account deficit is hovering around 11 per cent of GDP’ (Business Central Europe, March 1999, pp. 40–1).

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Reformers have their sights set on overhauling the machinery of government. Estonia’s courts, police and civil service, though better than most of those elsewhere in the former Soviet empire, are still in worse shape than in the Nordic countries which Estonians seek to emulate. Civil servants’ pay is too low to attract the brightest people … [Estonia has] no trade tariffs and no protection for farmers. (The Economist, 13 March 1999, p. 52) Centre Party: Led by Edgar Savisaar. Twenty-eight seats. The Centre Party combines liberal economics with mild social democracy … The Centre Party … wants to replace Estonia’s flat tax [26 per cent] with a progressive one … The Centre Party intends to make up for proposed tax cuts by reducing social benefits for the better-off. Child benefits, on the other hand, would rise to help the larger and poorer rural families … The Centre Party … [has a] plan for an export guarantee programme. (Business Central Europe, March 1999, pp. 40–1) ‘[The Centre Party is] populist, leftish’ (The Economist, 13 March 1999, p. 52). ‘Savisaar geared his campaign towards those people who had fallen through the cracks as a result of previous reforms’ (Baltic Times, 11–17 March 1999, p. 10). The Centre Party platform calls for greater state intervention in the economy and wants trade to be balanced between Russia and the EU … Since the early 1990s both corporate profits and personal incomes have been taxed at the flat rate of 26 per cent. The main plank in the Centre Party’s platform was a proposal to introduce a progressive rate for personal tax in the year 2000. Under this system people who earn more would pay a higher rate of taxation, while lower income earners would pay less. (p. 11) ‘The Centrists face difficulties in finding partners to form a workable government. Centre Party leader Savisaar has been dubbed “authoritarian” by opponents’ (p. 1). Reform Party: Led by Siim Kallas. Eighteen seats. ‘The Reform Party bills itself as ultra-liberal … Social benefits would be targeted according to wages’ (Business Central Europe, March 1999, p. 40). Pro Patria Union: Led by Mart Laar. Eighteen seats. Moderates: Led by Andres Tarand. Seventeen seats. Coalition Party: Led by Mart Siiman. Seven seats. The Coalition Party faction contains three Coalition Party members, two from the Pensioners’ and Families’ Party and two from the Rural Union (Baltic Times, 18–24 March

142 Estonia 1999, p. 7). ‘The Rural Party … wants to increase support for agriculture’ (Business Central Europe, March 1999, p. 41). Country People’s Party: Seven seats. United People’s Party: Six seats. [The party was] previously a coalition of ethnic Russian parties … It was notable that most of Estonia’s ethnic Russians who voted (around a fifth of the electorate) seem to have gone for Estonian, rather than specifically Russian, parties … The near-total absence of ethnic Russians in Estonian public life looks increasingly odd as more ethnic Russians learn Estonian and gain citizenship. (The Economist, 13 March 1999, p. 52) Both Russian parties looked in danger of being wiped out when personal disagreements and ideological differences led them to go to the elections under separate lists … The UPP is considered the more moderate party while the Russian Party of Estonia is more nationalist. (Baltic Times, 11–17 March 1999, p. 9)

Political developments after the March 1999 general election 25 March 1999: a coalition government is sworn in, comprising the Pro Patria Union, the Reform Party and the Moderates. Mart Laar is prime minister and Siim Kallas is finance minister. (Laar was prime minister from 1992 to 1994.) The government’s programme has a strong social orientation (e.g. creating a society friendly to families and children) but is also committed to a stable monetary policy, a fixed exchange rate for the kroon and a balanced budget. Other aims include full membership of the EU by 2003 and membership of Nato (Baltic Times, 25–31 March 1999, p. 4). 13 October 1999: the European Commission recommends that EU leaders at the December 1999 meeting in Helsinki allow Bulgaria, Latvia, Lithuania, Malta, Romania and Slovakia to begin accession negotiations in 2000. The ‘principle of differentiation’ for entry date will apply to each of the twelve candidates, reflecting differing states of readiness for EU entry. A ‘fully flexible, multi-speed accession process’ is envisaged. ‘Each country will be able to proceed on merit, including the possibility for those which join the negotiations from 2000 to catch up with the others.’ The European Commission thinks that existing EU members should undertake internal reforms by the end of 2002: ‘Whether the first accessions can take place as from 1 January 2003 will then depend entirely on the speed with which the applicant countries can make progress on meeting the criteria.’ Latvia has made good political progress but falls short of international standards on the protection of the linguistic rights of minorities. (Estonia is also

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criticized as regards linguistic rights.) Latvia has made ‘significant and sustained progress’ towards meeting market economy criteria and in regards to its ability to withstand competitive pressures. Latvia has a good chance of catching up with the group led by Hungary, with Lithuania not far behind. Latvia joins Malta and Cyprus, Hungary, Poland, Estonia and Slovenia in having functioning market economies. Lithuania could become a functioning market economy in 2000 if it pushes ahead with promised reforms. Malta and Cyprus have already met the economic terms set by the EU, being able to cope with competitive pressures and market forces in the EU. Hungary and Poland come next in economic terms, followed by Slovenia, Estonia and then the Czech Republic. Hungary, Poland, Estonia and Slovenia have improved their ability to cope with competitive pressures and market forces ‘in the medium term’ (meaning more than one year from 2000). Hungary is the closest of the Eastern European countries to meeting the criteria on a market economy with the capacity to withstand competition within the EU. (FT, 14 October 1999, pp. 1, 10; IHT, 14 October 1999, p. 5; Guardian, 14 October 1999, p. 14; Independent, 14 October 1999, p. 18; The Times, 14 October 1999, p. 21; Telegraph, 14 October 1999, p. 20.) The European Commission harshly criticized this country’s language laws … The report said the laws are unfavourable to business relationships and they tend to discriminate against minorities … ‘The adoption of the language law, which restricts access of non-Europeans in political and economic life, constitutes a step backwards and should be amended,’ the report said … The European Commission targeted amendments to the law that say business affairs should be conducted only in Estonian … Besides language laws, the report called for a tougher fight against corruption, acceleration in the pace of land privatization and progress in privatizing the oil-shale sector … The commission recognized Estonia’s commitment to judicial reform … [but] commented that the number of judges remains low and training is inadequate. Continued administrative reform was also mentioned as an idea that Estonia still needs to work on … For the second year, the report found Estonia to be a stable democracy and a functioning market economy with the ability to compete in the EU. (Baltic Times, 21–27 October 1999, p. 3) 10 December 1999: The EU agreed yesterday [10 December] to launch accession negotiations with five East European countries and Malta early next year [2000] … Government heads also decided that the EU would be ready by the end of 2002 ‘to welcome’ new members from the six countries already negotiating and potentially the six it agreed to talk with yesterday … [But] diplomats acknowledged that, in spite of the optimistic gloss put on the accession schedule by heads of government, it was likely to be 2004 at the earliest before

144 Estonia any country could join the fifteen already in the EU … Günter Verheugen, EU enlargement commissioner … [said] that member states’ ratification of new entrants would start after they had approved reform of the EU treaties. Reform ratification must be completed by the end of 2002, government heads decided yesterday. Ratification of individual countries’ accession to the EU will take at least another year. Mr Verheugen insisted the unanimous decision by member states to start talks in January or February [2000] with six more states would not slow down existing negotiations with the other six. (FT, 11 December 1999, p. 6) ‘Although government heads agreed the EU should be “in a position to welcome new members by the end of 2002”, diplomats said ratification of accession treaties was unlikely to be completed for at least another year after that’ (FT, 13 December 1999, p. 10). Günter Verheugen (European commissioner for enlargement since August 1999): We must balance two contradictory objectives, the speed and quality of enlargement … The EU must bring the candidates into line with the EU as quickly as possible. And the enlargement process must stick to the Copenhagen criteria. Which means candidates must respect democracy and human rights, create a functioning market economy so that they can compete in the EU, and implement the whole acquis communautaire (the EU treaty and legislation). Accession is only for those who are properly prepared and can meet all the rules applying to any member state … From now on negotiations will be carried out on a country-by-country basis, taking account of each country’s state of preparations. Therefore negotiations will progress according to merit, and progress largely depends on the candidates’ own efforts. Which is why a target date for accession cannot be set yet. All we can do is name a target date for the EU to be ready to take the first accession decisions. This date will be 2002, as long as the EU carries out the institutional reforms necessary to ensure a proper functioning of a Union of twenty-seven or twenty-eight members – and providing that negotiations with candidate countries have reached a conclusion. I firmly believe that negotiations with the most advanced candidate could be concluded in 2002. (Business Central Europe 1999: 17) On 11 December 1999 Turkey was added to the list of candidate members, albeit with especially strict conditions as regards areas such as human rights and relations with Greece. Formal negotiations were not even to begin until 2004. 31 August 2000: Estonia expels two Russian diplomats for allegedly spying. Russia reciprocated by expelling two Estonian diplomats. 8 November 2000: the EU publishes its reports on enlargement. The EU’s report on Estonia (Progress Towards Accession, 8 November 2000, pp. 86–8):

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Estonia is a functioning market economy and should be able to cope with competitive pressure and market forces within the Union in the near term, provided that it stays with its present reform path. It has made considerable progress in strengthening macroeconomic stability, restructuring the enterprise and financial sectors, and in implementing structural reforms in the utilities and energy sectors. The legal, institutional and regulatory framework is in place and enforcement is largely adequate. Enterprises have adapted to economic circumstances and have maintained their external competitiveness. Nevertheless, the current account deficit remains high, and not enough progress in containing government expenditures has been made, especially in the pension and health-care reform area, in the control of local government expenditure and debt policy. Remaining structural reforms must be completed, particularly the oil shale and land reforms. Estonia must continue with fiscal adjustment, further fiscal consolidation and improved expenditure management, including the control of local government expenditure and debt policy. Measures must be taken to reinforce the regulatory framework of the financial sector, complete land privatization and improve access to market-based credit for agriculture and small and medium-sized enterprise … Estonia needs to continue efforts as regards the integration of non-citizens, reinforcing the capacity of the public administration and improving the judicial system … Efforts need to be continued, in particular as regards asylum, the fight against organized crime, including drug trafficking, the fight against corruption in the police and customs administration, modernization of the police and upgrading surveillance equipment and infrastructures at the borders. A generally positive assessment of … [Estonia’s] readiness for EU membership [is] contained in a report published by the European Commission … Latvian and Lithuanian leaders acknowledged the need for more work in preparation for accession … [There was] a less-than-glowing assessment of Lithuania’s readiness … While progress has been made on integrating noncitizens, Estonia’s language law must be implemented in accordance with international standards, the report stressed. The powers of the country’s ombudsman for the protection of minorities should also be increased, it read. Estonia’s administrative capacity has been strengthened but further work is needed, according to the report. As in the other two Baltic States, little progress has been made in regional development policy, and Estonia’s internal financial controls also remain weak. The Latvia report reflected the country’s ‘satisfactory’ progress on accession preparation, said … the head of the European Commission’s delegation to Latvia … Within two to four years Latvia should be able to cope with competitive pressure in the EU provided the pace of structural reform is maintained, [he] said … The application of EU legislation should be improved and administrative capacity should be strengthened in Latvia, the report added … Efforts to combat corruption should also be maintained, advises the report. It highlights weaknesses in the

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Estonia country’s administrative capacity, delays in the privatization programme and the state of the agricultural sector as particular problem areas … Regarding the integration of Latvia’s non-citizens, the report praised the adoption of a language law and accompanying regulations which comply, in general, with the country’s international obligations. But the report also recommended that Latvian language learning should be promoted … Concerns [were] expressed in the Latvia report regarding the country’s large number of noncitizens … The current account deficit … is a cause for concern … The European Commission’s report on Lithuania is a ‘touch more positive’ than last year said … the head of the commission’s delegation to Lithuania. It nonetheless contained many reservations … Rising unemployment and falling investment are causes for concern. (Baltic Times, 16–22 November 2000, pp. 1, 8)

The report does not specify an exact entry date for the first of the new members: Transitional measures and all outstanding issues will be addressed by the Union with the most advanced countries by June 2002 at the latest … [The EU should be able] to conclude negotiations in the course of 2002 with those candidate countries who fulfil all the criteria for membership, thus allowing [the EU] to welcome new members from the end of 2002. ‘The legal ratification process cannot be done in much less than eighteen months after the end of negotiations. So 1 January 2004 looks like the earliest possible prospect for formal accession’ (FT, 9 November 2000, p. 30). ‘January 2005 is the most likely date’ (FT, 8 November 2000, p. 10). Every country’s accession will have to be approved by every existing [EU] member … Since ratification is expected to take at least eighteen months … The speediest timetable, therefore, has the first entrant joining in 2004 … But 2005 may be more realistic. (The Economist, 11 November 2000, p. 73) The report makes general comments: Corruption, fraud and economic crime are widespread in most candidate countries, leading to a lack of confidence by the citizens and discrediting the reforms … Trafficking in women and children [is a growing problem in some countries] … [Roma] continue to face widespread discrimination in social and economic life. Cyprus and Malta are the leading candidates in terms of the two economic criteria. Both have ‘functioning market economies’ and should be able to cope with the ‘capacity to withstand competitive pressure and market forces with the Union’.

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Estonia, Hungary, Poland, the Czech Republic and Slovenia are functioning market economies and ‘should be able to meet the second criterion in the near term’. Latvia, Lithuania and Slovakia will be ready in the ‘medium term’. (FT, 8 November 2000, p. 10, and 9 November 2000, p. 22; The Economist, 12 November 2000, p. 73; Guardian, 9 November 2000, p. 13; Independent, 9 November 2000, p. 14; Telegraph, 9 November 2000, p. 22; IHT, 9 November 2000, p. 5.) 7–11 December 2000: an EU summit is held in Nice. A longer-than-anticipated summit finally saw agreement reached on various changes designed to accommodate new members and make decision-making more feasible in a much-expanded EU. New voting weights in the Council of Ministers were assigned to existing and prospective members and the range of areas subject to qualified majority voting was expanded. EU leaders yesterday [9 December] pledged to speed the entry of the former Soviet bloc counties of Eastern and Central Europe … EU leaders said that some could become members by mid-1994 … Their original draft text repeated the Union’s long-standing aim of completing reforms to be ready for new members that meet its conditions from the end of 2002. Yesterday the leaders added that this would be carried ‘in the hope that they [new members] participate in the new European Parliament elections’ – due in June 2004. (FT, 9 December 2000, p. 5) The 60,000-strong Rapid Reaction Force was approved. 15 March 2001: The Russian customs authority on 15 March [effective 17 March] banned the import of goods from South-east Asia [including China and India] through the Baltic States and other European countries to protect the interests of Russian ports and local businesses … The Russian customs authority said the measure was expected to help prevent tax evasion schemes … China has made a remarkable rise among Estonia’s imports from sixteenth place in 1999 to sixth place in 2000. Undoubtedly part of those imports are turned into Estonian exports to Russia. Transit flows through Estonia have grown in 2000 by 35 per cent. Estonia is becoming an attractive foreign trade and transit partner for China. (Baltic Times, 22–28 March 2001, p. 7) 27–28 August 2001: three election rounds that took place in the Estonian parliament were not enough to bring the country a new president. It is now down to national electoral committee consisting of local government delegates to elect Lennart Meri’s successor on 21 September … The national electoral committee comprises 101 MPs and 266 local government representatives … A simple majority is what counts. (Baltic Times, 30 August–5 September 2001, p. 1)

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21 September 2001: The national electoral college elected … Arnold Ruutel [aged 73] to be its next president … [He] received 186 votes out of the 366 possible, confidently defeating parliamentary speaker Toomas Savi, Tartu city council chairman Peeter Tulviste and Peeter Kreitzberg from the large opposition Centre Party, who won 155, eighty-nine and seventy-two votes respectively … The electoral college consisted of 100 MPs and 266 local government representatives from around the country. The 101st MP was ill … It was Savi who managed to carry the fight into the final round, while Tulviste and Kreitzberg bowed out of the race after the first session … The outcome is a painful lesson for the right-wing coalition of the Moderates, Pro Patria Union and the Reform Party, said prime minister Mart Laar, a Pro Patria member … But he added it would not increase tensions within the ruling trio, which were already strained after the failure to agree on a common presidential candidate … It was the third time Ruutel had run for the presidency. In 1992 and 1994 Lennart Meri was his main rival … The new president, who takes over from the charismatic and enormously popular Lennart Meri on 8 October, announced on 24 September that he is resigning his present post of honorary chairman of the left-wing People’s Union Party … Arnold Ruutel … was deputy prime minister of the then Estonian Soviet Socialist Republic between 1978 and 1983 and chairman of the Supreme Council, installed in the post … in 1983 and keeping it … until 1992. (Baltic Times, 27 September–3 October 2001, pp. 1, 4) Estonia’s long quest for a new president ended yesterday [21 September] with the surprise victory of Arnold Ruutel, an opposition candidate and former Communist Party official, after a close fifth ballot. Mr Ruutel, once chairman of Estonia’s Soviet-era parliament, defeated Toomas Savi, current parliamentary speaker and a candidate of the ruling coalition, by 186 votes to 155, in a poll of parliamentarians and local government officials. (FT, 22 September 2001, p. 13) The electoral college picked Arnold Ruutel … [who] was chairman of Estonia’s Supreme Soviet legislature … He was also a member of the Central Committee of Estonia’s Communist Party in the Soviet era. He will succeed the popular Lennart Meri, who was barred by the constitution from seeking a third term. (IHT, 22 September 2001, p. 5) 28 September 2001: ‘Mihkel Parnoja, the embattled economy minister responsible for the country’s privatization process [resigns] … [He] said he was stepping down because of the unpopularity he faced when pushing through controversial sell-offs’ (FT, 29 September 2001, p. 9).

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‘[He is] a member of the ruling coalition’s Moderates … According to the coalition agreement between Pro Patria Union, the Moderates and the Reform Party, the economy portfolio belongs to the Moderates’ (Baltic Times, 4–10 October 2001, p. 4). 13 November 2001: the EU publishes its reports on enlargement. The EU publishes its progress reports on the twelve EU applicants for EU membership with which negotiations have began. There are thirteen applicants in all (including Cyprus, Malta and Turkey), but negotiations have not yet begun with Turkey. As many as ten countries may be ready to join the EU in 2004, but Bulgaria and Romania are not among them. ‘The EU is heading for a ‘big bang’ enlargement of up to ten countries that could take place as early as 2004 after negotiations are wrapped up by the end of next year [2002]’ (FT, 14 November 2001, p. 12). As many as ten new members could join the EU in a ‘big bang’, according to a report from the European Commission yesterday [13 November] … Diplomats had previously believed that an advance guard of a few countries … would make up the first wave of entrants, with others joining later in stages. (Independent, 14 November 2001, p. 20) ‘The Commission said candidates which were ready should be able to conclude their talks by the end of next year and take part as members in the European Parliament elections in June 2004’ (Guardian, 14 November 2001, p. 19). ‘[The Commission said that] significant progress [had been made], providing “a sufficient basis for up to ten new member states in 2004” ’ (IHT, 14 November 2001, p. 7). Günter Verheugen (EU enlargement commissioner): ‘The aim of achieving the first accessions before the European Parliament elections in 2004 remains a demanding one. But it is not a utopian dream; it is a realistic and feasible challenge’ (FT, 14 November 2001, p. 12). Behind yesterday’s carefully worded document lie highly political considerations, and the position of Poland is pivotal. Its progress has been overtaken by others but Poland enjoys the powerful support of Germany, which, for historical reasons, sees enlargement as politically impossible without the Poles. If Poland is admitted the Commission knows it will have great difficulty in turning down small countries that have made rapid progress, including Slovakia, Latvia and Lithuania. There are also concerns over the creation of barriers between neighbours by excluding Slovakia and admitting the Czech Republic or letting in Estonia but blocking … Latvia and Lithuania. (Independent, 14 November 2001, p. 20) Although the EU’s report cannot say so, since it restricts itself to technical assessments of readiness, the political logic points increasingly to a ‘big bang’

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Estonia enlargement. That is because it is widely felt, particularly in Germany, that a first batch of new members that excluded the biggest candidate, Poland, would not be worth having. And since Poland is a relative laggard in the negotiations, an enlargement that excluded the Poles would probably have to include quite a few others that might not, under strict criteria, have been in the first intake. A similar logic also suggests that it would be hard to admit one Baltic state but not all three – or the Czech Republic without Slovakia. (The Economist, 17 November 2001, p. 41)

‘[After the 11 September terrorist attacks on the United States the Commission said that] a strong and united Europe is more important than ever before to ensure peace, security, freedom and prosperity for all its citizens’ (FT, 14 November 2001, p. 12). ‘The ten new members would add some 75 million people to the EU’s present population of 375 million’ (The Economist, 17 November 2001, p. 41). ‘The fifteen-nation EU could soon … [see] its population expanded from 370 million to 450 million’ (Independent, 14 November 2001, p. 20). ‘[The EU] structural (regional) and agricultural funds account for 80 per cent of the EU’s annual budget’ (FT, 14 November 2001, p. 12). The conditions – that entrants have a functioning market economy and are able to withstand competitive pressure and market forces inside the EU – are met only by Cyprus and Malta … The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia are functioning market economies and, according to the Commission, [these eight countries] should be able to cope with competitive pressure and market forces [within the EU] ‘in the near term’ provided they follow EU policy recommendations. Bulgaria is ‘close to being a functioning market economy’ and with hard work should cope with competitive pressure in the medium term. Romania meets neither criterion … difficulties are ‘severe’ … but, for the first time, has made some progress. (p. 12) [As regards the first eight countries, the Commission says that] while there are ‘substantial differences’ between their performance in bringing their laws and economies into line with the EU … if efforts continue these should be able to cope with ‘competitive pressure and market forces within the Union in the near term’. (Independent, 14 November 2001, p. 20) ‘[Of all the twelve negotiating countries] Cyprus is the most advanced in the negotiations and Romania the least. Poland is sixth’ (Guardian, 14 November 2001, p. 19). ‘The Commission said all the [thirteen] candidate countries, with the exception of Turkey, met the political requirements. Romania and Bulgaria failed to make it mainly on economic grounds’ (IHT, 14 November 2001, p. 7).

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Along with seven other countries, the three Baltic States are on course to complete requirements for EU membership by the end of 2002 and to join the EU by 2004 … The European Commission told the European parliament that all three Baltic counties have developed to the point where they should be able to handle competitive pressure in the EU bloc if current reforms continue … Latvia and Lithuania need to take a harder stance against corruption, while Estonia was told to look at ways to address problems involving its large Russian-speaking minority … Lithuania and Latvia were both told corruption continues to be a hindrance, as are procedures for supervising EU structural funds … Latvia and Estonia were both told that integrating their large Russian minorities – many of whom do not speak their countries’ state languages – was a priority … Latvia … has made more progress toward integration … but naturalization and Latvian language education need to be expanded. Estonia … must improve language training and social integration measures, and combat unemployment … The Ignalina nuclear power plant … generates 75 per cent of Lithuania’s electricity … EU officials want Ignalina’s two nuclear reactors shut down by 2009 … The first reactor is due to be closed in 2005 … Pre-trial detention practices in Latvia … drew the attention of the European Commission. (Baltic Times, 15–21 November 2001, p. 3) Progress has been made in the modernization of the public administration by moving to a more results based system and improving public access to information … There is, however, a need to continue the implementation of the public administration reform programme, in particular to improve transparency in personnel matters and co-ordination across different bodies … Estonia has continued to make progress with the implementation of concrete measures for the integration of non-citizens … Estonia is a functioning market economy. Provided that it continues with and fully implements its reform programme, it should be able to cope with the competitive pressure and market forces within the Union in the near term … The legal, institutional and regulatory framework is in place and enforcement is largely adequate … The current account remains high … The restructuring of the oil shale industry has only just started and should be accelerated … Overall, Estonia has continued to make good progress in both adopting and implementing the acquis … Concerning agriculture important steps have been taken in preparing for the Common Agricultural Policy. (Progress Towards Accession, 13 November 2001, pp. 90–2) During the last year the government [of Latvia] remained committed to reforming the public administration and the judiciary, as well as to fighting against corruption … It will now be necessary to maintain the momentum of public administration reform … The reform of the judicial system must be carried on, with particular attention to the legal framework, speeding up and enforcing court decisions and addressing the issue of pre-trial detention.

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Estonia Measures to combat corruption, which remains a source of concern, need to continue … Further important steps were taken to promote the integration of non-citizens into Latvian society … The ongoing efforts to support the integration of non-citizens need to be sustained … including activities to encourage naturalization and the expansion of Latvian language training … Latvia is a functioning market economy. Provided that it makes further substantial efforts in maintaining the pace of, and completing, its structural reforms, it should be able to cope with the competitive pressure and market forces within the Union in the near term. Latvia has preserved macroeconomic stability. Further progress has been made on structural reform … The legislative framework for a market economy is, for the most part, in place … However, the authorities must continue a policy of fiscal discipline … Privatization of the remaining large enterprises has advanced more slowly than anticipated and should be completed. The privatization of land and the development of the land market should be advanced … Latvia has kept up a steady pace in aligning its legislation with the acquis in most areas. The need to strengthen the administrative capacity to manage and enforce the acquis has been recognized, even though the process continues to represent considerable challenges … Preparing its administration for EU membership remains one of the greatest challenges Latvia faces. With a view to the responsibilities Latvia will have to assume in managing and enforcing the acquis upon succession, a substantial portion of the necessary institutions and bodies have been restructured or created. The process needs to continue. (pp. 111–13) Lithuania has made some progress in reforming the public administration and the judiciary, where the administrative court system has been reorganized. The legal system has improved with the entry into force of the new Civil Code. The capacity to fight corruption has been strengthened … Sustained efforts are required to further advance the process of reform of the public administration … In the field of the fight against corruption the efforts made over the past year should be sustained and reinforced … Lithuania is a functioning market economy. Provided that it makes further substantial efforts to continue with the vigorous implementation of its structural programme, it should be able to cope with the competitive pressure and market forces within the Union in the near term … Lithuania has preserved macroeconomic stability, improved the fiscal and external imbalances and reduced state interference. The privatization of banking, other sectors and land is nearing completion. New bankruptcy and enterprises restructuring laws finally came into force. However, unemployment remains high and the structural problems in the labour markets will have to be addressed … Domestic and foreign investment remains at relatively low levels. The authorities need to properly implement the new legal framework for business, specifically the bankruptcy laws. The planned pension reform

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must be advanced and implemented. Fiscal discipline must continue … Lithuania has continued to make progress in reforming its structures in the agricultural field. However, important measures remain to be taken, in particular regarding the further strengthening of the land parcel identification system … [and] the enforcement and practical application of the management mechanisms of the Common Agricultural Policy … While continuing to pursue a prudent budgetary policy, Lithuania has made progress as regards the building of the administrative capacity which is necessary to implement and enforce the acquis. However, this capacity is still fragile and can easily be reduced if organizational structures are modified without careful attention. Sustained efforts are required to keep the administrative capacity acquired and to further develop it. (pp. 108–11) 19 December 2001: [Prime minister] Mart Laar … yesterday [19 December] … abruptly announced his resignation. Mr Laar said he would step down on 8 January [2002] … The collapse of Mr Laar’s thirty-two-month-old government, the longest since Estonia’s independence from the Soviet Union, was widely expected … The final blow came earlier this month [December] when the Reform Party, a coalition partner headed by Siim Kallas, finance minister, formed an unlikely alliance in Tallinn’s city council with the opposition Centre Party. (FT, 20 December 2001, p. 14) Mart Laar: ‘On being told the decision of the Reform Party taken behind its partners’ backs to bring the Centre Party to power in the capital, my first reaction was to resign immediately … I intend to step down … on 8 January 2002’ (Baltic Times, 10–16 January 2002, p. 1). 8 January 2002: Mart Laar … is due to resign today [8 January 2002], making good on a pledge that he would sacrifice his government over tensions in the centreright coalition … Tension within the ruling coalition rose to breaking point in early December [2001] when Reform, one of the three ruling parties, joined with the main opposition Centre Party to run Tallinn city. That alliance, made without informing Mr Laar’s Pro Patria Party and the third coalition member, the Moderates, made the national government unworkable, Mr Laar said in December. (FT, 8 January 2002, p. 8) 22 January 2002: parliament approves Siim Kallas, the Reform Party chairman, as the new prime minister. He and Edgar Savisaar (leader of the Centrist Party) signed a coalition agreement on 18 January.

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Estonia The only issue the two parties had not yet been able to solve, according to Kallas, was tax policy. ‘But we have decided to tuck this away until the next general elections,’ said Kallas. The Centre Party plans to implement a progressive income tax, while the Reformists want to lower the current income tax from 26 per cent to 20 per cent. (Baltic Times, 24–30 January 2002, p. 1)

May 2002: The Estonian parliament has postponed a vote on outlawing communism ahead of a visit to Tallinn by Chinese President Jiang Zemin … Parliament suspended discussions on whether to outlaw communism in June 2001 … According to the bill, about one-fifth of the Estonian population was forced to leave the country between 1940 and the late 1980s, crimes committed by the occupying powers of the Soviet Union and Germany … The statement, which was to be voted on in the parliament on 18 June … [says that]: ‘Given that the crimes of the German nationalist socialist regime are condemned by the international authorities and those of the Soviet Union are not, parliament declares the Soviet communist regime and related organizations such as the NKVD and KGB that enabled those crimes as criminal.’ (Baltic Times, 30 May–5 June 2002, p. 4) August 2002: ‘The Estonian Conservatives Club and the Farmers’ Assembly have formed a new political party … the National Conservative Party/Farmers’ Assembly … because they say Estonia’s existing national conservative party, Pro Patria Union, is not doing its job’ (Baltic Times, 8–14 August 2002, p. 4). 9 October 2002: the European Union publishes its Towards the Enlarged Union: The European Commission today recommended that the negotiations on accession to the European Union should be concluded by the end of this year with Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Malta, Poland, the Slovak Republic and Slovenia … with the aim of signing the Accession Treaty in spring [April] 2003 … The Commission considers that these countries will be ready for membership from the beginning of 2004. The recommendations are based on a rigorous and fair assessment of the state of preparedness of each candidate country. Preparations of the ten countries for membership will continue and will be strictly monitored by the Commission. As for Bulgaria and Romania, the Commission will strongly support these two countries in achieving their objective to join in 2007 … In order to ensure Bulgaria and Romania are ready for membership in the European Union, an increased focus will be put on judicial and administrative reform … Regarding Turkey, the Commission recommends that the EU should enhance its support for Turkey’s pre-accession preparations and provide additional resources for this purpose. The findings and recommendations of the regular reports and the strategy paper adopted today by the

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Commission will be examined by the European Council meeting in Brussels on 24–25 October … The regular reports point to a number of areas where further improvements need to be made … Six months before the envisaged date of accession the Commission will produce a comprehensive monitoring report for the Council and the European Parliament. After enlargement the Commission, as guardian of the Treaty, will ensure proper implementation of EU law in the new Member States with the same methods and rigour as in present Member States … For a limited time the Accession Treaty should envisage the introduction of a specific safeguard clause for the internal market (including food safety) and in the area of justice and home affairs, allowing [the Commission] to react more flexibly to possible problems associated with the initial period of membership. This will complement the Commission’s usual instruments which ensure compliance with the EU law. Such a safeguard should have a maximum duration of two years. (p. 1) (An EU summit is to be held in Copenhagen on 12–13 December 2002. The aim is for new members to be admitted in time to participate in elections for the European Parliament in June 2004. The population of the ten envisaged new members in 2000 was 74 million, while the EU’s population was 376 million. The enlarged EU’s population will be an estimated 451 million.) The three individual reports (Progress Towards Accession) are as follows: Estonia

(pp. 121–4)

Estonia is a functioning market economy. The continuation of its current reform path should enable Estonia to cope with competitive pressure and market forces within the Union. Improvements can be made by the government and the private sector to the functioning of labour markets by taking a more active role to tackle the unemployment problem … [As regards public administration] there remains a need to improve transparency in personnel matters and co-ordination across different bodies … Estonia needs to continue to increase efficiency in dealing with court cases as well as the quality and enforcement of court decisions … Estonia should continue efforts to increase the rate of naturalization and to facilitate the process. Estonia should ensure that the implementation of language legislation continues to respect the principles of justified public interest and proportionality, Estonia’s international obligations and the Europe Agreement … Continued attention needs to be given to further developing the capacity of the Data Protection Inspectorate, the Public Procurement Office and the Financial Intelligence Unit (anti money-laundering). There is also a need to ensure the effective application of competition acquis [communautaire: EU legislation] and to improve enforcement in the areas of piracy and counterfeit goods … Border controls [should be reinforced and the fight against] organized crime [stepped up] … In the period leading up to accession,

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Estonia Estonia needs to continue its preparations, in line with the commitments it has made in the accession negotiations.

Latvia

(pp. 135–9)

Latvia is a functioning market economy. The continuation of its current reform path should enable Latvia to cope with competitive pressure and market forces within the Union … Preparing its administrative capacity for membership remains one of the greatest challenges Latvia faces … While most of the deficiencies of the judicial system have been identified, only part of them have been addressed. Efforts in this field need to be multiplied in order to ensure a thorough systemic reform based on political support for modernizing the judiciary and sufficient funding. The legislative framework still remains to be completed and the increasing backlog of court cases should be reduced. The issue of pre-trial detention requires continued attention. Further significant efforts to strengthen the de facto independence, efficiency and quality of the judiciary are needed. The upgrading of the infrastructure of courts needs to be completed … Corruption … remains a cause for serious concern … The [process of] integration of noncitizens into Latvian society … needs to be accelerated and sufficient funding made available to encourage naturalization and language training … While Latvia’s legislation is well advanced in the field of intellectual and industrial property rights, effective action to fight against piracy and counterfeiting remains a challenge … Strengthening of integrated border controls and completion or upgrading of structures remains an important priority … In the period leading up to accession, Latvia needs to continue its preparations, in line with the commitments it has made in the accession negotiations. Lithuania

(pp. 135–9)

Lithuania is a functioning market economy. The continuation of its current reform path should enable Lithuania to cope with competitive pressure and market forces within the Union … Improvements can be made to the labour market by addressing the high unemployment. The management of public finances should be improved, in particular by addressing, at municipal level, the accumulation of expenditure arrears. Furthermore, the completion of the pension reform, by the planned introduction of a funded compulsory pension scheme, should make public finances more sustainable in the long term and support the development of financial markets … Lithuania needs to ensure that the reform [of public administration] is duly implemented in all services and that adequate financing is secured as a matter of priority … As regards administrative capacity, Lithuania has achieved a sufficient, though still rather fragile, capacity to ensure effective implementation and enforcement of the acquis [communautaire] … Further

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efforts are needed to improve the professional capacity of judges and prosecutors … The fight against piracy and counterfeiting needs to be significantly intensified, as does co-operation between the authorities involved in the enforcement of intellectual property rights … Further efforts remain to be made in strengthening inter-agency co-operation and in enforcing existing provisions on fraud, intellectual property rights and anti-corruption … [Further efforts are needed with regard to] … money laundering … data protection, the protection of the external border and the fight against corruption … In the period leading up to accession, Lithuania needs to continue its preparations, in line with the commitments it has made in the accession negotiations. 20 October 2002: Ireland ratifies the December 2000 Nice Treaty, the last of the fifteen EU members to do so. (Ireland is the only one of the fifteen members to use a referendum. In the first referendum, held in June 2001, the Nice Treaty was rejected.) 18 November 2002: Foreign ministers for the fifteen EU countries tentatively set 1 May 2004 as the date for the accession of ten candidate countries … The EU had never previously spelled out an accession date, saying only that the candidates would take part in the European parliament elections set for June 2004 as full members. Previous EU enlargements have taken place on 1 January. (IHT, 19 November 2002, p. 4) This means that the ten candidate countries which are expected to wrap up accession negotiations at next month’s Copenhagen summit [12–13 December] will not only participate in the European parliament elections, but also play a full part in the Inter-Governmental Conference that will set out the future structures of Europe when it convenes, possibly in late 2003. The decision that the candidates could play a full role in the IGC means they will have equal status with the fifteen current members. They will have the power of veto over any changes the IGC recommends to the existing EU treaty. (FT, 19 November 2002, p. 8) 21 November 2002: at the 21–22 November summit in Prague (the first Nato meeting in a former communist country) formal invitations are extended to seven countries to join Nato with a view to them becoming full members in May 2004 (after the ratification process): the Baltic States of Estonia, Latvia and Lithuania; Bulgaria; Romania; Slovakia; and Slovenia. Thus Nato would expand from nineteen to twenty-six members. ‘The seven new Nato members have agreed to be bound by “membership action plans” for several more years’ (IHT, 22 November 2002, p. 8).

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Estonia Albania and Macedonia are the next countries in line for membership. ‘We encourage both countries to redouble their reform efforts,’ the Nato leaders’ communiqué said. An entrance ticket was dangled before Croatia, but it was warned that co-operation with the international war crimes tribunal in The Hague was a prerequisite. Nato leaders also hinted that Serbia … could join the alliance eventually. It would first have to join the so-called Partnership for Peace [programme]. (Guardian, 22 November 2002, p. 16)

12–13 December 2002: an EU summit is held in Copenhagen. Detailed negotiations about funding continued up to the last minute, with Poland and the Czech Republic prominent. In total the EU will pay an extra Euro 433 million to the ten countries, taking the total cost of enlargement to Euro 40.8 billion for 2004–6. Poland will get the largest share, including an extra Euro 108 million for improved border controls and higher farm quotas. In addition Poland will have early access to Euro 1 billion of cash previously preserved for future infrastructure projects … The Polish team … intended to extract from the EU about Euro 2 billion ($2.01 billion) for the ten candidate states for 2004–6 on top of the Euro 40.4 billion already on offer for candidates … [There was] no overall increase in the EU’s Euro 40.4 billion. But Poland would get an extra Euro 1 billion cash for its government budget in 2004–6, taken from its allocation for EU-financed regional aid. The other nine candidates were to receive Euro 300 million … Poland [would receive] cash up front instead of Euro 1 billion for projects that might take years to finish or might not be completed at all, when the money would be lost to Poland … The Euro 40.4 billion figure is gross and the proposed net transfers, after taking account of money the ten will pay into the EU, are Euro 12 billion. After allowing for the fact that most new members will have some difficulty implementing EUfinanced projects, the actual transfers will be even smaller – Euro 9 billion on Commission estimates. (FT, 14 December 2002, p. 6) ‘The net cost of expansion is actually … Euro 10.3 billion ($10.5 billion) … for the first three years … according to documents released on Monday [16 December] by the European Commission’ (IHT, 17 December 2002, p. 1). ‘Euro 42.5 billion [was] originally budgeted in 1999 [when six candidate members were budgeted for]’ (Guardian, 12 December 2002, p. 16). ‘The next immediate step is to draw up the accession treaties for the ten candidate countries, which will be signed in Athens, under the Greek presidency, on 16 April 2003’ (Baltic Times, 19–25 December 2002, p. 1). As for the Baltic States, last-minute negotiations focussed on the level of EU aid to farmers and the Ignalina nuclear power plant. Lithuania agreed to

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close the Soviet-era plant in return for an extra Euro 300 million [Euro 285 million] over a period of three years to ensure the plant’s safe closure … The EU has already invested hundreds of millions of Euros in keeping Lithuania’s Soviet-built Ignalina nuclear power plant safe and will spend some Euro 300 million more to shut it down by 2009 … Estonia managed to cut a deal for direct support to its farmers which ensures that the country does not end up as a net contributor to the EU budget right from the start of membership. Direct support to farmers starts at 45 per cent of regular EU level payments and will increase 5 per cent every year. The transition period of agricultural funding was decreased from ten to seven years. (Baltic Times, 19–25 December 2002, pp. 1–2) ‘Lithuania is set to receive the highest per capita funding of all the ten countries invited to join in 2004’ (www.baltictimes.com). Turkey was to be subject to a progress review in December 2004 about issues such as human rights and the role of the military. Given a positive review, negotiations for entry would follow ‘without further delay’. ‘Lithuania is to hold a referendum on joining the EU in May [2003] and has the highest public support for accession of the three Baltic States, with about 60 per cent backing membership’ (FT, 7 January 2003, p. 7). Below are statistics (for GDR per head, GDP per head as a percentage of the EU-15 average, and agricultural employment as a percentage of the total labour force, respectively) for 2001 for the eight former communist countries (FT, 14 December 2002, p. 6; IHT, 14 December 2002, p. 5): Estonia Latvia Lithuania Czech Republic Hungary Poland Slovakia Slovenia

$9,340; 42 per cent; 7.1 per cent (EU-15 average, 4.3 per cent). $7,070; 33 per cent; 15.1 per cent. $6,980; 38 per cent; 16.5 per cent. $13,780; 57 per cent; 4.9 per cent. $11,990; 51 per cent; 6.1 per cent. $9,000; 40 per cent; 19.2 per cent. $11,040; 47 per cent; 6.3 per cent. $17,310; 69 per cent; 9.9 per cent.

17 February 2003: President Jacques Chirac … berated on Monday night [17 February] those accession countries that last month [January] sided with the ‘Atlanticists’ – Britain, Italy and Spain – by signing a letter of support for the United States over the Iraqi crisis … ‘They missed a good opportunity to keep quiet. When you are in the family, after all, you have more rights than when you are asking to join and knocking on the door,’ Mr Chirac said …He cautioned the ten candidate states due to join the EU next year [2004] … that their stance could be ‘dangerous’ as the decision to admit them had not

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Estonia yet been ratified … The ‘Declaration of Eight’ included Britain, Spain, Portugal, Denmark and Italy as well as Poland, the Czech Republic and Hungary … His diatribe also embraced the ten ex-communist countries forming the so-called Vilnius group awaiting EU membership [Estonia, Latvia, Lithuania, Slovakia, Slovenia, Bulgaria, Romania, Croatia, Macedonia and Albania], which also subscribed another letter backing the United States … He directed most spleen at Bulgaria and Romania … [which he claimed] had done their best to ‘reduce their chances of entering Europe’ … These two countries have strong historic cultural links with France and Paris has continued to champion their cause. (FT, 19 February 2003, p. 8)

‘Mr Chirac said: “If they [Bulgaria and Romania] had tried to decrease their chances of getting into Europe they could not have done a better job” ’ (IHT, 19 February 2003, p. 1). ‘The grouping of ten countries is unofficially known as the Vilnius 10 [whose statement was issued on 5 February] … because leaders first met there three years ago to co-ordinate their efforts to join Nato’ (IHT, 20 February 2003, p. 3). France and Germany have resisted the American push for military action [against Iraq], leading the US defence secretary, Donald Rumsfeld, last month [January] to chastise the two as ‘old Europe’, out of step with the ‘new Europe’ made up of former Soviet bloc countries. (IHT, 19 February 2003, p. 1) 2 March 2003: a general election is held. The turnout was 58 per cent. (The 101-seat parliament is called the Riigikogu: IHT, 3 March 2003, p. 4.) The only two parties capable of forming an outright majority coalition, the Centre Party [led by Edgar Savisaar] and Res Publica, are bitter political rivals … the Centre Party used an image of [Siim] Kallas, in a television ad promoting its progressive income tax policy, depicting the [current] prime minister as a person who would be the first to benefit from the Reform Party’s idea to cut income taxes. (Baltic Times, 27 February–5 March 2003, pp. 1, 3) ‘Res Publica [led by Juhan Parts], a newcomer to the political scene in Estonia, marked the centrists as its ultimate political rivals and has so far maintained this point of view after the results were clear’ (Baltic Times, 6–12 March 2003, p. 1). ‘Res Publica campaigned, in part, on a promise to curb corruption … and its leader, Juhan Parts, positions himself as a strong leader who would install law and order’ (p. 18). The Centre Party [led by Edgar Savisaar] … collected about 4,000 more votes than Res Publica [25.4 per cent and 24.6 per cent of the vote, respec-

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tively]. However, this was not enough … to win one additional seat in parliament … The Centre Party was expected by many analysts to win up to thirty-five seats … The Centre Party, as usual, polled well in Tallinn … The Centre Party has for many years been successful in appealing to the Russian voters … The Russian parties … did not manage to exceed the 5 per cent threshold … The results left parliament without a single party led by the country’s ethnic Russian minority for the first time since 1991. (p. 1) ‘The Reform Party … supports lowering the income tax rate from 26 per cent to 20 per cent’ (p. 3). The 101 seats were distributed as follows: Centre Party, twenty-eight; Res Republica, twenty-eight; Reform Party, nineteen; People’s Union [the ruralorientated party led by Villu Reiltan], thirteen; Pro Patria Union [led by Mart Laar], seven; Moderates, six. In 2002 Transparency International’s corruption perception index ranked 102 countries. Finland was the least corrupt at number one. Other countries were ranked as follows: Denmark, two; New Zealand, three; Iceland, four; Estonia, twenty-nine; Lithuania, thirty-two; Hungary, thirty-three; Latvia, fiftytwo; Russia, joint seventy-nine with India (The Economist, 31 August 2002, p. 82; Baltic Times, 13–19 March 2003, p. 5). 8 March 2003: Malta holds a referendum on EU membership, the first among the applicant countries. The turnout was 91 per cent, with 53.65 per cent saying ‘yes’ and 46.35 per cent saying ‘no’. 20 March 2003: the United States starts its attack on Iraq, aided principally by British troops, without submitting a second resolution to the UN Security Council (thus saving Russia from having to make a formal decision about whether to use its threatened veto). Australia and Poland also sent troops into action. (‘Poland has sent fifty-six troops’: IHT, 3 April 2003, p. 4. ‘Poland … has fifty-four soldiers involved in ground operations in Iraq’: Baltic Times, 10–16 April, p. 2.) The United States insisted on referring to ‘coalition’ forces. The Saddam Hussein regime effectively collapsed after three weeks, US troops entering the centre of Baghdad on 9 April, although some fighting continued. The action of the United States deeply divided world opinion, including Nato itself. France and Germany were leading critics of the United States, suggesting that UN inspectors should have been given more time to complete their task. Russia and China (less vehemently) were broadly in agreement with France and Germany, but both Russia and China remained on relatively good overall terms with the United States. The strongest CIS support comes from Uzbekistan, seen as tacitly seeking quid pro quo in the form of help against internal Islamic radicalism … [The United States listed thirty countries worldwide giving it] ‘unconditional support’ … [The list includes] three CIS countries – Azerbaijan, Georgia and Uzbekistan; the three Baltic States – Latvia, Lithuania and

162 Estonia Estonia; and the former East bloc countries of Bulgaria, Hungary, Poland, Romania, Slovakia and the Czech Republic. (CDSP, 2003, vol. 55, no. 11, p. 7) Lithuania, Latvia and Lithuania have decided to send troops to Iraq. Estonia is ready to send fifty-five peacekeeping troops to Iraq, but only after fighting has ended. Latvia’s parliament approved legislation permitting the government to send twelve soldiers, mostly medical personnel, mine clearing specialists and military police. Lithuania is ready to send sixteen soldiers, including a medical team and logistic support specialists … though a resolution calls for Lithuanian soldiers to participate in a ‘humanitarian mission’ and not take part in combat. (www.baltictimes.com, 6 April 2003) Though Nato enlargement hinges on legislative approval by all its members, the Senate – which determines the US stance on legislative approval by all its members – is seen by most as the key body … Despite government support of the United States [however], public opinion in all three Baltic countries remains staunchly opposed to the war, according to polls. About 74 per cent of people surveyed in Latvia in February opposed military action … [Representatives of the polling agency] said they expect that number to increase in the latest poll which is scheduled to be released [soon]. (Baltic Times, 27 March–2 April 2003, pp. 1, 4) 21 March 2003: Res Republica, the Reform Party and People’s Union, the three parties currently in coalition talks, agreed to a gradual decrease of income tax [to 20 per cent] … An annual 2 per cent decrease of the current 26 per cent income tax would start in 2004 and last three years. The monthly tax-free minimum income would [gradually] increase. (p. 3) 23 March 2003: Slovenia’s referendum on EU membership produces a ‘yes’ vote of 89.61 per cent. The turnout was 60.29 per cent. 2 April 2003: President Arnold Ruutel appointed Juhan Parts the new prime minister … The right-wing union of the Reform Party, Res Republica and People’s Union initialled their final coalition agreement [on 27 March]… Together the three parties have sixty seats in Estonia’s 101-seat parliament. (Baltic Times, 3–9 April 2003, p. 3) 7 April 2003: parliament approves Juhan Parts as prime minister.

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10 April 2003: the new coalition government is sworn in. Res Publica and the Reform Party are allocated five posts each and the People’s Union gets three. This is the eleventh government since Estonia regained its independence. 12 April 2003: Hungary’s vote on EU membership produced a ‘yes’ vote of 83.76 per cent. The turnout was 45.62 per cent. This was below the required minimum of 50 per cent but the vote was valid because more than 2 million voted ‘yes’. 16 April 2003: the ten prospective members of the EU sign the treaty of accession. The treaty needs ratification by the parliaments of all existing and future members. 10–11 May 2003: a referendum is held in Lithuania on EU membership. The ‘yes’ vote was over 91 per cent. The turnout was 63.37 per cent, the threshold being 50 per cent. 16–17 May 2003: a referendum is held in Slovakia on EU membership. The ‘yes’ vote was 92.46 per cent. The turnout was 52.15 per cent, the threshold being 50 per cent. 7–8 June 2003: a referendum on EU membership is held in Poland. The ‘yes’ vote was 77.4 per cent. The turnout was 58.9 per cent. If the turnout had fallen below 50 per cent, EU membership would have had to have been ratified through parliament, where a two-thirds majority would have been needed. 13–14 June 2003: a referendum on EU membership is held in the Czech Republic. The ‘yes’ vote was 77.3 per cent. The turnout was 55.2 per cent. 3 July 2003: Trade disputes over pork and milk this year have escalated into a diplomatic dispute between Lithuania and Latvia … Latvia’s introduction on 3 July of tariff quotas on live pigs and pork products was met with harsh resistance by its southern neighbour … Estonia is also upset with Latvia’s protective tariffs … A similar trade dispute arose earlier this year when Latvia … concluded that Lithuanian dairies were dumping milk on the Latvian market and that the government should levy additional duties on selected products of three Lithuanian dairies. (Baltic Times, 10–16 July 2003, pp. 1, 4) 14 September 2003: a referendum on EU membership is held in Estonia. The ‘yes’ vote was 67 per cent. The turnout was 63 per cent. 20 September 2003: a referendum on EU membership is held in Latvia. The ‘yes’ vote was 67 per cent. The turnout was 72.5 per cent. (Cyprus is joining the EU without a referendum. Parliament in the Greek Cypriot southern part of the country is to make the decision. ‘Cyprus ratified its membership on Monday [14 July 2003] … The accession treaty was ratified unanimously with a show of hands in Cyprus’s House of Representatives … But Turkish Cypriots, who make up 20 per cent of the island’s 800,000 population, will be left out … Cyprus will have its membership restricted to its southern twothirds, controlled by the internationally recognized Greek Cypriot government.

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The northern third of Cyprus is … only recognized by Turkey’: IHT, 15 July 2003, p. 2.)

THE ECONOMY

The economic background Owing to factors such as oil shale deposits, Estonia is self-sufficient in electricity production and meets 65 per cent of its total energy requirements (FT, Survey, 19 April 1994, p. 32). Oil shale is by far the most important source of energy. Between 1990 and 1993 it increased as a proportion of primary energy consumption by 8 percentage points to 63 per cent, owing to the sharp decline in imports of crude oil and natural gas from Russia. Environmental damage is largely caused by the use of shale for electricity generation (DIW, Economic Bulletin, 1995, vol. 32, no. 2, p. 21).

Financial policy The fight against inflation has been a key feature of government policy. Hence the stress on budgetary control (e.g. in late December 1994 a balanced budget for 1995 was passed by parliament: Business Europa, February–March 1995, p. 35). Estonia’s own national currency, the kroon (‘crown’), was introduced on 20 June 1992 as the sole legal tender. (It was agreed that roubles were to be returned to the Russian central bank within a month.) A currency board rule operates under which new issues of kroons are tied to the growth of foreign reserves (these were boosted by the return of gold reserves held in trust by Western governments from before the Soviet occupation) (Hansson 1993: 177–8). Banknotes and deposits in kroons placed with the Bank of Estonia qualify for a guarantee of exchange at the established rate of exchange (Bennett 1993: 454). The kroon has been successfully pegged to the Deutschmark at a rate of eight to one; the kroon can be devalued only by an act of parliament (Deutsche Bank, Focus: Eastern Europe, 19 April 1993, no. 73, p. 3; and 1994, no. 113, p. 12). In deciding to peg the kroon to the Deutschmark Estonia was backed by initial foreign currency reserves of $120 million, a $40 million stabilization loan from the IMF and 11.3 tonnes of gold retrieved from Western governments; the rate of the kroon against the Deutschmark has held, the annual inflation rate has come down from over 500 per cent to 30 per cent and foreign currency reserves have more than doubled (Independent, 26 July 1993, p. 21). It is often claimed that a currency board system means that the money supply is completely backed by foreign assets. But this cannot be correct, as countries with a currency board are certain to have a commercial banking system, which

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will create credit on the basis of this monetary base, which is 100 per cent backed (Gavin Peebles, review, Europe–Asia Studies, 1994, vol. 46, no. 6, p. 1061). Lithuania now has a currency board-like system similar to that of Estonia rather than an orthodox currency board system. The central banks of both countries retain considerable discretion in monetary policy, retaining powers such as setting reserve requirements for commercial banks (Steve Hanke and Kurt Schuler, Transition, 1994, vol. 5, no. 6, p. 13). The emission of kroon currency is tied by law to the authorities’ holdings of gold and foreign currency. The danger that irresponsible or incompetent commercial banking practices could detach the broader money supply has been avoided by tough bank regulation (Transition, 1994, vol. 5, no. 6, p. 9). The kroon is convertible on current account, but only partially convertible on capital account (IMF, World Economic Outlook, May 1993, p. 67). Estonia has established a fully convertible currency, with no capital controls (IMF, World Economic Outlook, May 1997, p. 95). There is full current account convertibility and virtual capital account convertibility (EBRD 1994: 109). The few remaining subsidies (e.g. on housing) are currently being cut (p. 23). The government has at times set a ceiling for pay increases in state enterprises (EBRD 1995b: 41). All kroons (cash and current and term accounts) issued by the Bank of Estonia are fully backed by gold and convertible currency. Wage setting is free and decentralized except for civil servants and top management in state enterprises (EBRD 1996b: 149). ‘Estonia has cleared out all the remaining minor restrictions on capital movements’ (EBRD 2001b: 138). The governor of the central bank cannot be fired and future governors will nominate their own successors (FT, 3 May 1994, p. 19). Two large banks have failed (IMF, World Economic Outlook, June 1995, p. 55). On 19 August 1999 the ruling three-party coalition settled on a budget in which corporate income tax would be abolished as of 1 January 2000. ‘The law would abolish income tax paid on investments in the firm only but not the entire income of the companies.’ In addition, customs tariffs would be imposed on imports from non-EU countries beginning on the same date (Baltic Times, 26 August–1 September 1999, pp. 1, 4). Key elements of the budget for 2000 included a freeze on pension and public sector wages, the abolition at the beginning of the year of corporate income tax on reinvested profits, an increase in personal income tax exemptions and compensating increases in other taxes (VAT and excise) … From January 2000 Estonia introduced new customs duties on agricultural goods from non-EU countries (excluding those with which it has free-trade agreements). (EBRD 2000b: 158) ‘Estonia issued its first ever Eurobond in June 2002’ (EBRD 2002b: 143).

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Prices Prices for household energy, municipal transport and housing are gradually being raised to cost recovery levels (EBRD 1995a: 55). Administered prices continue to account for 24 per cent of the consumer price index. The maintenance of relatively low prices for electricity and oil shale has impeded efficiency and environmental improvements (EBRD 1999a: 36).

Privatization Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 10 per cent; 1991, 10 per cent; 1992, 25 per cent; 1993, 40 per cent; 1994, 55 per cent; 1995, 65 per cent; 1996, 70 per cent; 1997, 70 per cent; 1998, 70 per cent; 1999, 75 per cent; 2000, 75 per cent; 2001, 80 per cent (EBRD 1999b: 24, 216; and 2002b: 20, 144). The government’s ambition is to complete large privatization by the end of 1995. By May 1994 more than 85 per cent of small enterprises had been privatized through employee buy-outs and auctions (EBRD 1994: 22). In 1993 fifty-four large enterprises were privatized out of a total of 155. The 1993 law allows for the use of vouchers as well as cash and instalment purchases for domestic buyers (p. 63). Privatization of large enterprises accelerated in the second half of 1994 in a ‘multi-track’ approach which includes national and international tenders and public share offerings. Privatization through evaluated bids, modelled after the Treuhandanstalt, is near completion. This approach is supplemented by public share offerings, the first of which took place in November 1994 and the second of which was initiated in early March 1995 (EBRD 1995a: 55). In the first half of 1995 the private sector accounted for 49 per cent of industrial production, according to official estimates (the figure was 40 per cent at the end of 1993). Virtually all large enterprises have been privatized, except for those in the transport, telecommunications and energy sectors (including oil shale mining and electricity supply). By mid-1995 the privatization of small enterprises (such as shops, other services and farms) had been largely completed through employee buy-outs and auctions (EBRD 1995b: 41). By May 1996 virtually all of the 450 large and medium-sized enterprises that were included in the original programme for asset sales during 1993–5 had been privatized. The privatization of state railways, the national telecommunications company and Tallinn port was envisaged during 1997–8. The 1993 act allows for the sale of assets both for vouchers (up to 50 per cent) and for cash. Enterprises sold through tenders number 433. Privatization of the remaining state enterprises, including utilities, will include public offerings of minority stakes for vouchers. By the end of 1994 the privatization of small enterprises was largely completed through employee buy-outs and domestic auctions (EBRD 1996b: 149). The number of bankruptcy cases has been substantial (p. 18). Although about 30 per cent of services and small enterprises have been auctioned, progress in privatizing large enterprises has been slow so far. A new privatization law was adopted in June 1993. A basic feature is the restitution of

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property lost in and after 1940. An elaborate system of vouchers has been instigated. About 15 per cent of claims have been resolved to date. Where physical restitution is impracticable, compensation vouchers are issued. In addition ‘work contribution’ vouchers are distributed, based on years of work in Estonia between 1945 and 1991. These are interchangeable and can be used in the privatization of housing, land, collective farm implements and state enterprises or redeemed for shares in the compensation fund. There have also been pilot commercial sales of property, with thirty large state enterprises having already been sold. A small percentage of shares, determined individually for each enterprise, will be reserved for sale in exchange for citizen vouchers. But the majority of shares will be sold for cash to strategic investors in the tender for sale of fiftytwo state enterprises announced in May (Lucja Swiatkowski Cannon, FT, 13 July 1993, p. 15). The asset transfer per adult averaged $1,000 (Lucja Swiatkowski Cannon, FT, 9 September 1994, p. 17). In a pilot programme planned for the autumn of 1994 four large enterprises were to sell about 30 per cent of their shares for vouchers in the initial public offerings on the stock exchange. And the government is diversifying privatization methods, beyond the tender offers (Lucja Swiatkowski Cannon, Transition, 1994, vol. 5, no. 7, p. 16). By the end of May 1994 an estimated 50 per cent of state-owned enterprises and business units had been transferred to private ownership or control. Privatization does not emphasize pay-offs to insiders (except for a discount to insiders at small-scale auctions). Instead a range of divestiture methods has been adopted: (1) restitution of homes, farms and businesses expropriated during the communist periods; (2) auctions of small-scale business units; (3) a tender process for medium-sized and large enterprises thought to be of interest to foreign or domestic investors; (4) lease arrangements for parts or all of certain enterprises; (5) joint ventures between state enterprises and foreign companies; (6) an active bankruptcy process which turns over the assets of liquidated enterprises to private entrepreneurs; (7) a voucher programme which would allow holders to exchange vouchers for shares in enterprises, investment funds, (residential) housing or land. (Each resident over the age of 18 was to receive ‘national vouchers’, the number depending on years of schooling or work between 1 January 1945 and 1 January 1992; ‘compensation vouchers’ were to be issued either to persons whose property was illegally expropriated but cannot be returned or to people who were deported during the Soviet era; tradability of vouchers was made complete at the end of May 1994.) By the end of May 1994 over a thousand small business units had been auctioned off, representing about 85 per cent of the small businesses originally designated for sale. A sixth tender, comprising about forty to fifty enterprises thought to be of interest to foreign investors, was scheduled for the autumn of 1994. Twenty large enterprises were to be privatized through a public offering (John Nellis, Transition, July–August 1994, vol. 5, no. 6, pp. 7–9). The approach used by the Estonians … [involves] limiting the exchange of vouchers to minority stakes in firms in which a controlling majority share

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Estonia had already been sold to a core investor. This increases the chances of turning a firm over to a good owner that has the incentives to look after and develop the health of the firm’s assets, and it also increases the chances that voucher holders will obtain shares that will maintain or increase their value. Indeed, the Estonians applied this procedure to a small number of the higher-potential firms, further increasing the prospects for the new minority shareholders. (Nellis 2002: 21)

About half of all companies slated for privatization have been offered to the international and national markets by means of four tenders, with the fifth being launched. Foreign investment is actively being sought. Price is only one consideration in the tenders, others including viability of plan, job guarantees and investment pledges (IHT, 24 March 1994, p. 9). Initially, vouchers could not be sold but could be passed on to relatives. But a law was passed at the end of June 1994 allowing voucher holders to sell them to other people who have lived in the country for more than fifteen years; as of August 1994 vouchers could be exchanged for shares in enterprises to be privatized (IHT, 2 August 1994, p. 11). Around 20 per cent of state-owned stock was to be sold to voucher holders (Business Central Europe, November 1993, p. 61). Tenders for ninety large enterprises have drawn offers for most of them; thirteen had been sold by August 1993 (p. 74). Vouchers were to be distributed from July 1994 onwards and fifty medium-sized enterprises were to be sold off by the end of the year (Business Central Europe, March 1994, p. 51). Beginning in 1992, with Germany’s Treuhandanstalt as a model, Estonia sold enterprises to investors outright through tenders for large enterprises (thus having regard for investment and employment and not just going for the highest sale price) and auctions for small enterprises. By the end of 1994 small privatization was virtually complete and nine tenders had been run listing 300 large enterprises. The 290th contract is currently being negotiated. In November 1994, bowing to popular demand for free shares, Estonia introduced a new method, which combines tenders with a public share offering. A majority owner is found by tender (for investment and corporate guidance), while the remaining shares are sold to the public for vouchers (Business Central Europe, March 1995, p. 18). Small privatization began in 1991 and 50 per cent of the target projects (shops, restaurants, handicrafts) have been sold. A law on large privatization was passed in August 1992. The first thirty-eight enterprises were registered for international tender and by March 1993 more than a hundred domestic and non-resident bids had been submitted. The main aim of the Land Reform Act is to return land to its former owners (compensation, solely in the form of vouchers, is meant to be the exception). Non-residents were previously not allowed to buy land, although leasing for ninety-nine years was available (Deutsche Bank, Focus: Eastern Europe, 19 April 1993, no. 73, p. 3). Small privatization is nearly complete and of the approximately 300 larger industrial enterprises that are capable of surviving, more than 250 had been sold off in

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nine international bids by the end of 1994 (Deutsche Bank, Focus: Eastern Europe, 22 June 1995, no. 121, p. 6). The majority of enterprises have been sold to domestic and foreign investors by auction or tender. The enterprises were not automatically sold to the highest bidder; higher priority was often attached to business plans which provided investment and employment guarantees. Voucher privatization has played a less important role (vouchers can be used to purchase land, residential property and shares in certain enterprises, e.g. a brewery and a department store). Management and employee buy-outs are not common, being allowed only in cases where it was certain that buyers had sufficient capital to run the business successfully. The privatization of the industrial and service sectors is now virtually complete. The private sector already generates 60 per cent of GDP. By the end of 1995 more than 1,100 small enterprises had been sold by auction and over 400 larger enterprises by tender. At present the state owns no more than fifty industrial enterprises and the intention is to sell them off as soon as possible. The final phase of privatization involves the sale of infrastructure projects such as telecommunications, a phase expected to last a year or two (24 September 1996, no. 163, p. 5). On 15 April 1993 Estonia became the first republic of the former Soviet Union to allow foreigners to buy land (subject to purchases being part of a major enterprise) (Business Europa, August–September 1993, p. 35). Only seven out of 300 large state enterprises have been sold to date (p. 35). Estonia has opted for an agency modelled on the East German Treuhandanstalt. Of more than 500 enterprises slated for sale, fifty-two had been sold by the start of 1994. A new wave of auctions is under way (FT, 21 June 1994, p. 3). A survey (FT, 19 April 1994, p. 30) provides the following information: 1 2

3

4 5 6

Small privatization is virtually complete (with the exception of rural land and property, where restitution and other legal problems are still obstacles). Large privatization started to take off only in August 1993 with the creation of the Privatization Agency. The agency is modelled closely on East Germany’s Treuhandanstalt (tenders, open to foreign firms, take account not only of price but also of factors such as investment and employment programmes). Since April 1993 foreigners have been allowed to buy land, but only in the sense of a particular land use connected with their investment, not of land as such. There is a list of more than twenty sectors which are currently restricted for foreigners (e.g. electricity, harbours, gas, liquor and tobacco). In 1993 the Privatization Agency signed fifty contracts for the sale of assets. In 1994 the aim was to prepare some 155 out of the remaining 500 industrial enterprises for sale by tender.

In December 1994 forty-two large enterprises were up for sale under the fifth and last international tender. Estonia had sold 192 enterprises, putting about 80

170 Estonia per cent of state property in private hands (excluding transport and public utilities). Foreigners accounted for about 40 per cent of investment. The Privatization Agency planned to finish its work by 1995. Public utilities, railway lines, harbours and oil shale industries were then to be put up for sale (FT, 13 December 1994, p. 2). The Privatization Agency expects to conclude the bulk of its large-scale privatizations by 1995. A final international tender round, covering about fifty enterprises, is soon to be announced, concurrently with a local tender round. A final local tender round will be held in spring 1995 (Baltic Observer, 13–19 October 1994, p. 7). Roughly 60 per cent of state industry and 90 per cent of small businesses has been privatized. Large privatization was expected to be finished by the end of 1995 (Baltic Observer, 23 February–1 March 1995, p. 15). The majority of state enterprises have been privatized, leaving only a few dozen large organizations with extensive infrastructures to be dealt with. The Privatization Agency sold 339 enterprises in 1994 (Baltic Observer, 6–12 April 1995, p. 9). The majority of state enterprises have been sold through tenders and direct sales, favouring strategic investors regardless of citizenship. From mid-1993 to mid1995 a total of 192 enterprises were sold in this manner. Vouchers were introduced relatively late and have played their most important role in housing (Bjorn Linderfalk, Baltic Observer, 7–13 March 1996, p. 7). By June 1996 some 430 enterprises had been transferred to private owners. Since 1993 about thirty high-profile enterprises have been purchased by foreign investors, the bulk of them from Sweden and Finland (Bjorn Linderfalk, Baltic Times, 27 June–3 July 1996, p. 15). On 15 November 1996 the government approved a list of enterprises regarded as strategically important, including the port of Tallinn, Tallinn airport, Estonian Telecom and Estonian Post. These cannot be privatized without the consent of parliament (which has to approve the entire list), but under the proposed bill the government will have the right to sell up to 34 per cent of shares in the listed enterprises (Baltic Times, 28 November–4 December 1996, p. 9). Large privatization started with the experimental privatization of seven enterprises in 1991–2. Beginning with the first tender of thirty-eight enterprises in November 1992, this process acquired a central place in the process. Altogether 373 enterprises were offered in ten tenders and 347 purchasing contracts were made. Approximately two-thirds of the enterprises were privatized by September 1995, including state enterprises and infrastructure entities such as Tallinn port and Estonian Air (Purju 1996: 42). The IMF believes that in the Baltic States the informal sector or grey economy may be responsible for as much as 20 per cent of the region’s GDP (Baltic Observer, 9–15 March 1995, p. 14). ‘In 1993 the share of the illegal economy [in Estonia] was 13.1 per cent, while at present it is difficult to find the precise percentage’ (Baltic Observer, 20–26 April 1995, p. 8). The Estonian Social Economic Analysis Institute produced figures for 1996 showing the shadow economy ‘accounting for 13.6 per cent of the country’s $400 million GDP’ (Baltic Times, 17–23 April 1997, p. 15).

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On 31 May 1996 Estonia became the third Baltic state to open a stock market. Further developments in privatization On 10 February 1999 it was announced that the sale of shares in the Estonian telecommunications company Eesti Telekom was more than eighteen times oversubscribed. Small domestic investors were given priority. As a consequence of the sale, the size of the Tallinn stock exchange was more than doubled. Previously banking stocks had dominated the exchange. Under the privatization plan 49 per cent of the shares were sold during a subscription process that began 25 January and ended 9 February. Within ninety days of the end of the subscription process, the company will be restructured and new shares will be sold to two Nordic Telekom partners who have been with the company since 1992. After the restructuring the two partners will hold 49 per cent of the company, the government will hold 27.3 per cent and the remaining 23.7 per cent will be held by private shareholders. ‘Now that the telecommunications privatization is largely completed, the railway and energy sectors are the only industries left to be privatized. But both have been on the negotiating table since 1996 and have gone nowhere’ (Baltic Times, 18–24 February 1999, pp. 9, 12). The government retains a 27.3 per cent stake, as well as a ‘golden share’ with veto rights over certain corporate decisions until the end of 2002 (p. 215). In February 1999 the government sold the remaining 11.4 per cent of shares in the single gas utility, Estonian Gas, to Ruhrgas, making it the largest single shareholder with 32.1 per cent. Russia’s Gazprom holds 30.6 per cent. Finland’s Neste and Latvia’s Itera each own 10 per cent and portfolio investors have 17.3 per cent. In 1998 two power distribution companies were separated from the integrated state power company (Eesti Energia) and privatized (p. 215). With the privatization of most medium-sized and large industrial enterprises complete, the focus is on the restructuring and privatization of some of the remaining state infrastructure enterprises … After almost four years of negotiations, in August 2000 the Estonian government signed an agreement under which the US company NRG is to buy a 49 per cent stake in Narva Power (which owns two power stations and a 51 per cent interest in the state-owned oil shale company). The state-owned Eesti Energia is to retain 51 per cent in Narva Power … In June 2000 the central bank reached an agreement with Finnish Sampo Finance for the sale of its 58 per cent stake in Optiva Bank, the third largest bank in Estonia … Following the sale of Optiva Bank the central bank and the government have no more shares in the banking sector (excluding some residual ownership of less than 1 per cent). (EBRD 2000b: 159)

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Estonia In January 2002 the previous government cancelled an agreement … with the US company NRG Energy … A final deadline of the end of December 2001 passed without NRG gaining approval for a $285 million loan … In August 2002 NRG filed a lawsuit against Eesti Energia claiming [compensation] … for the failed acquisition. (EBRD 2002b: 142) Rail Estonia has won the Estonian railway privatization tender … Two other companies contested for 66 per cent of the Estonian railway’s shares … The date for signing the actual contract is March 2001 … The minister for transport and communications wrote that … ‘We see three strong North American rail companies behind Rail Estonia’ … Estonia is the first Baltic country to privatize its railway. (Baltic Times, 21 December 2000–10 January 2001, p. 13) On 13 December [2000] the Rail Estonia consortium was declared the winner of a tender to buy 66 per cent of Eesti Raudtee … At the moment 90 per cent of Rail Estonia belongs to the international consultancy Kingsley Group, with two US railways firms … represented by 5 per cent each. Under Estonia’s restructuring of its railway sector Estonian railway owns the track infrastructure, while cargo and passenger traffic operations have been given to other companies. [There was a delay in the privatization process caused by an appeal.] (Baltic Times, 25–31 January 2001, p. 15) The privatization of Eesti Raudtee, the profitable freight arm of Estonian railways, appears to have taken a further blow as US transport giant Union Pacific Railroad, expected to be part of the leading bid, said on 30 January it was not planning to participate. (Baltic Times, 8–14 February 2001, p. 4) Last week … the Estonian privatization agency decided to invite the secondplace bidder, Baltic Rail Service, to negotiate the sell-off of a 66 per cent stake in the country’s railway. The talks with the winner of the tender, Rail Estonia, were cancelled as the bidder failed to provide a strategic investor and financial guarantees for privatizing Eesti Raudtee in the scheduled time … The previous loser, RER, also wants to participate in the new bidding … Under Estonia’s restructuring of its railway sector, Eesti Raudtee owns the track infrastructure, while cargo and passenger traffic operations have been given to other companies. (Baltic Times, 8–14 March 2001, pp. 7–8) Baltic Rail Services and the Estonian privatization agency signed an agreement on the privatization of the Estonian railway company on 30 April [2001] … BRS acquired 66 per cent of the shares of the national railway

Estonia

173

monopoly for $57.5 million … Eesti Raudtee is now privatized … The Estonian railway company owns the facilities – the railway tracks, the engines and some warehouses. Several companies like Edelaraudtee maintain passenger transportation … Baltic Rail Services unites Jarvis International of Great Britain with 25.5 per cent of the shares, the US rail operator Rail World Inc. (25.5 per cent) and Railroad Development Corporation of the United States (5 per cent). The rest, 44 per cent, are owned by Ganinger Invest, which belongs to Estonian businessmen. (Baltic Times, 3–9 May 2001, p. 7) The privatization of Estonia’s local railway passenger carrier Edelaraudtee was completed last week, more than eight months after its signature [on 29 November 2000]. But a change in investors was revealed as well, leaving Estonian officials astonished and surprised. It became clear on 1 August the British firm GB Railways PLC … actually owned only 20 per cent of the Estonian company. It was previously thought that GB Railways owned the entire company. The remaining 80 per cent, however, is owned by two notorious Estonian businessmen … Edelaraudtee, the operator of local passenger train lines, was split from the freight arm of the Estonian railway system, Eesti Raudtee, last year [2000]. It owns the track and infrastructure on two major local routes … and operates shorter lines as well. (Baltic Times, 9–15 August 2001, p. 7) Some 14 per cent of Estonia’s GDP comes from transit trade with Russia … The sale makes Estonia the first country in the region to privatize its national rail company … In November [2000] the government also had to cancel the sale of the passenger line Edelaraudtee to the UK’s GB Railways. The British firm argued that there was no way they could make a profit unless the government stumped up more in state subsidies for the lossmaking services deemed socially necessary. (Business Central Europe, February 2001, p. 27) Swedish banks Swedbank … and SEB broke off their merger plans on 19 September [2001], ending speculation about the consequences for the Baltic States’ banking sector, which the merged banks would have dominated. Swedbank is majority owner of Hansabank Group, which from its base in Estonia operates in all three Baltic countries. SEB meanwhile owns Estonia’s Uhispank, Latvia’s Unibanka and Lithuania’s Vilniaus Bankas. If the merger had gone ahead either Hansapanka or Eesti Uhispank, which together control 80 per cent of Estonia’s banking market, would have been sold. (Baltic Times, 27 September–3 October 2001, p. 7) ‘In May 2001 the owner of the Helsinki stock exchange … acquired a majority holding in the Tallinn stock exchange. The integration was completed in February 2002’ (EBRD 2002b: 143).

174

Estonia Thousands of people living in apartment buildings that are being reclaimed by pre-World War II owners or their families may need to look for a new place to live this summer … Under the new law, which is valid beginning 1 July [2002], owners who reclaim property are allowed to raise rents and evict tenants who do not pay. Around 22,500 people currently live in reclaimed buildings throughout Estonia. Roughly 12,000 of those live in Tallinn … The tenant may accept a higher rent or apply for an apartment in one of several government-funded buildings that are being planned. (Baltic Times, 18–24 April 2002, p. 4)

Foreign trade Virtually no restrictions on foreign trade remain (EBRD 1994: 23). A free-trade agreement with the EU came into effect in January 1995. Trade in ‘sensitive’ products (including agriculture and textiles) was to be governed by specific provisions. Unusually there was no transition period and reciprocity was granted upon entry into force (EBRD 1995a: 55). The trade regime is among the most liberal in the world (EBRD 1996b: 149). Estonia has not applied any notable tariffs since the mid-1990s (EBRD 1999b: 214). In 1991 more than 56 per cent of exports went to Russia alone and 95 per cent to the Soviet Union as a whole. Russia accounted for 46 per cent of imports (the Soviet Union for 85 per cent). In 1993 Russia’s share went down to 20 per cent of exports and 19 per cent of imports (the respective figures for the former Soviet Union were 38 per cent and 30 per cent). Finland is now the main trading partner (22 per cent of exports and 25 per cent of imports) (FT, Survey, 19 April 1994, pp. 29, 31). In 1992 the CIS accounted for only 50 per cent of merchandise trade, compared with 90 per cent in 1991 (Deutsche Bank, Focus: Eastern Europe, 19 April 1993, no. 73, p. 5). No Baltic State conducts more than 12 per cent of its trade with another. In 1993 the CIS accounted for 29 per cent of exports (Russia alone 23 per cent) and 22 per cent of imports (Russia 17 per cent) (United Nations Economic Commission for Europe 1994: 106). In 1993 the main trading partners were Finland (23.9 per cent), Russia (19.2 per cent), Germany (9.7 per cent) and Sweden (9.4 per cent) (IHT, 14 June 1994, p. 11). On 13 September 1993 Estonia, Latvia and Lithuania signed a free-trade agreement (Business Central Europe, November 1993, p. 18). The agreement came into force on 1 April 1994. Agricultural products are excluded and tariffs or quotas are allowed for the time being on some industrial goods. Extraordinary measures are permitted in the case of a ‘serious threat’ to a domestic market and temporary restrictions are allowed when ‘moral values’ or national security are adversely affected (Baltic Observer, 24 February–2 March 1994, p. 12; and 7–13 April 1994, p. 9). At least for an initial period some restrictions on the export of raw materials would be maintained by all three countries; in Latvia and Lithuania export tariffs would be employed and in Estonia quotas would be used (EBRD 1994: 113).

Estonia

175

On 16 June 1996 the prime ministers of Estonia, Latvia and Lithuania signed an agreement on free trade in agricultural products. The agreement was to go into effect on 1 October 1996 if ratified by the respective parliaments (Baltic Times, 20–26 June 1996, p. 1). On 13 November 1999 Estonia became the third former Soviet republic to join the WTO. Latvia and Kyrgyzstan became members in 1998. ‘From January 2000 Estonia introduced new customs duties on agricultural goods from non-EU countries (excluding those with which it has free-trade agreements)’ (EBRD 2000b: 158).

Foreign direct investment See Table 1.1 for the volume of net foreign direct investment. Net foreign direct investment was $58 million in 1992, $160 million in 1993, $225 million in 1994 and $205 million in 1995 (United Nations Economic Commission for Europe 1996: 149). Foreigners are allowed to own land (FT, 13 December 1994, p. 2). Foreigners and nationals normally have the right to own or lease land, but in the event of regional restrictions local government consent is required (EBRD 1996b: 150). No restrictions on capital flows or repatriation of profits exist, but tax incentives have been eliminated (IMF, World Economic Outlook, June 1995, p. 63). The Estonian Investment Agency reckons that foreign direct investment reached $350 million by the end of 1995. In post-communist Eastern Europe only Hungary has attracted more per capita foreign investment … By selling out controlling company stakes without discrimination toward foreigners, Estonia started a trend that its two Baltic neighbours with various success have copied several years later … Three-year investment and employment commitments included in the sale contracts have helped to keep positive attitudes toward new foreign owners among the public, labour unions in particular. Finally, these contracts have been backed by bank guarantees … As in Latvia, tax holidays were taken away in 1994. (Bjorn Linderfalk, Baltic Times, 15–21 August 1996, pp. 14–15) Direct foreign investment over the period 1991–6 amounted to $838 million. Foreign-invested companies account for over 50 per cent of exports (Baltic Times, 25 September–1 October 1997, p. 9).

Agriculture A separate law deals with the privatization of collective farms, three-quarters of which have been dismantled on the basis of resolved restitution claims or leases based on anticipated restitution (Lucja Swiatkowski Cannon, FT, 13 July 1993, p. 15).

2.6 29.0

Rate of growth of agricultural output (%)

Inflation rate (consumer, %)

0.199

Foreign direct investment (net, $ billion)

0.111

-0.398

10.0

-1.5

23.1

-1.2

1.6

3.9

1996

0.130

-0.563

9.6

2.2

11.2

5.8

15.4

9.8

1997

0.574

-0.478

9.8

-0.3

8.1

1.1

2.8

4.6

1998

0.222

-0.247

12.2

-4.6

3.3

-2.6

-4.2

-0.6

1999

0.324

-0.294

13.6

-0.7

4.0

0.9

4.6

7.1

2000

0.343

-0.339

12.6

0.4

5.8

-6.7

7.0

5.0

2001

0.185

-0.806

10.4

-1.2

3.6

-1.6

8.2

5.8

2002 (estimate)

General government balance: includes the state, municipalities and extra-budgetary funds (EBRD)

Based on ILO methodology (EBRD). The United Nations Economic Commission for Europe figures for job seekers (year end) were as follows: 1995, 5.0 per cent; 1996, 5.6 per cent; 1997, 4.6 per cent; 1998, 5.1 per cent; 1999, 6.7 per cent; 2000, 7.3 per cent; 2001, 7.2 per cent

2

1

Notes

Source: Various issues of European Bank for Reconstruction and Development, Transition Report; United Nations Economic Commission for Europe, Economic Survey of Europe; United Nations, World Economic and Social Survey; IMF, World Economic Outlook

-0.158

9.7

Balance of payments (current account, $ billion)

Unemployment rate (annual average, %)

Budget surplus or deficit (% GDP)

2

11.0

Rate of growth of industrial output (%)

-1.3

4.3

Rate of growth of GDP (%)

1

1995

Economic indicator

7DEOH Estonia: selected economic indicators 1995–2002

Estonia

177

Land has been sold to the highest bidder and the former owners have been compensated with shares in industrial enterprises (Matthew Kaminski, FT, 18 August 1993, p. 26). The privatization process has been slow. In Soviet times there were about 350 large farms. The proportion of land farmed privately is still only 14 per cent, while the ‘socialist sector’ has undergone a very limited breakup, with about a thousand co-operatives and public companies (FT, Survey, 19 April 1994, p. 32). The main aim of the Land Reform Act is to return land to its former owners (compensation, solely in the form of vouchers, is meant to be the exception). Non-residents were previously not allowed to buy land, although leasing for ninety-nine years was available (Deutsche Bank, Focus: Eastern Europe, 19 April 1993, p. 3). Over 90 per cent of land is still owned by the state. On 30 April 1996 parliament adopted a set of amendments to the land reform legislation. Home and summer cottage owners would henceforth be able to purchase the land under their property at half the official price. In prewar Estonia 3 million ha of land was privately owned. To date one-third has been reclaimed by prewar owners or their heirs, compensation has been requested for another one-third, and the remaining third is free to be sold or rented to new owners (Baltic Times, 9–15 May 1996, p. 10). The average size of farm in 1995 was 23.1 ha (Baltic Times, 28 August–3 September 1997, p. 12). The implementation of the restitution process has been slow (Davis 1996: 10). Land is being restituted according to the 1940 land register (p. 12). The land board has estimated that only 8 per cent of the total land being claimed has been returned (p. 13). ‘Although the process of privatization is incomplete, the task of restructuring the former state and collective farms is well underway. By January 1995 of the 365 kolkhoz [collective] and sovkhoz [state] farms in existence fifty-two had been privatized’ (p. 16). All the food-processing enterprises have either been privatized or are in the process of being privatized (p. 17). The privatization of land has been the least successful part of the privatization effort. Nevertheless, over a third of all the land that is claimed for restitution has been returned to the former owners (EBRD 1996b: 149). Only around 17 per cent of total land had been privatized by the end of 1997 (EBRD 1998b: 164). Only 17 per cent of land had been privatized by the end of 1998 (EBRD 1999a: 36). The amount of privatized land rose to about 25 per cent of all agricultural land by May 1999, up from 15 per cent in 1997. The sale of another 25 per cent is expected within the next two years. This would complete the privatization process, since 50 per cent is to remain in public hands (EBRD 1999b: 214). On 31 July 1995 the government agreed to introduce agricultural subsidies in order to placate farmers angry that it had failed to fulfil an election pledge to introduce protective tariffs (Baltic Observer, 27 July–9 August 1995, p. 3). The government gives hardly any direct subsidies to agriculture. Loans with interest subsidies are provided only on a small scale and for periods of up to one year (Deutsche Bank, Focus: Eastern Europe, 24 September 1996, no. 163, p. 2). The OECD has praised Estonia for having the world’s most liberalized agricultural

178 Estonia policy. According to the OECD’s method of calculating subsidies given to both the production and consumption of agricultural products, Estonia’s support for agriculture is -2 per cent compared with the EU countries’ collective score of +49 per cent (Baltic Times, 7–13 November 1996, p. 15). Estonia made a complete hash of agricultural reform … By cutting subsidies completely it did not create a lean farming sector but an uneven playing field with the EU. The EU’s markets are closed to Estonians, yet its subsidized exports flood the country. And as a result a third of Estonian farmland is simply uncultivated. (Business Central Europe, June 1998, p. 5) ‘The government’s new pre-accession economic programme … was presented to the EU last month [May 2001] … The government is reintroducing subsidies for farmers, which were all but eliminated in the early 1990s’ (Business Central Europe, June 2001, p. 46).

Economic performance The GDP growth rate turned positive in 1995, the rate being -14.2 per cent in 1992, -8.8 per cent in 1993 and -2.0 per cent in 1994 (EBRD 2001a: 15; and 2001b: 141). Growth was once again negative in 1999, but strongly positive thereafter. (See Table 1.1.) ‘The Baltic States have been affected much more severely by the Russian crisis than the other CEE countries, due in part to their closer trade and financial links to Russia’ (EBRD 2000a: 5). In 2001 GDP, as a percentage of the 1989 level, was an estimated 90 per cent in Estonia, 75 per cent in Latvia and 72 per cent in Lithuania (EBRD 2001b: 59). Agriculture has had a hard time in Estonia. The annual inflation rate reached a peak of 1,076 per cent in 1992, but a rate in single figures was achieved by 1998. If job-seekers who do not qualify for benefit are included, the unemployment rate rises from 1.8 per cent to 4.3 per cent (Baltic Observer, 9–15 March 1995, p. 14). An independent group of national experts indicate that open unemployment was 8 per cent of the labour force in the second quarter of 1995 (United Nations Economic Commission for Europe 1996: 91). Thanks to the establishment of new enterprises (above all in the service sector) and employment guarantees for employees of privatized enterprises, the rate of unemployment is low. Nevertheless, the official rate of just above 2 per cent is an underestimate since the very low unemployment benefit (paid for only six months) does not provide any incentive to register as unemployed. But even the actual unemployment rate is said to be no higher than 5 to 5.5 per cent (Deutsche Bank, Focus: Eastern Europe, 24 September 1996, no. 163, p. 3).

2

Latvia

POLITICS

Citizenship Henn-Juri Uibopuu (The World Today, June 1992, pp. 109–11) provides the following information. The census of 1935 split the population into 73 per cent Latvians, 12.5 per cent Russians, 5.2 per cent Jews, 3.9 per cent Germans, 2.8 per cent Poles, 1.3 per cent Livs and 0.4 per cent Estonians. In 1989, 52 per cent of the 2.7 million population were Latvians, 34 per cent were Russians, 4.5 per cent were Belarussians, 3.5 per cent were Ukrainians and 2.5 per cent were Poles (Gwiazda 1994: 77). About 20 per cent of Russians have mastered the Latvian language (p. 79). In 1993 the respective proportions were 54.2 per cent, 33.1 per cent, 4.1 per cent, 3.1 per cent and 2.2 per cent (FT, Survey, 18 November 1994, p. 32). The proportion of Latvians and Russians respectively in the population were as follows: 75.5 per cent and 12 per cent (1935); 62 per cent and 26.6 per cent (1959); 53.7 per cent and 32.8 per cent (1979) (Baltic Times, 28 August–3 September 1997, p. 5). In 2000, according to an official census, 29.6 per cent of the population was from the ethnic Russian minority and 57.6 per cent from the Latvian majority (Baltic Times, 6–21 September 2001, p. 1). ‘Latvia’s population is 2.38 million … according to a census published there last year [2001]’ (Baltic Times, 4–10 July 2002, p. 6). The 15 October 1991 (guidelines for the) citizenship law stipulated, for example, at least sixteen years’ lawful residence and a language test (see chronology below for changes). A letter in The Economist (29 January 1994, p. 8) said that fewer than 40 per cent of Russians had taken Latvian citizenship. There are about 740,000 non-citizens, 30 per cent of the population and 1,744,507 Latvian citizens (Baltic Observer, 16–22 June 1994, p. 4.). There are 731,878 registered non-citizens (Baltic Observer, 1–7 February 1996). The most recent official statistics show a total of 732,000 non-citizens (Baltic Times, 9–15 January 1997, p. 5). Minorities, including non-citizens, account for nearly 44 per cent of the population, including 30 per cent Russians, 4 per cent Belarussians

180

Latvia

and 3 per cent Ukrainians. Latvians are a minority in seven of the country’s eight largest towns. Within the 44 per cent, 28 per cent of the population (some 650,000 people) do not have Latvian citizenship and a large proportion of that group, consisting of former citizens of the USSR, have no citizenship at all (Baltic Times, 28 August–3 September 1997, p. 5). The number of non-citizens legally residing in Latvia is roughly 600,000 (Baltic Times, 30 April–6 May 1998, p. 3). There are nearly 600,000 non-citizens, most of whom are ethnic Russians (Baltic Times, 8–14 October 1998, pp. 1, 9). Out of a population of 2.6 million, 688,000 do not have citizenship – of whom 450,000 are ethnic Russians (FT, 15 April 1998, p. 2). Of a population of 2.5 million in 1989, 1 million did not speak Latvian. Naturalization was limited by a system which only allowed people in certain age brackets to apply for naturalization in any given year. In 1997 there were 687,000 non-citizens, accounting for 28 per cent of the population. Only 39 per cent of ethnic Russians had Latvian citizenship in 1997 (FT, Survey, 6 July 1998, p. vii). Only 26,000 of the 600,000 eligible have applied and only 18,000 have gained citizenship. Non-citizens get the same social benefits as citizens, they do not have to do military service and they can travel to the CIS more easily. But they cannot vote, travel West easily or work in areas like public administration or … security firms … [Some] 27 per cent of Latvian residents … [thus have] no vote. (Business Central Europe, December 1999–January 2000, p. 18) Latvia’s 535,000 non-citizens … who make up almost a quarter of the population, are mostly Russian speakers of Russian, Belarussian, Ukrainian or Polish origin … Naturalization procedures require applicants to have a certificate of basic proficiency in Latvian … [Non-citizens] cannot vote in national or local elections and are barred from holding jobs in state institutions. (Baltic Times, 27 September–3 October 2001, p. 5) As part of a broader initiative to increase Latvia’s naturalization rate, OSCE plans to launch a major public relations campaign … [in] November, December and January … Naturalization rates [have been declining] in recent years … Currently 535,000 of Latvia’s 2 million residents are noncitizens. Since the current naturalization process was introduced in February 1995 47,000 Latvia residents have become citizens through naturalization, most in the last three years … In order to become naturalized citizens residents must pass a test on Latvian history and one on Latvian. (Baltic Times, 4–10 October 2001, p. 5) ‘Russian is the mother tongue of around 37 per cent of Latvia’s population’ (Baltic Times, 18–24 April 2002, p. 5).

Latvia

181

At the beginning of the year [2002] 523,000 people remained non-citizens … Most are ethnic Russian, but there are also Ukrainians, Belarussians and others … Since … 1995 … only 55,000 non-citizens have become citizens … [Non-citizens] are denied the right to vote or travel as freely as citizens. They also cannot work in a variety of jobs, including almost every public or government position … To become a citizen one must prove basic proficiency in Latvian, recite its national anthem and pass a test on Latvian history. (IHT, 6 August 2002, p. 4) ‘[Some] 22 per cent of Latvia’s 2.35 million [people] remain non-citizens, most of them ethnic Russians’ (Baltic Times, 17–23 October 2002, p. 2). ‘Some 515,000 … people are non-citizens’ (Baltic Times, 23–29 January 2003, p. 2). A chronology of developments 26 November 1993: parliament approves the first reading of the new, controversial citizenship law. The requirements include a minimum ten-year residence, a conversational knowledge of Latvian and a loyalty oath. Former KGB or army officers are permanently barred and ‘naturalization quotas’ are proposed. 21 June 1994: parliament approves a highly controversial law on citizenship. Non-citizens born in Latvia (around 200,000) are able to apply for citizenship after 1996. But about 500,000 (mainly ethnic Russians) born outside Latvia will be subject to a strict annual quota after the year 2000. (The quota will be 0.1 per cent of the number of Latvian citizens in the previous year, i.e. around 2,000 people: CDSP, 1994, vol. XLVI, no. 23, p. 16.) President Guntis Ulmanis needs to approve the law. Non-citizens cannot vote or own land. There was considerable international criticism. At home the Union of Non-citizens estimated that there were 800,000 ‘forced non-citizens’ residing in Latvia. In March 1991, when a referendum was held, many of them supported independence and democracy. Around 637,000 subsequently declared their desire to be citizens (Baltic Observer, 21–27 April 1994, p. 13). The act of August 1994 laid down various conditions for citizenship, including a language examination, a history test and knowledge of national institutions and the national anthem (Baltic Times, 28 August–3 September 1997, p. 5). 28 June 1994: the president orders parliament to reconsider the law. 22 July 1994: a revised law on citizenship is passed. Instead of quotas, residents previously involved with specific organizations hostile to Latvia’s independence will not be granted citizenship (such organizations include the Union of Veterans of the Armed Forces of the USSR and the KGB). A one-year deadline is introduced for Latvian officials to process naturalization applications. (Under the previous draft the naturalization of some 400,000 non-citizens would have proceeded with tight quotas. The new law allows for naturalization of persons born in Latvia to begin in 1996 and for all non-citizens born outside Latvia to begin in the year 2003: Baltic Observer, 28 July–3 August 1994, p. 3.)

182 Latvia 27 October 1994: parliament approves the first reading of the draft aliens law (there have to be three readings in parliament and the president has to consent). The draft law grants automatic permanent resident status to citizens of the former Soviet Union and their descendants who were inhabitants of Latvia before 1 July 1992. Some 22,000 Russian military pensioners and their families will receive permanent resident status under the law, although they will be barred from applying for citizenship. Under Latvia’s citizenship law non-citizens who have lived for five years as permanent residents in Latvia since 4 May 1990 will be eligible to apply for naturalization. The first applicants will be considered on 1 January 1996. For those who emigrated to Latvia after 1 July 1992 the five-year term will be counted from the date of the issue of their permanent residence permit. Nearly half of Latvia’s 2.6 million population are Russian-speakers, most of whom emigrated during the half-century of Soviet control. Of these over 500,000 lack citizenship (Baltic Observer, 3–9 November 1994, p. 2). 31 January 1995: Latvia becomes the Council of Europe’s thirty-fourth member (the last of the Baltic States). (There is an OSCE mission in Latvia). 16 March 1995: parliament amends the citizenship law. Two groups would be granted citizenship without having to take language tests: (1) ethnic Latvians who did not return to Latvia until after the Second World War; and (2) residents who have completed a course of general education taught in Latvian (this affecting mainly Russian-speaking young people who were born in Latvia and graduated from Latvian schools). Approximately 70,000 people would be affected, including 25,000 to 28,000 repatriated from Russia (Baltic Observer, 23–29 March 1995, p. 1). 13 February 1996: the end of a month-long campaign by the Fatherland and Freedom Party to collect the minimum number of signatures needed to submit a more restrictive citizenship law to parliament. The 116,179 signatures (plus the 10,416 collected in July 1995) fell short of the 131,104 required. The proposed bill would have restricted the naturalization of Latvia’s 740,000 mainly Russian non-citizens to four groups of ethnic Latvians and Livs, legal residents from before 17 June 1940, former citizens of Lithuania and Estonia, and people who have been married to a Latvian citizen for ten years. An annual quota of 0.01 per cent of the current number of citizens would have applied to the last three groups. The result was formally announced on 23 February (Baltic Observer, 15–21 February 1996, p. 3; and 22–28 February 1996, p. 3). 15 April 1998: the government approves amendments to the citizenship law. (‘The Latvian parliament passed the amendments last June [1998], but thirty-six deputies opposed to the automatic citizenship article gathered enough signatures from voters to send the bill to a referendum: Baltic Times, 8–14 October 1998, p. 1.) The recommended changes are as follows: 1

To grant citizenship to all children born in Latvia after 21 August 1991, provided at least one of the parents is a former Soviet citizen and presently stateless and has resided in Latvia on a permanent basis since 21 August

Latvia

2

3

4

183

1991. These children will be able to obtain citizenship between 16 and 18 years of age by submitting an application for citizenship and proving their knowledge of the Latvian language, either by certifying they have completed a full course in a Latvian-language school or by passing a language and history examination (Baltic Times, 30 April–6 May 1998, p. 3). To abolish the ‘window’ naturalization system, by which only certain age groups can apply for citizenship in any given year (FT, 18 April 1998, p. 2). (The proposed amendment calls for the removal of a system under which younger non-citizens become eligible to apply for naturalization before older ones, meaning that ethnic Russians would be among the last who could apply: Guardian, 23 April 1998, p. 15.) There was agreement to discuss abolition of the window system for naturalization. Under the current law applications for citizenship are now being accepted for those persons born in Latvia and who are up to 30 years of age (Baltic Times, 23–29 April 1998, p. 1). ‘Citizenship windows’ are staggered time periods during which non-citizens of certain ages are clear to seek naturalization (Baltic Times, 7–13 May 1998, p. 7). The number of non-citizens legally residing in Latvia is roughly 600,000, while currently 150,000 comply with the current window system (Baltic Times, 30 April–6 May 1998, p. 3). The naturalization of residents and their descendants who were Polish citizens on 17 June 1940 if they have resided permanently in Latvia for at least five years before submitting their application (p. 3). The right to grant citizenship for special merits to up to fifty persons each year will belong to the government and not to parliament (Baltic Times, 16–22 April 1998, p. 3; and 30 April–6 May 1998, p. 1).

22 June 1998: the new citizenship law (third reading) is approved by parliament. 3 October 1998: a referendum is held. The new citizenship law is supported, with a 53.02 per cent vote in favour (45 per cent voting against). Some two-thirds of the electorate voted. The amendments will abolish the windows system, which forces age groups to wait their turn to naturalize, and offer citizenship without a Latvian language test to non-citizens’ children born in Latvia after 21 August 1991 … Removal of the windows system could mean up to 25,000 new citizens in Latvia per year. Currently only about 10,500 – or less than 5 per cent – of the 148,000 non-citizens eligible to apply have done so. In the months before the referendum Latvia was pressured by OSCE, the Council of Europe, the EU and the United States to pass the amendments and soften the naturalization procedure for the nearly 600,000 non-citizens in the country, most of whom are ethnic Russians … For Fatherland and Freedom was the only party to actively campaign against the amendments. (Baltic Times, 8–14 October 1998, pp. 1, 9)

184 Latvia 8 July 1999: Latvia’s parliament … overwhelmingly approved [a controversial language law] despite warnings from Brussels that it could violate the EU’s charter of rights and freedoms … It has also been criticized by OSCE. It requires, among other things, that all public meetings organized by the state or municipal authorities or state-owned firms be held in Latvian. (FT, 9 July 1999, p. 3) The lawmakers voted seventy-three to sixteen, with eight abstentions, to adopt the law … The debate in parliament was most heated on the use of other languages at public events. The lawmakers voted narrowly to tighten the draft law to require that interpreting be provided except for political demonstrations … Lawmakers supported several amendments to limit the scope of the law’s interference in private business. European institutions and foreign businesses warned that requiring all business to be conducted in the Latvian language threatened the flow of foreign investment. The law severely restricts possibilities for ethnic Russians to conduct business with the authorities in their language. It also prohibits the showing of films to preschool children unless they have been dubbed into Latvian. (IHT, 9 July 1999, p. 5) The 100-member parliament overwhelmingly supported it on 8 July by a count of seventy-six to sixteen … [But] in one of her first official acts as president, Vaira Vike-Freiberga asked parliament on 14 July to reconsider a controversial language law that has been assailed as discriminatory by European observers and human rights groups. The law, passed by parliament on 8 July, calls for the strict enforcement of the Latvian language in both the public and private sectors. Vike-Freiberga returned the draft, asking for certain articles to be re-examined. Among them are articles that prohibit multilingual signs and excessive regulation of private enterprises … The president called for more precise definitions within the law, especially regarding public announcements, events and official documents … ‘Broad definitions can create favourable conditions for official corruption’ [she said] … The OSCE’s high commissioner for national minorities has singled out a number of articles that need amending. Some are simply too vague. Others go too far. OSCE has taken particular issue with clauses that require all letterheads and all children’s cartoons to be dubbed in Latvian. (Baltic Times, 22–28 July 1999, pp. 1, 5) 9 December 1999: parliament passes a revised language law, with approval expressed by OSCE and the EU. Attention focused on the debate over the definition of ‘public events’ and the use of language on private letterheads and various kinds of ‘public information’. A provision allows languages other than Latvian to

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be used at privately organized public events. Key points of the new law were as follows (Baltic Times, 16 December 1999–5 January 2000, pp. 1, 8): 1

2 3 4 5 6 7

‘Foreign specialists and foreign members of company administration who work in Latvia must know and use the state language for the performance [of their duties] or they themselves must ensure translation [into Latvian].’ ‘The organizer [of a business meeting] shall provide translation [into Latvian] if so requested by at least one participant in the meeting.’ ‘State and municipal institutions … shall accept and examine documents from persons only in [Latvian].’ ‘Events organized by state and municipal institutions … take place in the state language.’ ‘In events [with the participation of foreigners and of state or municipal institutions] one of the working languages shall be [Latvian].’ Private businesses’ stamps, seals and letterheads may be in another language as well as Latvian. ‘Information intended to inform the public provided by state and municipal institutions … shall be only in [Latvian, subject to exceptions from the cabinet of ministers].’

21 January 2002: Latvia has got a sharp rebuff from the international community after President Vaira Vike-Freiberga failed to convince her country’s MPs on the need to abolish proficiency requirements in the Latvian language for parliamentary candidates … Under the effective language law candidates without top-level language proficiency cannot run for parliament or local government. The Latvian language is spoken by 79 per cent of Latvia’s population, according to the results of the nation’s census carried out in 2000. Latvian is spoken by 52.3 per cent of ethnic Russians. The number of people in Latvia speaking Latvian has grown by 17.3 per cent since the previous census in 1989, with 30 per cent more Russians speaking Latvian since 1989 … Vike-Freiberga promised to push through amendments to the election law last December in order to get the OSCE mission … out of Latvia. The mission has left … The mandate of OSCE’s mission to Latvia has expired … [but] OSCE is considering appointing a high commissioner to Latvia to continue supervising its attitudes towards local Russians … In Estonia the decision to scrap language requirements for election candidates was made last year [2001] and was a key element in declaring the OSCE mission’s work as complete. Lithuania was the only Baltic State not to have been assigned an OSCE mission. (Baltic Times, 31 January–6 February 2002, pp. 1, 3) 30 April 2002: ‘Parliament … [passes] a set of amendments to Latvia’s constitution that makes Latvian the official language of the parliament and local governments’ (Baltic Times, 9–15 May 2002, p. 5).

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10 May 2002: Parliament voted on 10 May to drop language requirements for election candidates which threatened to endanger the country’s Nato bid. Language requirements for candidates in national elections were abolished by sixtyseven votes in favour, thirteen against and four abstentions, while seventy-one MPs voted to abolish such requirements for municipal election candidates, thirteen voted against and three abstained … Parliament earlier approved amendments to the constitution intended to offset … amendments [which] enshrine the use of Latvian in both state and municipal elections and require MPs to swear an oath in Latvian in which they promise to uphold the constitution … In the Saeima [parliament] the sole working language will remain Latvian. (Baltic Times, 16–22 May 2002, pp. 1, 5) 23 May 2003: Various reports on Friday’s massive demonstration against the government’s education reform programme – one of the largest in Latvia’s history – cite completely different numbers of participants [ranging from 3,000 to 14,000] … People present at the demonstration demanded Russian language education for ethnic Russians … Demonstration organizers want the government to change its current 60–40 educational reform programme, whereby 60 per cent of courses for upper-level students will be taught in Latvian. (Baltic Times, 29 May–4 June 2003, p. 1) Around 10,000 took part (www.baltictimes.com, 3 June 2003). The government minister for social integration: In 1998 parliament adopted a new education law aimed at increasing the Latvian language skills and competitiveness of children in minority schools … The law foresaw increasing the percentage of instruction in Latvian/bilingually in state-funded secondary education to 60 per cent starting in [September] 2004 … In early 2003 minority schools had a curriculum in which about 52 per cent of all instruction took place in Latvian/bilingually and 48 per cent took place in minority languages … The OSCE High Commissioner on National Minorities has affirmed that the 60/40 solution in is line with minority rights standards. (Baltic Times, 22–28 May 2003, p. 19) 6 June 2003: Latvia’s highest court has ruled that a law requiring at least 75 per cent of all commercial radio and television broadcasts to be in the Latvian language

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violates freedom of speech … Under the 1995 law 25 per cent of a twentyfour-hour broadcast can be in a foreign language … The proliferation of cable television, which is not subject to the law, has helped undermine the law’s original intent … Russian speakers can now pull in every major channel in Russia, which observers say has helped spread a pro-Moscow view among many Russian speakers. (www.baltictimes.com, 13 June 2003)

The general election of 5–6 June 1993 A large proportion of the population were not eligible to vote because of the strict law on citizenship. The right to vote was confined to pre-1940 citizens and their descendants, which meant that about 40 per cent of ‘non-citizens’ were eligible (i.e. only about 20 per cent of the electorate were non-Latvian). There was a 5 per cent threshold for each of the twenty-three participating parties. The turnout was about 90 per cent. Below is the resulting distribution of votes and seats in the new 100-member Saeimaor parliament (it replaced the Supreme Council): Latvian Way: (32.38 per cent of the vote; thirty-six seats). The party is a centreright coalition of moderate nationalists, former communists and émigrés, stemming from the Latvian Popular Front and the pre-election government. The leader is Anatolijs Gorbunovs, the chairman of parliament and former ideology secretary of the Latvian Communist Party. The party advocates a ‘gradual’ citizenship process and is a firm supporter of the market economy. Latvian National Independence Movement: (13.35 per cent of the vote; fifteen seats). The party is right-wing and nationalist, adopting a hard line on citizenship. It is led by Joachim Siegerist, a German-speaking émigré. Harmony for Latvia: (11.99 per cent of the vote; thirteen seats). The leader is Janis Jurkans (a former foreign minister) and the party has a generous attitude towards naturalization. Latvian Peasants’ Union: (10.64 per cent of the vote; twelve seats). The leader is Ivars Berkis. The party advocates a ‘gradual’ approach to citizenship and priority support for agriculture. Fatherland and Freedom: (six seats). The party wishes to ‘decolonize’ Latvia by forcibly repatriating Russians. Christian Democrat Union: (six seats). Democratic Centre Party: (5 per cent of the vote; five seats). The party is liberal on the citizenship issue. Equal Rights Movement: (seven seats). Defends the rights of Russians and advocates immediate citizenship for ‘non-citizens’. It is led by Sergejs Dimanis.

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Political developments after the June 1993 general election 8–10 September 1993: the Pope visits Latvia. 15 March 1994: an agreement is announced with Russia: Russian troops will be withdrawn by 31 August 1994, although Russia will retain the use of the Skrunda radar station for four years after that (a formal agreement was signed by the presidents on 30 April 1994). (The non-operational part of the station was demolished on 4 May 1995 despite Russia’s objections.) Under the agreement the 22,000 Russian military pensioners (and their families) are, for example, able to buy and sell property. But they are ineligible to receive Latvian citizenship and so unable to vote (Baltic Observer, 1–7 September 1994, p. 1). 6 July 1994: President Clinton visits Latvia, the first US president to visit any of the Baltic States. He promises support for the removal of Russian troops, but encourages a tolerant attitude towards the Russian minority. A USA–Latvia trade and investment accord is signed and more US aid is promised. (The USA never recognized the Soviet Union’s claim to the Baltic States.) 14 July 1994: the government resigns after rejecting demands for increased tariff protection for imported foodstuffs from the Latvian Peasants’ Union (one of Latvian Way’s two junior partners in the coalition government). 18 August 1994: the Latvian National Independence Movement’s proposed government is rejected by parliament. (President Guntis Ulmanis then invited Latvian Way to try to form the next government.) 31 August 1994: the last Russian troops pull out (except for the 600 or so military specialists operating the Skrunda radar station until August 1998). 15 September 1994: Maris Gailis of Latvian Way becomes prime minister. Latvian Way formed a coalition government with the eight-member, centreleft Political Union of Economists (which had split away from Harmony for Latvia). Two former members of the Latvian Peasants’ Union also joined the government. Ironically, parliament later approved increased tariffs on food imports, effective 1 December 1994 (Baltic Observer, 6–12 October 1994, p. 2). 12 April 1995: Latvia and the EU initial an associate membership agreement (it was signed on 12 June 1995). 23 May 1995: Latvia and Ukraine sign a friendship and co-operation agreement. 27 July 1995: Alfred Rubiks, the former leader of the Latvian Communist Party, is given an eight-year prison sentence for conspiring to overthrow the Latvian government in support of the coup attempt against Gorbachev in August 1991.

The general election of 30 September–1 October 1995 The turnout was 71.9 per cent. Nine parties won seats in parliament, surmounting the 5 per cent threshold. There was no clear-cut election result,

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with the Democratic Party Saimnieks winning eighteen seats and Latvian Way winning seventeen seats. But the success of Joachim Siegerist, whose party came third with sixteen seats, was a real shock (pre-election polls suggesting around 5 per cent of the vote). Below is the resulting distribution of votes and seats in the Saeima: Democratic Party Saimnieks (DPS): (15.33 per cent of the vote; eighteen seats). The DPS is the result of a merger, on 28 April 1995, of the centre-left Latvian Democratic Party and the Saimnieks (‘master in your own home’) Party (the Riga City Council leftist minority Saimnieks), the co-chairman being Juris Celmins and Ziedonis Cevers (former leaders of the respective parties). The DPS advocates a socially orientated market economy and closer economic links with Russia. The DPS is critical of the central bank’s monetary policy, claiming that the high exchange rate harms exports (although an immediate devaluation of the lat is ruled out). Promises include tariff protection for agriculture and a halt to land privatization. Latvian Way: (14.65 per cent of the vote; seventeen seats). Its three top candidates are parliamentary speaker Anatolijs Gorbunovs, prime minister Maris Gailis and interior minister Janis Adamsons. Advocates the continuation of the reforms and speedy entry into the EU and Nato. People’s Movement for Latvia (Siegerist Party): (15.05 per cent of the vote; sixteen seats). An extreme nationalist and popularist party, founded in November 1994. The leader is the journalist Joachim Siegerist, who was born and raised in Germany and is vehemently anti-communist. He moved to Latvia in 1991 and, despite the fact that he spoke hardly any Latvian, gained Latvian citizenship in 1992 through his father (supposedly a Latvian national who fought in the German army during the Second World War). Joachim Siegerist was sentenced to eighteen months in prison by a German court in 1994 for inciting racial hatred against Gypsies, a sentence against which he is said to be appealing. He was elected to the Latvian parliament in 1993 as a member of the Latvian National Independence Movement (from which he was later expelled) and was suspended from parliament owing to poor attendance. His popularist streak is exemplified by his running of a charitable centre in Riga, which distributes free medicine to needy pensioners. He also promises to reduce taxes and to fight crime and corruption (including corruption among politicians). But the party’s policies lack clarity in general, e.g. Siegerist has become less anti-Russian. Siegerist asserted his party’s focus on joining the EU as well as its commitments to preserving the country’s close ties to the Eastern market … Foreign investment will only work if there is very close co-operation between Latvia and Russia … Siegerist’s promises of Western and Eastern expansion, of open markets and protection of Latvian farmers and of lower taxes and

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Latvia increased welfare make it unclear with whom [People’s Movement] For Latvia will try to team up. (Baltic Observer, 5–11 October 1995, p. 7)

Siegerist is in favour of selling land to foreigners. Fatherland and Freedom Party: (11.62 per cent of the vote; fourteen seats). Rightwing nationalist party taking a hard-line stance on the naturalization of non-citizens (e.g. the party supports the reinstatement of the discarded quotas). Advocates strong economic advantages for Latvian citizens only. Latvian Unity Party: (7.24 per cent of the vote; eight seats). Leader, Alberts Kauls. (He was banned from parliament for his anti-independence activities in 1991: Baltic Observer, 5–11 October 1995, p. 1.) Left-wing. Uses populist promises such as pensions increases. Advocates ‘active neutrality’ in foreign policy, restrictions on economic liberalization and ‘co-ordination of state monetary policy with the development of production’. Kauls is against the sale of land to foreigners. National Conservative Party/Latvian National Conservative Party (LNNK)/Green Party: (6.16 per cent of the vote; eight seats). Anna Seile is the chairperson of LNNK. Right-wing. Advocates strong economic advantages for Latvian citizens only. Farmers’ Union/Latvian Christian Democrat Union/Latgale Democratic Party: (6.13 per cent of the vote; seven seats). The parties signed a coalition agreement on 27 April 1995. In mid-September 1995 the bloc agreed to form a post-election government with the bloc below. Right-wing. Latvian Socialist Party: (5.65 per cent of the vote; six seats). Leader, Alfred Rubiks. (He is in prison serving a sentence for treason: Baltic Observer, 5–11 October 1995, p. 1.) Advocates the granting of citizenship to all permanent residents. People’s Harmony Party: (5.61 per cent of the vote; six seats). Leader, Janis Jurkans. Left of centre. Calls for harmony between Latvians and ethnic Russians.

Political developments after the 1995 general election 13 December 1995: Alfons Noviks, the head of the secret police in Latvia from 1940 to 1953, is sentenced to life imprisonment for ‘genocide against the Latvian people’ in the period 1941–9. (He died in prison on 13 March 1996.) 21 December 1995: parliament endorses Andris Skele as prime minister, having failed to approve Maris Grinblats (23 November) and Ziedonis Cevers (7 December). Cevers and Grinblats become deputy prime ministers, while the cabinet includes members of Saimnieks, Fatherland and Freedom, Latvian Way, LNNK, Farmers’ Union and Latvian Unity.

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Andris Skele is a wealthy businessman. He became deputy agriculture minister in 1990 and acting minister in 1993. Skele has been acting director general of the Latvian Privatization Agency, council member of Unibanka and council chairman of Riga Wines. In October 1995 be was elected council chairman of the Latvian Shipping Company (Baltic Observer, 21–27 December 1995, p. 5). 6 May 1996: agriculture minister Alberts Kauls is forced to resign after criticizing the government’s lack of state funding for agriculture. He advocates a more protectionist policy (Kauls’s five fellow Latvian Unity Party MPs left the coalition government the following day) (Baltic Times, 9–15 May 1996, p. 5). (Latvian Unity Party MPs returned to the coalition government on 22 May, but with a new agriculture minister from their ranks: Baltic Times, 30 May–5 June 1996, p. 5.) 18 June 1996: parliament re-elects Guntis Ulmanis as president for a second three-year term. Six People’s Movement for Latvia MPs announce that they will be leaving the party, citing Siegerist’s authoritarian leadership (Baltic Times, 20–26 June 1996, p. 5). (They formed a new parliamentary faction, For Nation and Justice, on 3 July: Baltic Times, 11–17 July 1996, p. 3.) 6 July 1996: two MPs leave the People’s Harmony Party’s parliamentary faction, leaving only four (one short of the minimum number for a faction) (Baltic Times, 11–17 July 1996, p. 3). 29 November 1996: Farmers’ Union and the National Economists merge. 20 January 1997: prime minister Skele offers to resign over his support for a new finance minister, a businessman accused of violating the anti-corruption law (an alleged conflict of interest). 22 January 1997: the new foreign minister leaves office. 29 January 1997: Skele is reappointed prime minister by the president. 13 February 1997: parliament approves the new Skele (five-party coalition) government by seventy votes to seventeen. ‘The new cabinet differs little from the one he headed for a year’ (FT, 14 February 1997, p. 2). 31 May 1997: the National Reform Party is formed. 17 June 1997: the culture minister resigns after admitting violating the 1 August 1996 anti-corruption law, which prohibits ministers from holding positions in private businesses (Baltic Times, 19–25 June 1997, p. 1). (The law went into force on 1 August 1996. Ministers are not allowed to hold paid positions in private businesses and cannot hold such positions as director, president or council chairman: Baltic Times, 24–30 July 1997, p. 8.) 30 June 1997: the interior minister resigns. 1 July 1997: the agriculture minister resigns. 16 July 1997: see the entry for Estonia. 28 July 1997: prime minister Skele resigns. The president invites Guntars Krasts (Fatherland and Freedom/LNNK) to become prime minister. 7 August 1997: parliament approves the new coalition government, comprising Fatherland and Freedom/LNNK, Democratic Party Saimnieks, Latvia’s Way

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and the coalition faction of Farmers’ Union and Christian Democrats (Baltic Times, 14–20 August 1997, p. 1). 16 January 1998: see the entry for Estonia. 17 January 1998: the New Party is formed. 22–23 January 1998: the Council of Baltic Sea States holds a meeting in Riga. (The council was created in Copenhagen on 5–6 March 1992. Denmark, Estonia, Finland, Germany, Iceland, Latvia, Lithuania, Norway, Poland, Russia, Sweden and members of the European Commission meet every year to discuss issues relevant to the region: Baltic Times, 29 January–4 February 1998, p. 8.) 3 March 1998: over a thousand protesters, mostly ethnic Russian pensioners, demonstrate in Riga against the increased cost of living. Some policemen use rubber batons to clear the road (Baltic Times, 12–18 March 1998, p. 1). Several thousand Russian speakers, many of them pensioners, hold a demonstration to protest against increased residential fees and to demand that Latvia continue to recognize their Soviet-era passports. Police disperse the rally by force (IHT, 9 April 1998, p. 7). Russia has accused the Latvian police of using force to disperse a demonstration by predominantly Russian pensioners (FT, 7 April 1998, p. 3). Between 2,000 and 2,500 Russian-speaking pensioners protest against the high cost of municipal and telephone services in relation to their low pensions (CDSP, 1998, vol. 50, no. 10, pp. 5–6). 16 March 1998: the fifty-fifth anniversary of the Latvian Legion. A parade is staged in Riga by some 500 veterans of the Latvian Legion, a division of the Waffen SS that fought with the Nazis during the Second World War. The controversy surrounding the parade is enhanced by the attendance of Juris Dalbins (the head of the Latvian armed forces) and several members of parliament (Baltic Times, 19–25 March 1998, p. 1; and 2–8 April 1998, p. 1). 2 April 1998: Riga’s synagogue is damaged in a bomb explosion. 3 April 1998: the national security council, headed by the president, recommends that armed forces commander Juris Dalbins be dismissed for attending the rally (Baltic Times, 9–15 April 1998, p. 3). (Parliament voted to dismiss Dalbins on 27 May. Dalbins ignored orders to the armed forces not to attend the rally in uniform: Baltic Times, 4–10 June 1998, p. 1.) 6 April 1998: a bomb explodes in the park next to the Russian embassy in Riga. 9 April 1998: Russia announces that it is to cut oil exports through the Latvian port of Ventspils by about 15 per cent in the second quarter of 1998 (IHT, 10 April 1998, p. 5). In 1997 Ventspils handled 11 per cent of Russia’s oil exports, second in importance only to Russia’s Black Sea port of Novorossiisk, which handled 25 per cent (IHT, 9 April 1998, p. 7). Ventspils is the deepest port in the Baltic. It is ice-free all year round and is connected to the former Soviet hinterland by excellent rail and road connections as well as by the only common carrier oil pipeline system in the former Soviet world. The system is a joint venture between a (recently privatized) Latvian company and a Russian company. The former has a 66 per cent stake and the latter a 34 per cent stake (FT, Survey, 6 July 1998, p. iv). ‘Ventspils controls a

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quarter of Latvia’s GDP … The oil terminal at Ventspils caters for about 13 per cent of Russia’s crude oil exports’ (Business Central Europe 1999: 39). The Democratic Party Saimnieks has left the coalition government (Baltic Times, 16–22 April 1998, p. 1). June 1998: Andris Skele forms a new political party called the People’s Party (FT, Survey, 6 July 1998, p. vi). Late July 1998: bowing to demands from the central election commission, the National Harmony Party withdraws the names of three candidates from the election list. The three people concerned were associated with the Communist Party after 13 January 1991, the day Soviet forces tried to suppress the Latvian independence movement. Latvian law states that anyone with a communist connection after this date is ineligible for public office (Baltic Times, 6–12 August 1998, p. 5). 31 August 1998: Russia’s use of the Skrunda early-warning anti-missile radar station ends when it ceases to be operational. Russia has until the end of February 2000 to complete dismantling the base (Baltic Times, 3–9 September 1998, p. 1).

The general election of 3 October 1998 Only six parties crossed the 5 per cent barrier to share in the allocation of the 100 seats. The results were as follows: People’s Party: (twenty-four seats). Led by Andris Skele. Latvia’s Way: (twenty-one seats). Led by Vilis Kristopans. For Fatherland and Freedom/LNNK (seventeen seats): Led by Maris Grinblats. National Harmony Party (sixteen seats): An alliance of four left-wing parties. Led by Janis Jurkans. Social Democratic Alliance: (fourteen seats). Led by Juris Bojars. Left of centre. New Party: (eight seats). Led by Raimunds Pauls. Centrist. ‘All of the other factions have expressed deep mistrust of its [the People’s Party’s] leader, former prime minister and businessman Andris Skele, and are unlikely to accept him as premier a second time’ (Baltic Times, 8–14 October 1998, p. 1). All of the parties except the Social Democrats have ruled out forming an alliance with the National Harmony Party, or ‘Communists’ as they are simplistically referred to. The more conservative factions mistrust them for providing a home for former pro-Soviet hardliners such as Alfred Rubiks and for having highly publicized links with political parties in Russia … a Harmony MP in the old parliament said that most of its support came from ethnic minorities, especially people in mixed families. (p. 8)

194 Latvia Two solidly pro-European parties came out on top. The People’s Party … is now hoping to patch together a coalition with Latvia’s Way, whose platform – including support for a stable currency and privatization of the few firms that remain in state hands – is virtually identical to its own. But the two parties are bitterly divided over who would lead the government … To build a majority they will probably look either to Fatherland and Freedom. the outgoing right-wing nationalist party, which is vehemently opposed to the liberalization of citizenship laws, or the centrist New Party. (The Economist, 10 October 1998, p. 57) ‘Corruption [is] widely seen as second only to Russia’s’ (Business Central Europe 1998: 33).

Political developments after the October 1998 general election 26 November 1998: parliament approves a new government. The new government of prime minister Vilis Kristopans of Latvia’s Way also includes the centrist New Party and the right-wing For Fatherland and Freedom/LNNK. The coalition has forty-six of the 100 seats in parliament (Baltic Times, 3–9 December 1998, p. 1). 3 February 1999: prime minister Kristopans and the Social Democratic Alliance sign a co-operation agreement. The Social Democrats will support most government initiatives in exchange for the agriculture ministry portfolio (Baltic Times, 11–17 February 1999, p. 5). 16 March 1999: Several hundred veterans of the Latvian Legion walked to Riga’s Freedom Monument … Last year’s march by the legionnaires, who fought in a World War II Waffen SS unit established by the Nazis, provoked condemnation from the West and threats of trade sanctions from Russia. In the aftermath the last parliament decided that 16 March should be a commemorative day for all Latvian soldiers of that conflict, whichever side they fought on. However … the decision was criticized in the lead up to this year’s march for associating the state with the SS and Nazi atrocities. As a result, on 23 February the government banned any of its members from attending the events, a rule which also applied to current members of the military. Last year the national armed forces commander was fired after disobeying orders by showing up at the march. President Guntis Ulmanis held meetings with the veterans to try dissuading them from marching. He and other politicians have said that the date, which marks the first joint engagements by two Latvian divisions on the eastern front in 1943, casts Latvia and the legionnaires in a bad light. (Baltic Times, 18–24 March 1999, p. 1) Hundreds of Latvian Waffen SS veterans parade in Riga. Some 146,000 Latvians were drafted by the Nazis in 1943 and 1944 (IHT, 17 March 1999, p. 5).

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More than 500 veterans took part in the march. About 140,000 Latvians volunteered or were conscripted to fight alongside Nazi forces in 1943. ‘This year [1999] … the Latvian parliament designated 16 March as official remembrance day for all veterans … Russian veteran groups object that it is the anniversary of an SS victory over the Soviet army’ (Guardian, 17 March 1999, p. 16). 17 June 1999: Vaira Vike-Freiberga is elected president by parliament. She will succeed President Guntis Ulmanis on 8 July 1999 when he finishes his second and final term of office. ‘The president’s role is largely ceremonial, but it does help the parliament form governments and can call emergency cabinet meetings and reject legislation’ (Baltic Times, 1–7 July 1999, p. 7). ‘Latvia’s president … can call a referendum in which voters can dismiss either president or parliament’ (The Economist, 21 August 1999, p. 29). The 100-member parliament cast fifty-three votes for Vike-Freiberga, who was backed by the Social Democrats, the opposition People’s Party and For Fatherland and Freedom, one of three government parties … The vote was a sound defeat for the government, especially Latvia’s Way, which saw its candidates [Anatolijs] Gorbunovs and Valdis Birkavs [the current foreign minister] rejected … This little-known Canadian–Latvian academic … [is] the first woman elected president in the former Soviet Union … A former psychology professor in Montreal [who did a stint as a scientific researcher for Nato in the 1980s], Vike-Freiberga returned to Latvia last year [the autumn of 1998] to become director of the Latvian Institute, a non-government organization that promotes the country’s image abroad. She gave up her Canadian citizenship one day before the election. She was born in Latvia in 1937 but her family managed to escape to a German refugee camp at the end of World War II … She is not associated with any political parties. (Baltic Times, 1–7 July 1999, p. 7) Vike-Freiberga: I think I have moral authority. I think I represent the fact that not everyone can be bought … [An unfortunate by-product of Latvia’s newfound freedom is the idea that] power is money and that everything can be bought and sold, even people … I have spent a great part of my life being part of a minority in this country or that. I know how it feels. (p. 7) ‘At the same time as urging ethnic Russians to learn Latvian, she has also announced her intention to learn Russian’ (FT, 9 July 1999, p. 3). 5 July 1999: prime minister Vilis Kristopans announces his resignation. Kristopans’ ruling coalition … almost from day one … was criticized as ideologically incompatible and unstable. Suspicions of rifts in the government came into the open on 3 July with the signing of an ‘agreement of common

196 Latvia action’ between Fatherland and the opposition People’s Party. The contract lists seven steps of economic reform needed to overcome what it describes as the ‘financial and economic crisis’ gripping the country, worsened by the prime minister’s inability to provide leadership for the country’s long-term interests. Kristopans responded in an interview on state radio on the morning of 5 July, saying that such a sign of disloyalty made it impossible for him to continue working with Fatherland … A decisive moment came in the parliament’s 17 June vote for the president, in which Fatherland, the People’s Party and the Social Democrats combined to get the non-partisan Freiberga over the line while Kristopan’s Latvia’s Way faction refused to budge from supporting its own candidates … While the stated reasons for Fatherland’s abandoning the coalition are economic, reflecting the country’s rising unemployment and soaring budget deficit, Kristopan’s term of office has been dogged by other problems. His bitter attacks on sections of the media for alleged bias … Another persistent problem has been accusations that he is controlled by powerful business interests, especially Ventspils mayor Aivars Lembergs. A few months ago economics minister Ainars Slesers resigned over alleged pressure from Lembergs on the privatization process. (Baltic Times, 8–14 July 1999, pp. 1, 3) ‘He said one of the three parties in his minority government’s fragile coalition had been negotiating with political rivals without his knowledge. “Political forces represented in the government are holding negotiations behind my back” [he said]’ (IHT, 6 July 1999, p. 8). His coalition government unravelled amid accusations of disloyalty and economic mismanagement. Mr Kristopans quit after discovering one of three parties in the governing coalition had held talks and signed accords on economic policy with a leading opposition party. ‘It is impossible to work with a party which behind my back signs a co-operation agreement with the opposition while I am out of the country,’ Mr Kristopans said. ‘There is only one reason for my resignation – the atmosphere of mistrust within my government’ … The eight-month-old government led by Mr Kristopans failed to make significant progress on privatization of the two remaining large state-owned companies, the Latvian Shipping Company and Latvenergo, the energy utility. (FT, 6 July 1999, p. 3) 12 July 1999: Latvia’s president, Vaira Vike-Freiberga, yesterday [12 July] asked Andris Skele … to form a new government, the country’s eighth since independence in 1991. Mr Skele’s government will be composed of his own centre-right People’s Party, the centrist Latvia’s Way and the nationalist Fatherland and Freedom. The ruling coalition will control sixty-two votes in the 100-seat

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Saeima. Latvia’s parliament … The immediate task of the government will be to tackle Latvia’s budget deficit … The previous government … had moved to postpone some expenditures, but shied away from sharp budget cuts. The new government is also expected to carry forward privatization of the two remaining large state-owned firms, the Latvian Shipping Company and Latvenergo. Mr Skele, who has held the post of prime minister twice, owns Ave Lat, a large food processing conglomerate. The food processing industry accounts for about 40 per cent of Latvia’s manufacturing output. (FT, 13 July 1999, p. 2) Skele’s first term as prime minister, when he was elected as a non-party compromise candidate, was marked by the speeding up of privatization, balancing of the state budget and other reforms. If he comes to power now his administration will face another state balance sheet in the red, and rising unemployment and slowing economic growth … [An] element of his demise as prime minister in mid-1997 may yet cause problems. Back then the passing of an anti-corruption bill placed dozens of ministers and MPs in a position of illegality and several resigned. However, when Skele insisted that others, including then transport minister Kristopans, follow suit, they decided Skele had to go instead … There has been persistent sniping that he got his start in this [food processing] business in the early 1990s through corrupt dealings. Skele denies this and claimed back in 1997 that he was not guilty of corruption because he had declared all of his business interests before assuming office … Skele told reporters on 12 July that he would considering handing over administration of the group to another person before he was elected prime minister again. (Baltic Times, 15–21 July 1999, p. 2) 16 July 1999: parliament approves Andris Skele’s three-party coalition, comprising the People’s Party, the right-wing For Fatherland and Freedom/LNNK and the centre-right Latvia’s Way. Skele will assume the prime minister’s chair for the third time since 1995 … He told lawmakers on 16 July that Latvia is in an economic crisis … He stressed balancing the budget as priority number one … The People’s Party won the October [1998] elections but was shut out of the government by Latvia’s Way. Although the two parties are ideologically similar they had been at odds since Skele’s last term as prime minister, when mutual corruption charges and other clashes strained their relationship. (Baltic Times, 22–28 July 1999, pp. 1, 7) 13 October 1999: the European Commission recommends that EU leaders at the December 1999 meeting in Helsinki allow Bulgaria, Latvia, Lithuania, Malta, Romania and Slovakia to begin accession negotiations in 2000. (See the entry for Estonia.)

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Latvia The European Commission … ranked Latvia, along with Malta, as one of the best prepared candidates in the second wave of applicants … The EC said the Baltic country can now be considered a functioning market economy that can withstand the winds of competition that blow inside the EU. The report said that prices and trade have been liberalized and barriers to enter and exit markets are few. It also lauded Latvia for continuing to attract foreign investment and for increasing its trade with the EU in the wake of last year’s Russian crisis. Some areas, however, still need work … Latvia’s judicial system must be strengthened with additional judges and training in EC judicial law. Corruption is still a large problem … Latvia must harmonize its legislation in the areas of telecommunications, agriculture and fisheries, data protection, mutual recognition of diplomas, health and safety, and customs policy. Another question mark is the pending language law. (Baltic Times, 21–27 October 1999, pp. 1–2)

(For further details, see the Estonia entry for 10 December 1999.) October 1999: An unremarkable ceremony in … Skrunda last week marked the symbolic end to Russian occupation of the Baltics … Russia pulled its last handful of soldiers from the Skrunda radar site … The pullout was completed well ahead of the February 2000 deadline. (Baltic Times, 28 October–3 November 1999, p. 2) 26 October 1999: the government announces that the Salaspils nuclear reactor is to be dismantled. Dismantling work must get under way in 2001 and will last nine years (p. 2). 12 April 2000: Prime minister Andris Skele resigned Wednesday [12 April], for the third time in four years … Facing a vote of no confidence in parliament on Thursday [13 April] Mr Skele had been at loggerheads with a junior partner called For Fatherland and Freedom after he dismissed the minister of economy, Vladimirs Makarovs, a member of that party. Mr Makarovs had voided the signing rights of the privatization agency’s chief, Janis Naglis, effectively stripping him of authority to manage the agency … Mr Naglis favoured swift privatization … Mr Makarovs complained that the agency has needlessly forfeited money for the sake of speed. The dismissal of Mr Makarovs led to For Fatherland and Freedom withdrawing its support for the prime minister. Mr Skele in turn dismissed the party’s five remaining ministers from the cabinet … The prime minister said he would not head [a new coalition cabinet] but might join as a minister. (IHT, 13 April 2000, p. 4)

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Andris Skele [People’s Party] resigned … after [centre-right] Latvia’s Way pulled out of a three-way ruling coalition … Skele put the coalition in an impasse by sacking [on 6 April] economics minister Vladimirs Makarovs of the conservative coalition party For Fatherland and Freedom/LNNK and nullifying Makarovs’s sacking of privatization agency chief Janis Naglis, a long-time friend of Skele … Makarovs … revoked the signature rights of … Naglis, making him ineffective in approving the privatization of state property. (Baltic Times, 13–19 April 2000, pp. 1–2) 4 May 2000: Latvia yesterday celebrated the tenth anniversary of its parliamentary vote for independence from the former Soviet Union against a backdrop of bitter political exchanges with Russia … Latvia has been singled out by Russia partly over its treatment of Soviet-era suspected war criminals. Estonia has given them suspended sentences, while Latvia has handed down prison terms. (FT, 5 May 2000, p. 8) 5 May 2000: parliament approves a new government under prime minister Andris Berzins. ‘Former Riga mayor Berzins pieced together a coalition of four right-wing parties … It includes all three factions which made up the last government: the People’s Party, Latvia’s Way, plus For Fatherland and Freedom/LNNK … [and] the small New Party’ (Baltic Times, 11–17 May 2000, pp. 1–2). The country’s ninth government in ten years of post-Soviet independence … collapsed last month … Government number ten took office on 5 May under Andris Berzins, a centre-right politician who was previously mayor of the capital, Riga. The three parties of the previous coalition are back in the new one; a fourth party has joined in. (The Economist, 13 May 2000, p. 50) 17 August 2000: there are two explosions in a shopping complex in Riga. One of the injured died four days later. ‘[A] spokesman for the state police said he does not think there are any political motives behind the bombing’ (Baltic Times, 24–30 August 2000, p. 1). 8 November 2000: the latest EU report is published. Estonia remains at the front of the Baltic field for future EU membership. The EU’s report on Latvia (Progress Towards Accession, 8 November 2000, p. 97): Latvia can be regarded as a functioning market economy and should be able to cope with competitive pressure and market forces in the medium term,

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Latvia provided that it completes and maintains the pace of its structural reforms. Latvia has preserved macroeconomic stability. Progress has been made also on structural reform. The legislative framework for a market economy is largely in place and market entry and exit mechanisms function in an increasingly satisfactory manner. The financial sector is currently small but functions well. However, the current account deficit must be kept under control. Enterprise privatization has not yet been completed. Considerable efforts are needed to encourage private and public investments and to enhance the market-oriented skills of the work force … It will be necessary to continue and accelerate the public administration reform process, in particular with the adoption of key legislation; to further strengthen the judicial system; and to continue the fight against corruption on a broad scale.

(For further details, see the entry for Estonia.) 13 November 2001: the EU publishes its reports on enlargement. The EU publishes its progress reports on the twelve EU applicants for EU membership with which negotiations have begun. There are thirteen applicants in all (including Cyprus, Malta and Turkey), but negotiations have not yet begun with Turkey. As many as ten countries may be ready to join the EU in 2004, but Bulgaria and Romania are not among them. (For details, see the entry for Estonia.) The Latvian government fired the director-general of the Latvian privatization agency, Janis Naglis … Economy minister Aivars Kalvitis … blamed Naglis for not keeping him informed about legal fees relating to proceedings against Latvia by Finland’s Sonera-owned Tilts Communications, which is a co-owner of Lattelekom. Tilts Communications is demanding compensation because the government curtailed Lattelekom’s monopoly status in order that it comply with EU competition requirements. (Baltic Times, 15–21 November 2001, p. 7) December 2001: ‘Bank of Latvia President, Einars Repse, decided to hand in his resignation in order to pursue a career in politics with the new right-wing party he plans to found, New Times (Baltic Times, 6–12 December 2001, p. 5). 18 December 2001: ‘OSCE yesterday [18 December] resolved to close its Latvian mission … This follows an OSCE move last week to withdraw from Estonia’ (FT, 19 December 2001, p. 8). March 2002: The Latvian Legionnaires, veteran soldiers who served in Germany’s Waffen SS during World War II, have cancelled a controversial annual march following warnings from government officials that it would be a public relations problem for the country’s Nato bid. For more than a decade it has been a custom for the Legionnaires. (Baltic Times, 7–13 March 2002, p. 1)

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Several hundred people turned out on 16 March to commemorate Latvian soldiers who fought alongside Nazi troops during World War II … Plans for a formal march … were cancelled for fear of endangering Latvia’s Nato membership bid … Some 140,000 Latvians were conscripted into the Latvian Waffen SS Legion. (Baltic Times, 21–27 March 2002, p. 1) Latvia stands accused of hypocrisy for concentrating on communist crimes while not dealing with citizens who participated in the murder of tens of thousands of Latvian Jews during the Nazi occupation from 1941 to 1944. Since Latvia regained its independence … in 1991 not one citizen has been tried for Nazi-related crimes. (The Times, 6 January 2003, p. 13) 30 September 2002: Prime minister Andris Berzins fired his interior minister … in a feud that has poisoned relations between two key coalition partners just days ahead of the general election [on 5 October]. Berzins demanded interior minister Mareks Seglins step down after police arrested two members of the prime minister’s Latvia’s Way party for allegedly distributing leaflets that labelled government partner the People’s Party a ‘gang of thieves’. (Baltic Times, 3–9 October 2002, p. 1) 5 October 2002: a general election is held for the 100 seats in the Saeima (parliament). There is a 5 per cent threshold. The turnout was 72.4 per cent. ‘Latvians opted for new leaders but old policies’ (Baltic Times, 10–16 October 2002, p. 1). Latvia’s Way, led by Andris Berzins, failed to cross the 5 per cent threshold. The New Era Party is led by Einars Repse (the ex-governor of the central bank). The party won 23.93 per cent of the vote and twenty-six seats. Its programme included cuts in taxes (Baltic Times, 3–9 October 2002, p. 1). ‘It gets 15 to 16 per cent according to recent public opinion polls’ (p. 1). ‘New Era [is] a newly formed conservative party that fought the election on a crusading anti-corruption ticket’ (FT, 7 October 2002, p. 5). Heading a party of political newcomers, [Einars] Repse pounded away at the centrist centre-right government during the campaign, calling it corrupt and out of touch. As prime minister, he said he would do nothing to jeopardize the country’s progress toward Nato and the EU and would continue the business-friendly policies carried out by the outgoing government. The difference, he pledged, would come in the form of a more transparent and accountable government that paid more attention to citizens’ concerns. (Baltic Times, 10–16 October 2002, pp. 1, 4)

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Latvia For Human Rights [in a United Latvia] is a union of three left-wing parties, headed [respectively] by [Janis] Jurkans, [Alfred] Rubiks … who spent five years in jail for backing the 1991 Soviet coup attempt … and [Tatiana] Zhdanok, barred from elected office for her role in the Communist Party after 1991 …While it has won heavy backing from ethnic Russian voters, largely for its stand on delaying plans to switch the language of instruction in minority schools from Russian to Latvian in 2004, it has angered many more mainstream politicians by making overtures to Moscow. Chairman Janis Jurkans infuriated the government last month [September] by meeting Russian president Vladimir Putin in the Kremlin. (Baltic Times, 3–9 October 2002, p. 2)

For Human Rights in a United Latvia won 18.94 per cent of the vote and twenty-four seats. The People’s Party is led by Andris Skele. Its programme includes cutting corporate taxes to 10 per cent (p. 1). ‘[The party is] staunchly pro-business’ (Baltic Times, 10–16 October 2002, p. 4). The party won 16.71 per cent of the vote and twenty-one seats. The Union of Farmers and Greens is led by former economy minister Ingrida Udre. ‘[The union] is riding on a strong Euro-sceptic message and support from Latvia’s farmers, who fear they won’t be able to compete against their heavily subsidized Western counterparts after joining the EU’ (Baltic Times, 3–9 October 2002, p. 2). ‘Ingrida Udre says she is for the EU but wants to delay joining the EU until the agricultural sector is able to compete with the better-subsidized Western counterparts’ (Baltic Times, 10–16 October 2002, p. 4). The Union won 9.46 per cent of the vote and twelve seats. Latvia’s First Party is led by Eriks Jekabsons. ‘Another group of newcomers who won ten seats on the strength of their anti-corruption, Christian values campaign’ (p. 1). ‘Jekabsons … has warned against joining the EU “at any cost”, saying the government should first ensure fair treatment for Latvian farmers’ (p. 1). The party won 9.58 per cent of the vote and ten seats. For Fatherland and Freedom won 5.39 per cent of the vote and seven seats. The Social Democratic Workers’ Party, led by Dainis Ivans, failed to cross the 5 per cent threshold. ‘[It] wants to replace Latvia’s flat tax with a progressive tax system’ (Baltic Times, 3–9 October 2002, p. 2). ‘The country is often seen as among the most corrupt EU candidates’ (p. 2). Four centre-right and centrist parties say they have agreed to form a government with ex-central banker Einars Repse at the helm and political newcomers in charge of several ministries … Election winners New Era are set to team up with Latvia’s First Party, the Union of Greens and Farmers

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and For Fatherland and Freedom to form a government that would command fifty-five seats in the 100-member parliament. (Baltic Times, 17–23 October 2002, p. 1) 9 October 2002: see the entries for Estonia for 9 October 2002, 20 October 2002, 18 November 2002, 21 November 2002 and 12–13 December 2002 as regards EU and Nato membership. 24 October 2002: Defeated Latvian lawmakers [forty-seven of them] have prompted widespread anger by voting to triple their severance pay before stepping down after this month’s elections … [There were] forty-six votes in favour, one against and eighteen abstentions … It was part of a legislative package requiring new lawmakers to swear they will be loyal to their country and defend the Latvian language. The government proposed a loyalty oath earlier this year to allay concerns that a decision to drop language requirements for MPs … jeopardized the status of the Latvian language. (Baltic Times, 31 October–6 November 2002, p. 1) ‘When the lame-duck parliament meets for the last time on 31 October … outstanding debts of nineteen enterprises and organizations [will be cancelled]’ (p. 4). 7 November 2002: the new government is approved by parliament. January 2003: The situation with oil deliveries to Ventspils, which have dropped off to nothing since the start of the year [2003], acquired a sense of urgency last week as Russia’s leading crude producers made a joint appeal to the Russian government to reopen the Baltic export route. However … Russian deputy prime minister Viktor Khristenko said on 14 January that the country’s oil export plan for the first quarter – which does not provide for shipments to Ventspils – will not be reviewed. Earlier this month Transneft, monopoly operator of Russia’s enormous oil pipeline system, said that it was halting all crude deliveries via Latvia because the route had become too ‘expensive’. Russia’s oil executives, struggling to find additional export routes to accommodate rapidly rising output [oil prices being very high], criticized Transneft’s policy in a letter to prime minister Mikhail Kasyanov … Transneft wants to maximize throughput at the Primorsk oil terminal outside St Petersburg in order to recover its costs, said analysts. The port, which opened in 2001, worked at maximum capacity last year [2002] … Primorsk was built in large part with Transneft’s (i.e. the government’s) own money … Apparently in mid-2000, not long before the Primorsk terminal was opened, the government decided to slowly close the spigot on the Polotsk–Ventspils pipeline … Last year oil and oil products handling at Ventspils fell by a staggering 25 per cent … Crude oil exports from the

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Latvia terminal, which was built in the 1960s, sank by 24 per cent in 2002. Ventspils mayor Aivars Lembergs, who also sits on the board of Ventspils Nafta, has blasted Transneft’s policy as ‘politically motivated’. Lembergs said he doubted the joint appeal would have much influence on the Russian government, which by closing the spigot is essentially coercing Ventspils Nafta in return for control over the port’s operations, according to the Ventspils mayor. Transneft is 75 per cent owned by the Russian government Russia’s prime minister said that the oil transportation sector should remain under state control, even if private capital were used to build an additional pipeline … Lembergs insisted that the Ventspils route is not only competitive but the ‘most profitable’ … By starving Ventspils the Russian government hopes to force it into relinquishing part of – if not all – control over the strategic port … said analysts. (Baltic Times, 16–22 January 2003, pp. 1, 4, 19)

‘Latvia’s government is set to sell its 37 per cent stake in the oil terminal later this year, and Transneft has said it will not consider restoring shipments to Ventspils Nafta unless it gets a stake’ (www.baltictimes.com). ‘What Russia is trying to do, claim Latvian officials, [is] starve the terminal and force the sale price down’ (Baltic Times, 13–19 March 2003, p. 2). Though crude oil throughput at the port had trickled down to nothing due to Russian policy, the terminal has been able to recover by using rail deliveries of oil. The terminal reportedly received some 1 million tonnes by rail in February … Latvijas Naftas Tranzits (LNT), owner of 47 per cent of the Ventspils Nafta oil terminal, on 3 April stated its attention to use an option to buy a 5 per cent stake and thus gain majority control … The 5 per cent currently belongs to the government but had been reserved back in 1997 for LNT provided that the investor meet all requirements at the time … [The 3 April move came] after a government-sponsored report claimed the law had been breached during the Ventspils Nafta privatization … LNT (Latvian Oil Transit) acquired 37 per cent of the terminal [in 1997] … LNT is controlled by Ventbunkers, based in Ventspils, though the dominant figure behind the company is Aivars Lembergs, mayor of Ventspils … Currently the government owns a 43 per cent stake, 5 per cent of which it is obligated to sell to LNT … Thus no side owns a controlling stake – precisely what Russia’s Transneft is after. (Baltic Times, 10–16 April 2003, p. 7) 17 February 2003: see the entry for Estonia. 8 March 2003: see the entry for Estonia. 20 March 2003: see the entry for Estonia. 23 March 2003: see the entry for Estonia. 12 April 2003: see the entry for Estonia. 16 April 2003: see the entry for Estonia. 10–11 May 2003: see the entry for Estonia.

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16–17 May 2003: see the entry for Estonia. 7–8 June 2003: see the entry for Estonia. 13–14 June 2003: see the entry for Estonia. 20 June 2003: President Vaira Vike-Freiberga is re-elected. Eighty-eight MPs voted for her and only six against. 14 September 2003: see the entry for Estonia. 20 September 2003: see the entry for Estonia.

THE ECONOMY

Financial policy The fight against inflation has been a key feature of government policy. Hence the concern with budgetary control (e.g. on 8 December 1994 parliament decided that the budget deficit for 1995 should not exceed 1.7 per cent of GDP: Baltic Observer, 15–21 December 1994, p. 2). On 7 October and 11 December 1996 parliament approved the 1997 budget, the first balanced budget since independence (Baltic Times, 10–16 October 1996, p. 1; and 19 December 1996–8 January 1997, p. 1). The Latvian rouble (rublis) was introduced as a parallel currency on 7 May 1992 and was allowed to float against other currencies in October. But on 20 July the Russian rouble was entirely withdrawn from circulation, to be exchanged at a rate of ten to one rublis (United Nations Economic Commission for Europe 1993: 170, 233). The first lats went into circulation on 5 March 1993, alongside the rublis. The phased introduction of the lat was to have been completed by the end of June 1993. Exporters are free to move their foreign exchange earnings wherever they please and there are no restrictions on the purchase of foreign currency by importers, tourists and foreign investors. The result is de facto convertibility of the lat (Deutsche Bank, Focus: Eastern Europe, 23 April 1993, no. 75, p. 3). Latvian roubles were no longer legal tender after 18 October 1993; there is an independent central bank (Einars Repse, Finance and Development, December 1993, pp. 28–9). The central bank is independent. Its chairman (Einars Repse) and council are appointed by parliament, but are not dismissible for a six-year term. Most restrictions on foreign exchange were lifted in 1992 (FT, Survey, 18 November 1994, p. 30). The monthly rate of inflation was reduced from 50 per cent in January 1992 to 0.3 per cent in April 1993, while the exchange rate against the dollar has stabilized since the lat became the sole currency at the end of June 1993 (Independent, 26 July 1993, p. 21). The IMF talks of current account convertibility and partial capital account convertibility (World Economic Outlook, May 1993, p. 67). Latvia has established a fully convertible currency, with no capital controls (IMF, World Economic Outlook, May 1997, p. 95).

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In addition to current account operations capital account transactions have also been largely decontrolled (United Nations Commission for Europe 1994: 121). The lat is totally convertible, with both local and foreign companies enjoying free access to international capital markets (IHT, Survey, 4 November 1994, p. 12). Although Latvia has a central bank that can engage in discretionary monetary policy, it has been operating as if it was a currency board. Moreover, the Latvian central bankers have kept the politicians at bay by threatening to introduce currency board legislation, if the politicians should meddle in monetary affairs. (Steve Hanke, FT, 5 May 1994, p. 24) The exchange rate was freely determined on the market until February 1994. It is still not officially pegged to a currency or currency basket. The central bank (the banks’ direct trading partner, since the currency exchange is still not fully functional as yet) exerts considerable influence on the exchange rate. According to the central bank, the lat has been informally pegged to Special Drawing Rights (SDRs) since February 1994 (Deutsche Bank, Focus: Eastern Europe, 28 August 1994, no. 113, pp. 12–13). ‘The lat is linked to the basket of currencies in the IMF’s Special Drawing Rights’ (FT, Survey, 15 June 2001, p. 30). The lat has been informally pegged to the SDR since February 1994 via central bank intervention in foreign exchange markets. Base money is fully backed by net international reserves. There is complete and effective current and capital account convertibility, with no repatriation or surrender requirements (EBRD 1994: 29, 109; and 1996b: 160). Trade unions’ influence on wage setting is modest (EBRD 1996b: 160). A series of financial scandals has badly dented the image of the Latvian banking system (Baltic Observer, 18–24 May 1995, p. 1). On 22 May 1995, for example, the central bank suspended the operations of the Banka Baltija, the largest commercial bank. The following day the government and the central bank announced that they had agreed on a 100 per cent take-over of the bank, as opposed to the 51 per cent mentioned earlier. On 19 May the finance minister had announced his intention to resign over the growing budget deficit and the problems of financing it (Baltic Observer, 25–31 May 1995, pp. 1, 7, 15). On 25 May the Bank of Latvia made a six-month loan to the government in return for a commitment to draft a non-deficit budget for 1996. The state budget crisis started in April 1995 when a dramatic decrease in state revenues and problems in the commercial banking system increased the budget deficit substantially (Baltic Observer, 1–7 June 1995, p. 7). On 13 June 1995 the first demonstration by depositors took place. On 20 June the government asked the central bank to bring bankruptcy proceedings against Banka Baltija, which was declared insolvent by the Latvian Economic Court on 27 June 1995. On 27 June it was announced that the former president and chairman of the Banka Baltija were to

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be arrested on criminal charges. New banking laws were passed by parliament on 27 July 1995 to increase regulatory control and to provide guidelines for a compensation scheme. Depositors in Bank Baltija were to be partially compensated and the government was working on a plan to provide cheap credits to businesses who lost money in the bank. Nine commercial banks have been declared bankrupt since February 1994 (Baltic Observer, 27 July–9 August 1995, p. 2). On 17 June 1996 the supreme court declared Banka Baltija’s case closed. An investigation by a parliamentary commission concluded that the bankruptcy was caused by the illegal activities of shareholders and managers as well as incompetent transactions (Baltic Times, 27 June–3 July 1996, p. 16). An excellent analysis of the banking crises in Latvia and Lithuania is given by Michael Bourke (Baltic Observer, 25–31 January 1996, p. 12): The single main reason for bank failures in Latvia and currently in Lithuania is reckless practices or abuses by the shareholders of these banks … The shareholders view their bank as a vehicle for raising funds from the depositors which are then used to finance their own private business adventures outside the bank …Most of these loans are at low interest rates and are never repaid … In many cases the shareholders do not disclose their true identities and hide behind nameless offshore companies. Likewise, the loans are not given directly to themselves but to other nameless ‘offshore companies’. In this way shareholders can avoid taxes and disguise what is happening to the depositors’ funds … In most cases, the shareholders have not paid in real capital but instead, in co-operation with the management, use double-entry accounting to create a fiction that their funds have been paid into the bank as capital. The high Russian exposure of some Latvian banks led to sharp losses in the aftermath of the Russian crisis and to the bankruptcy of the ninth-largest bank (EBRD 1998b: 177). The large exposure of the banking system to Russian assets has left some banks vulnerable to the debt moratorium imposed by Russia (EBRD 1999a: 39). Two banks have been closed owing to their large exposures to Russian assets, and the central bank may take further action against other banks (p. 40). Latvia is gradually moving away from the ‘pay-as-you-go’ scheme towards a mixed system. Legislation for the operation of private pension funds that would collect voluntary private contributions became effective in July 1998 but difficulties have been experienced (EBRD 1998b: 177).

Prices Price liberalization began in early 1991 and was virtually complete by late 1992. No formal price controls remain. Rents and public transport and heating prices are set by municipalities (EBRD 1994: 29). Few formal price controls remain. Electricity tariffs are moving towards cost recovery levels (EBRD 1996b: 160).

208

Latvia

Privatization Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 10 per cent; 1991, 10 per cent; 1992, 25 per cent; 1993, 30 per cent; 1994, 40 per cent; 1995, 55 per cent; 1996, 60 per cent; 1997, 60 per cent; 1998, 65 per cent; 1999, 65 per cent; 2000, 65 per cent; 2001, 70 per cent (EBRD 1999b: 24, 240; and 2002b: 20, 172). In mid-1994 the private sector accounted for roughly 55 per cent of the GDP (EBRD 1994: 10). In 1993 state sector employment fell to 50 per cent of total employment and the non-state sector’s share of industrial output was 30 per cent. Large privatization is lagging behind other areas of reform; only eighty-five enterprises were privatized by April 1994 out of a total of 698 to be privatized. The law of February 1994 streamlined the process of privatization by creating an independent Privatization Agency and State Property Fund. Methods were to include tenders, auctions and liquidation. Vouchers were to be used for up to 25 per cent of capital and investment funds were to be set up. The government is committed to privatize 75 per cent of state property by the end of 1996. Small privatization is, by contrast, advanced, with two-thirds of enterprises transferred by April 1994 (trade and services) (EBRD 1994: 28). Voucher privatization began in January 1995. Plans were put forward to sell off fifty enterprises during 1995 using vouchers (EBRD 1995a: 60). In mid-1995 the private sector accounted for roughly 60 per cent of GDP (EBRD 1995b: 11). The mass distribution of vouchers, which began in 1994, was completed in March 1995. In the first international tender, forty-five enterprises were offered to the public under a pilot programme in January 1995. Overall about 200 large enterprises (accounting for 10 per cent to 20 per cent of industrial output) were expected to be privatized by the end of 1995 (EBRD 1995b: 49). In mid1996 the private sector accounted for roughly 60 per cent of GDP (EBRD 1996b: 11). The number of medium-sized and large enterprises at the start of the reforms was about a thousand. The distribution of vouchers, which started in 1993, was practically completed by July 1995. The vouchers are tradable and can be used to purchase shares in enterprises as well as land and residential housing. The 1994 regulation stipulates that 50 per cent of any joint stock company must be privatized for vouchers. During 1994–6, 101 entities employing more than fifty employees were privatized, with over 50 per cent of payment in vouchers. In 1996 the government authorized the sale of about 240 enterprises, including large ones such as the Latvian Shipping Company and the state gas company. Other privatization methods include the following: international tenders in medium-sized and large enterprises (four concluded as of August 1996); restricted tenders and direct sales of large infrastructure enterprises; domestic auctions or direct sales of smaller enterprises; public offerings of minority stakes. Foreigners have been granted permission to purchase vouchers. Some 300 medium-sized and large enterprises have been privatized predominantly through lease buy-out agreements and management and employee buy-outs. Small privatization is almost complete. Restructuring has been largely left to the new owners of privatized enterprises. The emphasis in

Latvia

209

the privatization process has shifted to strategic investors, including foreign ones (EBRD 1996b: 159–60). In mid-1997 the private sector accounted for roughly 60 per cent of GDP (EBRD 1997b: 14). The Privatization Agency is confident about reaching its mid-1998 target of privatizing the fewer than 200 industrial and real estate objects that are still on its books. The outstanding areas will then be further privatization of utilities and large transport enterprises, land and housing. Progress was made in privatizing some of the utilities in 1997 (EBRD 1998a: 38). By June 1998 around 50 per cent of the assets in former state enterprises had been sold, including stakes in Ventspils Nafta oil terminal (56 per cent) and Latvian Gas (58 per cent). A case-by-case approach was adopted. In most larger enterprises several methods were combined, including international tenders, direct sales, public auctions and public offerings on the stock exchange. The focus has recently shifted to preparing the privatization of infrastructure and to privatizing the Latvian Shipping Company (to be sold to a foreign strategic investor through a capital increase, while minority stakes are to be sold through a local and an international public offering). Around fifty entities, including ports, the postal service and the railway company, are excluded from the privatization list. Organic growth of new enterprises has often been hindered by red tape coupled with inefficient and sometimes corrupt bureaucracy (EBRD 1998b: 176). At the end of 1998 fifty-eight large entities remained under state control, of which the privatization programmes of twenty entities had been approved. These included Latvenergo (the integrated energy monopoly), Lasco (a shipping company) and the majority state-owned telecoms joint venture Lattelekom. The privatization agency had drawn up privatization plans for these enterprises, but disagreements over the privatization methods could not be resolved in the run-up to elections in late 1998 (EBRD 1999a: 40). Of more than a thousand sales contracts concluded by the Latvian privatization agency between 1994 and 1998, controlling stakes (over 50 per cent) were sold in only 12 per cent of the enterprises. As a result a dispersed ownership became prevalent. But cross-shareholding within company groups has developed. Moreover, these groups have begun to consolidate ownership within holding company structures and to unwind the cross-shareholdings (EBRD 1999b: 238). ‘Political tensions and conflicting objectives have delayed large-scale privatizations’ (EBRD 2000a: 64). The privatization of four remaining large-scale enterprises (Latvian Shipping Company, Ventspils Nafta, Latvenergo and Lattelekom) has been consistently delayed. Delays have been due mainly to the influence of rival industrial groups in Latvia that have considerable sway in the domestic political process, the at-times conflicting objectives of retaining domestic control over major enterprises and attracting foreign strategic investors to maximize revenues for the state budget and to enhance enterprise performance … A 27 per cent stake in the gas utility (AS Latvijas Gaze) was auctioned in March 2000 … As a result of the sale Ruhrgas increased its stake to 26 per cent, Itera to 21 per cent, Gazprom to 18 per cent and

210 Latvia Preussen Elektra to 17 per cent. The state retains a 10 per cent stake. There are plans to sell a further 2 per cent of the state holdings in late 2000. (EBRD 2000b: 182) ‘The privatization of remaining large-scale enterprises has been consistently delayed, due to the conflicting objectives of retaining domestic control and attracting foreign strategic investors’ (EBRD 2001a: 74). ‘Privatization of the remaining large enterprises has had limited success’ (EBRD 2002a: 68), The deadline for applying for vouchers was extended from the end of 1994 to the end of April 1995. Latvia is now seeking to attract investors both from within and without the country, using auction and international tender, and employing a system requiring investments to be half in vouchers and half in cash. The first international tender was arranged in December 1994 and bids were received for forty-five enterprises. A second offering, of fifteen to thirty enterprises, was to take place in March 1995. The Privatization Agency aimed to sell seventy enterprises through the new stock market by the end of 1995 (Baltic Observer, 23 February–1 March 1995, p. 15). The Riga stock exchange was formally opened on 25 July 1995. Small-scale privatization was carried out early with significant foreign participation, mainly German and Scandinavian. Large enterprises were slated for sale later and proved to be more problematic. In 1995 a pilot programme of forty-five enterprises was presented, in which strategic investors were favoured rather than present management or worker collectives. It was only in 1994 that voucher privatization was introduced (Bjorn Linderfalk, Baltic Observer, 7–13 March 1996, p. 7). Linderfalk has written a follow-up article (Baltic Times, 4–10 July 1996, p. 15). During the period 1992–4, 256 enterprises were privatized. This phase of the process was characterized by the decentralization of decision-making to branch ministries, a lack of transparency and accusations about insider deals made within ministries. There was a radical change in 1994 with the introduction of a more centralized and comprehensive privatization policy. The new public voucher programme involved minority holdings being offered to the public through the stock exchange. The distribution of vouchers was completed in March 1996. After reserving an additional 20 per cent of enterprise shares to employees, controlling packages were offered to strategic investors. Since December 1994 three Germansponsored tenders (offering 125 enterprises for sale) have been completed, with the fourth tender (including another twenty-eight enterprises) closing in the summer of 1996. Parallel to the tenders a few strategic enterprises were to be privatized on a case-by-case basis, e.g. the national carrier Latavio, the Latvian Shipping Company, two banks and three energy companies. An adviser to the Latvian privatization agency explained: ‘Initially only minority stakes in these companies are offered for sale. Once the legal framework regulating them is installed, majority holdings can be sold out without losing state control over them.’ ‘The government … undertakes to complete privatization of the remaining state-owned companies by the end of March 2001’ (Baltic Times, 6–12 July 2000, p. 7).

Latvia

211

On 3 August 2000 parliament voted to withdraw Latvenergo from the privatization list and to retain it as a single, vertically integrated energy company (Baltic Times, 10–16 August 2000, p. 11). On 30 August 2001 there was an auction for a 3 per cent stake held by the state in the Latvian gas monopoly Latviyas Gaze. After the auction the distribution of shareholding in the company was as follows: Ruhrgas (a German company), 26 per cent; Gazprom (a Russian company), 25 per cent; Itera Latviya (a Russian-owned gas company), 24 per cent; E. ON Energie (a German company), 17 per cent; the Latvian state, 3 per cent; other shareholders, 5 per cent (Baltic Times, 6–12 September 2001, p. 8). Latvia’s competition council last week approved a merger between … Telia and Sonera … The merger of Swedish Telia and Finnish Sonera, both in dominant positions on the Baltic market, gives the new company a 49 per cent stake in Lattelekom, Latvia’s fixed-line monopoly and its largest mobile-phone operator, LMT. The new TeliaSonera company … will also own 60 per cent of Lithuania’s fixed-line carrier Lietuvos Telekomas and 55 per cent of the country’s largest mobile operator Omnitel. The merged company will also own a 49 per cent stake in Estonia’s state-owned fixedline provider Eesti Telekom. (Baltic Times, 22–28 August 2002, p. 8) Other sources dealing with privatization The legal framework of privatization has almost been completed, including restitution, land privatization and a voucher scheme. (The November 1992 legislation allows the free distribution of vouchers partly on the basis of length of residence in Latvia.) But implementation has been slow. Most progress has been made in the small privatization of shops, restaurants and handicrafts. Large enterprises have to determine their own privatization strategies. An enterprise may be purchased by its employees, by domestic and/or foreign investors or by the state. An auction is also possible (Deutsche Bank, Focus: Eastern Europe, 23 April 1993, no. 75, p. 4). Voucher distribution began (slowly) in the summer of 1993, allocation depending on length of residence, with extra amounts going to ‘real Latvians’, restitution claimants and political victims. Vouchers can be used to buy enterprises, land and housing. State enterprises have to set aside 25 per cent of their shares for vouchers (Business Central Europe, November 1993, p. 61). Latvia has sold only forty-two enterprises to date, but the plan is to push 75 per cent of state enterprises into the private sector by 1996 (Business Central Europe, June 1994, p. 20). Plans to privatize as many as 300 enterprises by the end of 1994 have proved to be unrealistic, with only six large enterprises sold so far (Business Central Europe, December 1994–January 1995, p. 74). The privatization agency’s first tender in December 1994 attracted a good deal of foreign interest. A second is under way. Tendering is designed to speed up privatization and attract investors.

212

Latvia

The agency planned to privatize 250 enterprises in 1995, with a minimum of fifty by public offering. Core investors were to be found in each case, with a minimum of 25 per cent of the shares sold through the Riga stock exchange for vouchers (Business Central Europe, March 1995, p. 18). The delay has been caused by a quarrel between the newly set up privatization agency and government ministries over where responsibility lies and whether to opt for hard currency or voucher sales. Although the aim is to privatize about 200 enterprises a year, only about eighty-five out of a list of 703 have actually changed hands so far (FT, 21 June 1994, p. 3). Initially ministries were permitted to privatize at their own speed the enterprises for which they were responsible. Privatizations were achieved, but went largely to existing management, which brought in financial partners without effective oversight. The law provided that managers could lease their plant and buy it over a set period of years. In 1993 the government decided to restructure a process clearly seen to be failing and set itself the target of privatizing 75 per cent of all state property by 1996. Instead of a decentralized approach based on the ministries two new institutions were established, namely the Privatization Agency (to put into effect the privatizations themselves) and the State Property Fund (to manage the existing state portfolio). Forty-four enterprises were to be put up for tender in November 1994 (FT, Survey, 18 November 1994, pp. 29, 31). Only citizens are allowed to own land (Independent, 8 June 1993, p. 12). On 14 January 1994 a British-led consortium took a 49 per cent stake in Lattelekom. This was the first internationally tendered privatization of a state telecommunications company in any country of the former Soviet Union. The State Property Fund, in business since 1 September 1994, was at that time the residual ‘owner’ of 1,500 industrial enterprises. Enterprises are handed over to the Privatization Agency (founded on 22 April 1994), which handles the sale. The privatization law of early March 1994 includes an element of employee ownership and tenders involving not only price but also job and investment guarantees. The plan was to put 121 large industrial enterprises up for auction in December 1994. The main phase of the privatization programme was to be completed by 1996, with the state retaining important stakes in certain key industries and enterprises. Small privatization was to be virtually complete by the end of 1994. About 70 per cent of industry is still in state hands, but the agency has started its programme of transferring 75 per cent of state enterprises into private hands over the next three years (IHT, Survey, 4 November 1994, p. 12). On 22 December 1994 the Privatization Agency successfully concluded its first international tender involving forty-five enterprises, while the second one (forty-six enterprises) was completed on 27 April 1995. The third, scheduled for September 1995, was to feature forty to fifty enterprises (IHT, Survey, 9 June 1995, p. 20). The head of the privatization programme stated that ‘By the end of 1996 all of our industrial enterprises, with a few key exceptions, will have been sold to the private sector or put into liquidation’ (p. 19). About half the industrial sector has now been privatized. The Skele government assigned roughly 300 enterprises to the privatization agency for sale in

Latvia

213

1996, including large enterprises in the energy sector. The post office, health care institutions and ports were to be excluded from privatization (Deutsche Bank, Focus: Eastern Europe, 31 May 1996, no. 155, p. 3). Privatization was to be completed by mid-1998 (Deutsche Morgan Grenfell, Focus: Eastern Europe, 5 September 1997, p. 67). On 17 August 1999 the cabinet agreed on the privatization of the Latvian Shipping Company, with 44 per cent of shares going to a strategic investor and the remainder to the general public (Business Central Europe, September 1999, p. 48). The attempt to privatize 44 per cent of the Latvian Shipping Company failed for the third time in March 2000, when the only bid submitted was rejected. Investor interest in this deal has been low because, currently, the privatization structure does not allow an investor to acquire a controlling stake and the state retains a golden share. (EBRD 2000a: 64) A 26 per cent stake in Latvian Gas has been floated on the Riga stock exchange (Business Central Europe, May 2000, p. 17). A 27 per cent stake in the gas utility was auctioned in March 2000. Most of the existing strategic investors were successful in increasing their respective stakes and the state is left with less than 10 per cent (EBRD 2000a: 64). ‘The government’s last remaining 3 per cent stake in Latvijas Gaze was sold in February 2002 against privatization vouchers’ (EBRD 2002b: 170). Although the current coalition partners agree on the need to sell the handful of big enterprises still in state hands, the process has been mired in infighting and corruption allegations. These obscure more complex political and business manoeuvring behind the scenes. Last month [May] the government’s long-delayed attempt to sell a 68 per cent stake in the Latvian Shipping Company (Lasco) ended in failure when the two companies participating in the sale missed a deadline to pay a security deposit … An earlier attempt to part with the shipping company brought down the previous government, headed by Andris Skele … For many observers it was just another symptom of what a World Bank report last year [2000] described as ‘state capture’, the subordination of politics and government to vested economic interests. It is a brand of corruption in which Latvia was identified by the bank as the leader among former communist EU accession candidates … In the past the [privatization] process has been skewed, says the bank, by vested economic interest with close ties to government … Difficulties with structural reform caused the World Bank last month [May] to freeze the second $40 million tranche of a $100–$120 million loan programme, with progress in privatization a central benchmark to be met if the money is to be disbursed … [But] some observers insist the corruption issue is blown out of proportion. (FT, Survey, 15 June 2001, pp. 29–30)

214

Latvia The storied journey of the Latvian Shipping Company toward privatization gained speed on 18 February [2002] as 32 per cent of the state-owned company was offered for privatization vouchers …The offer runs through 22 March … Another 51 per cent of the company will be offered on the Riga stock exchange next month [March], 6 per cent will be sold to LASCO employees and pensioners for privatization vouchers, 10 per cent will be designated to the state pension special budget and 1 per cent will be held in a special ‘privatization reserve’. The state hopes that share sales on the Riga stock exchange will attract institutional investors. (Baltic Times, 21–27 February 2002, p. 7)

‘After five years of wrangling over the company’s future, a 32 per cent stake was sold in April via privatization vouchers distributed after Soviet rule came to an end … Later this month [June] … 51 per cent of shares [will be sold]’ (Baltic Times, 13–19 June 2002, p. 8). A 51 per cent stake in the Latvian Shipping Company [was sold on 25 June] … The Latvian oil firm Ventspils Nafta bought 61.3 per cent of the auction shares and 38.6 per cent were bought by the Estonia-based Hansabank … The handful of remaining shares were bought by individuals. Ventspils Nafta now owns 31 per cent of the company, if the deal is approved, which is expected later this week … The auction follows a sale of 32 per cent of the company for privatization vouchers in April. Those shares were bought by two Latvian banks, Latviyas Krajbanka and Hansapanka, the Latvian subsidiary of Hansabank, on behalf of clients. Analysts speculated that Ventspils Nafta could be one of those clients … Another 6 per cent of the company will be sold to retired employees in an offer that runs until 15 November. The process to privatize the Latvian Shipping Company began in May 1999. Three previous attempts to sell the company failed and resulted in the downfall of two governments. In the last failed attempt the Latvian government had planned to sell a 68 per cent stake. (Baltic Times, 27 June–3 July 2002, p. 11) [After] Ventspils Nafta … [acquired] a 31.27 per cent stake in an equity auction for LASCO, one of Europe’s largest shipping firms … the oil firm then bought an additional 18.67 per cent on the open market, raising its total stake to 49.94 per cent … The state still holds a 40 per cent stake in Ventspils Nafta. (Baltic Times, 4–10 July 2002, p. 7) [But] after auctioning off a 51 per cent stake in LASCO [Latvian Shipping Company], most of it to the oil firm Ventspils Nafta … Riga’s central district court stepped in to freeze the shares … the 51 per cent sold in the auction … The crisis stems from accusations by the British firm Beacon Shipping Ltd…. [a] Cyprus-registered offshore company … that it was

Latvia

215

unfairly disqualified from the auction because it did not submit a letter of credit verifying its bid before the 25 June deadline … Riga stock exchange officials said they first found out about Beacon’s intentions more than an hour after the posted deadline… [The judge] said the hold-up might last six months or longer while an investigation into Beacon’s accusation is conducted … Beacon Shipping was offering $75 million, or 0.45 lats per share, in its bid … Ventspils Nafta paid 0.35 lats per share for a 31.27 per cent stake in the company … On 2 October 1997 the Tufton Group and Lavina Consortium were the only two bidders in the first failed attempt. [There were] accusations of corruption and unfair auction conditions … On 16 June 1999 … Tufton Oceanic Ltd and Eastline Maritime S.A. were the only two bidders in the second attempt to sell the company. Both companies failed to pay bid deposits. On 8 July 1999 … 41 per cent of LASCO shares were put up for auction; 15 per cent were set aside for sale by privatization vouchers; 9.1 per cent were kept by the Latvian Privatization Agency until further notice; and 10 per cent were meant to go to the state pension fund … No company showed any interest. On 19 December 2000, 68 per cent of the shares were to be sold at auction, 15 per cent for privatization vouchers, 6 per cent to LASCO employees, 10 per cent to the state pension fund and 1 per cent would be kept in reserve by the Latvian Privatization Agency. In April 2001 the Italian firm D’Amico and the oil company FAL showed interest, but … both companies failed to pay deposits on their bids. In April 2002 32 per cent of LASCO’s shares were sold for privatization vouchers. The shares were bought by Latviyas Krajbanka and Hansapanka on behalf of unnamed clients. (pp. 1, 8) Trading in shares in the 51 per cent floatation of the Latvian Shipping Company … resumed on the Riga stock exchange on 8 July after a court lifted an earlier freeze on trading in the shares … The week-long suspension in trading was lifted on 5 July … The stock exchange … [said] … [the Beacon Shipping bid] was [too] late. (Baltic Times, 11–17 July 2002, p. 7) ‘Beacon Shipping was reported to have ties with Sovkomflot, a state-owned Russian shipping company’ (Baltic Times, 19–25 December 2002, p. 1). ‘Full privatization of the [Latvian Shipping] Company will be completed when current and retired employees subscribe for the remaining 6 per cent in the company, with a deadline of mid-November 2002’ (EBRD 2002b: 170). ‘Following its takeover of the Tallinn stock exchange last year [2001], the Helsinki stock exchange … [bought] a 93 per cent stake in the Riga stock exchange in June 2002’ (p. 171). A confidential settlement of a dispute between the Latvian state and Sonera, the Finnish telecommunications company, could result in a foreign

216

Latvia controlled and dominated telecommunications market in Latvia in the light of the recently announced merger of Sonera with Sweden’s Telia. If it is finalized by shareholders, the newly formed [announced in March 2002] entity, TeliaSonera, would control Latvia’s current fixed-line telephone monopoly Lattelekom and mobile-phone market leader LMT. After the sale of the 26 per cent state-held stake in Lattelekom, Sonera, the owner of Tilts Communications, which currently owns 49 per cent of Lattelekom, could increase its stake to 75 per cent in the telecom monopoly. Also Lattelekom has a 23 per cent stake in LMT, while Telia and Sonera both own 24.5 per cent each in the mobile operator … A settlement would bring to an end the dispute that emerged after the government decided the telecommunications industry should be liberalized in 2003, reducing by ten years Lattelekom’s monopoly on fixed lines pursuant to an earlier agreement between the government and Sonera. In 1993 the Latvian government signed an umbrella agreement with Tilts Communications. The agreement set the level and type of investment in Latvia’s telecommunications system upgrade in exchange for 49 per cent of Lattelekom’s shares. The agreement also provided Lattelekom with a monopoly on fixed-line services until 2013. However, in conjunction with its joining the WTO, Latvia committed itself to breaking up the telecommunications monopoly by 2003 … The new government will have the right to decide whether it would continue negotiating a settlement with Sonera or withdraw from the talks to proceed with the litigation. (Baltic Times, 14–20 November 2002, p. 7) [On 26 May 2003] the sale [was approved] of a 5 per cent state-owned stake in the oil terminal Ventspils Nafta reserved for its current largest shareholder. Latvijas Naftas Tranzits [LNT] … The 5 per cent stake was reserved for LNT under a prior privatization agreement … Just before exercising its option to buy the reserved stake in the oil terminal, LNT sold off a 9.2 per cent stake in the oil terminal with first rights to buy it back at a later date … Before selling off the 9.2 per cent stake in early April LNT held 47 per cent in Ventspils Nafta. The Latvian state held 43.6 per cent, of which 5 per cent was reserved for LNT. (Baltic Times, 29 May–4 June 2003, p. 13)

Foreign trade Trade has been largely freed of quantitative restrictions. There are export taxes on raw materials, precious metals and antiques, but there are few quantitative restrictions (EBRD 1994: 29, 109). A free-trade agreement with the EU came into effect in January 1995. Latvia benefited from a transitional period of four years for industrial products, while the EU was to open its market immediately. Trade in ‘sensitive’ products (including agricultural goods and textiles) was to be ruled by specific provisions (EBRD 1995a: 60). The trade regime is very liberal

Latvia

217

for industrial goods but less so for agricultural goods. But free trade in the latter has been agreed (though not yet ratified) with Estonia and Latvia. Import tariffs are generally modest except for agricultural goods (EBRD 1996b: 160). In 1993 the CIS accounted for 46 per cent of exports (Russia alone 28 per cent) and 38 per cent of imports (Russia 28 per cent) (United Nations Economic Commission for Europe 1994: 107). The EU now accounts for over 31 per cent of exports (virtually zero in 1991) and 40 per cent of imports. The free-trade agreement signed by Latvia and the EU on 18 July 1994 was to take effect at the beginning of 1995. All EU tariffs and quotas on Latvian goods were to be removed, with the exception of those on such ‘sensitive’ items as steel and textiles. Latvia was to be allowed to maintain various tariffs for a four-year transitional period (IHT, Survey, 4 November 1994, p. 13). The worst effects [of the August 1998 financial crisis in Russia] were felt in 1999 … Exports to Russia and other CIS countries fell from 20 to 12 per cent of total exports, with a further decline to 8.7 per cent last year [2000] … Exports to EU markets last year [2000] took more than 64 per cent of the total. (FT, Survey, 15 June 2001, p. 30) Free-trade agreements have been signed with the EFTA countries (Deutsche Bank, Focus: Eastern Europe, 23 April 1993, no. 75, p. 6). On 14 October 1998 the WTO approved entry terms for Latvia, which was to join once the accession protocols had been ratified. Latvia was the first Baltic state to be admitted (FT, 15 October 1998, p. 5; Baltic Times, 22–28 October 1998, p. 1). Latvia became a member of the WTO in February 1999 and has undertaken to bind its tariff schedule on agricultural products at a ceiling rate of 50 per cent (effective on the date of accession) and to reduce tariffs on exceptional items (EBRD 1999b: 238). ‘Trade policy remains liberal. The authorities intend to keep their tariffs at or below EU levels’ (EBRD 2001b: 166).

Foreign direct investment See Table 2.1 for the volume of net foreign direct investment. Net foreign direct investment was $43 million in 1992, $49 million in 1993, $279 million in 1994 and $216 million in 1995 (United Nations Economic Commission for Europe 1996: 149). During the period 1991–4 Latvia attracted $371 million in direct foreign investment (Baltic Observer, 11–17 January 1996, p. 4). Foreign direct investment amounted to $103 million in the period 1990–3 (EBRD 1994: 123). Direct foreign investment over the period 1991–6 amounted to $760 million (Baltic Times, 25 September–1 October 1997, p. 9).

11.7 25.0

Rate of growth of agricultural output (%)

Inflation rate (consumer, %)

0.245

Foreign direct investment (net, $ billion)

0.379

-0.279

19.4

-1.8

17.6

-7.0

2.5

3.7

1996

0.515

-0.345

14.8

0.3

8.4

6.4

12.5

8.4

1997

0.303

-0.650

14.0

-0.8

4.7

-3.6

3.5

4.8

1998

0.331

-0.654

13.5

-3.9

2.4

-3.7

-5.7

2.8

1999

0.398

-0.493

13.2

-3.3

2.6

11.3

3.2

6.8

2000

0.151

-0.732

13.1

-1.9

2.5

5.0

6.9

7.9

2001

0.388

-0.659

12.2

-2.5

1.9

—

5.8

6.1

2002 (estimate)

General government balance: includes the state, municipalities and extra-budgetary funds; privatization revenues are not included in revenues (EBRD)

EBRD figures. The United Nations Economic Commission for Europe figures for registered unemployment (year end) were as follows: 1995, 6.6 per cent; 1996, 7.2 per cent; 1997, 7.0 per cent; 1998, 9.2 per cent; 1999, 9.1 per cent; 2000, 7.8 per cent; 2001, 7.7 per cent

2

1

Notes

Source: Various issues of European Bank for Reconstruction and Development, Transition Report; United Nations Economic Commission for Europe, Economic Survey of Europe; United Nations, World Economic and Social Survey; IMF, World Economic Outlook

-0.016

18.1

Balance of payments (current account, $ billion)

Unemployment rate (annual average, %)

Budget surplus or deficit (% GDP)

2

1.6

Rate of growth of industrial output (%)

-4.0

-0.9

Rate of growth of GDP (%)

1

1995

Economic indicator

7DEOH Latvia: selected economic indicators 1995–2002

Latvia

219

Foreigners were only able to lease land for up to ninety-nine years (IHT, Survey, 4 November 1994, p. 12). But on 24 November 1994 new legislation was passed by parliament allowing foreign enterprises from countries that have bilateral agreements with Latvia on investment protection and promotion to purchase the land on which the enterprises are situated (Baltic Observer, 1–7 December 1994, p. 2). Joint ventures with minority foreign stakes have the right to buy the land of their business premises (Bjorn Linderfalk, Baltic Times, 8–14 August 1996, p. 15). Foreigners may not own land, but are able to lease land for up to ninety-nine years (EBRD 1994: 126). The government has removed restrictions on foreign investments in certain sectors. So far land ownership is restricted to Latvian citizens and legal entities where majority stakes belong to Latvian citizens or foreign nationals from countries with which Latvia has mutual investment protection treaties (EBRD 1996b: 160). On 9 September 1996 parliament adopted amendments to the law on land privatization in rural areas, with the final reading planned to be adopted in October 1996. (The previous version of the law stipulated that land could be owned only by Latvian citizens, municipalities and enterprises more than 50 per cent owned by Latvian citizens.) The amendments stipulated that land could be purchased by enterprises registered in Latvia and more than 50 per cent owned by individuals or legal entities from countries which have signed agreements on investment promotion and protection with Latvia. In addition, land could be freely sold to stock companies and public and religious organizations. Parliament also supported the proposal to give a chance of buying land to foreign legal entities and individuals who are investing in Latvia. Purchase of land would have to be co-ordinated with local governments. It would not be possible to buy land near the border, at the sea and other public waters as well as in the national parks and protected areas (Baltic Times, 12–18 September 1996, p. 14).

Agriculture In line with the 24 November 1994 changes in the law on land reform in cities, the law on rural land reform was amended on 8 December 1994. Land can be sold to Latvian citizens, state and municipal institutions, and legal persons and enterprises that are registered in Latvia and in which more than half the registered capital is owned by Latvian citizens. Land may also be sold to Latvian-registered foreign businesses from countries with which Latvia has concluded agreements on the promotion and protection of foreign investments (Baltic Observer, 15–21 December 1994, p. 2). More than half of agricultural land has been privatized (EBRD 1995b: 49). Despite an increasing number of private farms the majority of these are based on usage rather than ownership rights (EBRD 1996b: 160). Practically the whole of agriculture, both production and processing, has already passed into private hands. Initially a large number of small private units

220

Latvia

was formed. Some of these are voluntarily teaming up as co-operatives (Deutsche Bank, Focus: Eastern Europe, 31 May 1996, no. 155, p. 3). In accordance with the law on land reform, former owners or their heirs, current occupiers of the land and others who wished to receive land and were not employed in agriculture could all apply to receive a parcel of land. No fulltime farm would be less than 10 ha or more than 50 ha in total size, except for farms which had been exempt from the size restriction in the 1930s. First priority went to claims by former owners or their heirs except in certain circumstances, e.g. where it was occupied by individual farms (Davis 1996: 25). In 1990 state farms accounted for 31 per cent and collective farms for 61 per cent of agricultural land. By the beginning of 1995, 80 per cent of agricultural land was either used or managed privately. In greater detail, as of 1 January 1995 the share of agricultural land was as follows (with average size in hectares in brackets): family farms, 46.7 per cent (19.9 ha); part-time farms, 22.7 per cent (5.2 ha); private plots, 9.2 per cent (2.0 ha); private orchards, 0.3 per cent (0.1 ha); state farms, 1.9 per cent (547 ha); corporate farms (joint stock, shareholding or limited liability companies: Davis 1997: 1413), 16.9 per cent (706 ha); others, 2.3 per cent (15.1 ha) (Davis 1997: 1415). The average size of farm in 1995 was 19.3 ha (Baltic Times, 28 August–3 September 1997, p. 12). Latvia’s parliament on 3 April [2003] approved a seven-year ban on foreigners buying rural land in preparation for EU membership. Only Latvian citizens and EU citizens who have lived and farmed in the country for three years will be allowed to buy agricultural or forest land from 1 May 2004 – the date Latvia is scheduled to join the EU – through 2011. The move was expected after Latvian and EU negotiators agreed on the ban last year [2002]. Most candidate countries – including Lithuania and Estonia – will also have transition periods on the sale of rural land after joining the EU. Urban and commercial property will not be affected by the ban. Latvia presently has virtually no restrictions on land sales, unlike Lithuania where a ban on foreigners buying farmland is written into the constitution. Lithuania will also lift the ban in 2011 … Latvian banks will offer farmers government-subsidized loans to buy land during the transition period. Under the ban non-citizens in Latvia – about 25 per cent of the population – will also be banned from buying rural land. (Baltic Times, 10–16 April 2003, p. 4)

Economic performance Output fell heavily in 1992 (-34.9 per cent) and in 1993 (-14.9 per cent). The GDP growth rate turned positive in 1994. But output fell once again the following year before returning to positive growth in 1996. Thereafter GDP growth was encouraging. (See Table 2.1.) ‘The Baltic States have been affected much more severely by the Russian crisis than the other CEE countries, due in

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part to their closer trade and financial links to Russia’ (EBRD 2000a: 5). In 2001 GDP, as a percentage of the 1989 level, was an estimated 90 per cent in Estonia, 75 per cent in Latvia and 72 per cent in Lithuania (EBRD 2002b: 58). Agricultural output fell heavily in 1996, 1998 and 1999. The annual inflation rate reached a peak of 951.2 per cent in 1992, but a rate in single figures was achieved by 1997. Many firms have drastically reduced work hours or laid employees off under the euphemism ‘unpaid vacation’ (which enables employers to avoid paying severance benefits). According to one report, if this hidden unemployment is included the real unemployment rate is closer to 20 per cent. But that may be an exaggeration, because many of the people who have joined the ‘hidden unemployed’ have managed to find ‘hidden employment’ (Baltic Observer, 9–15 March 1995, p. 14). The informal economy is reckoned to be worth 30–40 per cent of GDP (Deutsche Bank, Focus: Eastern Europe, 31 May 1996, no. 155, p. 3). Officially the unemployment rate is 6–7 per cent. But the real rate is more likely to be 12–13 per cent, particularly in view of shortened working hours (p. 4).

3

Lithuania

POLITICS

Citizenship Henn-Juri Uibopuu (The World Today, June 1992, pp. 109–11) provides the following information. The 1923 census split the population into 84 per cent Lithuanians, 7.6 per cent Jews, 3.2 per cent Poles, 2.5 per cent Russians, 1.4 per cent Germans and 0.7 per cent Latvians. In 1989, 79.6 per cent of the 3.7 million population were Lithuanians, 9.4 per cent were Russians and 7.0 per cent were Poles (Gwiazda 1994: 77). Around 34 per cent of Russians have mastered the Lithuanian language (p. 79). In 1993 the split was 80.3 per cent Lithuanians, 9.1 per cent Russians, 7.4 per cent Poles and 3.2 per cent ‘other’ (Business Central Europe, April 1994, p. 82). The last census was conducted [in 1989] … The latest census [held in 2001] highlights a disturbing 5 per cent population decline, though this is less than in Latvia or Estonia … Lithuania’s population now stands at 3.48 million … Only 9.4 per cent of the population declined to identify themselves with a particular religious faith and some 79 per cent said they considered themselves Catholics. Russian Orthodox amounted to 4.1 per cent … Russian Lithuanians (6.3 per cent of the population) are no longer the second largest ethnic group but the third largest, having been supplanted by Polish Lithuanians, who amount to 6.7 per cent. Ethnic Lithuanians now constitute 83.5 per cent, a … rise … since 1989, while the Russian and Polish populations have decreased … Other ethnic groups present in Lithuania are Belarussians (1.2 per cent), Ukrainians (0.7 per cent) and people of German, Jewish, Tartar and Latvian origin who each number less than 0.1 per cent. In contrast to Latvia and Estonia, which both have large populations of resident non-citizens, 99 per cent of Lithuania’s population are citizens. (Baltic Times, 4–10 July 2002, p. 6) The 10 December 1991 citizenship law stipulated that applicants have to prove ten years’ lawful residence and take an oral and written language test. But

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all residents of the former Soviet republic were given citizenship (Newsbrief, 1993, vol. 13, no. 9, p. 65). Citizenship also requires the signing of an oath of loyalty (Gwiazda 1994: 79). All the major parties have welcomed the compromise, reached on 21 May [2002]. Parliament is due to change Article 119 of the constitution at the beginning of June, giving aliens the right to vote and be elected to local governments … [i.e. to] allow foreigners with permanent residence status to participate in municipal elections … The planned change to the law would come into force on 1 January 2004 … [Only some] 25,000 people currently have permanent residence permits to live in Lithuania … There are also 1,700 Belarussians, 1,100 Ukrainians, 300 Poles, 300 Kazakhs and 200 Latvians residing in Lithuania. The other 9,400 are a diverse mix of nationalities. (Baltic Times, 30 May–5 June 2002, p. 6) ‘Parliament adopted Thursday [20 June] constitutional amendments allowing foreign residents of the Baltic country to vote in local elections’ (IHT, 21 June 2002, p. 5).

Political developments 14 February 1993: Algirdas Brazauskas wins the presidential election with 60 per cent of the vote. His campaign platform included the acceleration of privatization and a warm welcome to private investment. During the campaign Brazauskas was critical of the previous government’s agrarian policy, which stressed the return of land to the previous owners or their heirs (see below). He argued that the return of land should not be automatic and stressed compensation instead. The tax system should be used to penalize those who leave land idle or use it poorly. There should be a ceiling on the profits of monopolistic food producers such as dairies and meat packers. 22 August 1993: Russia breaks off talks over troop withdrawals and says that the remaining 2,500 (out of the original 22,000) will not now leave by the 31 August 1993 deadline. Lithuania has submitted a claim for compensation for the military occupation. (In fact the troops did leave on schedule.) 4–8 September 1993: the Pope visits Lithuania, the first visit to any of the republics of the former Soviet Union. 4 January 1994: Lithuania applies to join Nato. 27 January 1994: Lithuania becomes the first country of the former Soviet Union to sign a Partnership for Peace agreement with Nato. 26 March 1995: in local elections 1,488 seats were contested. The turnout was only 42.4 per cent. There was a swing to the right. The results were as follows: Conservative Party (Homeland Union), 29.1 per cent of the vote and 426 seats; Christian Democratic Party (partner of the Conservative Party) 16.9 per cent of the vote and 247 seats; Lithuanian Democratic Labour Party, 19.9 per cent of the vote and 291 seats.

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12 April 1995: Lithuania and the EU initial an associate membership agreement. (It was signed on 12 June 1995; as part of the agreement Lithuania promised to lift the ban on the sale of land to foreigners.) 5 July 1995: economics minister Aleksandras Vasiliauskas is dismissed. The prime minister was unhappy at the slow pace of development of a law on the second stage of privatization, which was not passed until 4 July (Baltic Observer, 13–19 July 1995, p. 3). 5 January 1996: the resignations of the defence and foreign ministers are not accepted. (The prime minister, Adolfas Slezevicius, was criticized for withdrawing his personal savings from the Innovation Bank two days before it was declared insolvent and for allegedly receiving higher than normal interest on his deposits.) 9 January 1996: Kazys Ratkevicius, the governor of the central bank, offers his resignation which was accepted on 23 January. 19 January 1996: interior minister Romasis Vaitekunas offers his resignation after allegations are made that he withdrew his savings from the Innovation Bank two days before it closed. 8 February 1996: prime minister Slezevicius is voted out of office by parliament. Deputy prime minister Mindaugas Stankevicius becomes acting prime minister. (Stankevicius became prime minister on 15 February. On the same day Reinoldijius Sarkinas was appointed chairman of the central bank. The president signed in the new government on 23 February.)

The general election of 20 October 1996 and 10 November 1996 Twenty-eight parties competed for 141 seats. There was a 5 per cent threshold for parties. Seventy seats were to be decided by proportional representation and seventy-one by a simple majority, first-past-the-post system. The turnout in the first round was 54 per cent. The number of seats won by each party are shown in Table 3.1. The right-wing Homeland Union was led by Gediminas Vagnorius and Vytautas Landsbergis. It advocated clean government (one with ‘clean hands’, according to Landsbergis), lower taxes and higher welfare spending. Landsbergis’s one year in power evokes painful memories of disorganization and economic populism. This year’s campaign hardly indicates that the right learned much from four years in opposition. The Homeland Union opposes free energy prices and a privatized telecommunications sector. It also says that the litas, now pegged at four to the dollar, might be devalued. This controversial move would alienate investors. (FT, 18 October 1996, p. 2) Homeland Union considers the Lithuanian Democratic Labour Party to be ‘the party of the new economic elites that profited from insider deals while the rest of the country suffered during the tough times’ (FT, 22 October 1996, p. 2).

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7DEOH Lithuania: the general election of 20 October and 10 November 1996 Seats Homeland Union Christian Democratic Party Centre Union Lithuanian Democratic Labour Party Social Democratic Party Lithuanian Democratic Party Christian Democratic Union Young Lithuania Lithuanian Nationalists’ Union Lithuanian Polish Electoral Action Lithuanian Women’s Party Union of Political Prisoners and Exiles Lithuanian Liberal Union Lithuanian Peasants’ Party Independent candidates Total

70 16 13 12 12 2 1 1 1 1 1 1 1 1 4 * 137

Note *

Four to be decided

Gediminas Vagnorius … promises to get rid of the currency board and move back to a system managed by the central bank before mid-1997. The Conservatives argue that the currency board has allowed an enormous expansion of the money supply … The Conservatives, however, have made efforts to reassure investors that their party stands for currency ‘stability’ … ‘We are not talking about devaluation’ … Vagnorius said … Still … [there is] concern over possible devaluation. (Baltic Times, 24–30 October 1996, p. 6) On 11 November, after the election victory, Vagnorius said: ‘Next year we will start plans to strengthen the central bank, but any exit from the current arrangement would be gradual and not done before twelve months from now.’ In addition, the Homeland Union would ‘deepen’ privatization efforts through ‘open public sales with no restrictions on foreign participation’ (FT, 12 November 1996, p. 4). The Centre Union was led by Romualdas Ozolas. ‘Nationalists [espousing] anti-corruption populism’ (The Economist, 12 October 1996, p. 48). The Social Democratic Party advocated the introduction of new taxes (Baltic Times, 17–23 October 1996, p. 6).

Political developments after the October–November 1996 general election 25 November 1996: Vytautas Landsbergis is elected speaker of parliament. 10 December 1996: the new government is sworn in, with Gediminas Vagnorius as prime minister.

226 Lithuania 23 January 1997: the finance minister resigns amid press allegations of financial misdealings when he worked at the Kredit Bank (Baltic Times, 30 January–5 February 1997, p. 1). 16 July 1997: see entry for Estonia. 5–6 September 1997: Lithuania and Poland jointly organize a conference entitled ‘Co-existence of Nations and Good Neighbourly Relations: the Guarantee of Security and Stability in Europe’. Also attending are Belarus, Bulgaria, Estonia, Hungary, Latvia, Moldova, Romania, Russia and Ukraine (Baltic Times, 11–17 September 1997, p. 1). 24 October 1997: Lithuania and Russia sign a border agreement. Russia pledges to guarantee the security of Lithuania. 21 December 1997: in the first round of the presidential election the result is as follows: Arturas Paulauskas (a former prosecutor-general who has the support of the current president Algirdas Brazauskas and who has been effective in the drive against organized crime), 45.35 per cent; Valdas Adamkus (a Lithuanian–American), 27.89 per cent; Vytautas Landsbergis, 15.85 per cent. The turnout is 71.54 per cent. The run-off is on 4 January 1998. 4 January 1998: with the support of Landsbergis, the 71-year-old Valdas Adamkus (the candidate of the Centre Union Party) narrowly wins the run-off. He wins 50.31 per cent of the vote to Paulauskas’s 49.69 per cent. The turnout is 73.78 per cent. Adamkus left Lithuania in 1944 when the Soviet Union reoccupied the country. He had resisted both Nazi and Soviet occupation. In the USA Adamkus became a senior officer in the US Environmental Agency. He acquired an apartment in Lithuania in 1991, was granted Lithuanian citizenship in 1992 (thus gaining dual US–Lithuanian citizenship) and moved back to Lithuania in 1996. In October 1997 a local court ruled that he had fulfilled the minimum three-year residency period and could run for president. On winning, he stressed the importance of ‘good neighbourliness with Russia’. ‘Russia is of especial importance to Lithuania … Russia will remain our partner in the east, but Lithuania will continue to actively seek membership in the European Union and Nato.’ He intends to renounce his US citizenship. 16 January 1998: see the entry for Estonia. 2 May 1998: parliament approves a law on mass deportations to the Soviet Union during the Soviet era. Those responsible will be prosecuted as war criminals (Baltic Times, 4–10 June 1998, p. 1). 30 April 1999: Prime minister Gediminas Vagnorius announced his resignation on 30 April to end a schism with the country’s president that was beginning to overshadow the government’s work … He said he was stepping down ‘in the name of political harmony’ and to stop the ‘senseless political tensions that have appeared between the government and the president’. Vagnorius’s resignation, which became effective on 3 May, means the ministers in his coalition government of Conservatives and Christian Democrats must step

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down as well. President Valdas Adamkus has appointed … [the] minister of social welfare as the interim prime minister … Vagnorius and Adamkus had been at odds for months. In an address televised on six Lithuanian channels on 19 April Adamkus said he no longer trusted Vagnorius … The constitution gives the president the power to appoint and fire prime ministers, but it is largely symbolic since parliament has to rubber stamp all such decisions. But his declining popularity, coupled with strong public support of Adamkus, appeared to push him toward stepping down … He [Vagnorius] resigned [in 1992]. (Baltic Times, 6–12 May 1999, pp. 1, 6) 18 May 1999: Vilnius mayor Rolandas Paksas is overwhelmingly approved as prime minister by parliament (Baltic Times, 20–26 May 1999, p. 1). 13 October 1999: the European Commission recommends that EU leaders at the December 1999 meeting in Helsinki allow Bulgaria, Latvia, Lithuania, Malta, Romania and Slovakia to begin accession negotiations in 2000. (See the entry for Estonia.) The report praised the Baltic country for implementing judicial reforms, increasing trade with the EU countries and continuing ‘to make progress in establishing a functioning market economy’ … The European Commission … also praised parliament’s decision to shut down the first of the two nuclear reactors … but stressed the second should be taken out of operation by no later than 2009 … Lithuania relies on Ignalina for 80 per cent of its energy … But the report was hardly all praise. Lithuania was told it must cut its fiscal deficit, trim the current account deficit, continue with agricultural reforms and increase efforts in fighting corruption. Lithuania was also ranked slightly behind leaders Latvia and Malta and was criticized for not handling the fallout from last year’s Russian crisis as well as it could have, largely because of Lithuania’s historical trade links with Russia and its dependence on the Russian market. (Baltic Times, 21–27 October 1999, p. 2) (For further details, see the Estonia entry for 10 December 1999.) 18 October 1999: Prime minister Rolandas Paksas … announced [18 October] that he would not sign a deal to allow US energy company Williams International to buy into the state-owned Mazeikiu Nafta oil complex … Paksas said he objects to part of the deal that would require Lithuania to cough up 1.4 billion litas ($350 million) in long-term financing to help pull Mazeikiu out of an economic slump … ‘The last hope of our negotiators was the possibility to spread this sum over several years or offer the Americans our state guarantees,’ said Paksas … The government, however, refused to call off

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Lithuania negotiations with Williams … a decision that prompted … [the] economics minister and [the] finance minister … to step down. (Baltic Times, 21–27 October 1999, p. 1)

The two ministers resigned the following day after the government had approved the deal (Baltic Times, 28 October–3 November 1999, p. 1). The president of Williams International emphasized that the 1.4 billion litas ($350 million) was a high-interest loan and not a gift (p. 2). 23 October 1999: prime minister Rolandas Paksas offers to resign. He has refused to approve the sale of a 33 per cent stake in the Mazeikiu Nafta oil refinery to the US oil company Williams International. The finance and economy ministers have tendered their resignations. The prime minister hoped that Williams International, which expects the Lithuanian government to spend $350 million to refinance the refinery’s debts, would make further concessions, but the president of the US company has refused to back down (FT, 24 October 1999, p. 8). 27 October 1999: the prime minister’s resignation is accepted by the president. Paksas (of the refinery deal): ‘I do not want and cannot be responsible for the consequences of this decision.’ Irena Degutiene, the labour minister, is appointed acting prime minister. The prime minister … has gained wide popular support for his harsh criticism of the proposed sale, which stipulated that the Lithuanian government will have to provide $350 million to cover the refinery’s debts and working capital shortfall … The IMF also opposes the deal, warning that it will increase the country’s fiscal deficit. (FT, 28 October 1999, p. 10) 29 October 1999: The Lithuanian government yesterday [29 October] signed the controversial oil privatization agreement, despite popular opposition to the deal and the resignation of the prime minister … The ruling Conservative party has also approved a key provision requiring Lithuania to come up with $350 million in long-term financing … The IMF has also spoken out against the deal, claiming it would increase the budget deficit to more than 10 per cent … The once-popular president [Valdas Adamkus] has seen his ratings plummet as a result of his support for [the privatization deal]. (FT, 30 October 1999, p. 5) The president invites Andrius Kubilius, deputy speaker of parliament to form a new government. Acting prime minister Irena Degutiene declined an earlier offer. 2 November 1999: parliament approves Andrius Kubilius as prime minister. 11 November 1999: parliament approves the new government.

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Mr Kubilius has promised to trim the budget to raise the $350 million in debt financing Williams is demanding. And he has earned the flak of his citizens by suspending payments to those whose savings were wiped out by 1992’s rouble hyperinflation. (Business Central Europe 1999: 40) 17 February 2000: ‘[Ex-prime minister Gediminas] Vagnorius suspended his membership of the Conservative Party on 17 February this year [2000] … At the same time Vagnorius promised to support ‘all constructive steps of the current government” (Baltic Times, 30 March–5 April 2000, p. 6). 24 March 2000: The biggest parliamentary faction, the Conservatives, split on 24 March. Supporters of ex-prime minister Gediminas Vagnorius formed their own faction and named it the Moderate Conservatives’ faction. There are thirteen MPs in this faction … Fifty-one MPs remain in the Conservative faction supporting Landsbergis. There are 139 MPs in parliament. (Baltic Times, 30 March–5 April 2000, p. 6) 25 March 2000: ‘On 25 March the Christian Democratic Party, the main ally of the Conservatives, split when part of its members decided to establish the Modern Christian Democratic Union in April’ (Baltic Times, 30 March–5 April 2000, p. 6). 19 May 2000: the Vilnius accord is signed by nine countries (Lithuania, Latvia, Estonia, Bulgaria, Romania, Slovenia, Slovakia, Albania and Macedonia). The nine pledged to work together towards membership of Nato (IHT, 20 May 2000, p. 1). All nine Nato candidate countries signed a common document urging the Alliance to invite them all to be full members in 2002 … The final sentence of the … ‘Vilnius Statement’ … [says that] ‘We call upon the member states at the next Nato summit in 2002 to invite our democracies to join Nato.’ (Baltic Times, 25–31 May 2000, p. 1) 26 September 2000: The Nazi genocide suspect Aleksandras Lileikis, 93, has died of a heart attack, his lawyer said Wednesday [27 September], before a Lithuanian court could pass judgement on his alleged crimes. The trial, which forced Lithuanians to re-examine their country’s wartime past, was the first to deal with Nazi-era genocide charges in a post-Soviet state … Mr Lileikis’s trial had proceeded fitfully since the case was initiated in mid-1997 because of his deteriorating health and it was officially put on hold in July. He had denied the charges against him. (IHT, 28 September 2000, p. 8)

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Lithuania

‘Lileikis returned from the United States in 1996 … In 1996 US authorities stated that Lileikis was hiding some facts about his life when he emigrated to the United States’ (Baltic Times, 5–11 October 2000, p. 7). 8 October 2000: a general election is held. Half of members of parliament are elected from party or coalition lists and half in individual constituencies. The parties and their programmes were as follows: Conservative Party: The Conservatives have formed an informal coalition with the Lithuanian Union of Political Prisoners and Deportees. Christian Democratic Party: Partner of the Conservative Party in government. Social Democratic Coalition: The coalition unites two big parties (the Democratic Labour Party and the Social Democratic Party) and two smaller parties (the Russian Union and the Party of New Democracy – the former Women’s Party – of Kazimimiera Prunskiene). The Democratic Labour Party is led by Ceslovas Jursenas and consists mostly of members of the former Lithuanian Communist Party. The Social Democratic Party is led by Vytenis Andriukaitis and Aloyzas Sakalas. The Social Democratic Coalition stated that [Algirdas] Brazauskas would be appointed to the post of prime minister if the leftist coalition wins the elections. Brazauskas, the former president and leader of the Social Democratic Coalition … [is] currently not a member of any party … He was deputy prime minister in the government of Prunskiene after the restoration of Lithuania’s independence in 1990. (Baltic Times, 14–20 September 2000, p. 6) ‘The Social Democratic Coalition … promised more social spending and tax cuts’ (IHT, 9 October 2000, p. 11). New Policy Bloc: Four middle-of-the-road parties belong to … the loose coalition of the New Union (Social Liberals), the Centre Union, the Liberal Union and the Modern Christian Democratic Union. They are negotiating co-operation in the formation of the new government after elections. However, they will compete against each other in the elections. Only the Modern Christian Democratic Union of former Soviet dissident Vytautas Bogusis will not have its own election list of candidates. The New Union, the Centre Union and the Liberal Union have allowed three leaders of the Modern Christian Democrats to assume the eleventh position on their candidate lists … The New Union … [is led by] Arturas Paulauskas, the first prosecutor general of Lithuania after it re-established its independence on 11 March 1990. (Baltic Times, 14–20 September 2000, p. 6)

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New Union: (Social Liberals). A centre-left party led by Arturas Paulauskas. ‘New Union … is billing itself as a “social liberal” party’ (Business Central Europe, October 2000, p. 17). Liberal Union: A centre-right party led by Rolandas Paksas (the former mayor of Vilnius and former prime minister). (Paksas joined the Liberal Union in 1999, having left the Conservative Party: Baltic Times, 12–18 October 2000, p. 6.) Centre Union: Led by Romualdas Ozolas. Peasants’ Party: Led by Ramunas Karbauskis. The turnout was over 56 per cent. The distribution of the 141 seats was as follows: Social Democratic Coalition, fifty-one; Liberal Union, thirty-four; New Union, twenty-nine; Conservative Party, nine; Peasants’ Party, four; Polish Electoral Action, two; Centre Union, three; Christian Democratic Party, two; Freedom Union, one (won by its leader Vytautas Sustauskas, who will have to resign his position as mayor of Kaunas); Moderate Conservatives, one (for former prime minister Gediminas Vagnorius); Christian Democratic Union, one; Modern Christian Democratic Union, one; Young Lithuania, one; independents, three. ‘The Liberal Union and New Union announced plans to form a coalition with independents and small parties’ (IHT, 10 October 2000, p. 7). In two days [the two parties] agreed to lead the country’s government. Paksas will be the country’s prime minister, while Paulauskas will be the chairman of parliament … Both leaders say the coalition government is faithful to the pre-election agreement between the New Union, the Liberal Union, the Centre Union and the Modern Christian Democratic Union about forming a coalition after elections. This liberal coalition is known as the New Policy Bloc … Paksas said that the political party of Polish speakers, the Polish Electoral Action, Kazys Bobelis, leader of the Christian Democratic Union, and a couple of independent MPs are invited to join the coalition, which will make it possible for this liberal bloc to have an absolute majority in parliament. The Peasants’ Party said it will support the liberal coalition. (Baltic Times, 12–18 October 2000, p. 1) The New Policy Coalition, which has sixty-seven MPs … is supported by a couple of independent MPs, the Peasants’ Party, Lithuania’s Poles’ Electoral Action, Young Lithuania Party and the Christian Democratic Union. Each of these small parties has from one to four MPs. (Baltic Times, 26 October–1 November 2000, p. 1) The Social Democrats were keen to form a coalition government with the Peasants’ Party, the Centre Union and the Christian Democratic Union (Baltic

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Times, 12–18 October 2000, pp. 1, 6). ‘Algirdas Brazauskas, who emerged from retirement to lead the left-wing Social Democratic coalition fight in October’s parliamentary elections, has retired again’ (Baltic Times, 9–15 November 2000, p. 7). ‘The ruling Conservative Party of Vytautas Landsbergis … was turned into a marginal political party overnight with just nine seats’ (Baltic Times, 12–18 October 2000, p. 1). On 19 October Arturas Paulauskas was elected chairman of parliament. On 26 October parliament approved Rolandas Paksas as prime minister. Prime minister Rolandas Paksas introduced to parliament on 3 November his government’s programme for the next four years … promising to liberalize the economy and make business more transparent … He said that education, creating an information society, the economy, social and health system reforms, Nato and the European Union integration and pragmatic relations with neighbouring countries were the right priorities … Lithuania is clawing its way out of a deep recession. Paksas pledged to keep the budget deficit at ‘no more than 2 per cent or 3 per cent’. (Baltic Times, 9–15 November 2000, p. 1) 8 November 2000: the latest EU report is published. Estonia remains at the front of the Baltic field for future EU membership. The EU’s report on Lithuania (Progress Towards Accession, 8 November 2000, pp. 97–9): Lithuania can be regarded as a functioning market economy and should be able to cope with competitive pressure and market forces within the Union in the medium term, provided that it continues with the implementation of the current structural reform programme and undertakes further necessary reforms. Lithuania has preserved macroeconomic stability and managed to reduce the fiscal and external balances and state interference. The protective measures introduced after the Russian crisis have been largely removed. Significant progress has been made in the privatization of the banking sector. Progress has also been achieved with the adoption of important laws to restructure and liberalize the energy market. Land restitution is close to completion. However, there is a need to maintain fiscal discipline and to keep the current account deficit under control … As regards the fight against corruption the important measures which have already been taken need to be completed … As Lithuania reaches a more advanced level of alignment greater attention needs to be paid to strengthening administrative capacity. (For further details, see the entry for Estonia.) 27 January 2001: Two left-leaning parties, the Democratic Labour Party of Ceslovas Jursenas and the Social Democratic Party of Vytenis Andriukaitis, announced their

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merger on 27 January [2001]. The newly created party will keep the title of the Social Democratic Party. With 15,000 members it is Lithuania’s biggest political party … Algirdas Brazauskas was elected as the party’s chairman while Andriukaitis and Jursenas became his first deputies … Brazauskas has been a non-party man since 1993. (Baltic Times, 1–7 February 2001, p. 6) 14 February 2001: Lithuanian judges Wednesday [14 February] found a 93-year-old Nazi war crimes suspect guilty of helping to kill Jews during World War II but said he was too ill to be sentenced … It was independent Lithuania’s first conviction of a Nazi collaborator. (IHT, 15 February 2001, p. 5) [He was found] guilty of genocide committed during the Nazi occupation. The court spared the 93-year-old terminally ill man from a prison sentence … The court [also] found that … [he] suffered incurable mental disorders … [He is] the only defendant ever found guilty by a Lithuanian court of committing genocide against Jews. (Baltic Times, 22–28 February 2001, p. 2) 27–31 May 2001: ‘The Nato Parliamentary Assembly … [is] being held in Vilnius … More than 200 parliamentarians from Nato states and more than seventy from sixteen associated states are attending’ (Baltic States, 31 May–6 June 2001, p. 1). (Russia did not attend.) 29–31 March 2001: ‘President Valdas Adamkus became the first leader in the Baltic States to visit the Russia of President Vladimir Putin’ (Baltic Times, 5–11 April 2001, p. 1). 18 June 2001: A key party left Lithuania’s minority coalition cabinet Monday [18 June] after prime minister Rolandas Paksas rejected its call to resign because of disputes over privatization and other reforms. The New Union had called for Mr Paksas to step down following disagreements over impending energy sector privatizations, as well as tax, agriculture and pension reforms. (IHT, 19 June 2001, p. 5) Parliamentary chairman Arturas Paulauskas, leader of the Social Liberals … asked prime minister Rolandas Paksas. leader of the Liberal Union … to leave his post on 18 June. When Paksas refused all six Social Liberal government ministers resigned. On 19 June Paksas narrowly survived a no confidence vote against him … ‘Paksas … does not keep his promises in his work,’ Paulauskas said … The durability of the ruling coalition has been in doubt since its formation. The partners have had clear ideological

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Lithuania differences … related to taxation and other issues. However, it is considered that the privatization and restructuring of two of Lithuania’s strategic companies, the natural gas monopoly Lietuvos Dujos and power company Lietuvos Energija, drove the wedge between them. In the privatization of Lietuvos Dujos the interests of the financial supporters of the parties allegedly clashed. The Liberal Union favoured bringing in foreign investors, while the Social Liberals demanded that local investors be given priority. (Baltic Times, 21–27 June 2001, pp. 1, 6) The government, represented mostly by Liberals, now controls 92 per cent of the gas company’s stock and intends to sell 34 per cent of it to a strategic investor, preferably a Western gas company. Russia’s Gazprom and its intermediary companies would not be granted control … The Social Liberals would like to see Gazprom and its Lithuanian affiliate companies in on the deal. (p. 13)

20–25 June 2001: The Social Liberals, led by Arturas Paulauskas, and the Social Democrats of Algirdas Brazauskas agreed on the formation of a new government this week … Prime minister Rolandas Paksas. leader of the Lithuanian Liberal Union, resigned on 20 June. On 25 June Paulauskas met with President Valdas Adamkus and told him that Brazauskas is the official candidate of the Social Democrats and the Social Liberals … Some MPs are worried about Brazauskas’s relationship with Russian oil and gas companies. (Baltic Times, 28 June–4 July 2001, pp. 1, 6) 3 July 2001: parliament approves the nomination of Algirdas Brazauskas as prime minister by eighty-four votes to forty-five. 5 September 2001: Rolandas Paksas resigns as chairman of the Liberal Union (Baltic Times, 13–19 September 2001, p. 3). September 2001: Last week Lithuania started to publish in a state newspaper the names of former KGB agents who had not come forward and registered with the state authorities as required by law … Two names [have been published] so far … According to a [lustration] law passed on 23 November 1999, those who secretly co-operated with the Soviet secret services between 1940 and 1990 had to register with a special state commission. The deadline for the exagents was August 2000 … The file of a former KGB agent becomes a state secret after he or she agrees to register with the commission. But there are exceptions to the rule of secrecy. The commission will not preserve the confidentiality of a former agent if he or she is an MP, government minister, judge, prosecutor or the Lithuanian president. Names will also not stay

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secret if they choose to run for these posts. The lustration law speaks of moral punishment of those who have not come to register by making their names public if the courts confirm their collaboration with the KGB. The former agent will then be banned for ten years from work in state institutions, education, banking, strategic locations like the Ignalina nuclear power plant, and companies whose work is related to weapons or communication. Some 1,600 former KGB agents registered before the deadline passed. (Baltic Times, 27 September–3 October 2001, pp. 1, 2) 27 October 2001: A four-month tussle culminated in former Klaipeda mayor [and former economy minister and former acting prime minister] Eugenijus Gentvilas being elected the new chairman of Lithuania’s opposition Liberal Union … Gentvilas won 374 votes against [Rolandas] Paksas’s 208 votes … Gentvilas is not an MP, having lost his seat in parliament in the last election … Paksas was elected the party’s first deputy leader … A new leader of the parliamentary faction will be elected next week … In winning the contest Gentvilas returns to a post he held from 1996 to 1999, before he was ousted by Paksas. (Baltic Times, 1–7 November 2001, pp. 1–2) 13 November 2001: the EU publishes its reports on enlargement. The EU publishes its progress reports on the twelve EU applicants for EU membership with which negotiations have begun. There are thirteen applicants in all (including Cyprus, Malta and Turkey), but negotiations have not yet begun with Turkey. As many as ten countries may be ready to join the EU in 2004, but Bulgaria and Romania are not among them. (For details, see the entry for Estonia.) A bone of contention is what to do about access through Lithuania for the citizens of the Russian enclave of Kaliningrad when Lithuania joins the EU. The ‘island of Russia’, as it is known in that country, has a population of 900,000 (IHT, 18 July 2002, p. 5). Kaliningrad took its Soviet-era name from Mikhail Kalinin, who was the Soviet Union’s honorific head of state from 1938 to 1946, the year the city was named. Until then Kaliningrad was known as Königsberg, capital of the then-German region of East Prussia … Split from the rest of Russia by Poland and Lithuania … [Kaliningrad is] about half the size of Belgium … [The city] was founded in 1255 … [In Russia] a city that bore his [Kalinin’s] name went back to its historic name, Tver. (Baltic Times, 18–24 July 2002, p. 6) The Russian region of Kaliningrad (East Prussia before 1945) … after [EU] enlargement will become a Russian enclave within the EU. The underdevelopment of this region, its flourishing shadow economy and high crime levels, together with its unique geography, pose a big challenge for both

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Lithuania Russia and the EU. The EU has numerous ‘soft security’ concerns (illegal immigration, crime, spread of AIDs, nuclear waste etc.), while Russia is mainly concerned about transit and military issues, as well as the region’s future energy supplies and its overall economic development. (RET, 2002, vol. 11, no. 3, p. 3) Russia has objected to plans that would require Kaliningraders to apply for visas after Lithuania and Poland join the EU … Lithuania and Poland both have strict visa regimes for Russian citizens, but until now both allowed Kaliningrad residents to visit visa free. (Baltic Times, 25–31 July 2002, p. 1)

2 September 2002: Russia offered tighter, airline-style controls on train and bus tickets to and from its enclave of Kaliningrad yesterday [2 September] and new deals on taking back illegal immigrants … EU officials gave a guarded welcome to the proposals … Russia wants to persuade Lithuania to drop its plans to impose visas next January [2003] … The problems with Kaliningrad’s other neighbour, Poland, are minor in comparison, because it only accounts for a small amount of traffic. (Independent, 3 September 2002, p. 8) 3 September 2002: The EU yesterday [3 September] cautiously welcomed a new Russian proposal to settle the dispute over the Baltic enclave of Kaliningrad … [Russia] proposed that the visa-free regime from Kaliningrad to Russia would be limited only to Lithuania and not include Poland and that it would apply only to Russians travelling by train or long-distant coaches. (FT, 4 September 2002, p. 8) September 2002: Lithuania last week revoked visa-free travel for citizens of Russia’s Kaliningrad region and Belarus … The decision came just days before EU foreign ministers met in Brussels on 30 September to discuss the Kaliningrad issue … Russians going to or from Kaliningrad by train will need visas beginning 1 January 2003, while those crossing Lithuania by car will have until 1 July 2003. Visa privileges for Russian truckers will also be invoked in January, as they will for certain groups of Belarussians, including pensioners, people who live near the border and truckers. Kaliningrad residents … have enjoyed visa-free rights for travel since 1995 and Belarussians since 1994. Russians from the rest of the country have always needed visas to enter Lithuania … Russia has called visa requirements for Kaliningraders

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‘unacceptable’ and has so far been cool to an alternative EU proposal that would offer special passes good for up to thirty-six hours to Kaliningrad residents at cut rate prices – essentially a cheap transit visa by another name. (Baltic Times, 3–9 October 2002, pp. 1, 5) 9 October 2002: see the entries for Estonia for 9 October 2002, 20 October 2002, 18 November 2002, 21 November 2002 and 12–13 December 2002 as regards EU and Nato membership. 11 November 2002. ‘The deal reached Monday [11] November between Russia and the EU will allow Russians to use a special travel document to transit through Lithuania once it becomes part of the EU’ (IHT, 12 November 2002, p. 8). Putin agreed to a ‘facilitated transit document’ – a multiple-entry visa – proposed by Brussels for Kaliningraders who wish to cross Lithuania by road and rail … The FTD for travel by road and train will be issued by Lithuanian authorities beginning 1 July 2003 ‘free of charge or at a very low cost’. The EU said it had taken note of Russian demands for visa-free travel via high-speed trains and promised to launch a feasibility study next year in consultation with Lithuania on constructing a suitable line. The EU also promised to review the FTD scheme by 2005. (Baltic Times, 14–20 November 2002, p. 1) ‘Under the deal a system of multiple-entry transit papers will be available for Russian citizens travelling to and from the enclave. Lithuania will agree to operate its border controls more flexibly’ (The Times, 12 November 2002, p. 16). Russians will be able to travel between Kaliningrad and mainland Russia proper by using a multiple re-entry transit pass or a document which would allow for single return trips by train. Travellers will be able to apply for the latter type of document when they buy tickets. Until the end of 2004 both types of travel pass can be used in conjunction with internal Russian identity documents rather than international passports … They agree to an early feasibility study on setting up fast, non-stop trains between Kaliningrad and the rest of Russia, avoiding the use of transit documents. (Independent, 12 November 2002, p. 10) ‘From next July [2003] Poland and Lithuania … will issue all Kaliningrad residents with a multiple-entry transit document for travel to the rest of Russia. Another document will allow for trips by train’ (Guardian, 12 November 2002, p. 16). ‘Flexible “facilitated travel documents” [will be] issued by the Lithuanian government. Visas in all but name … the costs [will be] carried by the EU’ (FT, 12 November 2002, p. 6). (‘[On 12 May 2003 Lithuania and Russia signed a] readmission agreement

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that sets forth procedures for the reciprocal return of illegal immigrants … It is the first agreement of its kind in Russian diplomatic practice … Starting 1 July any illegal immigrant who crosses into Lithuania from Russia will be handed back to the Russian authorities’: CDSP, 2003, vol. 55, no. 19, p. 18.) 22–23 November 2002: US President George W. Bush visits Lithuania and receives a warm reception. 22 December 2002: a presidential election is held. The turnout is very low. Valdas Adamkus wins 35.06 per cent of the vote. Rolandas Paksas came second with 19.40 per cent of the vote. ‘[In the] first round poll … Adamkus soundly defeated a record seventeen candidates’ (Baltic Times, 9–15 January 2003, p. 1). Among the candidates were Vytautas Serenas (a television personality) and Arturas Paulauskas. ‘Paksas has served twice as prime minister and twice as mayor of Vilnius’ (IHT, 6 January 2003, p. 3). ‘Mr Paksas … won acclaim as mayor of Vilnius for reviving the city’s medieval quarter, which had fallen into disrepair under Soviet rule’ (Independent, 6 January 2003, p. 8). ‘Mr Paksas … swung to the right in the election run-up with a tough stance on law and order and promises to improve living conditions’ (The Times, 6 January 2003, p. 13). 5 January 2003: in the second round of voting a surprising result gives the election to Rolandas Paksas (aged 46) with 54.91 per cent of the vote. Valdas Adamkus (aged 76) received 45.09 per cent of the vote. ‘The voter turnout of 48.42 per cent of Lithuania’s 2.7 million registered voters was more than the rate for the first 22 December round but far less than the 68.15 per cent in 1997 and 78.94 per cent in … 1993’ (Baltic Times, 9–15 January 2003, p. 1). ‘Paksas, 46, waged a spirited campaign in the second round … Adamkus ran largely on his record’ (IHT, 7 January 2003, p. 2). Mr Paksas, an accomplished stunt pilot, fought a flamboyantly populist campaign, including flying his single-seater propeller aircraft in formation with two others underneath a low bridge. He emphasized issues of social inequality and law and order and has also questioned the terms of Lithuania’s EU accession agreement. Yesterday [6 January], however, he moved quickly to offer reassurances that he would not alter the country’s foreign policy priorities … But Mr Paksas yesterday pledged to address the concerns of those who feel excluded from the country’s economic transition. He said: ‘If there were no gap between Lithuanians and the political elite, people would have voted for Valdas Adamkus. But the gap exists. Over the past five years life did not improve in many spheres.’ (FT, 7 January 2003, p. 7) Paksas … ran a flashy campaign – some said aggressive – which included displaying his skills as a daredevil stunt pilot. During the campaign Adamkus

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hardly left the capital, whereas Paksas crisscrossed the country, often by helicopter … Paksas captured the protest vote against the establishment … The election also reflected a deep geographical divide between the largest cities and the rest of the country. Paksas gained a majority in every election district with the exception of the cities of Vilnius, Palanga and Birstonas and the populace of Kaunas, Adamkus’s birthplace. (Baltic Times, 9–15 January 2003, pp. 1, 5) Lithuanian voters who guaranteed a surprising and abrupt end to Valdas Adamkus’s presidential career by plumping for change are unlikely to get much of it. That is because President-elect Rolandas Paksas will have just as much power as his predecessor – hardly any … Lithuanians are fast growing disenchanted with their leaders. Low wages and pensions, high unemployment and other ills have them hungry for change. But while it is the negligence – perceived or real – of the government and its policies they resent, it was Adamkus, the ceremonial head of state whose approval ratings had been firmly lodged in the stratosphere since his 1998 election, who paid the price … [Paksas, who] was rarely shy to play the populist, shrewdly tapped into voter malaise with his ‘Vote for Change’ campaign. Though he professed support for joining the EU, he accused Adamkus of selling out on farm subsidies. His ads were laced with populist slogans that really took aim at the government: ‘Nobody has the right to steal and waste your money. Those who want work must have jobs. No one should be afraid of becoming ill and getting old.’ If Paksas wants to effect change he will have to work closely with the centre-left government. But his stormy relations with prime minister Algirdas Brazauskas do not bode well. Over the years Paksas has angered almost everyone, crossing swords with lawmakers on the left and the right. (Baltic Times, editorial, 9–15 January 2003, p. 19) ‘Paksas’s campaign promises included more generous pensions, lower tuition rates and compensation for money lost in personal bank accounts in the period following independence’ (Baltic Times, 9–15 January 2003, p. 5). ‘Lithuania’s Russian and Polish minorities voted overwhelmingly for Paksas’ (Baltic Times, 6–12 March 2003, p. 1). ‘Some people call me [Jean-Marie] Le Pen [the French nationalist], others say I am a populist, a demagogue, a Fascist or a radical,’ he [Paksas] said. In fact, he emphasized yesterday [6 January] he did not fit into any of these categories. A large measure of support comes from unhappy pensioners who believe that Mr Paksas will ensure that EU membership brings higher rewards and greater security for old people. (The Times, 7 January 2003, p. 16) Three parties decided to merge after the second round of the presidential elections on 5 January 2003 … Leaders of Lithuania’s right and centre-right

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Lithuania parties [Liberal Union, Centre Union and Modern Christian Democrats] … signed an agreement … to merge the three parties into a new liberal political power … At present the Liberals have twenty-three seats, the Centrists have three and Modern Christian Democrats also have three seats in the 141-seat parliament … Incumbent President Valdas Adamkus offered strong support to the future centre-right political power. (Baltic Times, 16–22 January 2003, p. 5)

17 February 2003: see the entry for Estonia. 26 February 2003: Rolandas Paksas is inaugurated as president. (‘Plans for President Rolandas Paksas to meet with Pope John Paul II have been pushed back … While spokesman from the Vatican cited the Pope’s poor health as the primary reason for the delay, speculation has arisen that … Lithuania’s highest-ranking Roman Catholic cleric has recently cooled to the idea of a Lithuanian state visit in light of Paksas’s close ties to a Georgian mystic’: www.baltictimes.com, 8 April 2003.) 8 March 2003: see the entry for Estonia. 20 March 2003: see the entry for Estonia. 23 March 2003: see the entry for Estonia. 12 April 2003: see the entry for Estonia. 16 April 2003: see the entry for Estonia. 10–11 May 2003: see the entry for Estonia. 16–17 May 2003: see the entry for Estonia. 7–8 June 2003: see the entry for Estonia. 13–14 June 2003: see the entry for Estonia. 1 July 2003: Lithuania introduced its new facilitated travel documents on Tuesday [1 July] for Russian citizens transiting through the country on their way to the Kaliningrad enclave … FTDs allow citizens of Russia and other countries from which residents normally need visas to enter Lithuania to transit through the country, which hopes to join the Schengen zone of free travel by 2007. (Baltic Times, 3–9 July 2003, pp. 1, 5) 14 September 2003: see the entry for Estonia. 20 September 2003: see the entry for Estonia.

THE ECONOMY

The economic background The Ignalina nuclear plant supplies 85 per cent of Lithuania’s electricity (FT, 10 November 1993, p. 12; IHT, 29 August 1996, p. 10).

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Lithuania finally surrendered to international pressure on 8 September [1999], agreeing to shut down the first of two nuclear reactors at the Ignalina nuclear power plant by 2005 … For eight years the European Commission has pressured Lithuania to set a specific date for the decommissioning of Ignalina, linking the schedule of closure with the start of EU membership negotiations. The power plant, modelled on the same design as the Chernobyl plant in Ukraine, was built by the Soviet Union in the 1970s. The two reactors generate about 80 per cent of Lithuanian electricity … The closure of the second unit will be discussed … in 2004. (Baltic Times, 16–22 September 1999, p. 1) Parliamentary approval was gained in October 1999 (Baltic Times, 14–20 October 1999, p. 1). [The] economy minister … announced on 27 April that Lithuania will postpone the decommissioning of the Ignalina nuclear power plant … ‘Lithuania has its own arguments for not closing the second block in 2009, the year that has been suggested to us, and seeking the postponement of this term. This means that it could continue to run until 2012 or 2015’ … The minister said he had made his position clear to European Commission officials … In the opinion of the European Commission the second reactor block of the Ignalina nuclear power plant should be closed by 2009. The closure of the first reactor block is scheduled for 2005 and international donors have already donated over $181.82 million for the event … The Ignalina nuclear power plant produces over 70 per cent of Lithuania’s electricity … The West considers Ignalina’s two Soviet-made RBMK-type reactors operating in the plant to be generally unsafe. These are the same type of reactors as the one that exploded at Chernobyl on 26 April 1986. (Baltic Times, 3–9 May 2001, p. 1) ‘Lithuania yesterday [11 June 2002] reached a deal with the EU to close Ignalina’ (FT, 12 June 2002, p. 8). Under the preliminary deal … the EU will help Lithuania close its Sovietdesigned Ignalina power plant by 2009 … But the two sides put aside, probably until December, the question of how much the EU will provide for the closure, which Vilnius has said will cost $2.3 billion. (IHT, 12 June 2002, p. 6) The government would close both of the Soviet-built reactors in the timeframe the EU had requested – the first reactor by 2005 and the second by 2009 … The closure will cost an estimated $2.4 billion. EU officials said negotiations with Lithuania would continue to determine how much EU money would be provided … The Lithuanian government had previously

242 Lithuania said the second reactor could not possibly be closed before 2015 without financial backing from the EU. (Baltic Times, 13–19 June 2002, p. 1)

Financial policy The fight against inflation was a key feature of government policy. Hence the concern for budgetary control. The 1995 budget was passed by parliament on 14 December 1994. The budget deficit was to be 1.9 per cent of GDP (Business Europa, February–March 1995, p. 39). The coupon (talonas) was introduced alongside the rouble in April 1992, but it became the only legal tender on 1 October 1992 (United Nations Economic Commission for Europe 1993: 170). It was then allowed to float. The litas was introduced on 25 June 1993; the talonas was to be withdrawn entirely by 20 July. A currency board-like system was installed on 1 April 1994; the litas must be fully backed by foreign reserve currencies and gold and is freely convertible at a fixed rate of four litas per US dollar (Steve Hanke, FT, 5 May 1994, p. 24; see also Business Central Europe, May 1994, p. 19). The amount of litas in circulation is tied to the amount of foreign currency and gold reserves in the Bank of Lithuania. Only three other countries in the world have currency board arrangements, namely Argentina, Estonia and Hong Kong (Baltic Observer, 19–25 May 1994, p. 11). In April 1994 Lithuania switched from a managed float to a currency board, with the litas pegged by law to the US dollar (EBRD 1995a: 7). Wage setting was liberalized in mid-1993 (EBRD 1996b: 162). In June 2001 the central bank announced that it would repeg the currency from the US dollar to the Euro on 2 February 2002. The central bank intends to maintain the currency board arrangement until Lithuania accedes to the EU … The share of trade with the EU and EU candidate members has steadily increased in recent years to almost 75 per cent of total exports. (EBRD 2001b: 170) Lithuania repegged its currency to the Euro … [on] 2 February … The change is part of political and economic integration with the EU and preparation for likely making the Euro Lithuania’s national currency in a few years … Some 80 per cent of Lithuanian exports now go to EU members and accession states. A similar share of imports come from there … Pegging the litas to the dollar in April 1994 accompanied the introduction of a currency board in Lithuania, which required the Bank of Lithuania to hold enough foreign assets to fully cover the base money supply. (Baltic Times, 7–13 February 2002, p. 3) ‘With government approval the Bank of Lithuania issued a decree on 1 February setting the new official fixed exchange rate at 3.4528 litas to one Euro’ (p. 7).

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In addition to current account operations, capital account transactions have also been largely decontrolled (United Nations Economic Commission for Europe 1994: 121). There is virtually full convertibility of the litas on both the current and capital account (EBRD 1995b: 50). Lithuania has not in practice applied capital controls (IMF, World Economic Outlook, May 1997, p. 95). The number of concluded bankruptcy cases remains small owing to a lack of qualified administrators (EBRD 1998b: 179). [On 31 August 2001] the IMF approved a stand-by loan facility worth $111 million … signalling approval of the government’s economic programme ahead of a crucial currency reform. The nineteen-month agreement will give Lithuania access to credit for the period covering a planned repeg of the litas from the US dollar to the euro due on 1 February [2002]. (FT, 1 September 2001, p. 7) The currency was repegged from the US dollar to the Euro on 2 February 2002 at 3.4528 Lithuanian litas to one Euro … The Bank of Lithuania intends to maintain the currency board arrangement until Lithuania accedes to the EU and joins the Euro. (EBRD 2002a: 70) ‘The Bank of Lithuania intends to maintain this currency board arrangement until the country accedes to the EU and joins the Exchange Rate Mechanism II’ (EBRD 2002b: 174). ‘[On] 1 January 2002 the corporate profit tax was lowered from 24 per cent to 15 per cent and exemptions on reinvested earnings were eliminated’ (p. 174). The banking crisis In December 1995 the government moved quickly to avert a banking crisis (FT, 22 December 1995, p. 2; and 23 December 1995, p. 2). 20 December 1995: Innovation Bank, Lithuania’s largest bank, is declared insolvent. 21 December 1995: Innovation Bank’s chairman and two bankers from Litimpeks (the second largest bank) are arrested on fraud charges. (Irregularities were discovered earlier in the month after the two banks had asked for permission to merge.) 22 December 1995: Litimpeks is declared insolvent and its management is dismissed. Parliament passes a bill permitting the government to guarantee interbank loans of up to 300 million litas, while the prime minister promises that enterprises whose assets have been frozen will be compensated by the government. The Economist (20 January 1996, p. 93) talked of the government speedily promising to guarantee most deposits and offering to buy Treasury bills from banks in difficulties.

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5 January 1996: the resignations of the defence and foreign ministers are not accepted. (The prime minister Adolfas Slezevicius was criticized for withdrawing his personal savings from the Innovation Bank two days before it was declared insolvent and for allegedly receiving higher than normal interest on his deposits.) Innovation Bank and Litimpeks resume currency and government bond operations. 9 January 1996: Kazys Ratkevicius, the governor of the central bank, offers his resignation (which was accepted on 23 January). 19 January 1996: interior minister Romasis Vaitekunas offers his resignation after allegations are made that he withdrew his savings from the Innovation Bank two days before it closed. 26 January 1996: Lithuania signs a deal with the World Bank, in preparation for a major structural adjustment loan. The government states that the bill for restructuring its banking system amounts to £325 million (IHT, 29 January 1996, p. 11). 29 January 1996: the government presents parliament with its plan to merge the Innovation and Litimpeks banks (which together accounted for 23 per cent of all deposits). The new United Bank (which is to include Vakaru Bank, which was closed earlier in 1995) is to be formed by 1 July 1995 and is to be privatized before the end of 1997. Depositors in the Innovation and Litimpeks banks are to be compensated for up to 1,000 litas. A trust is to take over bad loans and will try to recover as much as possible. Any one of the three banks which can find sufficient capital can reopen on its own. The World Bank has also developed a restructuring plan for the entire banking system (Baltic Observer, 1–7 February 1996, p. 6; FT, 30 January 1996, p. 2). ‘Lithuania’s banking crisis in January had to be solved with the help of the IMF because the government could not use domestic finance’ (Business Central Europe, February 1996, p. 22). 8 February 1996: prime minister Slezevicius is voted out of office by parliament. Deputy prime minister Mindaugas Stankevicius becomes acting prime minister. (Stankevicius became prime minister on 15 February. On the same day Reinoldijius Sarkinas was appointed chairman of the central bank. The president signed in the new government on 23 February.) More of the same for Baltic bank depositors: the collapse of the two largest banks in Lithuania makes the local wage-earner and the foreign investor alike wonder what they have to do to find a safe place to put their money. Just after one could begin to think that the new year might bring some stability and honesty into Baltic financial operations, here we go again with the same gross incompetence, the astounding corruption and the filthy, sickening, disgusting excuses and promises from the rhetoric masters in politics and at the banks. (leader column, Baltic Observer, 4–10 January 1996, p. 13) For an excellent analysis of the banking crises in Latvia and Lithuania, see Michael Bourke’s comments in the chapter on Latvia.

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18 April 1996: the central bank decides to allow Litimpeks Bank to renew full activity on 10 June 1996 provided it meets all standard requirements for commercial banks (it has been allowed to carry out limited activities for about seven weeks). Litimpeks Bank plans to pay depositors back on a percentage basis over six to seven months. Previously the government proposed uniting Litimpeks, Innovation and Vakaru. The central bank has postponed its decision on Vakaru until its shareholders decide what they want to do (Baltic Times, 25 April–1 May 1996, p. 16). (The government has decided to nationalize Innovation Bank, with the aim of eventually merging it with another bank or privatizing it: Baltic Times, 30 May–5 June 1996, p. 9. On 18 June parliament approved the plan to nationalize the bank: Baltic Times, 20–26 June 1996, p. 15.) In August 1999 the central bank suspended most of the banking operations of Litimpeks Bank, owing to its illiquidity (EBRD 1999b: 243).

Prices The prices of food, consumer and industrial goods were fully liberalized during 1991–2. Restrictions remain on energy and housing (EBRD 1994: 31). Administrative controls remain on prices for energy and housing (EBRD 1996b: 162). Administrative controls remain on the prices of around thirty goods and services in energy, transport, housing and other utilities. Some agricultural products are subject to minimum purchase prices (EBRD 1997b: 184).

Privatization Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 10 per cent; 1991, 10 per cent; 1992, 20 per cent; 1993, 35 per cent; 1994, 60 per cent; 1995, 65 per cent; 1996, 70 per cent; 1997, 70 per cent; 1998, 70 per cent; 1999, 70 per cent; 2000, 70 per cent; 2001, 75 per cent (EBRD 1999b: 24, 244; and 2002b: 20, 176). In mid-1994 the private sector accounted for roughly 50 per cent of GDP (EBRD 1994: 10). Originally only voucher (large) privatization had been envisaged, but some cash auction sales have also taken place. Previous preferences for employees and management (up to 50 per cent of shares reserved) are being eliminated. By the end of 1993, 1,915 enterprises had been privatized out of 2,203 in the privatization programme and a total of some 5,500 state enterprises. There has been substantial progress in the sale of small enterprises. The deadline for applications from former landowners was March 1994 (p. 10). Privatization of the largest state enterprises was to accelerate in 1995 and the privatization of utilities was to begin (EBRD 1995a: 60). In mid-1995 the private sector accounted for roughly 55 per cent of GDP (EBRD 1995b: 11). The private sector is defined to exclude companies with minority private ownership. The voucher-based first phase of the ownership transfer involved 6,700 enterprises, 84 per cent of which had been privatized by the end of June 1995. By mid-1995 the privatization of housing had been largely completed (p. 50). In mid-1996 the private sector

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accounted for roughly 65 per cent of GDP (EBRD 1996b: 11). A total of 6,644 (out of 8,457) enterprises participated in the first phase of privatization. These enterprises represented 73 per cent of all enterprise assets (by book value). By the end of June 1995, when the first phase ended, about half of these assets had been sold, representing about 30 per cent of all assets of the 8,457 enterprises. It is estimated that around 45 per cent of the assets had been sold against vouchers and 30 per cent for cash. Most of the medium-sized and large enterprises in the first phase were sold through share offerings in which preference was given to employees and management (with up to 50 per cent of shares reserved for these new shareholders). Foreign participation in the privatization has so far been minimal. A law passed in February 1995 exempted ‘strategic’ enterprises (mainly in energy, transport and telecommunications) from privatization until the year 2000, but this was amended in July 1996 to allow up to 30 per cent private ownership in these enterprises. The second phase of privatization (under the July 1995 law) involves the remaining state assets being sold predominantly through cash sales. Small privatization has been comprehensive. Direct subsidies to enterprises have been largely discontinued (p. 161). In mid-1997 the private sector accounted for roughly 70 per cent of GDP (EBRD 1997b: 14). In February 1997 the government approved a list of fourteen large enterprises, including those in infrastructure (e.g. telecommunications, aviation and oil refining) to be privatized to strategic investors by international tender. In July 1997 parliament adopted a new restitution law, which, among other things, broadened the application of the previous law to non-resident owners (p. 184). A programme to privatize previously ‘strategic’ enterprises, mainly in infrastructure, is making headway. The government has decided to introduce more flexible methods in privatizing these enterprises combining tenders and direct negotiations (EBRD 1998a: 38). After privatizing 30 per cent of all state enterprise assets by means of voucher privatization through mid-1995 the strategy in the second phase of privatization has shifted to cash sales. Revenues were initially small owing to the unattractiveness of the assets offered and the conditions attached to sales. Voucher privatization led to the transfer of up to 50 per cent of enterprise shares to employees and management at preferential prices. Insider ownership was further consolidated through the post-privatization dilution of residual state shares via the formation of manager-controlled investment companies that participated in the tenders of remaining state shares of large enterprises. In 1997 and the first half of 1998, however, privatization revenues grew substantially following the inclusion of fourteen strategic enterprises, mainly in infrastructure, which were offered in international investment tenders. In November 1997 a legal requirement that all privatizations go through tenders was abandoned. The subsequent reliance on direct negotiations has proved controversial. Lithuanian Telecommunications was granted exclusive rights over the provision of fixed-line services until the end of 2002. This contributed to the successful sale of a 60 per cent stake to a Swedish–Finnish consortium in June 1998, the largest privatization to date (EBRD 1998b: 178–9). ‘Large-scale privatization is close to completion’ (EBRD 2001b: 170).

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The Vilnius stock exchange opened on 14 September 1993. ‘Though the bulk of Lithuania’s economy is now in private hands, most of the managers who ran the old show are still, in new guises, in charge. Their obsolete methods have changed but little’ (The Economist, 12 October 1996, p. 48). An extensive survey of Lithuanian privatization is provided by Bjorn Linderfalk (Baltic Observer, 7–13 March 1996, p. 7). Privatization peaked between 1992 and 1994 when more than 80 per cent of all privatized enterprises were sold. Currently 2,923 enterprises have been transferred to voucher holders and 2,726 smaller businesses (mainly in trade, catering and services) have been sold via auctions. By September 1995 (when vouchers became invalid) two-thirds of vouchers had been exchanged for investment fund or state enterprise shares, and approximately one-quarter had been used for the privatization of apartments, garden plots and other small properties. Seven per cent of the vouchers remained unused. Some 20 per cent of privatized capital is held by investment funds. In early 1993 tenders were introduced, the criteria for sales of enterprises being future investment plans as well as the prices offered. Fifteen enterprises have been sold this way. In the period 1991 to 1995 some 5,700 enterprises of the 6,700 enterprises intended for sale were denationalized. Seventy-six per cent of this state capital was transferred via vouchers. By 1994 the private sector’s share of both GDP and employment passed the 60 per cent mark. Completed privatization (measured in terms of capital intended to be privatized) varies from 97–8 per cent in construction and services and 91 per cent in industry to a mere 30 per cent in transport and public utilities. In 1992 the first list of 140 enterprises was presented to international investors, slated for sale in hard currency. But only forty-eight enterprises were sold for hard currency and of these only three were acquired with foreign capital. In July 1995, after the official end of voucher privatization, a new stage of privatization was announced. The most significant change concerned cash sales. A new privatization agency started work in January 1996. Foreign and domestic buyers were to be treated on equal terms (vouchers were no longer valid as a means of payment). Except for cash auctions and tenders, enterprises will, in cases when no competition exists, be sold by direct negotiation between the agency and potential buyers. Another new method is ‘leasing with a right to buy’. State enterprise shares are now traded on the stock market. The municipalities are now responsible for the selling of smaller, local businesses. The private sector accounted for 63 per cent of GDP in 1994 and by the end of 1995 more than 85 per cent of state enterprises slated for sale had formally been transferred to private owners. But Linderfalk is very critical of the Lithuanian privatization process: Even though companies are formally off the state books, they are far from run by ‘real’ private owners with ‘real’ investment capital. The domestic private sector has not yet accumulated the investment capital needed to reconstruct the obsolete state industry. As a result, companies are left in a grey zone, being officially private but in practice still operating as before. With a poorly functioning competition policy, privatized monopolies are not

248

Lithuania split up and corruption thrives among individuals with influence over both state regulations and private profits in a given industry … Politicians in Vilnius gave preference to employees and former management when selling enterprises. Up to 50 per cent of shares were reserved for these groups, and, as a result, company management has often remained intact after privatization … Former managers and worker collectives have … given priority to job security and the status quo, even after privatization … The Lithuanian bankruptcy law has remained a piece of paper seldom implemented … The minimal role in the Lithuanian privatization programmes of foreign investors and the obstacles in their way created by the Lithuanian government must be seen as counterproductive to alleged efforts to boost growth and to raise living standards. (Baltic Observer, 7–13 March 1996, p. 7)

Linderfalk has written a follow-up article (Baltic Times, 4–10 July 1996, p. 15). Between 1991 and late 1995 some 2,900 medium-sized and large enterprises were written off the state books. In the bulk of these, however, the controlling share packages were left with insider managers or handed over to enterprise employees. At this stage roughly a third of enterprise shares were kept by the state, another third were handed over to employees or managers and the rest were held by investment funds. ‘Lithuanian privatization lacked both fresh management and funds.’ Privatization has practically come to a halt since September 1995, when the voucher programme was completed. A ‘commercial’ privatization law, based on cash sales, was passed in July 1995, but its implementation ‘has so far consisted mainly of organizational changes inside the ministry of economics’. The respective branch ministries are responsible for the evaluation and preparation process prior to privatization. ‘The only reasonable explanations concerning the privatization trend in Lithuania are the vested interests inside state companies, ministries and legislative bodies unwilling to give up personal control of state businesses.’ A sales list of 200 ‘objects’ (including 120 enterprises) has recently been released. In the vast majority of cases only minority stakes (mainly in the 2 per cent to 10 per cent range) are offered for sale. In a later article he stated that by February 1997 only one enterprise (a transport company) had been purchased by foreign capital (Bjorn Linderfalk, Baltic Times, 3–9 April 1997, p. 15). Almost 97 per cent of apartments and houses have been privatized. Of the 2,300 commercial and industrial enterprises to be sold by subscriptions for shares, 88 per cent have been privatized. Of the 2,700 to be privatized by auction, 88 per cent have been sold, representing 77 per cent of the state capital invested in them (Baltic Observer, 24 February–2 March 1994, p. 9). On 10 February 1994 President Brazauskas complained that ‘almost half of all vouchers have yet to be used’ (Baltic Observer, 3–9 March 1994, p. 9). About 30 per cent of all the vouchers received by citizens have not been used so far. The 1 July 1994 deadline for the use of vouchers has been extended to the end of the year. Despite the relatively rapid progress, only 40 per cent of all state assets have

Lithuania

249

been privatized to date (Baltic Observer, 21–27 April 1994, p. 12). Over 80 per cent of large industry has been privatized and close to 60 per cent of workers are now in the private sector (Baltic Observer, 23 February–1 March 1995, p. 15). By the end of 1994 Lithuania had privatized over 95 per cent of all domestic apartments, 85 per cent of all agricultural land and assets, and around 83 per cent of all state enterprises that were put under the privatization programme. Despite the slower rate at which larger enterprises have been privatized and the relative lack of large new businesses, over half GDP is now attributable to the private sector. Most privatization has been done under the 1991 law, which involved the distribution of free vouchers to the whole population (exchangeable for housing, land or shares). Certain groups, such as employees and managers, were given privileges in buying shares (workers have the right to buy up to 51 per cent of an enterprise), but these are slowly being eliminated. By the end of 1994, of the 114 enterprises originally advertised on the privatization list, only three had attracted foreign investors and thirty-nine had been sold by tender to Lithuanian investors. There has been criticism that the process of privatization has not been transparent enough and that some shady deals have been done (power resides in the ministries). In January 1995 the government announced that the voucher scheme was officially to end in July 1995. The draft law drawn up in the summer of 1994 originally recommended that two new organizations should be established: a state property fund (to look after state enterprises until they came to be sold) and a privatization agency (which would sell them). The split between ownership and sale was recommended mainly because ministries and municipalities are often reluctant to relinquish control. But as the draft law progressed the two new organizations were replaced by a co-ordinating body controlled by the ministries. The exact shape of future privatization was not certain at the time of writing, but there was likely to be greater encouragement of foreign investment, the introduction of a number of new methods of privatization and flexible rules for tenders (e.g. stress on investment plans) (Baltic Observer, 2–8 March 1995, p. 8). A law on the second stage of privatization was not passed until 4 July 1995, months behind schedule. Many large enterprises have yet to pass into private hands (Baltic Observer, 13–19 July 1995, p. 3). The second stage was to start in September 1995, involving the sale of the remaining shares for cash. A new Privatization Agency was to be set up. By August 1995, 83 per cent of all ‘objects’ destined for privatization had been denationalized. In 1991, 10.5 billion vouchers were distributed for the privatization of 9,418 enterprises; by August 1995, 6,670 enterprises had been privatized. But some 1 billion vouchers remained unused by the 1 July 1995 deadline. With some exceptions (e.g. their continued use for the purchase of flats and garden plots) the vouchers were annulled, even though the government had originally pledged to exchange them for government bonds. As of August 1995, 20 per cent of all privatized property belonged to investment funds, while 30 per cent of former state property had gone to employees of the privatized enterprises on privileged terms. Another 36 per cent was acquired by ‘separate natural and juridical persons’. Ten enterprises have been subjected to bids for hard currency, but only four of them have been

250

Lithuania

bought by foreign bidders (Baltic Observer, 17–23 August 1995, p. 5). The actual sale of state property was to begin at the start of 1996 (Baltic Observer, 14–20 September 1995, p. 6). The Lithuanian State Privatization Agency published a statement in Baltic Times (1–7 August 1996, p. 14). The new law on privatization was adopted on 5 July 1995 and went into force on 15 September 1995: According to the law, it is cash-based privatization of remaining state and municipal property at market prices … There will be no concessions for employees or selected groups … It is foreseen that state property in strategically important infrastructure objects in the fields of energy, transport and communications will be privatized after restructuring has been completed. On 16 April 1997 the preliminary schedule was announced for the privatization of fourteen of the largest enterprises, including those in telecommunications, airlines, shipping, the hotel industry and oil. In total 835 enterprises were slated for privatization in 1997 (Baltic Times, 24–30 April 1997, p. 1). On 5 June 1997 parliament passed a law on the restoration of property rights which grants prewar owners the right to property which was nationalized in 1941 by the Soviet authorities. The property in question includes buildings, farmland and forests. According to the new law, the owner will have property returned after signing an agreement with the municipality based on conditions set by the government, e.g. the owner has to rent the property to current residents until they can move into a government-built flat. Financial compensation will also be issued. The law allows owners of agricultural land to be given forest land if the farmland is occupied. President Brazauskas vetoed the bill and returned it to parliament with a number of suggestions centring on compensation for farmlands and the restitution of homes or buildings in which non-owners currently reside. But on 1 July 1997 parliament overruled the veto (Baltic Times, 12–18 June 1997, pp. 1, 8; and 3–9 July 1997, p. 3). Further developments in privatization On 25 June 1998 a Swedish/Finnish consortium was selected to take a 60 per cent stake in Lithuanian Telecom, with a commitment to invest $221 million over the next two years. Two-thirds of the money received by the government was to go towards paying back those who lost their rouble savings when Lithuania regained its independence (Deutsche Bank Research, Emerging Europe Weekly, 26 June 1998, p. 3; Baltic Times, 2–8 July 1998, p. 9). In May 1999 the government sold its 70 per cent stake in the state insurance company to a Danish company (EBRD 1999b: 243). On 8 March 1999 the US company Williams International formally received a 33 per cent stake in the Mazeikiu Nafta oil company (comprising the Birzai pipeline, the Mazeikiu refinery and the Butinge terminal). The government also passed its operating rights over to Williams International. The Russian oil company Lukoil had sought to buy the 33 per cent stake and still wants to

Lithuania

251

become one of the operators (Baltic Times, 18–24 February 1999, p. 11; and 25 February–3 March 1999, p. 13). The Mazeikiu Nafta complex includes a refinery, a pipeline system and an offshore import–export terminal that contributes roughly 10 per cent of GDP (Baltic Times, 21–27 October 1999, p. 1). Lithuania has inherited a huge energy potential when it left the Soviet Union … [But] despite the size of the energy and oil industry, which amounts to 20 per cent of GDP, it plays anything but a dynamic role in the economy because of its gross inefficiency … The oil industry is perhaps Lithuania’s best energy asset. Mazeikiu Nafta is the largest oil terminal in the region and is directly connected to the leading export pipeline for Russian oil, most of which is shipped via the Latvian port of Ventspils … The government launched the construction of the Butinge oil terminal … [and] recently reorganized the oil sector by merging Mazeikiu Nafta, the Butinge terminal and the Naftoiekis pipeline. It then sold a 33 per cent stake in the new company to Williams International, a US oil firm … The state will retain a 57 per cent stake but plans to divest down to 25 per cent … Concern about quality of the [Ignalina nuclear power] plant is at the core of the EU’s worries … the reactors generate about 83 per cent of Lithuania’s electricity. (FT, Survey, 25 November 1998, p. iv) On 5 October 1999 parliament voted to amend the law forbidding the state to hold less than 25 per cent of shares in the oil sector. This opened the way for the US company Williams International to close a deal on a controlling stake in Mazeikiu Nafta, Lithuania’s oil complex that includes a refinery, pipeline and import–export terminal. It opened the way for Williams to buy an initial onethird stake in the oil complex and could allow other investors and Russian oil suppliers to buy shares. Russia’s Yukos is said to be interested. Under the terms laid down by parliament, suppliers of crude oil can purchase up to 10 per cent of shares in Mazeikiu Nafta. The Russian oil giant Lukoil has not hidden its own desire for a significant share of Lithuania’s oil complex. Although Williams is going for a 33 per cent cut, the company could later increase it to 51 per cent. Lukoil, however … has expressed its unwillingness to play second fiddle to Williams and threatened to pull out of Lithuania entirely. (Baltic Times, 7–13 October 1999, pp. 1, 6) The highly controversial deal was finally signed on 29 October 1999 (see the section on political developments, p. 228). The agreement calls for Williams to purchase 33 per cent of Mazeikiu Nafta for $150 million. Williams will have operational control of the refinery, pipeline and offshore crude terminal. The pact allows Williams to own a controlling interest within five years (Baltic Times, 4–10 November 1999, p. 1).

252

Lithuania On 14 June [2001] … Yukos [of Russia] and Williams International signed … an agreement of co-operation to pursue Yukos’s participation in the equity of … Mazeikiu Nafta as well as long-term crude supplies. The transaction should be completed by mid-September … After approval by the Lithuanian government, Williams and Yukos will become equal financial partners and each hold a 26.85 per cent share in Mazeikiu Nafta. (Baltic Times, 21–27 June 2001, p. 7) Lithuania’s acting government approved an agreement on … 25 June between the US oil company Williams International and Russia’s Yukos … However, the government refused to issue a state guarantee to back $50 million litas of the loan from the Yukos company. (Baltic Times, 28 June–4 July 2001, p. 15) A tentative crude-for-shares agreement between Williams International and Yukos seems to have fallen apart at a time when the prosecutor’s office has launched an investigation into possible corruption and other financial crimes at Mazeikiu Nafta between 1996 and 2000 … The termination of negotiations [was announced] on 11 December. (Baltic Times, 20 December 2001–9 January 2002, p. 7) Lithuania’s financially troubled Mazeikiu Nafta oil refinery … reached agreement with Russia’s Yukos oil supplier following ten months of negotiations. The deal has been sent to the government for approval, although the exact terms have yet to be made public. It is known that Yukos will pay around $75 million for a 26.85 per cent stake … and invest another $75 million in reconstruction. Yukos has also pledged to supply some 5 million metric tons of raw crude annually to the operation which has frequently been left without supplies from Russia. The government would retain a 40.66 per cent stake in the enterprise. The deal would put Yukos on an equal footing with the company’s ‘strategic investor’ Williams International … Day-to-day management of the refinery will remain in Williams’ hands he [its executive] said. (Baltic Times, 18–24 April 2002, p. 7) The deal would give Yukos a 26.85 per cent share in Mazeikiu for a payment of $75 million, a $75 million loan and a guaranteed delivery of 5 million tonnes of crude oil per year for a decade. The Lithuanian parliament on 4 June adopted legislation clearing the way for the Russian oil company Yukos to acquire a 26.85 per cent stake … The legislation allows the government to provide loan guarantees for Yukos’ investment in the refinery … Williams … will keep management rights in the refinery but see its stake in the company decrease to 26.85 per cent. The Lithuanian government will hold 40.66 per cent after the transaction and small shareholders the rest. The deal places no restrictions on Yukos obtaining more shares in

Lithuania

253

Mazeikiu Nafta and provides the Russian company the possibility of reselling its stake. (Baltic Times, 6–12 June 2002, p. 15) ‘The Lithuanian government and … Williams International signed a crudefor-equity deal on 18 June as expected with Yukos … The deal is the largest investment by a Russian company in Lithuania’ (Baltic Times, 20–26 June 2002, p. 7). ‘After months of rumours the US energy company Williams International agreed to sell its 26.85 stake in Mazeikiu Nafta oil refinery to Russian oil giant Yukos … A letter of intent [was signed] in New York on 19 August to complete the $85 million deal that would give Yukos a controlling stake and management rights in Lithuania’s largest company … [accounting for] 10 per cent of GDP … The Russian company will now control 53.7 per cent of Mazeikiu after acquiring its first 26.85 per cent and agreeing to a ten-year crude supply deal in June. The deal, expected to be concluded in September, includes a provision that allows the Lithuanian government to buy half the stock sold by Williams, but [the] economy minister … said the government would not likely exercise that right. (Baltic Times, 22–28 August 2002, p. 1) The government on 6 September proposed Yukos as the refinery’s strategic investor … Lithuania’s government declined to exercise its right to buy back shares … Purchase of the shares would have prevented Yukos from gaining a majority stake … but it would not have blocked the transfer of management rights … [and the government] would have had to contribute more money to its [the refinery’s] modernization. (Baltic Times, 12–18 September 2002, p. 7) [On 17 September parliament approved [the deal] … Yukos had requested the parliament vote on setting up the legal framework of the deal … Prime minister Algirdas Brazauskas … said the Klaipeda oil terminal could be used in any emergency to import oil, especially since the government took direct control on 13 September of the terminal’s operator, Klaipedos Nafta. The government now holds 70.44 per cent of the shares in Klaipedos Nafta. Previously it controlled the oil terminal operator through Nafta Terminalas, which had held 94.9 per cent of Klaipedos Nafta shares until a capital reduction procedure was completed. (Baltic Times, 19–26 September 2002, pp. 7–8) ‘Nearly bankrupt, Williams asked Yukos this summer to buy out its shares … Yukos said no [because it wished to preserve the partnership] … But Williams had no choice’ (IHT, 20 September 2002, p. 12). Significant progress in large-scale privatization has been marred by the lack of transparency in some transactions, although the recent disclosure of the

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Lithuania full terms of transactions is a step in the right direction … In the past year the government privatized a number of large-scale enterprises to foreign strategic enterprises … In June 2000 a 25 per cent stake in the partially privatized Lithuanian Telecom was sold through a global IPO … About one-quarter of the shares were sold in Lithuania, Latvia and Estonia and listed on the national stock exchange of Lithuania … The sale leaves the state with a 10 per cent residual holding. (EBRD 2000b: 186–7) The Lithuanian state property fund and the Danish company DFDS Tor Line signed an agreement on the sale of 76.36 per cent of shares in the Lithuanian Shipping Company on 23 April [2001]. Under the agreement DFDS Tor Line is obliged to pay $47.6 million for the block of shares and invest another $60 million in the shipping company within three years … The Lithuanian government is attempting to privatize LISCO for the third time … and it is still not clear whether the government … will successfully navigate the deal to a safe landing. (Baltic Times, 26 April–2 May 2001, p. 7) Lithuania has sold 91 per cent of its state savings bank to Estonia’s Hansabank … The sale went ahead despite plans by Hansabank’s owner, [Sweden’s] Swedbank, to merge with SEB, owner of Lithuania’s Vilniaus Bankas. If the merger goes ahead then one of the Lithuanian banks must be sold to avoid creating a monopoly. (Business Central Europe, June 2001, p. 16)

‘The deal was signed in late April [2001] … Completion is due in June … Hansabank had to promise that a merged SEB–Swedbank would divest one of its Lithuanian banks’ (pp 38–9). Lithuania’s Scandinavian-dominated banking sector is due for a shake-up with Germany’s Nord-deutsche Landesbank set to buy the Lithuanian government’s 76.01 per cent stake in the Lithuanian agricultural bank Zemes Ukio Bankas … the country’s third largest bank … [and] the last bank remaining in state hands … Its assets totalled 1.87 billion litas at the end of December [2001] and it accounted for 13 per cent of the Lithuanian market. In terms of assets the bank ranked after Swedish SEB-owned Vilniaus Bankas and Hansa–LTB …The sale [agreed on 18 February 2002, is expected to be completed] by late March … Privatization of the bank would increase foreign ownership of Lithuanian banking capital to about 89 per cent, compared with 81 per cent at present and just 58 per cent at the end of 2000. The Lithuanian agricultural bank is only half the size of Lithuania’s Hansa–LTB, which the Lithuanian state sold last summer [2001] to Estonia’s Swedish-owned Hansabank. (Baltic Times, 21–27 February 2002, p. 7)

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‘The sale [of the Agricultural Bank] completes the privatization of the banking system’ (EBRD 2002b: 175). The Lithuanian government has agreed to launch the second stage in the privatization of Lietuvos Dujos, the Lithuanian gas utility, and has begun distributing promotional material to potential bidders for the 34 per cent stake … A German consortium of EON Energia and Ruhrgas is due to purchase the first 34 per cent stake in June … Ruhrgas is reportedly interested in sharing ownership with Russia’s Gazprom, which is likely to be a bidder for the second stake. If all goes to plan private investors will hold 68 per cent of shares in the utility while the government will retain a 24.36 per cent stake. (Baltic Times, 20–26 June 2002, p. 8) One of Lithuania’s largest banks has come under nominal control of a littleknown Russian financial institution … On 21 March [2003] Snoras Bankas’s chairman resigned after the Moscow-based Konversbank acquired the holding company that owns a controlling stake in the Lithuanian bank … Earlier in March Konversbank acquired the Luxembourg-registered Incorion Investment Holding Company, Snoras’s majority shareholder … By taking control of a pre-existing holding company Konversbank has avoided the approval procedure from the Bank of Lithuania, which would have to grant its permission for the Russian bank to take direct control of Snoras. (Baltic Times, 27 March–2 April 2003, p. 7)

Foreign trade Foreign trade has been largely freed of non-tariff restrictions (EBRD 1994: 31). There have been no import quotas since October 1993 except for health and safety reasons. The export licensing system was abolished in July 1993, but there are some export taxes on raw materials and foodstuffs and some quantitative restrictions (p. 109). A free-trade agreement with the EU came into effect in January 1995. Lithuania was to benefit from a transition period of four years for industrial products, while the EU was to open its market immediately to most Lithuanian products. Trade in ‘sensitive’ products (including agricultural goods and textiles) was to be ruled by specific provisions (EBRD 1995a: 60). Foreign trade has been freed of non-tariff restrictions. Import tariffs are generally moderate. Import tariffs on some agricultural products were raised in July 1994. Import tariffs on agricultural products were removed within the Baltic free trade area in 1996. There are no quantitative restrictions or tariffs on exports except for four items (e.g. raw timber and medical supplies) (EBRD 1996b: 162). Lithuanian failed to comply with an IMF agreement to cut agricultural tariffs further to 20 per cent by March 1997 (EBRD 1997b: 185). In 1993 the CIS accounted for 63 per cent of exports and 84 per cent of imports (especially energy and raw materials) (United Nations Economic Commission for Europe 1994: 108).

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In 1994, 26.4 per cent of imports came from the EU, of which 13.8 percentage points came from Germany (Baltic Observer, 9–15 March 1995, p. 15). On 13 February 1993 the government announced that Russia had agreed to take roubles as payment for a backlog of energy debts, but that from 1 March 1993 hard currency would be used in settlements (FT, 20 February 1993, p. 2). Lithuania formally became a member of the WTO on 8 December 2000. Estonia and Latvia became members in 1999 (Baltic Times, 14–20 December 2000, p. 6).

Lithuania and the Russian financial crisis Lithuanian banks are less exposed directly to the Russian crisis than their rivals in the other Baltic States, notably in neighbouring Latvia. They had just 1.4 per cent of assets in Russia, compared with 8 per cent for Latvia’s banks … Bankers have much greater concern about their indirect exposure to Russia via Lithuanian companies exporting to the country since Russia accounts for a higher percentage of exports than in other Baltic States. (FT, Survey, 25 November 1998, p. v) The direct damage to banks is limited because, with just 1.4 per cent of assets in Russia, Lithuanian banks were far less active in Moscow than some others in the region. The real concern is about the effect on Lithuanian exports to Russia. Before the crisis Russia accounted for about 20 per cent of total exports, with almost a further 20 per cent going to Ukraine and Belarus, which are also suffering economic difficulties. With total exports accounting for 55 per cent of GDP the numbers paint a grim picture. Roughly a fifth of the economy is in some way dependent on the Commonwealth of Independent States. (p. iii) ‘Russia took 20 per cent of exports last year [1997] but the EU bought more than 30 per cent … And the crisis could force restructuring in an economy which has been slow to modernize’ (p. i). ‘By the middle of 1998 only 36 per cent of 288 cases filed under bankruptcy had been completed’ (p. vi). Following the Russian crisis, import tariffs on refined oil, fertilizer and agricultural products were increased to protect domestic producers. In June 1999 it was announced that the government would not consider changing the currency peg before 2000 (EBRD 1999b: 242).

Foreign direct investment See Table 3.2 for the volume of net foreign direct investment.

14.0 39.6

Rate of growth of agricultural output (%)

Inflation rate (consumer, %)

0.072

Foreign direct investment (net, $ billion)

0.152

-0.723

16.4

-4.5

24.6

12.6

5.0

4.7

1996

0.328

-0.981

14.1

-1.8

8.9

8.6

3.3

7.0

1997

0.921

-1.298

13.3

-5.8

5.1

-5.2

8.2

7.3

1998

0.478

-1.194

14.1

-8.5

0.8

-14.5

-11.2

-1.8

1999

0.375

-0.675

15.4

-2.8

1.0

5.0

5.3

4.0

2000

0.439

-0.574

17.0

-2.0

1.3

-5.0

15.9

6.5

2001

0.714

-0.663

16.3

-1.2

0.3

6.0

7.5

6.7

2002 (estimate)

General government balance: includes the state, municipalities and extra-budgetary funds (EBRD)

EBRD figures. The United Nations Economic Commission for Europe figures for registered unemployment (year end) were as follows: 1995, 7.3 per cent; 1996, 6.2 per cent; 1997, 6.7 per cent; 1998, 6.9 per cent; 1999, 10.0 per cent; 2000, 12.6 per cent; 2001, 12.9 per cent

2

1

Notes

Source: Various issues of European Bank for Reconstruction and Development, Transition Report; United Nations Economic Commission for Europe, Economic Survey of Europe; United Nations, World Economic and Social Survey; IMF, World Economic Outlook

-0.614

17.5

Balance of payments (current account, $ billion)

Unemployment rate (annual average, %)

Budget surplus or deficit (% GDP)

2

5.3

Rate of growth of industrial output (%)

-4.4

3.3

Rate of growth of GDP (%)

1

1995

Economic indicator

7DEOH Lithuania: selected economic indicators 1995–2002

258 Lithuania Net foreign direct investment was $8 million in 1992, $31 million in 1993, $31 million in 1994 and $41 million in 1995 (United Nations Economic Commission for Europe 1996: 149). There are generous tax holidays (Business Central Europe, April 1994, pp. 46, 82). The corporate profit tax is reduced for the first five years and there is no tax on money taken out of the country (Baltic Observer, 13–19 October 1994, p. 6). Joint ventures and firms with foreign capital may only lease land and buildings (for up to ninety-nine years) necessary to carry out business (p. 30). On 22 February 1995 parliament began consideration of a constitutional amendment that would allow foreign citizens to buy land (Baltic Observer, 2–8 March 1995, p. 16). Lithuania is the only post-communist state in Central and Eastern Europe which prevents foreign companies or individuals from owning land. There are mixed feelings within the country over whether to allow foreigners to acquire property, but there is pressure from the EU to permit foreign firms to acquire immovable property together with the land on which it stands (Baltic Observer, 16–22 March 1995, p. 16). On 20 June 1996 parliament voted to change an article in the constitution. The new law, which was to go into effect when all of the EU countries ratify the association agreement with Lithuania, allows foreigners to purchase non-agricultural land for economic purposes (Baltic Times, 27 June–3 July 1996, p. 1). A new law on land went into effect in July 1994. It permits the transfer of land among Lithuanian citizens, but foreign ownership of land is not allowed (EBRD 1995a: 60). Foreign citizens, joint ventures and firms with foreign capital cannot own land but are able to lease land for up to ninety-nine years (EBRD 1995b: 50). A constitutional ban on foreign land ownership was lifted in June 1996. Foreigners can now own non-agricultural land (EBRD 1996b: 161). A new law was passed in the summer of 1995, providing for equal treatment of foreign and domestic enterprises (although foreigners were still not allowed to buy land) (Deutsche Bank, Focus: Eastern Europe, 1996, no. 150, p. 6). The law which allows foreigners to buy non-agricultural land applies to countries that are members or associate members of the EU or members of Nato. Thirty-seven countries are eligible: thirty-one European countries, the USA, Canada, Mexico, Japan, Australia and New Zealand. Thus countries such as Russia, Ukraine and Belarus are not on the list. Even for eligible countries there are restrictions, e.g. land may not be purchased in resort and recreational areas and foreigners may not buy properties of historical, cultural or archaeological significance (CDSP, 1996, vol. XLVIII, no. 25, p. 22). [According to an official in] the ministry of agriculture … as early as 1996 the Lithuanian constitution has allowed foreigners to buy land except for agricultural use. A law created in 1998 further clarified the rules for foreign companies. ‘The 1998 law allows foreign companies to purchase a plot of land through an auction … If the company has already been engaged in economic activity or has built a factory on a piece of land, that company

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can buy the land surrounding the establishment without an auction’ … [But in reality] buying Lithuanian land is still cloudy for foreigners. (Baltic Times, 11–17 November 1999, p. 10) On 28 June 1995 parliament passed a law allowing the creation of Free Economic Zones, where companies will be subject to tax and customs concessions (Baltic Observer, 6–12 July 1995, p. 10). A Free Economic Zone has been approved by parliament for the north-western town of Siauliai (Baltic Times, 11–17 July 1996, p. 10). On 4 June 1996 parliament passed laws relating to foreign investment in the banking sector. Foreign banks could open branches, buy shares in new banks or buy shares in banks already operating (FT, 6 June 1996, p. 2). Between 1993 and 2001 Lithuania’s cumulative FDI net inflow per capita was one of the lowest among the ten EU accession countries of the regions … The government is taking steps to improve the investment climate … [For example] in January 2002 parliament adopted a national anti-corruption programme. (EBRD 2002b: 174)

Agriculture Reform started in 1989 when the process of re-establishing individual farms began. Between the summer of 1989 and the autumn of 1990 around 6,000 private farms acquired land use rights. The main laws on restructuring the agricultural sector were adopted during the period 1990–2. Citizens of Lithuania who owned property, including land, before 1940 (or their heirs) were able to claim physical or monetary restitution. The maximum size of land holding was set at 80 ha. In 1991, 94,000 ha of land were given to 5,900 farmers, an average area per farmer of 16 ha. The privatization of agricultural assets was carried out by issuing vouchers. The following forms of agricultural enterprises resulted: individual (private) farms; partnerships (general and limited) based on joining privately owned land; joint stock companies (open and closed); state enterprises in which property belongs to the state (local municipality); and state stock companies, joining state and private property. The share of agricultural output produced by individual properties has increased significantly, but even so in 1991 large-scale farms accounted for 79 per cent of grain, 95 per cent of sugar beet, 96 per cent of flax, 67 per cent of meat and 54 per cent of milk (Kazlauskiene 1992: 1174–5). Legislation introduced in 1991 allowed former landowners or their heirs the right to receive land expropriated during the Soviet era. The resident citizens were able to claim up to 80 ha of land, of which 50 ha could be arable. The 1940 land register was used as a basis. The non-assets of collective and state farms were privatized (not restituted) by means of a voucher system based on wage and length of service (Davis 1996: 39). Where it has not been possible to return land to previous owners, compensation in the form of special certificates or cash is employed (p. 41).

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Agriculture was disrupted by the chosen methods of privatization and this featured strongly in the presidential campaign (see above). The collectives began to be dismantled by ‘outside’ officials and there were many claims to property (mostly from people now living in the towns). Matthew Kaminski (FT, 18 August 1993, p. 26) puts part of the blame for falling output on the small size of many plots. The 1,058 collectives were quickly split up into 413,000 plots of no more than 3 ha each. The average size of farm fell to 9 ha in the summer of 1993. Parliament then prohibited the division of farmland below 20 ha. On 12 October 1995 the Lithuanian agriculture minister said that the average farmer had just 7 ha of land and that farms of this size could not be effectively provided with the necessary modern technology and fertilizers (Baltic Observer, 19–25 October 1995, p. 6). Collective farming has passed into the history books, with over 80 per cent of the unindexed (initial) value of enterprises in agriculture privatized to date (Baltic Observer, 24 February–2 March 1994, p. 9). By the end of 1994 Lithuania had privatized 85 per cent of all agricultural land and assets (Baltic Observer, 2–8 March 1995, p. 8). By 1995 the average size of farm had fallen to 8.4 ha. Limited access to credit makes it difficult for small farms to expand to optimum size, and inability to use land as collateral for loans impedes development of the credit market. Agricultural companies are allowed to lease land, but cannot own it. In 1996 the constitution was changed to allow foreigners to own land, but agricultural land was excluded. Lithuanian producers continue to face monopoly power in dealing with processors, especially for meat. Payments by meat processors to producers have frequently been late. (Baltic Times, 28 August–3 September 1997, p. 12) At the end of 1993 individual private farmers, partnerships and households held 80 per cent of agricultural land (EBRD 1994: 30). By mid-1995 the privatization of farmland had been largely completed (EBRD 1995b: 50). Before the end of 1993, 1,100 collective and co-operative farms had been broken up and privatized (EBRD 1996b: 161). The government aims to maintain control of 80 per cent of the country’s (valuable) forests. Prewar owners can claim only up to 25 ha of forest land (Business Europa, February–March 1994, p. 28). Agricultural production has been wholly privatized, while 80 per cent of processing in that sector is now in private hands (Deutsche Bank, Focus: Eastern Europe, 28 February 1996, no. 150, p. 5). Farm subsidies were cancelled in November 1992, but were reintroduced on 10 February 1995 for cattle and milk purchases (Baltic Observer, 23 February–1 March 1995, p. 10). Collective farms have been eliminated but the average farm size is only 11.9 ha, one of the lowest in Eastern Europe. Of the 500,000 claims for land submitted to the restitution programme, more than 190,000 are unresolved.

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Since less than 50 per cent of farmland is transparently owned, the land market is limited in size and scope. Farmers who wish to expand their plots face an uphill struggle. Lithuania’s constitution bars legal entities from owning land and there is an upper limit to the amount of land any individual can own … Banks do not accept land as collateral. (FT, Survey, 25 November 1998, p. iv) ‘Land restitution is close to completion’ (EU’s report on Lithuania, Progress Towards Accession, 8 November 2000, p. 97). A constitutional amendment allowing foreign companies to purchase agricultural land was initiated on 30 October [2001]. The government looks set to win the two-thirds majority necessary to pass the amendment, thus bringing Lithuania into line with the EU. (Baltic Times, 8–14 November 2001, p. 13) In the past week the Seimas (Lithuania’s parliament) has passed two important pieces of legislation that will eventually grant foreigners the right to purchase agricultural land in the country. On 23 January [2003] the Seimas adopted an amendment to Article 47 of the constitution, which allows foreign entities and individuals the right to purchase land intended for agricultural cultivation … In a complementary piece of legislation the Seimas passed on 28 January a law outlining the rules for the purchase of land. According to the new laws, nationals of countries that belong to the EU or to Nato will be allowed to acquire agricultural land beginning seven years after Lithuania officially joins the EU. Foreigners who have been living in Lithuania for at least three years will be allowed to buy the land immediately … Only seventy-three such persons exist, farming a total of 1,100 ha of land. The law also sets limits on the amount of land that can be purchased: 2,000 ha for agricultural firms, 1,100 ha for co-operatives and 300 ha for individuals … The legislation … stipulates that only 3 ha of [agricultural] land per buyer can undergo conversion … for other purposes … Right now only 30 per cent of farmers in Lithuania own their own land … Lithuania has yet to complete the sale of state-held land to farmers … The Lithuanian government privatized the largest amount of land – 339,000 ha – in 1999, a figure that it projects will shrink to 130,000 ha by 2010. (Baltic Times, 30 January–5 February 2003, p. 5)

Economic performance The GDP growth rate turned positive in 1995. Output fell heavily in 1992 (-21.3 per cent) and in 1993 (-16.2 per cent), 1994 (-9.8 per cent) and 1999 (-3.9 per cent) (EBRD 2001b: 173). GDP growth was very encouraging in 2000 and thereafter (EBRD 2002b: 177). (See Table 3.2.) ‘Baltic States have been affected much more severely by the Russian crisis than the other CEE countries, due in part to

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their closer trade and financial links to Russia’ (EBRD 2000a: 5). In 2001 GDP, as a percentage of the 1989 level, was an estimated 90 per cent in Estonia, 75 per cent in Latvia and 72 per cent in Lithuania (EBRD 2002b: 58). The annual inflation rate in Lithuania reached a peak of 1,020 per cent in 1992, but a rate in single figures was achieved by 1997 and consumer prices were more or less stable by 1999. If job seekers who do not qualify for benefit are included, the unemployment rate rises from 1.9 per cent to 4.8 per cent. There is also hidden unemployment. Many firms have drastically reduced work hours or laid employees off under the euphemism ‘unpaid vacation’ (which enables employers to avoid paying severance benefits) (Baltic Observer, 9–15 March 1995, p. 14). Unemployment is 8 per cent (The Economist, 12 October 1996, p. 49). According to a labour force survey, 12.5 per cent of the labour force was unemployed in the third quarter of 1995 (United Nations Economic Commission for Europe 1996: 91).

Part II

Belarus, Moldova, Russia and Ukraine

4

Belarus

POLITICS

The political and demographic background ‘Belarus managed barely nine months of independent statehood in 1918’ (The Economist, 15 September 2001, p. 42). The population at the end of 1998 was 10.2 million. Almost 80 per cent of the population are Belarussians and only 13 per cent are Russians (The Banker, March 1993, p. 47). In 1992 13 per cent of the population were ethnic Russians (The Economist, 10 July 1993, p. 33), while about 96 per cent of Belarussians speak Russian as their main tongue (The Economist, 20 May 1995, p. 37). There are 600,000 Poles (The Economist, Survey, 13 March 1993, p. 18). ‘Only 3 per cent of the people speak Belarussian at home. Russian predominates not only at the official level, but also in everyday life’ (CDSP, 2001, vol. 53, no. 52, p. 17). Ukraine and Kazakhstan … have both become nuclear-free, handing over their missiles, as agreed, to Russia for dismantling. But Belarus has not even begun the process … The problem for the United States is that Belarus has nuclear weapons, borders on what are likely to be the boundaries of an expanding Nato and is led by an unpredictable, anti-Western leader who is pushing for nearly unlimited power … A failure to get Belarus to give up its eighteen nuclear weapons, however, would be dangerous, even if they are currently under the control of Russian officers. The SS-25 missiles are Russia’s most modern mobile single-warhead missiles. (Steven Erlanger, IHT, 14 October 1996, p. 5) All nuclear weapons were sent to Russia by November 1996, slightly ahead of the scheduled end-of-1996 deadline. On 13 November 1996 Belarus president Alexander Lukashenko said that ‘slightly over a dozen’ SS-25 nuclear missiles remain in Belarus’. ‘I hate to think that the situation might occur that the removal of missiles from Belarussian territory will coincide with the deployment of nuclear missiles and warheads on the territory of new Nato members.’ If Nato wants the ex-Soviet missiles removed, Belarus might ‘demand guarantees

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from the West that it will not locate nuclear weapons near Belarus’s borders’. If Nato expands eastwards Belarus and Russia should ‘work jointly on an adequate response’. Lukashenko also expresses the desire for a new ‘strategic partnership’ with Russia that might mature into ‘reunification’. Belarus claims that the nuclear weapons have been returned to Russia ahead of the end-of-year deadline (FT, 23 November 1996, p. 2). Confusion surrounds the nuclear status of Belarus as Lukashenko says that the remaining nuclear missiles will be sent to Russia on 25 November. A legislator from Belarus said that the last missile had been sent on 22 November and a Russian general announced the pullout on 23 November (IHT, 25 November 1996, p. 5). On 25 November a Russian spokesman said that all the missiles had been returned (IHT, 26 November 1996, p. 10). A ceremony is held to mark the sending of the last eighteen (disarmed) nuclear missiles to Russia. The warheads were sent back on 23 November (IHT, 28 November 1996, p. 5).

Political developments 26 January 1994: Stanislav Shushkevich, chairman of parliament, loses a vote of no confidence. The alleged reason was corruption (using government workers to help relatives build dachas), but his dismissal was probably on account of his strongly pro-reform and pro-independence stance (there had been a clash between him and prime minister Vyacheslav Kebich over these issues). 3 March 1994: Russian gas supplies are reduced because of delays in payment. 23 June 1994: a second round of the presidential election will be needed, but there is a surprising result in the first round (turnout 79 per cent). The populist Alexander Lukashenko wins 44.82 per cent of the vote on an anti-corruption platform. (During the campaign he vowed to ‘defeat the mafia, which like an alldevouring octopus has ensnared all government organs with its tentacles’.) Lukashenko also made promises to do the following: suppress inflation; restrict price rises through state regulation; stop privatization in its present form and confiscate the ‘ill-gotten gains’ of the private sector; provide generous credits for agriculture and industry; ‘a job and a home for every Belarussian’; restore severed economic contacts with the republics of the former Soviet Union and especially Russia; compensate people for the losses caused by the devaluation of their bank deposits. (The FT notes the inconsistency of his policies, e.g. he has said that an economic union with Russia should be complemented by a political one, but he has also advocated substantially increasing the independence of the central bank of Belarus and initiating ‘a regime of direct economic management of state enterprises’: 13 July 1994, p. 23. Formally, Lukashenko supports monetary union on the terms agreed in September 1993. Post-election, Lukashenko said that he is ‘the guarantor of the unshakeability of our statehood’: CDSP, 1994, vol. XLVI, no. 28, p. 15. In April 1994 Lukashenko began his campaign with talk of taking Belarus into the Russian Federation. But in mid-May he did a U-turn and by the time the election came he was stressing that reforging broken economic links with Russia did not mean surrendering independence: Rich 1995: 48.)

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(Lukashenko was formerly vice-chairman of a collective farm, deputy director of a construction association and director of a state farm. In parliament he voted against the creation of the CIS in 1991 because it meant the end of the Soviet Union and he supported the August 1991 coup attempt in the Soviet Union.) Vyacheslav Kebich won only 17.33 per cent of the vote. He is an advocate of close links with Russia, including a merging of the two economies; during the campaign he promised full indexation of pensions and savings by 1995 and to avoid bankrupting ailing industrial enterprises. (Stanislav Shushkevich came fourth with only 9.9 per cent of the vote.) 10 July 1994: Lukashenko wins a massive 80.1 per cent of the vote, compared with Kebich’s 14.2 per cent. 12 July 1994: prime minister Kebich and the rest of the government resign. 20 July 1994: Lukashenko appoints as the new prime minister the banker and market reformer Mikhail Chigir. The pro-market governor of the central bank, Stanislav Bogdankevich, is retained. He is against monetary union with Russia. 29 July 1994: Michel Camdessus, the managing director of the IMF, meets Lukashenko. The latter adopts a pro-economic reform tone in his inaugural speech. 30 September 1994: parliament supports President Lukashenko’s ‘anti-crisis’ (radical economic reform) programme, but rejects his request for additional powers to implement the measures. The aim is to bring down the monthly rate of inflation to 7–8 per cent by June 1995. December 1994–January 1995: In mid-December 1994 an opposition member of parliament presented a report alleging corruption in the president’s own team. Lukashenko immediately imposed a media clampdown – broadcasting from parliament was stopped, some newspapers appeared with blank spaces, others failed to appear at all and one editor was dismissed on government orders and accused of corrupt dealings in foreign currency. Lukashenko later denied the media clamp-down and dismissed the official allegedly responsible. Back in August 1994 parliament had endorsed Lukashenko’s proposed reform package, but then consistently refused to vote him the sweeping executive powers to implement it by decree. The president was accused, among other things, of incompetence and inaction. Despite opposition from parliament Lukashenko, at the end of November 1994, enacted a decree setting up ‘vertical’ local authority chains of command reporting directly to him and bypassing the elected local councils. Already the IMF has backtracked on a planned $398 million credit because of insufficient progress in rebuilding and liberalizing the economy. The chances of pulling Belarus out of economic disaster seem increasingly remote. The relatively young advisers and supporters have quietly melted away. (Rich 1995: 49)

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For example, the young economic adviser Viktar Hanar resigned in December 1994 (EEN, 1995, vol. 9, no. 3, p. 8). Lukashenko is accused of press censorship in his attempt to prevent the publication of a report on corruption in the president’s team (CDSP, 1995, vol. XLVII, no. 2, p. 27). 6 March 1995: Belarus and the EU sign a trade and co-operation agreement. 20 March 1995: the EU agrees to lend Belarus Ecu 75 million. 12 April 1995: armed soldiers expel nineteen nationalist deputies from parliament, on hunger strike over the president’s plan to hold a referendum at the same time as the 14 May general election. (The hunger strikers objected to the president’s threat to dissolve parliament if he did not get his way.) Parliament rejected three of the four proposed questions in the referendum, namely on extending the president’s powers (including the right to dissolve parliament if it ‘systematically or seriously violates the constitution’), on re-establishing Russian as a ‘state language’ (with equal status) and on what should be the national flag and coat of arms (specifically restoring the Soviet-era flag, albeit minus the hammer and sickle and the inscription ‘Workers of the World Unite’). The one approved was whether to forge economic links with Russia. (Parliament later approved all four questions and also made 7 November, the anniversary of the Bolshevik Revolution, a national holiday.) 14 May 1995: the referendums and the general election take place. All four questions were strongly approved. Lukashenko responded by saying: Slav unity is the most important issue in our lives. If the people call for it we shall also have a political union that is even closer than the Soviet Union was. For the moment I am talking about economic union.’ The election was held on a first-past-the-post basis, so that a candidate obtaining 50 per cent plus one vote in the first round would win (the second round being fixed for 28 May). The new parliament had 260 seats (down from 315 elected seats owing to boundary changes). Broadly there was a ‘democratic’ bloc, a socialist bloc and a large number of independents (many of whom were protégés of Lukashenko) (EEN, 28 April 1995, vol. 9, no. 9, p. 4). Agrarians, communists and a non-party nomenklatura (‘party of power’) were likely to win most of the votes. Of the 2,348 candidates only about two-thirds listed themselves as belonging to any of the twenty-two fledgling official parties (FT, 15 May 1995, p. 3). The competing parties or blocs were as follows: Belarussian Popular (National) Front: Led by Zenon Poznyak. Pro-democracy and economic reform. In favour of developing a national consciousness and against union with Russia. Bloc of Democratic Forces: This coalition of the five leading non-socialist parties (set up at the end of January 1995) comprises the Belarussian Social Democratic Hramada, the Belarussian Peasant Party, the Belarussian Christian Democratic Party, the Party of the Belarussian Popular Front and the National Democratic Party of Belarus. The agreed platform stresses

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democracy (including guaranteed minority rights), the strengthening of state sovereignty, market reforms, privatization, a reduction in inflation and a social security system. United Democratic Party and Civic Accord: They set up a centrist coalition in February–March 1995. Despite a turnout of 65 per cent, very few deputies were elected in the first round (the most commonly cited figure was eighteen). This poor response pleased Lukashenko, who indicated his contempt for the election by declaring in advance that he would not be voting for any candidate and actually crossed out all names on the ballot paper on the day. OSCE observers were concerned about certain ‘irregularities’. After the second round, held on 28 May, the number of elected deputies went up to only 119 (the most commonly cited figure), leaving parliament well short of the quorum mandated in the constitution. ‘Virtually all the 120 deputies are Communists, Agrarians or non-party candidates opposed to market reforms. The Belarussian National Front, the biggest progressive grouping, did not gain a single seat’ (FT, 30 May 1995, p. 2). The average turnout was 56 per cent, but good turnouts in the countryside contrasted with a poor one in Minsk. Communists, the Agrarian Party and local chief administrators (the ‘party of power’) did well (CDSP, 1995, vol. XLVII, no. 22, p. 21). Of the 119 elected deputies, thirty were from the Agrarian Party and twentyseven were communists. ‘Fifteen seats house the “party of power”, i.e. those who work in the president’s immediate entourage and their subordinates in the hierarchy of executive structures.’ The remaining deputies belonged to no particular party, but included representatives of the so-called New Left. The Belarussian Popular Front suffered total defeat (Moscow News, 4–10 August 1995, p. 4). On 14 June 1995 the old parliament refused to reduce the quorum requirement. Thus Lukashenko was to govern by means of presidential decrees until the November elections (CDSP, 1995, vol. XLVII, no. 24, p. 22). On 17 August 1995 workers on the Minsk underground began a strike. This led to the detention of several trade union leaders, MPs and other opposition figures (EEN, 1995, vol. 9, no. 17, p. 3). The state prosecutor started criminal proceedings against the organizers of the strike. The strike (and the previous one by tram drivers elsewhere) ‘was symptomatic of worker unrest throughout the country. The late payment of wages, which are anyhow barely enough for subsistence, appears to have reached crisis point.’ On 1 September the Free Trade Union was formally banned by the administration. Any party or organization which supports the strike is also to be banned (EEN, 1995, vol. 9, no. 18, pp. 1–2). 21 August 1995: a presidential decree bans the Free Trade Union of Belarus, the union that organized the Minsk underground strike. Deputies at all levels are stripped of their immunity (an immunity guaranteed by the constitution). The decree threatens political parties with suspension if they dare stage strikes (CDSP, 1995, vol. XLVII, no. 35, p. 22).

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11 October 1995: the constitutional court confirms the legitimacy of the incumbent Supreme Soviet (CDSP, 1995, vol. XLVII, no. 41, p. 22). 8 November 1995: the constitutional court overrules the following aspects of the 21 August decree: (1) ‘suspend the activity’ of the free trade union; (2) the ban on participation in strikes by political parties and measures up to and including the banning of parties if they disobey the decree; (3) heavy restrictions on deputies’ parliamentary immunity. 29 November 1995: voting takes place in 141 districts. Lukashenko spoils his ballot paper, but the turnout is 61.8 per cent. Twenty candidates are elected, eleven independents, five communists (twentyseven in May), three agrarians (thirty-one in May) and one from the United Citizens Party (CDSP, 1995, vol. XLVII, no. 48, p. 25). The run-offs will be held on 10 December. In September 1995 parliament lowered the level of voter participation necessary for any given election to be valid from 50 per cent to 25 per cent. The constitutional court supported parliament against Lukashenko (CDSP, 1995, vol. XLVII, no. 45, p. 17). 10 December 1995: despite Lukashenko’s call for a boycott of the polls, there was a turnout of over 52 per cent. Fifty-nine more deputies were elected, bringing the total to 198. This number exceeds the 170 deputies needed for parliament to become quorate (CDSP, 1995, vol. XLVII, no. 48, p. 24). 9 January 1996: the new session of parliament begins. The following parties are represented in the 260-seat parliament: the Communist Party of Belarus, forty-two seats; the Agrarian Party, thirty-three; the United Civic Party, nine, and its ally the Party of People’s Accords, eight; the Belarussian Social Democratic Hramada, two. The Belarussian Patriotic Movement, the Green Party, the Party of Labour and Justice, the Peasant Party, the People’s Party, the Social-Sporting Party and the Ecological Party have one seat each. There are also ninety-eight independent MPs, about fifty of whom have formed a pro-communist ‘nomenklatura’ faction (EEN, 18 January 1996, vol. 10, no. 2, p. 4). 18 January 1996: Lukashenko warned of the consequences of extending membership of Nato to countries in Eastern Europe. In that event, ‘I am afraid we will have to redeploy in Belarus the nuclear weapons that were withdrawn from it’ (FT, 19 January 1996, p. 2). 27 February 1996: Belarus and Russia agree to a mutual intergovernmental debt cancellation. Since Belarus owes more, the agreement will cost Russia about $170 million (Moscow News, 22–28 February 1996, p. 1). Russia had already converted $400 million in claims accumulated from energy sales to Belarus into government loans at the end of 1994. In February 1996 these loans, together with other energy-related debts from 1995 ($800 million), were offset against claims on Russia which had arisen from the stationing of Russian troops and nuclear weapons. But energy bills run up since then are still not being paid in full (Deutsche Bank, Focus: Eastern Europe, 28 June 1996, no. 156, p. 6). ‘The [energy] debt was supposed to be cancelled under the so-called zero

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option. In fact, Russia has so far refused to provide the necessary funds to finance the agreement’ (BET, Quarterly Update, September 1996, p. 29). All gas debt except $62 million owed by the Belarussian gas company Beltransgas to Russia’s Gazprom to 1 February 1996 has been settled. Under the deal a gas debt of $642.5 million and fines of $200 million owed by Beltransgas have been settled by means of the supply of foodstuffs and other goods from Belarussian enterprises to regional municipalities in Russia in lieu of Gazprom budgetary arrears. New gas debt starting from 2 February 1996 totalled $470 million at the end of October 1996. The debt agreement is not the ‘zero option’ first announced on 27 February 1996, whereby gas debt was to have been exchanged for Belarussian claims relating to the value of nuclear material withdrawn from Belarus and payment for the upkeep of Russian troops since 1992. Instead, Belarussian gas arrears have effectively been bartered for unsold Belarussian goods. The debt agreement reduces Belarussian debt by 50 per cent to approximately $600 million (6 per cent of GDP). It appears that a large part of the goods transferred was made up of foodstuffs and went to northern regions of Russia to which Gazprom owed tax arrears (BET, Monthly Update, November 1996, p. 5). 20 March 1996: the presidential administration issues a decree ordering the sacking of the editor of Narodny Gazeta, which is owned by parliament. The newspaper’s foreign editor states that: ‘The president already controls radio and television and has forced the independent press out of the country.’ The independent media has been forced to print newspapers and magazines in Lithuania and Poland (FT, 21 March 1996, p. 4). 27 July 1996: thousands attend an anti-Lukashenko rally in Minsk. Lukashenko has renewed efforts to establish one-man rule … but has mainly energized and united his diverse political opposition … On Thursday [25 July] a broad spectrum of Belarus’s political parties, including nationalists, liberals and communists, denounced his move in an unprecedented joint declaration … Two weeks ago Mr Lukashenko called on the legislature … to extend the presidential term of office from five to seven years … He also called for the creation of a powerful second legislative chamber whose members he would appoint and for a new constitutional court, to which he would name half of the justices … If the legislature refuses, he said, he will call a referendum for 7 November. (IHT, 31 July 1996, p. 5) 29 July 1996: Lukashenko bans rallies for the duration of the harvest: I categorically forbid all rallies and demonstrations during the time the peasants are in the field, when they are working. Everyone should work, not organize campaigns to remove the president from office. I intend to serve out not only this presidential term but two future terms as well.

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(The constitution provides for only two terms of office.) (Lukashenko has outlawed public assemblies and introduced permits for foreign travel: Business Central Europe, September 1996, p. 17.) 30 July 1996: leaders of the seven parties controlling 70 per cent of the seats in parliament (including the Popular Front, the Communist Party and the Agrarian Party) issue a statement condemning Lukashenko’s idea of holding (on 7 November 1996) a referendum to change the constitution. This would lead to ‘unrestricted power for one individual for many years’. The statement calls Lukashenko ‘a violator of the constitution’ but the party leaders also appealed to the president to shift from a policy of confrontation to one of dialogue with his political opponents. Lukashenko responded thus: ‘Those who are thinking of removing me will find themselves removed first’ (CDSP, 1996, vol. XLVIII, no. 32, pp. 15–17). The draft constitution to be submitted to a referendum on 7 November was published on 31 August 1996. Lukashenko’s term of office was to be extended by two years to 2001. The president would have the following rights: to issue decrees with the force of law; to call referendums; to appoint half the members of the central electoral commission and half the judges of the constitutional court (including the court’s chairman); to declare a state of emergency and to delay or suspend strikes. Parliament would be bicameral with a term of four years. The lower chamber (House of Representatives) would be directly elected, but the upper chamber (Senate), a third of whose senators would be appointed by the president, would have greater powers. For example, the senators would choose the nominees for the other half of the constitutional court judges and central electoral commission members. The draft says that: ‘The powers of the House of Representatives may be terminated ahead of schedule in the event of failure to pass a vote of confidence in the government, or two consecutive refusals to approve the appointment of a prime minister.’ Recently an independent radio station was closed down and the bank accounts of a number of publications frozen (CDSP, 1996, vol. XLVIII, no. 36, p. 24). Under Lukashenko’s proposed constitution he would be immune from prosecution for life and would have a permanent seat in the cabinet even after leaving the presidency. He would have sweeping powers to control or dissolve parliament, be authorized to declare a state of emergency if he even suspected a threat of violence and be able to bring charges against MPs ‘for defamation and insult’ (IHT, 26 November 1996, p. 8). Other proposals in Lukashenko’s referendum are as follows: to bring forward the national holiday to 3 July (anniversary of the liberation from Nazi control in 1944) from 27 July (the anniversary of the first constitution in 1994); to reject the ‘free, unlimited buying and selling of land’; to reject the abolition of the death penalty (FT, 20 November 1996, p. 2). 31 July 1996: Zenon Poznyak (chairman of the Popular Front party) and Sergei Naumchik (the party spokesman) have asked for political asylum in the USA, claiming that they feared for their lives in Belarus. (They left Belarus in March 1996 after Lukashenko issued a warrant for their arrest on charges of

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organizing demonstrations against both his regime and integration with Russia: Baltic Times, 8–14 August 1996, p. 7. They were granted political asylum in the USA in August 1996.) 11 October 1996: parliament votes by eighty-eight to eighty-four to hold a referendum on 24 November 1996 to abolish the post of president. (About a month earlier parliament rescheduled the referendum for 24 November rather than 7 November, 7 November being the anniversary of the Russian Revolution of 1917: CDSP, 1996, vol. XLVIII, no. 37, p. 9.) Parliament proposes: to abolish the presidency and give greater power to the cabinet through constitutional reform; to elect directly local leaders currently appointed by the president; to fund state institutions from the budget, replacing the non-budget fund controlled by the president (FT, 20 November 1996, p. 2). 19 October 1996: Lukashenko agrees to 24 November (instead of 7 November) for a referendum. An anti-Lukashenko demonstration takes place in Minsk. Estimated numbers vary from 10,000 to 50,000. 4 November 1996: the constitutional court declares that Lukashenko’s referendum should be advisory rather than binding. 7 November 1996: a decree signed by Lukashenko states that the referendum will have the force of law (CDSP, 1996, vol. XLVIII, no. 45, p. 19). 11 November 1996: the chief electoral officer says that Lukashenko’s referendum is unconstitutional (EEN, 1996, vol. 10, no. 23, p. 8). 15 November 1996: Lukashenko dismisses the chief electoral officer, Viktor Gonchar, ‘for political intrigue and the use of his official position to pursue his own political ends – destabilization of the situation in the republic and the whipping up of anti-presidential hysteria’. According to the FT (18 November 1996, p. 3), Gonchar, ‘siding with parliament and the courts, ruled that the [Lukashenko’s] referendum would carry no legal force’. The chief electoral officer has complained about flagrant violations of the law in the running of the referendum. The constitutional court declares Gonchar’s dismissal to be illegal, since filling the position is parliament’s prerogative (CDSP, 1996, vol. XLVIII, no. 46, p. 21). A number of MPs occupy the parliament building. Parliament opens impeachment proceedings against Lukashenko (EEN, 1996, vol. 10, no. 23, p. 8). 17 November 1996: an anti-Lukashenko demonstration, numbering an estimated 10,000, is held in Minsk. 18 November 1996: prime minister Mikhail Chigir resigns. He is concerned about the growing confrontation between president and parliament, is against the president’s referendum and wishes for an improvement in both the political and economic situation. The labour minister and the deputy foreign minister also resign. 19 November 1996: seventy-six MPs send a motion to impeach Lukashenko to the constitutional court. (The impeachment proceedings were dropped on 26 November: EEN, 1996, vol. 10, no. 24, p. 7.)

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20 November 1996: Lukashenko does not attend Russian-sponsored talks with the Belarussian parliamentary opposition held in Smolensk (Russia). 22 November 1996: after talks in Minsk sponsored by Russian prime minister Chernomyrdin, it is announced that agreement is reached. Lukashenko will treat the referendum as consultative as opposed to legally binding, while MPs will withdraw their impeachment petition. Within three months a joint committee (constitutional assembly) will draw up a draft new constitution based on the version that gains approval in the referendum. (But opposition in parliament was strong enough to reject the agreement made on parliament’s behalf by the speaker. Lukashenko warned that unless the agreement was ratified the referendum would be legally binding. According to The Economist, the deal collapsed ‘mainly because Mr Lukashenko’s own supporters in the parliament declined to endorse it’: 30 November 1996, p. 60.) 23 November 1996: Lukashenko declares the referendum to be legally binding. (If Lukashenko is supported in the referendum he will seek approval from twothirds of the existing parliament to form two chambers. But if MPs cannot reach agreement on this within a month Lukashenko will have the right to call fresh elections: IHT, 25 November 1996, p. 5.) 25 November 1996: official figures are given for the referendum, which started on 9 November and finished on 24 November 1996. The turnout was 84.05 per cent and 70.5 per cent of registered voters said ‘yes’ to Lukashenko’s new constitution (compared with only 7.9 per cent for the parliamentary deputies’ version) (CDSP, 1996, vol. XLVIII, no. 47, pp. 5–6). OSCE did not send observers. A small, informal group from the European parliament complained of an unfair campaign (such as overwhelming bias in the media) and voting irregularities. The former chief electoral officer, Viktor Gonchar, talked of a ‘fantastic’ fake (Independent, 26 November 1996, p. 13). 26 November 1996: according to Lukashenko’s supporters, 112 MPs (out of 199) set up a breakaway parliament (constituting the new lower house, the House of Representatives). Fewer than sixty deputies attended a meeting of the Supreme Soviet. (A Council of Europe delegation said that it would not accept the authority of a new parliament: FT, 27 November 1996, p. 2. The Council of Europe considers that the draft presidential constitution does not comply with European standards: Baltic Times, 28 November–4 December 1996, p. 7.) The constitutional court suspends its proceedings against Lukashenko (CDSP, 1996, vol. XLVIII, no. 48, p. 19). 27 November 1996: Lukashenko signs a decree on the creation of the lower house of the National Assembly (CDSP, 1996, vol. XLVIII, no. 48, p. 19). The first law passed by the new lower house was a law terminating the powers of the former Supreme Soviet (p. 20). The 114 MPs loyal to Lukashenko press ahead with the formation of a new 110–member lower house of parliament, with the sixty-four-member upper house to follow later (IHT, 28 November 1996, p. 5). (By the end of November 1996 the number of deputies supporting Lukashenko went up to 122: CDSP, 1996, vol. XLVIII, no. 48, p. 19.)

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The new constitution comes into force. 4 December 1996: the chairman of the constitutional court and three judges of the court resign in protest at the new constitution (EEN, 1996, vol. 10, no. 24, p. 8). December 1996: prime minister Mikhail Chigir is replaced by his deputy Sergei Ling. The labour minister is also replaced (BET, Quarterly Update, December 1996, p. 13). 13 January 1997: the Council of Europe suspends Belarus’s ‘guest status’ on the grounds that the new constitution fails to meet minimum democratic standards. 14 March 1997: police arrest some of the demonstrators attending an antiLukashenko rally in Minsk (for which official permission was not given). (Stanislav Shushkevich was arrested for having taken part in an unauthorized demonstration on 15 March 1997: CDSP, 1997, vol. XLIX, no. 14, p. 20.) 21 March 1997: the USA suspends $40 million in aid on the grounds of human rights violations. 23 March 1997: a large anti-Lukashenko rally takes place in Minsk (with official permission). It commemorates the seventy-ninth anniversary of the founding in 1918 of the short-lived Belarus Republic. A US diplomat is expelled for allegedly taking part in the rally and for spying. 25 March 1997: Russia expresses ‘deep concern’ at the expulsion of a Russian journalist (FT, 26 March 1997, p. 2). 26 March 1997: the USA expels a Belarussian diplomat in return. Lukashenko: ‘We have no one left to count on. They have started to suffocate us openly: to suffocate us in the West and unfortunately somewhat in the East … People are saying: ‘Mr President, give us dictatorship; give us Stalin’s times’. Lukashenko talks of introducing mandatory and unpaid Saturday work, e.g. cleaning up the streets after winter on 22 April (Lenin’s birthday). 27 March 1997: the USA tells Belarus’s new ambassador (who has not yet arrived in the USA) not to come. 30 April 1997: the USA announces that it will restore ambassadorial relations with Belarus after a demonstration on 26 April (formally about Chernobyl) was allowed to take place peacefully. 1 May 1997: the Soros Foundation is fined $3 million for allegedly violating both its charitable status and the country’s currency exchange laws. In March 1997 the director of the foundation was barred from returning to Belarus for allegedly taking part in opposition rallies (IHT, 2 May 1997, p. 15). 15 May 1997: the Soros Foundation announces its withdrawal from Belarus. (This was confirmed on 3 September 1997 after unsuccessful talks.) (On 10 February 1998 the constitutional court reduced the fine for tax law violations from $3 million to $28,000. The government was authorized to confiscate the Foundation’s property, which was said to be worth less than the fine: Baltic Times, 12–18 February 1998, p. 2.) 21 August 1997: President Yeltsin’s presidential spokesman demands the release of journalists who work for Russian television and who were arrested on 26 July and 15 August 1997, accused of trying illegally to cross the Lithuanian border. (They were investigating smuggling.)

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15 September 1997: EU foreign ministers call a halt to negotiations on changes to the constitution in Belarus and impose political and economic sanctions. All official EU contacts are to be restricted and inter-departmental contacts will need special permission. All technical aid programmes at the EU level are to be stopped and EU member are recommended to do the same. Aid programmes for humanitarian purposes, for support of democracy and for regional development are to continue (BET, Monthly Update, September 1997, p. 9). 2 October 1997: Yeltsin prevents Lukashenko from making a planned visit to Russia, saying that he will allow visits once the last journalist is released. 7 October 1997: the remaining journalist (who works for Russian television but is actually a citizen of Belarus) is released but told not to leave the country since he is to go on trial. (On 28 January 1998 the two ORT – Russian Public Television – journalists were given suspended prison sentences for ‘intentional illegal crossing of the state border’: CDSP, 1998, vol. 50, no. 4, p. 19.) 15 October 1997: parliament adopts new amendments to the law on the press and media. ‘These changes enable Alexander Lukashenko not only to shut down any publication he finds disagreeable but also to block the distribution of foreign media in Belarus.’ The amendments state that the media will be punished for ‘disseminating information besmirching the honour and dignity of the President’. Publications found guilty of ‘abusing freedom of the press’ are to be punished by the State Committee on the Press (possible punishment including suspension). Permission to distribute foreign media lies with the committee (Kommersant Daily, 17 October 1997, pp. 1–2; reprinted in CDSP, 1997, vol. XLIX, no. 42, p. 21). 7 November 1997: Tamara Vinnikova, the former head of the central bank, is released from prison on condition that she does not leave Minsk. She was arrested on 14 January 1997 for alleged irregularities during her tenure at the commercial bank BelarusBank and before her appointment as the head of the central bank (BET, Monthly Update, November 1997, p. 9). ‘The example of the feisty former head of the central bank, Tamara Vinnikova, who has languished in a security service hospital for months awaiting charges of corruption, encourages caution from critics’ (Business Central Europe 1997: 47). 24 November 1997: the independent newspaper Svaboda is ordered to cease publication by the high economic court. Since the beginning of 1997 the state committee on the press has issued several warnings, accusing the newspaper of violating articles of the law on the press and other media, e.g. stirring up ‘social enmity’ (CDSP, 1997, vol. XLIX, no. 47, p. 21). 8 June 1998: eviction notices are given to twenty-two ambassadors living in the Drozdy complex outside Minsk. The official reason given is that repairs are needed to improve sanitary conditions. Lukashenko’s residence is nearby. After protests from residents (including the US and Russian ambassadors) the deadline for moving out was extended. On 17 June Lukashenko rescinded the eviction order. But on 18 June the complex was claimed to be a presidential residence and the following day it was sealed off. On 22 June the USA, the UK, Germany,

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France, Italy, Greece and Japan recalled their ambassadors from Belarus. The EU countries expelled the ambassadors from Belarus, while the USA ordered the ambassador from Belarus to remain in Minsk. (In December 1998 it was agreed to substitute other accommodation.) 30 June 1998: mandatory work assignments for graduates are revived. Most of the graduates are to be sent to Gomel and Mogilev provinces, regions that suffered from the Chernobyl nuclear accident. There is a shortage of qualified personnel in these areas. The contracts will oblige graduates to work in assigned jobs for three years. If the terms of the contract are violated the state will have to be reimbursed for the cost of education (CDSP, 1998, vol. 50, no. 26, p. 17). 13 July 1998: the EU announces that visas to visit EU countries will be denied to Lukashenko, the government and senior officials. 14 July 1998: the USA also denies visas. 24 November 1998: rationing is imposed for products such as milk, cheese, meat and matches. Lukashenko tells the government to cap salaries in private companies (IHT, 26 November 1998, p. 5). 12 January 1999: ambassadors of five EU nations (France, Germany, the UK, Greece and Italy) plan to return to Belarus on 17 January (IHT, 13 January 1999, p. 5). 17 January 1999: the ambassadors return as planned. 20 July 1999: the final day of President Lukashenko’s original term of office. Under the nullified constitution Mr Lukashenko’s term in office would have expired on Tuesday [20 July] … On Tuesday thirty-five members of the old parliament decreed that Mr [Semyon] Sharetsky was acting president under the old constitution, which provides for the speaker to fulfil any presidential vacancy until new presidential elections are held … The police have cracked down on protests by dissidents several times this week [the week starting 19 July]. On Tuesday a peaceful march by roughly 1,000 protesters was followed by the arrest of about a dozen dissidents and the opening of a criminal investigation against the editor of a popular opposition newspaper. The editor … said Friday [23 July] that she was accused of defamation after the newspaper printed allegations about a month ago that top officials had ties to organized crime … On Wednesday [21 July] the police dogged an unauthorized protest by some 2,500 people in central Minsk’s October Square and arrested fifty-three more critics, including some members of the disbanded parliament … On Thursday [22 July] the police arrested a leading human rights activist … The new pro-Lukashenko legislature absorbed many members of the old Supreme Soviet, but those who refused to join have become a focus of what political opposition still exists … The [US] state department said Wednesday [21 July] that it no longer considered Mr Lukashenko to be president of Belarus and would follow a policy of ‘selective engagement’ with the government while denying its legitimacy … The opposition leader, Semyon Sharetsky, fled late Thursday [22 July], two days after the long-disbanded parliament that he once led proclaimed the

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Belarus Lukashenko regime at an end and elected Mr Sharetsky as acting president … Mr Sharetsky was speaker of the Belarus parliament in 1996 when Mr Lukashenko nullified the nation’s first constitution, disbanded parliament and extended his own term to 2001. Mr Lukashenko acted after staging a national referendum that most international observers say was rigged. (Michael Wines, IHT, 24 July 1999, p. 2)

(The opposition held an unofficial presidential election in May 1999. Former prime minister Mikhail Chigir, the main candidate in the election, was taken into custody. Zenon Poznyak, who is abroad, withdrew his candidacy. Less than half the electorate was given the chance to vote; ballots were taken from door to door. The unofficial electoral commission declared the election valid but the results invalid. Several opposition parties have held talks with Lukashenko about recognizing the extension of his term of office until 2001 in return for free and fair parliamentary elections in 2000: CDSP, 1999, vol. 51, no. 31, pp. 8, 20.) 23 August 1999: Semyon Sharetsky, the exiled Belarus opposition leader, yesterday [23 August] proclaimed himself the country’s new executive head, saying that President Alexander Lukashenko’s term of office had expired under the constitution … Mr Sharetsky, the speaker of the parliament disbanded by Mr Lukashenko in 1996, fled to neighbouring Lithuania last month [July] after hearing rumours there was an arrest warrant for his arrest in Belarus. (FT, 24 August 1999, p. 2) 30 August 1999: Following the statement by opposition leader Semyon Sharetsky, chairman of the thirteenth Belarussian Supreme Council … the Belarussian opposition has issued a declaration conferring presidential authority on the former speaker. As of now, the document states, Lukashenko is an ordinary Belarussian citizen, and the duties of head of state have officially passed to Semyon Sharetsky pending elections to the country’s supreme government bodies. The declaration was issued by … [three people including] Stanislav Shushkevich, former chairman of the twelfth Supreme Council … Semyon Sharetsky has no plans to leave Lithuania. (CDSP, 1999, vol. 51, no. 35, p. 21) 16 September 1999: Viktor Gonchar (a political dissident) and Anatoli Krasovsky (a publisher) go missing. The two men were the third and fourth people linked to the political opposition to vanish since April … There is little evidence to indicate who might be responsible for the disappearances … With little hard evidence the disappearances have become surrounded by rumour and speculation … The first

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person to vanish was Tamara Vinnikova, a former head of the central bank. She was under house arrest and armed guard at the time … Miss Vinnikova said she knew of shady financial deals at the top of the government … The second person to disappear, former interior minister Yuri Zakharenko, was the campaign manager for an opposition politician and former prime minister [Mikhail Chigir] … Mr Gonchar, who organized the shadow elections, was imprisoned in March for ten days … The former prime minister, Mikhail Chigir, was arrested and briefly jailed three weeks later, on 30 March. Miss Vinnikova … vanished on 8 April. She was a supporter of Mr Chigir … Mr Zakharenko, Mr Chigir’s campaign chairman … vanished on 7 May … On 22 July [Semyon Sharetsky] … fled to neighbouring Lithuania, saying he feared for his safety. (Michael Wines, IHT, 5 October 1999, p. 6) A special conference of top Belarussian officials began with a speech by Alexander Lukashenko, who … called the opposition ‘rabble’ and said that independent newspapers should be closed down. A few hours later acting Supreme Soviet chairman Viktor Gonchar disappeared … Gonchar and a friend, Anatoli Krasovsky, general director of the Krasiko limited liability company, left a bathhouse and neither of them returned home … Tamara Vinnikova, the former chairwoman of the National Bank, vanished more than six months ago, followed by former minister of internal affairs Yuri Zakharenko. (CDSP, 1999, vol. 51, no. 38, p. 18) 15 March 2000: around 20,000 people participate in a ‘freedom’ march in Minsk. Some protesters and journalists are beaten up (EEN, 2000, vol. 12, no. 23, p. 7). 25 March 2000: an opposition demonstration marking the eighty-second anniversary of Belarussian independence is brutally suppressed (CDSP, 2000, vol. 52, no. 13, p. 15). 19 May 2000: former premier Mikhail Chigir is given a three-year suspended sentence with a two-year probationary period. He was arrested on 30 March 1999 and released on 30 November 1999, earlier than expected after spending eight months in confinement. The trial began in January 2000. Chigir was charged with dereliction of duty, abuse of official position and exceeding his authority while serving as executive board chairman at the Agro-Industrial Bank and as prime minister (CDSP, 1999, vol. 51, no. 48, p. 21; and 2000, vol. 52, no. 21, p. 22). (‘The Belarussian supreme court … yesterday [5 December 2000] ruled in favour of an appeal filed by former prime minister Mikhail Chigir … The case will be reheard in connection with numerous procedural irregularities: CDSP, 2000, vol. 52, no. 49, p. 17.) 7 July 2000: a cameraman who works for Russia’s ORT (Russian Public Television) Belarussian bureau vanishes in mysterious circumstances. In 1997 he and a colleague were arrested for supposedly crossing the

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Belarussian–Lithuanian border illegally while shooting a documentary. They were given suspended prison sentences (CDSP, 2000, vol. 52, no. 28, p. 17). 15 October 2000: an election for the 110 seats in the lower chamber takes place. The election was boycotted by most of the opposition and others had been barred from running by technicalities. The OECD did not send observers. If the official figures are to be believed, average voter turnout in the country as a whole was 60.6 per cent. The elections were valid in ninety-six of 111 election districts and forty-three deputies were elected in the first round. (CDSP, 2000, vol. 52, no. 42, p. 14) The USA said yesterday [16 October] it would not recognize the results … citing government pressure on the media and harassment of opposition candidates by the government … such as closing opposition newspapers … The state department said that ‘under current circumstances it was practically impossible to hold free and fair elections in Belarus’ … Of the handful of opposition candidates who stood despite the boycott, none were elected. (FT, 17 October 2000, p. 11) 16 March 2001: President Alexander Lukashenko has signed a decree … designed to bring humanitarian aid under strict government control … [One] provision bans the use of grants to prepare for or conduct elections, strikes, assemblies or rallies … The Belarussian foreign ministry’s recent statement [says] that it regards the election-observer workshops being run by OSCE as an indirect method of campaign financing [for the opposition] in the coming presidential election. (CDSP, 2001, vol. 53, no. 11, p. 19) 18 March 2001: Officials in Belarus declared a partial rerun of parliamentary elections on Sunday [18 March] to be valid, but opposition parties accused President Alexander Lukashenko of trying to fill parliament with his supporters. The balloting, in thirteen of the country’s 110 constituencies, was ordered after voter turnout for a run-off in October [2000] failed to reach the 25 per cent required. A spokesman said average turnout as of 2 p.m. Sunday was 57 per cent. The October vote was denounced in the West as neither free nor fair and the main opposition parties boycotted it. They also condemned the elections on Sunday, in which most candidates were Communists or independents. (IHT, 19 March 2001, p. 7)

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25 March 2001: about 3,000 people demonstrate in Minsk against Lukashenko (IHT, 26 March 2001, p. 1). 18 June 2001: Two former state prosecutors claim that a paramilitary unit set up in 1996 has killed thirty prominent enemies of Alexander Lukashenko … The squad’s alleged victims include a former speaker of parliament and a Russian cameraman … Oleg Sluchek and Dmitri Petrushkevich, former investigators for the prosecutor-general’s office are said to be hiding in Poland. (The Times, 19 June 2001, p. 13) ‘Figures who have disappeared include former interior minister, Yuri Zakharenko, a deputy speaker of parliament, Viktor Gonchar, and a cameraman, Dmitri Zavadsky’ (Telegraph, 19 June 2001, p. 13). [In an email message sent to media outlets] two prosecutor’s office employees have made sensational statements charging high-level officials with involvement in political assassinations … Former internal affairs minister Yuri Zakharenko, Supreme Soviet chairman Viktor Gonchar and businessman Anatoli Krasovsky disappeared without trace … [and] so did [ORT: Russian Public Television] cameraman Dmitri Zavadsky. (CDSP, 2001, vol. 53, no. 24, p. 4) The authorities have charged four former members of an elite anti-terrorist unit … But two key witnesses have died mysteriously and few people expect that truth will out … The opposition has at last united around a single candidate … [to run in] the presidential election on 9 September … a worthy trade union leader called Vladimir Goncharik. (The Economist, 28 July 2001, p. 42) 21 July 2001: Trade union leader Vladimir Goncharik is the opposition’s common candidate for president of Belarus. The decision was made by five alternative contenders on Saturday [21 July]. Goncharik received the support of the other opposition candidates – former prime minister Mikhail Chigir, former governor Semyon Domash, former defence minister Pavel Kozlovsky and Communist leader Sergei Kalyakin. They do not intend to drop out of the race in Goncharik’s favour just yet, however; they will do so only after the central electoral commission has registered him. The decisive factor in Goncharik’s favour was, no doubt, a set of documents he released last week regarding the disappearances of well-known politicians … There are … [other] contenders. (CDSP, 2001, vol. 53, no, 30, p. 16)

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7 August 2001: OSCE has warned Belarus that the results of September’s presidential election would not be regarded as credible if its polling monitors were shut out. OSCE has so far been refused permission to start its monitoring campaign … President Alexander Lukashenko … has accused OSCE of working with the opposition … OSCE had hoped to begin monitoring on 1 August. It says it needs six weeks before an election – polling is scheduled for 9 September – to conduct an effective operation. (FT, 8 August 2001, p. 5) ‘A mysterious video – featuring a former prison director and two men who claim to have worked for the KGB – emerged last week, alleging that Mr Lukashenko approved the murder of an opposition leader and his associate in 1999’ (Independent, 3 September 2001, p. 11). ‘President Lukashenko’s … main opponent [is] Vladimir Goncharik, a veteran trade unionist … Sergei Gaidukevich [is] a third, marginal candidate’ (FT, 8 September 2001, p. 8). Vladimir Goncharik … was officially adopted on 13 August [2001] as the ‘single candidate’ of the democratic opposition (the ‘broad civic coalition of political parties and public associations’) … Regarded as the ‘third candidate’ … Sergei Gaidukevich … [is] a clone of the Russian nationalist Vladimir Zhirinovsky … In 1992 he was instrumental in the formation of the Liberal Democratic Party … and was elected president of the party in 1995. (Hill 2002: 129) 9 September 2001: a presidential election is held. The turnout was 83.86 per cent. Official results make Alexander Lukashenko a clear winner, with 75.65 per cent of the vote. Vladimir Goncharik (director of the Federation of Trade Unions) had 15.65 per cent of the vote and Sergei Gaidukevich (of the extreme right-wing Liberal Democratic Party) had 2.48 per cent. International observers and human rights groups Monday [10 September] condemned [the election] as ‘fundamentally flawed’ … Western human rights groups and observers … charged that Mr Lukashenko had rigged the election long before by blocking his opponents from the media, smearing and thwarting independent vote monitors, intimidating voters and election officials and conducting a vote that was wide open to manipulation … In a postmortem Monday OSCE … said the flaw lay not so much in the election itself, which was reasonably orderly, but in the weeks of campaigning and months of harassment that preceded it … Of 80,000 local, provincial and national election commissioners – officials whose ostensible job is to ensure an impartial vote – all but 230 were nominated or appointed by the govern-

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ment … [Russia’s] own observers joined with those from other former Soviet republics in decreeing Mr Lukashenko’s victory as both democratic and fair … But the chairman of Russia’s central election commission … expressed distress over the election-day shutdown of opposition web sites, email, telephone service and even cellular telephone access … Mr Goncharik charged Monday that the vote was rigged … [that] Mr Lukashenko had won a plurality of 46 per cent to his 40 per cent … A runoff election is required when no candidate wins an outright majority. (IHT, 11 September 2001, p. 4) ‘Vladimir Goncharik declared [on 10 September] that the election returns had been falsified and that he had polled 42 per cent of the vote to Alexander Lukashenko’s 46 per cent, an outcome necessitating a second round’ (CDSP, 2001, vol. 53, no. 3, p. 1). ‘[That] Alexander Lukashenko … won a resounding victory … was acknowledged without reservation by observers from the CIS and by [the] Russian central electoral commission chairman’ (CDSP, 2001, vol. 53, p. 37, p. 18). OSCE’s 293-strong monitoring mission said yesterday [10 September] the presidential election ‘failed to meet’ international standards. Voting on Sunday was lawful and orderly … But … [there had been] abuses in preceding weeks … [OSCE] accused the Belarus government of ‘doing everything in its power to block the opposition’. It identified a ‘campaign of intimidation’ against opposition activists and independent media. It said excessive rule by presidential decree led to ‘arbitrary changing of the election environment’. (FT, 11 September 2001, p. 8) OSCE’s statement: ‘There were fundamental flaws in the election process. The political regime did everything in its power to block the opposition. The legal framework prevented free and fair elections’ (Baltic Times, 13–19 September 2001, p. 2). Hrair Balian (the head of the OSCE monitoring mission): I would not use the words free and fair. There was an atmosphere of fear that made a fair election impossible’ (The Times, 11 September 2001, p. 12). Hans-Georg Wieck [the head of OSCE in Belarus] said: ‘In each election district local officials produced figures that may have no connection with the actual balloting.’ No independent observers were allowed to watch the count … In pre-election polls Mr Lukashenko … had the support of between 40 per cent and 50 per cent of the electorate. (Independent, 11 September 2001, p. 11) (‘Yesterday [9 September] … President Lukashenko said that Hans-Georg Wieck, the head of OSCE, was a spy and would be thrown out of Belarus’: The Times, 10 September 2001, p. 12. ‘Yesterday … the president announced that

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Hans-Georg Wieck, the OSCE ambassador in Minsk, was a spy who would be expelled if he did not leave the country freely’: Guardian, 10 September 2001, p. 10. ‘Mr Lukashenko said last week: “Hans-Georg Wieck was wrong to expect that Lukashenko would expel him before the presidential election. We will throw him out after the election” ’: Independent, 10 September 2001, p. 11. ‘[Before the election Lukashenko] said that a special team charged with making preparations for a forcible seizure of power had been set up in the republic under the direct supervision of Hans-Georg Wieck’: CDSP, 2001, vol. 53, no. 32, p. 17.) ‘Mr Lukashenko would probably have won the election anyway. He is popular among the poor, the old and in country districts. Although wages and pensions are low, they are still paid on time’ (Patrick Cockburn, Independent, 11 September 2001, p. 11). ‘Wages are low but they are paid. Jobs are available. Utilities, education and health care are cheap (Patrick Cockburn, Independent, 10 September 2001, p. 11). Andrei Vardomaski, of the opinion poll company Novak, said: ‘It is the less well educated, the poor, the old and people living in isolated villages who will vote for Lukashenko. His opponents are strongest among the better off and in cities like Minsk.’ (Independent, 10 September 2001, p. 11) ‘In Minsk … Lukashenko … managed only 58 per cent against Goncharik’s 30 per cent … Demonstrations … in Minsk on 10 September were limited to a couple of thousand’ (Baltic Times, 13–19 September 2001, p. 2). ‘Many foreign observers conceded that he would have won a second term without vote-rigging and harassment of the population’ (Telegraph, 11 September 2001, p. 13). ‘Unsupervised advance voting began on Tuesday [4 September]’ (Telegraph, 8 September 2001, p. 18). Several observers raised questions about the ‘early’ votes, cast from last Tuesday by people who said they might be away for the weekend. About 15 per cent of registered voters chose this option, leaving the ballot papers sitting in flimsy boxes in polling stations for up to five days. (FT, 10 September 2001, p. 8) ‘As much as 20 per cent of the electorate was reported to have cast its ballots in a five-day “early voting” period before Sunday [9 September], a procedure … potentially wide open to ballot-stuffing’ (IHT, 11 September 2001, p. 4). The campaign was very unlike most campaigns in established democracies in a number of respects … [The provision] for voting up to five days in advance of the official election day of 9 September … is open to abuse and

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it appears to have suffered in that way … Independent surveys indicated that he [Lukashenko] might win comfortably on the first ballot even if he played according to the rules of democracy. He undoubtedly enjoys a significant level of popularity and electoral support, particularly outside Minsk … It would have been politically astute to achieve a majority in the range 53 per cent to 57 per cent: such a figure would have been difficult to challenge politically … In the event he went for a crushing victory … International monitors under the broad aegis of the International Limited Election Observation Mission identified ‘fundamental flaws’ in the process, in particular the extreme bias of the mass media and the general culture of a system in which opposition is not accepted as a normal part of political life. This team – sponsored by the Parliamentary Assembly of OSCE, OSCE’s Office for Democratic Institutions and Human Rights, the Council of Europe and the European Parliament – declared that the election failed to meet the agreed international standards … [But] monitors from the CIS … declared that the elections were ‘free, open, in compliance with all universal democratic principles’. (Hill 2002: 130–7) ‘[There is] a belief among many voters that Mr Lukashenko’s economic management style has protected them from the pain of transition felt in neighbouring Russia’ (Andrew Jack, FT, 26 September 2002, p. 9). 11 September 2001: there are terrorist attacks on the USA. 1 October 2001: Gennadi Novitsky is named as the new prime minister. 6 November 2001: ‘A conference of Central European leaders [was held] in Poland … The meeting of seventeen governments had been convened by Poland to tighten regional security co-operation and to show support for the US-led [anti-terrorism] coalition’ (IHT, 7 November 2001, p. 1, 8). Pledging ‘full political support’ for the US-led fight against terrorism, representatives of seventeen Central and East European countries endorsed an action plan aimed at improving co-operation and shoring up controls. Meeting in Warsaw Central European, Baltic and Balkan leaders agree to tighten border clearance, crack down on money laundering and drug trafficking, and improve co-operation of their intelligence, customs and police services. ‘This is the political manifestation of our presence in the international anti-terrorism coalition,’ said Alexander Kwasniewski, who organized the summit … Poland has offered the USA military assistance, but … the country has not yet received a request for help. The Czechs have offered a chemical warfare-protection unit that was deployed in the Gulf War … Belarus, which attended as an observer, formally voiced its support for the anti-terrorist campaign for the first time since the 11 September attacks on the USA … [although it said that] the United Nations should be the ‘focal point’ in the fight against terrorism. (FT, 7 November 2001, p. 8)

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January 2002: [There] are signs of dissent in the ranks of the elite … On 16 January the chairman of the newly created upper house of parliament, Alexander Vaitovich, bluntly criticized the president’s penchant for rule by decree … Law-making by parliament, said Mr Vaitovich, worked better … Two weeks later Mr Vaitovich criticized Belarus’s foreign policy, in particular the recent denial of a visa to Hans-Georg Wieck … head of an international human rights mission in Minsk … The foreign minister admitted that locking up businessmen had hurt the country’s image … A senior member of the lower house of parliament, Vasil Khrol … blamed the president for breaking his promise to liberalize the economy … On 29 January the chairman of the government securities outfit, Valentin Shukhno, complained about the backwardness of Belarus’s state-controlled financial exchange. (The Economist, 2 February 2002, p. 41) 14 March 2002: A verdict in the case of the ‘Ignatovich gang’ was handed down … The court found Valeri Ignatovich guilty of creating and leading a gang and committing robbery, theft, murder and other crimes and sentenced him to life in prison with confiscation of property. The same sentence was meted out to another former officer of the Almaz [Diamond] special unit … The criminal gang whose backbone was made up of current and former special service officers killed people for gain … Among other crimes attributed to gang leader Valeri Ignatovich and his accomplices was the kidnapping of ORT [Russian Public Television] cameraman Dmitri Zavadsky. But the investigators were unable to say what happened to the reporter after that … [The] attorney who represented the interests of the Zavadsky family at the trial … feels that … only the people who carried out the kidnapping not those who ordered it have been found … [In the attorney’s view] one of the top suspects is the man who oversaw the investigation, prosecutor-general Viktor Sheiman. (CDSP, 2002, vol. 54, no. 11, p. 17) 3 June 2002: Belarus has ordered the expulsion of a British diplomat working [as its thirdranking member] for OSCE – the second envoy from the body to be thrown out of the country … [Lukashenko] has been at odds with OSCE since it denounced his re-election in September 2001 as tainted … The mission’s second in command… was expelled on 15 April … Hans-Georg Wieck, the former OSCE mission head, left … last December [2001] after being repeatedly accused of supporting the opposition. And Lukashenko’s government has persistently refused to accredit the mission’s designated new chief, Eberhard Heyken of Germany … Minsk accuses OSCE … of interfering in

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its internal affairs by criticizing Lukashenko’s regime … [The latest] departure leaves the OSCE mission in Minsk with only two staff members. (IHT, 4 June 2002, p. 5) 12 June 2002: The Council of Europe said Wednesday [12 June] that it was ready to begin an independent probe into a string of unexplained disappearances … Belarus has seen at least four high-profile disappearances since President Alexander Lukashenko was first elected in 1994. They include the Russian television cameraman Dmitri Zavadsky, the former Belarussian interior minister Yuri Zakharenko and the opposition leader Viktor Gonchar. (IHT, 13 June 2002, p. 7) 24 June 2002: The trial of two journalists from the defunct [closed down by the authorities in November 2001] newspaper Pagonya [Pursuit] who had been charged with slandering President Lukashenko ended Monday [24 June] … Under Belarussian law that crime … ‘libel against the president’ … can land a person in prison for up to six years … [The editor and a journalist] were sentenced to two and a half years’ and two years’ restriction of freedom, respectively … spending the next couple of years in an ‘open-type special institution’. (CDSP, 2002, vol. 54, no. 26, p. 17) 27 June 2002: The House of Representatives … approved on second and final reading a bill ‘On freedom of conscience and religious associations’. The document codifies in law the ‘defining role of the Orthodox Church in the historical formation and development of the spiritual, cultural and state traditions of the Belarussian people’ … Specialists were particularly concerned by … [the grounds upon which] a religious organization can be liquidated by decision of its founders or by decision of a court … The amendments greatly complicate registration procedures for religious congregations and associations (churches). Specifically, only religious associations with at least fifteen congregations that have been registered on Belarussian territory for at least fifteen years will be eligible for registration. In other words, the church has to have been recognized under the Soviet regime … Once the law takes effect religious associations will be permitted to print and distribute religious literature in the country only after religious-studies experts from a government agency have conducted a special review of the materials. (CDSP, 2002, vol. 54, no. 27, pp. 18–19)

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Belarus The law makes special mention of Belarus’s leading religions and faiths [the Orthodox Church, the Catholic Church, the Belarussian Evangelical Lutheran Church, Judaism and Islam] … [The law] states that ‘religious organizations shall be subject to compulsory state registration’ … A religious association may be registered only if it ‘has at least ten religious congregations of a single faith, of which at least one shall have been operating on the territory of Belarus for at least twenty years’ … However, the twenty-year requirement applies only to religious associations (centralized organizations) and does not affect individual organizations, which may register individually … The law bars foreigners from serving as leaders of religious associations. (CDSP, 2002, vol. 54, no. 42, p. 16) The law has forty articles of bewildering complexity, but at its root, it outlaws regular meetings of worshippers of any faith not registered with the state, and strictly limits the places where even registered faiths can hold services. Registering is a daunting task: no individual church may have fewer than twenty members. Any organized faith must have at least ten churches and be able to prove that it had a church in Belarus before 1982 – a time of religious repression under the Soviet Union. That merely begins to describe the law’s restrictions, which govern church publications, visits by foreign priests, religious schools, charities and a welter of other activities … Even before it fully takes effect persecution of Hindus and people of other faiths not approved by the government – and some that are – has been ratcheted sharply up. The effect is to hamstring any rivals to the Belarussian branch of the Russian Orthodox Church, which helped draft the new law and is a pillar of support for the autocratic government of President Alexander Lukashenko. A Belarussian chapel of the Russian Autocephalus Orthodox Church, which has split from the main Russian Orthodox faith, was bulldozed in August … The bill’s authors … say … the state is obligated to protect its [the Russian Orthodox faith’s] leading role from dangerous sects, which, they say, are the law’s targets. (Michael Wines, IHT, 25 November 2002, p. 5)

(The new law was signed by the president on 12 October and went into force on 16 November.) 12 September 2002: ‘Another [OSCE] member … left … because authorities refused to extend her visa … The departure left only one representative in its mission to Belarus’ (IHT, 13 September 2002, p. 3). September 2002: ‘Last week the third journalist this year was sentenced to two years’ hard labour for libelling Mr Lukashenko in the build-up to his poll campaign last year’ (FT, Thursday 26 September 2002, p. 9). 23 October 2002: Upon arriving in Minsk on Wednesday [23 October] Russian parliamentary deputies Boris Nemtsov and Irina Khakamada and political analyst Sergei

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Markov were immediately sent home … The three had flown to Belarus in order to attend a conference on Belarussian–Russian relations. (CDSP, 2002, vol. 54, no. 43, p. 16) 29 October 2002: ‘Belarus in effect expelled the last [OSCE] member … by denying her a visa’ (IHT, 30 October 2002, p. 3). 15 November 2002: The Czech government has barred [President Lukashenko] … from attending … next week’s Prague [Nato] summit … Nato has made it clear to Mr Lukashenko and to Ukraine’s Leonid Kuchma that they will not be welcome at the summit … The EU is expected to isolate Mr Lukashenko further next Monday by putting him and fifty of his top officials on a visa blacklist … [Lukashenko has said] that Belarus would stop efforts to block the movement of illegal migrants and drug smugglers unless the EU agreed to foot the bill. (FT, 16 November 2002, p. 8) (‘[On 18 November only] fourteen of the fifteen EU nations imposed a travel ban on … Alexander Lukashenko and seven government ministers … Portugal was the country to vote against’: Independent, 20 November 2002, p. 12.) ‘The Czech Republic refused Friday 15 November] to issue a visa for … Alexander Lukashenko … A day earlier Lukashenko … [had warned] that he was prepared to open Belarus’s borders to allow a flood of illegal immigrants and drugs into Europe’ (IHT, 16 November 2002, p. 1). Lukashenko (13 November): ‘The Europeans won’t just come to Belarus; they’ll come crawling and beg us to help them fight drug trafficking and illegal immigration. If the Europeans don’t pay, we won’t protect them from flows of narcotics and illegal immigrants’ (CDSP, 2002, vol. 54, no. 46, p. 8). 20 December 2002: OSCE and Belarus sign a memorandum of understanding to reopen the OSCE office in Minsk as of 1 January 2003 (CDSP, 2003, vol. 55, nos 1–2, p. 20). 20 February 2003: The members of the Parliamentary Assembly of OSCE voted unanimously in Vienna to restore ‘specially invited’ status to a delegation from the National Assembly of Belarus. Ever since the embattled parliament (the Thirteenth Supreme Soviet) was dissolved in 1996 and replaced with deputies loyal to President Lukashenko, official Minsk has been trying to get its legislative branch recognized in international organizations. But the OSCE Parliamentary Assembly and the Parliamentary Assembly of the Council of Europe ignored the Belarussian ‘puppet’ parliament for seven years. For three years Belarus’s legislative branch was represented by members of the former Supreme Soviet. However, their terms expired in 1999. Sessions in Vienna and Strasbourg were attended by two delegations,

290 Belarus present as observers without voting rights – one representing official Minsk and the other representing the opposition parties. Two delegations went to Vienna this time as well. (CDSP, 2003, vol. 55, no. 7, p. 18) 20 March 2003: Belarus was very critical of the US-led war in Iraq. (See the summary of political developments in Russia.) 14 April 2003: ‘[The EU has] lifted a visa ban that prevented President Lukashenko and his senior officials travelling to the EU after OSCE was allowed back’ (The Times, 15 April 2003, p. 18). (The United States did the same the following day.)

The negotiations about the formation of a political, economic and monetary union with Russia 2 April 1996: Russia and Belarus form a Community of Sovereign Republics. Each country is to retain its independence, territorial integrity, flag, place in international institutions and national anthem. But the following is agreed (CDSP, 1996, vol. XLVIII, no. 14, pp. 6–8): 1 2

3

4 5

A Supreme Council (comprising the presidents, prime ministers and parliamentary speakers), which will adopt decisions on the basis of unanimity. The co-ordination of foreign and defence policy (sharing the use of ‘military infrastructure’), joint border patrols and a joint fight against organized crime. By the end of 1997 the parties are to synchronize the stages, timetables and extent of economic reforms they are conducting, and they are to create a uniform base of laws and regulations in order to remove all interstate barriers and restrictions and to ensure equal opportunities for unrestricted economic activity. During this period the parties are to form a standardized system of anti-monopoly legislation, taxes, state support for production, rules for investment, and standards and regulations for occupational safety, as well as complete the creation of a common customs space. By the end of 1997 the monetary, credit and budgetary systems are to be standardized, and conditions for the introduction of a common currency are to be created. Membership is open to other states. A new national holiday in both countries is declared for 2 April, the Day of Unity of the Peoples.

(After the idea was agreed in principle on 23 March 1996, there were demonstrations in Belarus both for and against.) 2 April 1997: Lukashenko and Yeltsin sign a short version of a Union Treaty and initial a longer version. This will allow for public debate until 15 May 1997. After the two presidents have agreed the draft of the longer version the Union

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Treaty will be presented to the Supreme Council of the Community by 25 May 1997. (Referendums were ruled out. Chubais and Nemtsov and their supporters achieved their aim of ensuring that only the shorter – and weaker – version was signed on 2 April.) Yeltsin stresses that: ‘The Union does not create a single state. Each side retains its sovereignty.’ The main provisions are as follows (CDSP, 1997, vol. XLIX, no. 14, pp. 7–8; and 15, pp. 10–14): 1

2

3 4

5 6

7

‘Each state participating in the Union shall retain its state sovereignty, independence and territorial integrity, constitution, state flag, state emblem and other attributes of statehood.’ The setting up of a nine-member Supreme Council of the Community between Belarus and Russia, including the two prime ministers and parliamentary speakers. It is to be chaired by the two presidents on a two-year rotating basis. ‘The Supreme Council shall make decisions on any and all matters that this charter classifies as areas of Union jurisdiction, as well as matters pertaining to the Union’s powers in areas of joint jurisdiction between the Union and the member states … Decisions of the Supreme Council shall be made on the basis of unanimity and in accordance with the principle of ‘one state, one vote’. A Parliamentary Assembly and an Executive Committee are also to be set up. The co-ordination of foreign, economic, social and military policies. ‘Every citizen of the Russian Federation and every citizen of the Republic of Belarus shall simultaneously be a citizen of the Union … A citizen of the Union shall have the right … to free movement and permanent residence within the territory of the Republic of Belarus … A citizen of the Union who resides permanently in the other member state shall have the right to vote in elections for and be elected to bodies of local government on the territory of that state.’ ‘The bringing of national legal systems into closer correspondence and the formation of a Union legal system.’ ‘To create a single economic space … to create and develop a common infrastructure … to provide for the functioning of uniform monetary, credit, budgetary and tax systems, and to create the necessary conditions for introducing a single currency … to provide for the effective functioning of a single customs space … a Union budget shall be formed for the purposes of funding joint programmes, projects and activities, as well as the staffing and operations of Union agencies.’ Other states may apply for membership.

An anti-Lukashenko and anti-union demonstration is held in Minsk. 23 May 1997: Yeltsin and Lukashenko sign the Union Treaty. 3 November 1998: the ninth session of the Parliamentary Assembly of the Union of Russia and Belarus decides to turn the assembly into a single representative and legislative body that will be called the Parliament of the Union. The first of its chambers will be the Council of the Union and will consist of equal

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numbers of deputies from the Russian and Belarussian parliaments. The second chamber will be the Council of Representatives and its deputies (three times as many Russians as Belarussians) will be elected by majority voting in single-seat districts (CDSP, 1998, vol. 50, no. 44, p. 15). 25 December 1998: a declaration on the further unification of Russia and Belarus is signed by Yeltsin and Lukashenko: The presidents of Russia and Belarus hereby declare their resolve to continue the gradual progression toward voluntary unification within a Union State, while preserving intact the national sovereignty of the Union’s member states. To that end a treaty on the unification of Russia and Belarus into a Union State will be drafted and presented for public discussion before mid-1999. Union government bodies and corresponding supranational administrative bodies will be created and a common budget will be drawn up. A mechanism for pursuing a common policy in international affairs and in defence and security matters will be put in place … By the end of the first half of 1999 a common legal environment for all economic agents will be in place, there will be a common customs space, and civil and tax law, currency regulation and monetary systems will be standardized … A transition will be made to a single currency. (CDSP, 1999, vol. 50, no. 52, pp. 1–2) 2 July 1999: Speaking in Minsk yesterday [2 July] at the opening of the twelfth session of the Parliamentary Assembly of the Union of the two countries he [Lukashenko] accused the Kremlin staff and Russia’s ministries of ‘literally blocking’ Belarus’s integration-orientated initiatives … [He] warned … that his current drive to promote integration would be his last. If the Kremlin fails to respond Belarus will take steps to establish closer relations with Western countries. (CDSP, 1999, vol. 51, no. 27, p. 9) 8 December 1999: Lukashenko and Yeltsin sign another agreement. Some of the main elements are as follows: 1 2

3 4 5 6

The eventual creation of a confederal state. The creation of a council of officials from both countries to co-ordinate policy. The presidents of Russia and Belarus will alternately take turns to head the supranational body. Work on a ‘common monetary unit’ will take six years to complete. A unified budget will be phased in over four years. A unified trade and customs policy toward outside nations will take six years. Defence policy will be harmonized by 2005.

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Yeltsin: ‘The union state is based on the sovereignty and independence of member nations and is not directed against anyone.’ Lukashenko: ‘We shall still sign the treaty which the people of Russia and Belarus expect from us – the treaty on a unified state’; ‘This is not the last agreement we [Lukashenko and Yeltsin] will sign’; ‘When people speak about the time scale, we say that this will take five or eight or perhaps ten years.’ (Guardian, 9 December 1999, p. 15; IHT, 9 December 1999,p. 5; Telegraph, 9 December 1999, p. 19.) ‘The agreement was largely symbolic … The actual document is long on goals and short on specifics … The mechanics have barely moved in recent years’ (David Hoffman, IHT, 9 December 1999, p. 5). The union state will have common territory, borders, citizenship, bodies of power and symbols. There will also be a common currency (the rouble) with its emission centre in Moscow. The treaty stipulates that the following bodies will be formed in the union state during the first stage: 1

2

3

4

5

Supreme State Council: a governing body consisting of the heads of state, heads of government and leaders of the houses of the two parliaments. Parliament: a legislative body consisting of the House of the Union and a House of Representatives. Each state will delegate thirty-six parliamentarians to the House of the Union, while the House of Representatives will consist of seventy-five deputies from Russia and twenty-eight from Belarus, elected by universal secret ballot. Court: an arbitration and oversight body consisting of nine judges whose task will be to ensure the ‘uniform interpretation and application of the treaty’. Council of Ministers: the union state’s government, which will comprise a chairman of the Council of Ministers, the two heads of government, a state secretary (vice-chairman), the heads of the two states’ Ministries of Foreign Affairs, Economics and Finance, and the heads of their chief industrial ministries. Accounting Office: a special eleven-person oversight and auditing body that will monitor the Union State’s finances.

Russia and Belarus will each retain its national sovereignty and remain a full member of the international community, and retain its membership in international organizations. Belarus will also retain its status as a nuclearfree state. The treaty makes special note of the fact that ‘military induction and service shall be conducted as set forth in the member countries’ constitutions. A common army shall not be established.’ Although the treaty requires the two states to co-ordinate their foreign and defence policies, each will retain its own foreign ministry and defence ministry. (CDSP, 1999, vol. 51, no. 49, p. 14)

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30 August 2000: The Council of Ministers of the Union State of Russia and Belarus … [announces] that the Russian rouble will become the common monetary unit of Russia and Belarus as of 1 January 2005; but not until three years later, on 1 January 2008, will the rouble be transformed into the currency of the Union State … But yesterday’s meeting was unable to decide where the single emission centre would be located … The final go-ahead to introduce the common currency of Russia and Belarus will be given by the two countries’ Supreme State Council, consisting of Alexander Lukashenko and Vladimir Putin … Belarus’s National Bank will begin pegging the Belarussian currency to the Russian rouble as of September [2000]. (CDSP, 2000, vol. 52, no. 35, p. 17) 14 November 2000: The Russian rouble will become the national currency of Belarus as of 1 January 2005. A resolution to that effect was approved yesterday [14 November] at a meeting of the Union State’s Council of Ministers … [Russian] support will take the form of a $100 million credit … A resolution to sign agreements on the credit and the introduction of the common currency will be adopted by the Union State’s Supreme State Council at a meeting in Minsk on 30 November. Belarus should get the first instalment of $30 million, to be used to stabilize its national currency and prepare for the switch to the Russian rouble, by December of this year. The plan is for the Russian currency to serve as the common currency until 2008, when it will be replaced by a new common currency. At the moment, however, no one really knows just what that currency will be, especially since the Council of Ministers was unable to resolve the issue of a single currency-emission centre yesterday … Belarus has yet to take any of the steps needed to bring its customs policy into line with Russia’s. (CDSP, 2000, vol. 52, no. 46, p. 16) 29–30 November 2000: A meeting of the Supreme State Council of the Union State of Russia and Belarus [was held] yesterday [30 November] … Mr Lukashenko … declared that the new state should be created as quickly as possible … President Putin [said] there is no need to rush the formation of the Union State … [Putin:] ‘We are moving toward granting powers to the bodies of the Union State, and that will require the surrender of some of our sovereignty. This is a very delicate process. We need to look at the decisions we are making a hundred times, perhaps even a thousand … But we should not drag them out, either’ … The presidents reported that they had signed five resolutions … [including] ‘On efforts to introduce a common currency and to establish a

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common emission centre’ … Both sides assiduously avoided revealing any specifics about the procedure for introducing a common currency. As Kommersant has already reported, the only thing decided for certain so far is that the Russian central bank will be the common emission centre in 2005–2008, after which some sort of Union bank will take over … Mr Lukashenko, however … yesterday … talked about the introduction after 2008 of ‘some sort of new currency’, not the Russian rouble, as the common currency of the Union. (Kommersant, 1 December 2000, pp. 1–2: CDSP, 2000, vol. 52, no. 48, pp. 16–17) The document … signed in Minsk on 30 November 2000 … stipulates that the Russian rouble will begin circulating in Belarus in 2005 and that some sort of common currency will be introduced in the merging states in 2008 … ‘The agreement provides for the possibility of introducing a common currency before 1 January 2005, too – provided that the necessary conditions are in place,’ a source at the ministry of economic development told Sevodnia … Belarus is to receive two loans. The first loan is for $100 million, $30 million of which is to be transferred by 28 December 2000. The remaining $70 million will be paid in 2001, after Minsk meets some tough conditions. Among other things it has to abolish its multiple exchange rates by the end of 2000. The second loan – a stabilization loan – will be for 4.5 billion roubles. The loan is intended to promote the stability of the ‘bunny’ [the Belarussian rouble]. (Sevodnia, 28 December 2000, pp. 1, 5: CDSP, 2001, vol. 53, no. 1, pp. 17–18) 29 January 2001: A session of the Union State’s Council of Ministers takes place in Moscow. ‘The heads of government yesterday [29 January 2001] signed an agreement to establish a common customs system … Minsk long refused to bring its customs legislation into conformity with Russia’s. But now the Belarussians … [have promised] to impose duties on petroleum products analogous to those currently in effect in Russia … The Russian finance ministry estimates that the Russian budget was losing up to $70 million annually due to the absence of oil export duties in Belarus … Because Belarus had no export duties, exporting companies found it more profitable to export oil from there than from Russia … Minsk is to receive 50 per cent more oil from Russia in 2001. (CDSP, 2001, vol. 53, no. 5, p. 17) 17 December 2001: Minsk, which always used to favour rapid integration, now feels there is no need to rush: it does not like Moscow’s proposed constitution … Late last week Alexander Lukashenko criticized Russian policies for the first time in a

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Belarus year … [He] accused Russia of being unwilling to create a Union State with a common parliament and government. (CDSP, 2001, vol. 53, no. 51, p. 17)

12 March 2002: ‘Russia and Belarus moved to merge their economies Thursday [12 March 2002] by agreeing to harmonize tax and customs laws, remove all trade barriers and unify energy prices by next month [April]’ (IHT, 13 March 2002, p. 12). 13 June 2002: President Vladimir Putin (two days after a meeting with President Lukashenko): There can be no attempts to restore the USSR at the expense of Russia’s economic interests, since that would strengthen centrifugal forces within the country and weaken Russia economically … [Belarus is trying to] create something along the lines of the USSR. So why write about a sovereign state and territorial integrity in the Constitutional Act, or about the power to veto decisions? … [The economy of Belarus is equal to just 3 per cent of Russia’s economy] … So we too should have veto power, and that is no longer the USSR but something else … We cannot allow the establishment of a supranational body with vague functions. (CDSP, 2002, vol. 54, no. 24, p. 2) 18 June 2002: President Lukashenko: Belarus will never become the ninetieth member of the Russian Federation. The Union can only be built on an equal basis … The Russian side lacks a desire to move in the direction of unifying the fraternal people of Belarus and Russia … We have always heard that Belarus is supposedly a ball and chain on Russia’s leg and wants to solve its problems at the Russian Federation’s expense. (p. 5) ‘A cooling of relations could be sensed as soon as Putin replaced Yeltsin … For Lukashenko, who was already imagining himself as president or at least prime minister of the Union State, it was like a cold shower’ (Yekaterina Grigoryeva and Yelena Daneiko, Izvestia, 19 June 2002, p. 4: CDSP, 2002, vol. 54, no. 24, p. 5). 24 June 2002: [President Putin said that] the unification of Russia and Belarus ‘must be conducted on an unconditional basis within the framework of a single state. That means there must be no [Russian] State Duma or Belarussian parliament. There must be a single parliament, a single government and a single country’ … He said that the draft Union State Constitutional Act submitted by the Belarussian side reflects such principles as the sovereignty of Belarus,

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its territorial integrity and right to veto. Putin said that the single state could be based on the sort of mechanism that exists in the EU. In that case the Union parliament … would make certain decisions that would acquire the force of national law only after they were confirmed by the national parliaments … The existing Union Treaty provides for a Union parliament with, as the president puts it, ‘very broad powers and incomprehensible mechanisms for exercising them. If we choose such a parliament with such powers, its laws will not be followed in either Belarus or Russia and we will discredit the very idea of unification.’ (CDSP, 2002, vol. 54, no. 26, p. 8) Mr Putin said [yesterday] that if Russia and Belarus wanted a union, then he favoured merging them into a single government and parliament. But Belarus, he said, was proposing a looser association. This would mean a supranational parliament and a constitution which guaranteed sovereignty to Belarus and gave it veto power over any joint decisions. Mr Putin said he was willing to study whether Russia and Belarus could form a union based on the EU, with specific powers delegated to a supranational parliament. But he was strongly opposed, he said, to the kind of supranational parliament implied by the ‘Union Treaty’ signed … in 1996. This assembly would have wide-ranging powers in theory, but no clear means for implementing or enforcing its decisions, he said. ‘If we choose a parliament like that with powers like that, its laws will not be respected in Belarus or in Russia, and we will discredit the whole idea of the union’ … Last week … Mr Lukashenko said he had rejected the idea of merging Russia and Belarus into a single state, because Belarus would be left with the status of a province. That was an ‘insult’ to Belarus, he said. Mr Lukashenko also disliked the idea of a union modelled on the EU. (FT, 25 June 2002, p. 9) ‘The Kremlin is clearly unwilling to unite with Lukashenko in a confederation in which he would retain sovereignty and have the power to veto Russian decisions’ (CDSP, 2002, vol. 54, no. 26, p. 17). The planned reunification smacked of an attempt to resurrect the Soviet Union, the Russian president said. And he brutally reminded the Belarussians that their economy’s size was only 3 per cent of Russia’s. ‘Let us keep the rissoles and the flies separate,’ Mr Putin said … [Lukashenko]: ‘We have been accused of being a burden on Russia, a burden that wants to solve its domestic problems at Russia’s expense. Now we have heard it at the highest level. Good. Now we know the Russian leadership’s position.’ Belarus would never agree to be merely the ninetieth member of the Russian Federation, he said. It had never been so insulted in a decade of independence. (Telegraph, 22 June 2002, p. 17)

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21 July 2002: The supreme economic court of Belarus has revoked the registration of Zapad-Transnefteprodukt [West-Petroleum Product Transportation], a private unitary production enterprise that is part of Russia’s Transnefteprodukt state company and owns the entire system of trunk petroleum product pipelines in Belarus. The ruling is the first step toward nationalizing this Russian state property in Belarus … Unlike the system of trunk oil pipelines in the former USSR (the Russian portion of which now belongs to Transeft [Petroleum Transportation]), the Soviet Union’s national network of petroleum product pipelines was not divided among the countries that joined the CIS … Under an agreement the CIS countries signed in October 1992 the Belarussian sections of the pipeline, like the parts in Ukraine and Kazakhstan, became Russian property … Its [Belarus’s] territory was crossed by foreign pipelines from which it received no profit … only taxes amounting to about $5 million a year … It never acknowledged that the pipelines were Russian property. The rights to the pipelines were never codified as envisioned in an agreement the countries reached in 1997 … On 5 July the Belarussian ministry of economics filed a complaint in the supreme economic court seeking to invalidate the incorporating documents of Zapad-Transnefteprodukt … Belarus needs the court ruling in order to initiate talks with Russia on turning Zapad-Transnefteprodukt into a joint venture whose charter capital would be evenly split between the two countries. (Kommersant, 22 July 2002, pp. 1, 10: CDSP, 2002, vol. 54, no. 30, p. 14) A dispute over ownership of an oil products pipeline through Belarus has raised tensions with Russia … Last week a Belarus court cancelled on technical grounds the registration of Zapad-Transnefteprodukt, the Belarus subsidiary of a Russian state company that operates an oil products pipeline in Belarus. Links between Russia and Belarus have deteriorated since President Vladimir Putin dismissed Belarussian terms for ‘union’. (FT, 24 July 2002, p. 8) Experts are unanimous in the view that the Belarussian ruling could mark the start of a broad assault on Russian interests in Belarus. Hence it is clear why Moscow, after hesitating for some time, ultimately decided not to build a new natural gas pipeline through Belarus, preferring instead to come to terms with Ukraine. (Nezavisimaya Gazeta, 23 July 2002, p. 6: CDSP, 2002, vol. 54, no. 30, p. 15) 14 August 2002: [President Putin said that] Russia could merge with … Belarus in time for single parliamentary elections by the end of next year [2003] … [He] raised

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the prospect yesterday [14 August in talks with President Lukashenko] of a union under the Russian constitution, with the election of a joint president by spring 2004 … However … Alexander Lukashenko … stressed that Putin’s proposals were ‘not the final and agreed version’ and that in their current form they were ‘unacceptable’ to Belarus … President Putin … said a joint referendum for the citizens of Russia and Belarus could be launched next May [2003] in preparation for the creation of a single country … He also said he had proposed a new timetable to move towards planned currency union ahead of schedule, with adoption of the Russian rouble by Belarus in 2004, a year earlier than previous plans. Full currency union has previously been scheduled for 2008, beginning with the replacement of the Belarus hare [bunny] with the Russian rouble in 2005. (FT, 15 August 2002, p. 6) Putin also outlined a second possible option, calling it ‘something along the lines of integration within the EU framework’. He said that this option would entail the creation of a Union parliament that would pass laws that subsequently ‘would have to be confirmed by internal laws’. But judging from his tone the Russian president himself appeared to take a very sceptical view of this unification option … [On 15 August Lukashenko said that the] EU model might work if the existing Union Treaty is retained. (CDSP, 2002, vol. 54, no. 33, pp. 2, 4) 21 August 2002: President Lukashenko: ‘Even Lenin and Stalin did not go so far as trying to dissolve Belarus and making it part of Russia’ (The Times, 22 August 2002, p. 14). Lukashenko described the proposals put forward by Vladimir Putin … as ‘unacceptable’ … He took issue mainly with the proposal that Belarus join Russia in the form of seven individual [Federation] members and that a fullfledged state subsequently be established in accordance with the Russian constitution … Lukashenko fumed: ‘Not even Lenin and Stalin went as far as to suggest breaking the republic into pieces and incorporating it into the USSR!’ … Lukashenko said he also had a problem with the second option proposed by Vladimir Putin, which calls for developing relations between Russia and Belarus according to the EU model. ‘I cannot destroy a federal agreement that cost me a lot of sweat and blood and that is dear not just to me, but also to the former Russian leadership,’ the Belarussian leader said. (CDSP, 2002, vol. 54, no. 34, p. 15) 4 September 2002: President Vladimir Putin sent a message to President Alexander Lukashenko yesterday [4 September] … [proposing] three basic options … (1) full integration into a single state; (2) a supranational structure along the lines of the

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Belarus EU; (3) work toward integration based on the provisions of the existing treaty on the creation of a Union State … The Russian president proposes that a joint commission be established [to study these options] … Moscow prefers the first two options … a single state (it is proposed that Belarus become one of Russia’s republics) or an entity along the lines of the EU. (Vremya MN, 5 September 2002, p. 5: CDSP, 2002, vol. 54, no. 36, p. 7)

27 November 2002: President Vladimir Putin met with President Alexander Lukashenko … in Moscow…Private talks end with hints of reconciliation … They said that only 20 per cent of their time had been devoted to political matters and that they had mainly discussed economic issues. (CDSP, 2002, vol. 54, no. 48, p. 6) 20 January 2003: ‘Vladimir Putin … and Alexander Lukashenko … agreed yesterday [20 January 2003] to deepen economic ties and plan a constitution-like document that would give what is now a largely symbolic union more political weight’ (Independent, 21 January 2002, p. 11). The presidents … said that the appearance of a single currency in 2005 is still quite feasible … In another promise the presidents announced that a joint venture to handle natural gas transport would be established by 1 July … Commenting on the outcome of their meeting, the two presidents expressed deep satisfaction. (CDSP, 2003, vol. 55, no. 3, p. 17)

THE ECONOMY

The economic system The Economist (20 February 1993, p. 45) saw delays in the reform process. The State Planning Committee still set some plan targets for enterprises and there was rationing. The budget deficit in 1992 was 4.6 per cent of GDP, according to official figures. Nearly a third of Russian oil was bought at market rates. According to Deutsche Bank (Focus: Eastern Europe, 28 February 1994, no. 102, p. 3), only fragments of an initial programme planned for 1992–3 have been put into practice. Production based on edict and financed through central bank issuance means that restructuring of the real sector has hardly begun. Pressure for restructuring through tight fiscal stance is absent … The current institutional arrangements are not market-based and have become less so during 1996 and 1997. Effective economic decision-making has moved away from

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the NBB [central bank], line ministries and the council of ministers to the president’s administration. Instead the ministries simply attempt to implement orders. (BET, Quarterly Issue, July–September 1997, pp. 15–16) On 1 January 1998 there came into force a decree whereby the state has a veto on the most important questions concerning the development of joint stock enterprises (p. 11). ‘In effect the decree gives the state total discretion in controlling the management and restructuring of enterprises and any joint ventures, even where nominally the state is a minor shareholder with a 1 per cent share’ (pp. 56, 65–6). Most companies remain state-owned, taking their orders from a slew of ministries according to a central plan. Central planning has maintained growing production, though that just means more and more Soviet-era goods, which fewer and fewer people want to buy. (Business Central Europe 2000: 43) ‘There has been some modest progress in phasing out or easing administrative control mechanisms in many areas, including in business registration’ (EBRD 2001a: 50). ‘Compliance with the policy requirements of the Union Treaty with Russia calls for increasing alignment with Russian market regulations, which may give a boost to reforms’ (EBRD 2001b: 118).

Financial policy The Banker (March 1993, p. 47) reported Belarus’s desire to remain in the rouble zone. While negotiations with Russia were continuing Belarus froze those with the IMF on a programme of macroeconomic and structural reform. Coupons (rubels) were introduced alongside the rouble for cash transactions (the coupon fell against the rouble). Belarus had thought about introducing its own currency (the taler), but after the Russian currency reform of late July 1993 it was announced that the country would remain in the rouble zone. On 11 October it was announced that the use of foreign currencies in all cash and domestic transactions was to be banned. Coupons (rubels) would be the sole means of payment in retail trade by the end of 1994 and enterprises would have to comply within a week. The currency was redenominated in September 1994 and the rubel was made the sole legal currency in October 1994 (EBRD 1995a: 53). On 29 September 1994 Lukashenko presented his reform package to parliament. The intention was to reduce the monthly rate of inflation to 7–8 per cent and to halt the production slump and the decline in the standard of living by mid-1995. Near-term plans included cutting off the flow of easy-term credits to loss-making enterprises, drastically limiting social benefits to numerous categories

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of citizens and charging world prices for energy (CDSP, 1994, vol. XLVI, no. 39, p. 23). The programme called for the monthly rate of inflation to be reduced from about 30 per cent to 11 per cent by the end of the year and to 7 per cent by July 1995 (Transition, 1994, vol. 5, no. 8, p. 16). The following day parliament supported the president’s ‘anti-crisis’ programme, but rejected his request for additional powers to implement the measures. Lukashenko has begun to implement a somewhat ad hoc emergency economic programme; subsidies have been reduced and part of the energy debt is to be repaid by giving Russia shares in oil refineries (EEN, 1 September 1994, vol. 8, no. 18, p. 7). The penal taxation of enterprises paying in excess of the maximum permissible payroll was abolished at the beginning of 1995 (DIW, Economic Bulletin, 1996, vol. 33, no. 7, p. 25). The IMF has withheld $250 million, although $206 has already been loaned (FT, 25 March 1995, p. 3). An IMF mission withheld a $250 million stand-by credit in March 1995, owing to unsatisfactory progress with the economic reforms (Belarus had received a $100 million systemic transformation facility loan the previous month) (CDSP, 1995, vol. XLVII, no. 13, p. 20). ‘The IMF halted lending to Belarus in 1995 … In March this year [2001] co-operation resumed with a six-month IMF “staff-monitored programme”. This does not include lending but tests the government’s capacity to meet policy targets’ (FT, 11 September 2001, p. 8). On 28 August 1996 Lukashenko decreed that 75 per cent of goods and services sold in all stores must be locally produced (FT, 29 August 1996, p. 2). At the end of April 1997 selected economic agents were allowed to sell certain goods and services (such as cars, consumer electronics and travel tours abroad) to the citizens of Belarus for foreign cash currency. ‘This regulation contradicts the existence of BRB as the sole medium of exchange in Belarus and raises the possibility of dollarization’ (BET, Monthly Update, May 1997, p. 8). A restrictive monetary policy has been pursued since the beginning of 1995, but inter-enterprise lending has risen. ‘This makes the apparent stabilization of inflation appear deceptive and points to the crucial weakness in Belarus’s reform approach: monetary stabilization is not being accompanied by structural reforms and changed behaviour patterns at company level’ (Deutsche Bank, Focus: Eastern Europe, 28 June 1996, no. 156, pp. 3–4). Fiscal policy has also been restrictive (p. 4). In 1995 the IMF provided $203 million under the systemic transformation facility, but in February 1996 the IMF suspended a standby programme ($293 million) indefinitely after paying out the first tranche ($73 million) because Belarus was not fulfilling the conditions of the programme. The World Bank has also stopped all lending programmes until progress is made with the structural transformation of the country (p. 6). President Lukashenko revised the budget for 1997 by decree, with revenues increased by 70 per cent and spending by 63 per cent. Some 50 per cent of the budget deficit is financed by central bank credits (Deutsche Morgan Grenfell, Focus: Eastern Europe, 5 September 1997, p. 71). A currency crisis in March 1998 led to a further loss of foreign reserves and the reintroduction of price and exchange rate controls (EBRD 1998a: 33).

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A presidential decree of 20 March 1998 stated that the Council of Ministers was to co-ordinate the activity of the central bank. ‘Thus decisions of the Council of Ministers regarding monetary and credit policy in Belarus are obligatory for the NBB. This means that the monetary authority is fully dependent on the government’ (BET, Monthly Update, March 1998, p. 12). Virtually no enterprise has been declared bankrupt and closed (EBRD 1997b: 155). Although the bankruptcy law is six years old and an estimated 20 per cent of enterprises are loss-making, no enterprise has yet been declared bankrupt (EBRD 1998a: 25). Inter-enterprise arrears amounted to over 40 per cent of GDP by the end of 1997. Not one enterprise has been declared bankrupt under the 1991 bankruptcy law. The government continues to support state enterprises by means of directed credits and budgetary funds to write off arrears (EBRD 1998b: 155). ‘Pervasive directed credits, as well as explicit and implicit subsidies, allow non-viable enterprises to avoid restructuring … Industrial enterprises are heavily dependent on subsidized inputs, particularly energy’ (EBRD 2000a: 42). ‘In the context of ongoing negotiations with the IMF on a staff monitored programme, the authorities made a commitment to phase out directed lending’ (EBRD 2001a: 50). The phasing out of the system of directed credits as a condition before the [IMF’s April 2001] SMP [Staff-Monitored Programme] could be initiated has been a notable positive development. Other important policy steps include the maintenance of positive real interest rates since February 2000. (EBRD 2001b: 119) Liberalization of the foreign exchange market, initiated as part of an IMF Staff-Monitored Programme, enabled Belarus to accept some of the obligations of Article 8 of the IMF’s Articles of Agreement in November 2001. However, many other restrictions remain in place, including administrative price controls and a surrender requirement on foreign exchange transactions, which remains at 30 per cent but does not apply to all exports … The Belarussian authorities appear to be reluctant to enter into a second SMP … A presidential decree … announced in mid-2002 … instructing commercial banks to provide new loans to specific agricultural processing enterprises … goes against the IMF SMP which eliminated directed lending. (EBRD 2002b: 122–3) ‘Barter … [is] estimated at some 30 per cent of industrial sales’ (EBRD 2003a: 46). Firms are constrained from reacting to price signals because they have little incentive to cut costs, shed labour or restructure. The lack of the threat of corporate insolvency or takeover is one constraint – there has been no bankruptcy and only fifteen cases have come to court. (BET, Quarterly Update, December 1996, p. 64)

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Belarus No serious attempt to undertake a credible economic plan is likely before 1997. Attention in Belarus is presently focussed on the forthcoming referendum in November and the political struggle between the president and parliament … The policy mix adopted by the government, namely a fixed exchange rate sustained through a dual exchange rate market, a comparatively high inflation rate, a lax monetary policy which cannot but reflect an underlying fiscal instability hidden in the form of quasi-fiscal transfers, can only result in a return to very high inflation and in a strong devaluation of the exchange rate in the medium term … If the government persists in the current anti-free market stance of its policy and in pursuing policies designed on the basis of the assumption that Belarus is a large closed economy rather than a small open one, the final result can only be an outburst of the instability that has long been compressed. (BET, Quarterly Update, September 1996, pp. 5–6)

‘After a period of tight monetary policy, in the context of the stand-by arrangement with the IMF in 1995, the stance on monetary policy has been progressively relaxed’ (p. 24). There have been protectionist moves, e.g. on 28 August 1996 the president ordered all shops to stock at least 75 per cent domestic goods (p. 40). Following initial success in monetary stabilization in 1995, a new course has been adopted in 1996, one that poses a threat to the stabilization process … The expansion of centralized loans and the associated selective provision of loans at negative real interest rates mark a significant reverse on the path towards establishing a banking and financial system organized on market principles. For as long as the banking system is used to maintain soft budget constraints for individual forms and sectors, it will not be possible to implement the structural reforms so urgently needed. (DIW, Economic Bulletin, 1996, vol. 33, no. 12, pp. 8–9) ‘Monetary and credit policy has, it seems, been dragged into a pattern of administrative resource allocation’ (p. 15). Earnings from the ‘republican working Saturday’ of 19 April 1997 (‘a throwback to the tradition from the USSR, when working Saturdays were organized in spring to commemorate Lenin’s birthday’) were to be allocated to the construction of a hospital devoted to Chernobyl victims (BET, Monthly Update, April 1997, p. 7). On 23 October 1997 the government approved a list of enterprises (‘producers–exporters’) subject to an experiment. Credits were to be at 50 per cent of the refinancing rate and there were also to be a number of tax privileges (BET, Monthly Update, November 1997, p. 8). State domestic debt declined from 3.3 per cent of GDP in 1996 to 2 per cent in 1997. ‘These are very low levels by international standards and result from both the high monetization of budget deficits and the practice of negative real

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interest rates on the public debt’ (BET, Quarterly Issue, January–February 1998, p. 9). ‘The initial forecasts for 1998 were that 64 per cent of the state budget deficit was to be financed by the emission of domestic securities, while the remainder would be financed by money creation’ (BET, Quarterly Issue, July–September 1998, p. 11). (See the section on the Asian/Russian financial crisis on p. 315.)

Prices Producer prices were liberalized in early 1992, but ceilings on profit margins for traders were subsequently introduced to check the increase in retail prices. Prices of products produced by monopolistic enterprises are also controlled by ceilings on profit margins (EBRD 1994: 19). The prices of food products were liberalized in late 1994 by presidential decree, but food rationing for some basic products was introduced in early 1995, indicating that some controls remain. Rents and public utilities’ prices were raised in early 1995, but remained well below costs (EBRD 1995a: 17–18, 53). The ceilings on wholesale and retail margins were eliminated in November 1994, but rents and energy prices remain administratively controlled (EBRD 1995b: 36). Some price controls still apply to consumer goods such as meat, dairy produce and bread. Administered prices are set for transport, energy and communications, while profit margin restrictions are also applied to essential agricultural products. By January 1996 cost recovery in household utilities had reached about 60 per cent, compared with 12 per cent a year earlier (EBRD 1996b: 141). The government continues to set tariffs for utilities, gas and electricity, to influence the price of basic food products and to ‘recommend’ profit margins. Some price liberalization did take place in January 1997 and utility prices have been increased to levels close to cost recovery. Although wholesale prices have been freed, food prices remain controlled through ‘recommended’ farm-gate prices (EBRD 1997b: 155). Throughout 1998 the government increased its control over the economy through restrictions on domestic and foreign trade and through extensive price controls, leading to shortages of goods in domestic markets and the introduction of food rationing in several Belarussian regions. (EBRD 1999a: 33–4) Since late 1996 the government has gradually reversed the process of price liberalization, replacing informal controls with administrative measures. In May 1999 a presidential decree banned any price rise that is not compensated for by measures of social protection, and mandated the Council of Ministers and the central bank to set annual limits for price indices. The decree also introduced a wide-ranging list of goods and services subject to state price regulation, including products and services supplied by monopolies, rents, and basic food products and spirits (EBRD 1999b: 194). ‘The authorities have … resorted to direct administrative controls on most prices’ (EBRD 2000b: 138). ‘The list of goods and

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services subject to price controls was reduced in early 2001’ (EBRD 2001a: 50). ‘The scope of administrative price controls was reduced in early 2001 and again under the terms of the IMF Staff-Monitored Programme, which began in April 2001’ (EBRD 2001b: 118). ‘Further progress [has been made] with price liberalization, including higher utility charges’ (EBRD 2003a: 46). In mid-August 1994 there were substantial price increases, e.g. a twentyfold increase in the price of milk and a tenfold increase in the price of bread. Housing and energy costs have also risen. Enterprises are being given new rights to trade and hold hard currency (Business Central Europe, September 1994, p. 22). On 1 September 1994 fuel prices rose by an average of 50 per cent; petrol prices jumped by 30–40 per cent (Transition, 1994, vol. 5, no. 8, p. 16). At the start of 1996 price ceilings only applied to a number of basic goods, including energy. But on 30 August 1996 it was decreed that the prices of a number of foodstuffs were to be frozen until the end of the year. The president also decreed that prices in general could only increase in line with wage growth (DIW, Economic Bulletin, 1996, vol. 33, no. 12, p. 14). ‘Belarus has in place an extensive network of both direct price controls and controls on margins’ (BET, Quarterly Update, December 1996, p. 31). ‘Price and distribution controls are applied to products such as sugar, meat and oil and, where not officially, informally’ (p. 64). On 6 December 1996 the Minsk Komarovsky market, the principal retail outlet for food and trade goods, was nationalized by presidential order. The following month the new state-appointed managers introduced stringent trading regulations. Only agricultural producers and traders hired by the market administrators were to be allowed to sell there, while profit margins were to be regulated (BET, Monthly Update, January 1997, p. 7). In January 1997 food prices were raised by 40 per cent and those of communal services by 15 to 38 per cent (BET, Monthly Update, February 1997, p. 5). In February 1997 the price of electricity was raised by 39 per cent (p. 7). Cost recovery ratios for household services were to rise to between 80 per cent and 100 per cent by the end of 1997 (BET, First Quarter, 1997, p. 8). The aim was to bring the cost recovery rate close to 100 per cent for electricity, housing rent, heating, water, sewerage, natural gas and post. Railway fares were to increase to a 50 per cent cost recovery rate (p. 29). After a period of liberalization in 1994 and 1995 price ceilings were introduced in late 1995 and 1996, partially weakened in January 1997 and tightened again thereafter. According to a recent directive issued by the president, commercial entities that allow their prices for goods and services to rise by more than 2 per cent over January 1998 are subject to examination. In addition, an order (issued on 18 March) to all state and private enterprises to cut their prices to the level of 1 March has already come into effect (BET, Quarterly Issue, January–March 1998, pp. 16, 64).

Privatization Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 5 per cent; 1991, 5 per cent; 1992, 10 per cent;

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1993, 10 per cent; 1994, 15 per cent; 1995, 15 per cent; 1996, 15 per cent; 1997, 20 per cent; 1998, 20 per cent; 1999, 20 per cent; 2000, 20 per cent; 2001, 20 per cent (EBRD 1999b: 24, 196; and 2002b: 20, 124). Large-scale privatization under the 1993 law began in June that year and about 300 enterprises were privatized by the end of the year. Two-thirds of state assets were to be privatized by 1997, with half involving the distribution of vouchers to the general population. A voucher-based programme was launched in July 1994 (for small-scale privatization as well) (EBRD 1994: 18). By late 1994 only 3 per cent of state enterprises had been privatized (EBRD 1995a: 53). In August 1995 the government unveiled a list of 1,000 enterprises to be privatized before the end of 1995. Foreigners would be invited to participate (EBRD 1995b: 36). The privatization programme launched in 1993 foresaw the denationalization of two-thirds of enterprises owned by central and local governments by the year 2000. By January 1996, however, only 20 per cent of the 1,595 enterprises concerned had been ‘transformed’ into joint stock companies (in which the government initially owns 100 per cent of the shares). Genuine privatization of large enterprises has not taken place as yet. The September 1996 privatization programme involved 516 enterprises owned by the central government. Shares were to be sold to the population for vouchers distributed in 1994. By May 1996 no transactions under the scheme had taken place. Eighty-eight small enterprises were sold or transformed during the first seven months of 1996, compared with 415 privatized in 1995. No property restitution has taken place to date. There has been no significant effort by the government or the banking system to instigate restructuring of state enterprises (EBRD 1996b: 140–1). The privatization process stalled in 1997. Most privatizations of large enterprises have been to management and employees. Small privatization has progressed somewhat faster (EBRD 1997b: 155). In December 1997 a presidential decree was drafted abolishing annual privatization lists and requiring presidential approval for the privatization of large state enterprises (EBRD 1998a: 33). A presidential ‘golden share’ decree, effective 1 January 1998, gives state representatives in joint stock companies a veto right on main decisions (p. 25). Modest results were achieved on small-scale privatization during 1998 but virtually no privatization of medium-sized and large-scale enterprises took place … The voucher privatization programme has progressed very slowly, with less than 40 per cent of vouchers used by the end of 1998. (EBRD 1999a: 34) The privatization of communal enterprises, mainly small and medium-sized enterprises, has been considerably faster than that of republican assets, mainly large industrial and agricultural enterprises. By mid-1999, 40 per cent of the communal property and only 10 per cent of the republican property targeted for privatization in 1993 had been privatized. The latter increases to 20 per cent if enterprises are included that have been transformed into joint stock companies

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or have sold minority stakes. None of the forty enterprises transformed into joint stock companies in 1998 have been privatized. The voucher programme launched in 1994 has resulted in less than 40 per cent of vouchers being redeemed for shares. The repurchase of the remaining vouchers, originally planned for mid-1999, is likely to be postponed because of the implied budgetary costs. In mid-1999 the government announced plans to accelerate the sale of shares in state enterprises. Although the government is willing to attract foreign capital, it is unlikely that it will offer majority stakes. According to existing legislation, sales of stakes of over 50 per cent in industrial enterprises are forbidden, while sales of shares with a book value of over $40,000 require the approval of the president. In May 1999 parliament decided that utilities, local infrastructure and energy companies will remain under state control. In September 1998 a presidential decree suspended the registration of new enterprises on the grounds that around 17 per cent of registered businesses were idle or used to evade taxes. The new reregistration procedures, adopted in March 1999, oblige all firms and banks to reregister by January 2001 and to increase their statutory capital in accordance with the growth of the minimum wage. The decree holds owners and shareholders of insolvent companies personally liable for corporate debts, practically eliminating the concept of limited liability (EBRD 1999b: 194–5). Privatization of medium-sized and large enterprises has stalled. However, the pace of privatizing small enterprises picked up in 1999. By the end of the year the government had transferred 79 per cent of such enterprises scheduled in 1994 for privatization. (EBRD 2000a: 42) Progress in privatization has slowed even further … Relatively few companies have been truly privatized (defined as a reduction in the state share to less than 50 per cent), with the majority having been sold from one state entity to another … The introduction of reregistration and statutory minimum capital requirements will continue to inhibit the growth of new private businesses. (EBRD 2000b: 138–9) ‘Both large and small-scale privatization remain stalled, although some progress has been made in the corporatization of state-owned companies … Under the terms of the Union Treaty with Russia, Belarus has agreed to accelerate large-scale privatization in 2001’ (EBRD 2001a: 50). Progress in privatization remains stalled and there have been no true privatizations this year … Few companies have been truly privatized (defined as a reduction in the state share to less than 50 per cent), with the majority having been sold from one state entity to another. Only about 10 per cent of republican enterprises and about 40 per cent of communal enterprises have

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been genuinely privatized so far. In line with [the April 2001] SMP [StaffMonitored Programme] commitments to the IMF, the government has recently announced its intention to restart the privatization process for small and medium-sized enterprises. However, the government also believes that large-scale enterprise privatization would be premature in the present environment, given depressed asset prices and lack of interest from foreigners … Persistent soft budget constraints for privileged enterprises, little genuine privatization and stifling government controls impede new investment and the restructuring of industry and agriculture. (EBRD 2001b: 119) Privatization remains stalled, although the corporatization of some state enterprises is under way, for example in the petrochemicals sector … The mid-November [2001] repeal of presidential decree No. 40, which empowered the state to confiscate property of individuals and legal entities that cause (undefined) damage to the state, was a further welcome improvement in the investment climate. (EBRD 2002a: 44) While privatization remains essentially stalled, the government has made some progress on corporatization … The government has recently stated that it intends to retain a controlling interest in certain, as yet undefined, strategic enterprises … The arrest of several senior business figures in early 2002 – mainly on charges of corruption or mismanagement – are, however, seen as a setback to the investment climate, with some commentators feeling the arrests were politically motivated. The investment climate has also been further weakened by the authorities introducing ‘golden shares’ into enterprises that have already been privatized. (EBRD 2002b: 122–3) By the end of 1995, 12 per cent of small enterprises had been privatized (BET, Quarterly Update, September 1996, p. 41). ‘Only 11 per cent of large privatizations have so far been completed. Most of the recorded privatizations have been accomplished by converting enterprises into fully publicly-owned joint stock companies’ (p. 50). ‘Both privatization and corporatization came to a halt in 1996’ (BET, Quarterly Update, December 1996, p. 61). As of 1 January 1997, 2,122 small enterprises (out of 88,000 enterprises, or 2.4 per cent) had been privatized (BET, First Quarter 1997, p. 66). ‘At present SOE production prevails in the total economic activity of Belarus accounting for more than 65 per cent’ (p. 67). ‘The latest share of employees at privatized entities in the total employment of the Belarus economy stands at 4.4 per cent’ (BET, Second Quarter 1997, p. 62). As of 15 April 1997 the activities of enterprises that did not reregister according to the presidential decree of 24 May 1996 were to be halted and bank accounts frozen (BET, Monthly Update, April 1997, p. 8). On 28 July 1998, after a break of almost two years, a republican voucher auction was held.

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Shareholdings were sold in forty-four of the fifty joint stock companies that were put forward, but overall only 60 per cent of the shares on sale were actually sold (BET, August 1998, p. 10). The privatization process started in 1993 and has been mainly carried out on a case-by-case basis, concerning the two types of state property: republican property … comprises the large industrial and agricultural enterprises; communal property … comprises smaller units within the regions. The methods used for privatization have been the following: buyouts performed by workers’ collectives, leaseholders or outsiders; sale by auction or by competition; corporatization – the transformation of a state enterprise into a joint stock company, transferring total or partial ownership to private owners; alienation [see below], which involves only a change in the legal form of the entity without any implication of change to private enterprise. BET recognizes only cases where 50 per cent of ownership has been transferred to the private sector as being effective privatization. This precludes corporatization where the majority of the shareholding was left in state hands, and alienation, which usually involves no change in ownership. A voucher scheme was introduced in 1994 to give all citizens the opportunity to own shares in privatized companies. However, by 1 May 1998 only 36 per cent of vouchers had been used, and investment funds that had been established to invest in shares under the voucher scheme had virtually ceased operations. Due to the slow pace of effective privatization very few new shares were available and there were few profitable enterprises in which to invest … At the beginning of 1994, 4,423 republican properties had been selected for privatization. By the end of 1998 a total of 891 (i.e. 20.1 per cent of these) had been transformed: bought out by leaseholders, workers or individuals, 145; sold at auction or competition, twenty-two; corporatized, 506; alienated 218. As only those bought out or sold at auction or competition are considered privatization, then, according to these statistics, only 3.8 per cent of republican properties planned for privatization in 1994 have been privatized …. By the end of the fourth quarter of 1998 a total of 41 per cent of communal properties originally planned for privatization had been privatized [out of a total of 2,220 communal properties 505 had been bought out by leaseholders or workers, while 1,182 had been sold at competition or auction] … A total of 60.1 per cent of total housing stock [had been] privatized by the end of 1998. (BET, Quarterly Issue, October–December 1998, pp. 86–9) ‘The restructuring process is not underway in Belarus’ (p. 91). On 16 February 1999 the first specialized auction on the sale of share of state enterprises for privatization vouchers took place. Only two of the twenty-seven joint stock companies available for sale remained unsold (BET, Monthly Update, March 1999, p. 12).

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Alienation … involves the selling off of divisions of state firms that are considered not being effectively used. Sales may be to the private sector or to other state firms … But an alienated firm is not considered privatized until the majority of its shares are owned by the private sector. (BET, Quarterly Issue, January–March 1999, p. 90) During the first quarter of 1999 the operations of private firms appear to have been restricted due to the increase in statutory funds required for company registration and the virtual abolition of limited liability … The restriction of limited liability (i.e. putting personal possessions at risk in the case of business failure) increases the personal risk to entrepreneurs. (BET, Quarterly Issue, January–March 1999, p. 91) On 16 March 1999 the minimum statutory fund for company registration was increased. The edict virtually abolishes limited liability as the private property of company founders of limited and joint stock companies can be confiscated in the case of bankruptcy … Firms are to list in their registration documents all areas of economic activity in which they would like to be involved and companies must undertake all areas of the economic activities listed. If a business does not undertake these for a period of six months it is subject to liquidation. (p. 112) ‘Retroactive legislation [has been introduced] which would allow the government to acquire a controlling “golden share” in companies already privatized’ (FT, 26 September 2002, p. 9).

Foreign trade Foreign trade has been liberalized and a unified exchange rate introduced (Business Central Europe, March 1994, p. 19). Import subsidies were abolished in August 1993. There are few quantitative or licensing restrictions on imports. Quantitative restrictions and taxes on exports were substantially reduced in early 1994. There are restrictions on current and capital account convertibility. There is a floating exchange rate regime with heavy central bank intervention (EBRD 1994: 19, 111). In April 1996 the interbank currency exchange was nationalized and came under the direct control of the central bank. In January 1996 a 10 per cent tax was imposed on purchases of foreign currency and exporters were required to surrender 100 per cent of their foreign currency earnings (albeit with many exemptions). In June 1996 the 10 per cent tax was removed and the surrender requirement reduced to 50 per cent (EBRD 1996b: 141). In early February 1997 the official exchange rates were unified and fixed at a nominally devalued rate of

312

Belarus

22,050 Belarussian roubles to the US dollar. But as of the end of February 1997 the central bank began to set a single rate ‘based on supply and demand, taking into account the inflation rate’ (EBRD 1997a: 26). There are many export and import restrictions, e.g. import quotas on alcohol and alcoholic beverages; export quotas on agricultural fertilizers (to keep the price of agricultural inputs low); an embargo on imports of butter and margarine and a ban on cattle and beef exports were introduced in October 1997 with the aim of ensuring stable domestic supplies (EBRD 1997b: 155). The reform package outlined in late September 1994 envisaged the scrapping of most export licences and quotas, except for textiles and defence products, by the end of 1994. Import licences would be retained only for goods that could endanger domestic industry (Transition, 1994, vol. 5, no. 8, p. 16). A ‘currency corridor’ has been created, with the Belarussian rouble’s range limited to between 11,300 and 13,100 to the US dollar (Transition, January–February 1996, vol. 7, no. 1, p. 20). The use of the exchange rate as a nominal anchor to bring down inflation contributed to price stability in Belarus, but led to an overvalued real exchange rate … In consequence, the currency has been subject to speculative attacks that forced the NBB [central bank] to revise the exchange rates, undermining its credibility. In response, the authorities imposed controls on foreign exchange trading, and de facto nationalized the Minsk interbank currency exchange … This does not mean that intervention in the foreign exchange market should be abandoned. Indeed, a pure float policy would itself be a source of instability due to the extreme volatility of the exchange rate … A feasible alternative is to keep a managed float, but with a consistent monetary and exchange rate policy … In the long run, after a period of nominal stability, it is recommended that the BRB [Belarussian rouble] be pegged to the RUR [Russian rouble]. (BET, Quarterly Update, September 1996, pp. 13–14) In January 1996 the central bank introduced an exchange rate band of 11,300 to 13,100 to the US dollar, ‘though keeping the actual exchange rate at the earlier level of 11,500’. Exchange rate depreciation started in April 1996. As pressures on the upper band were felt by the end of June, a new band was introduced, namely 13,100 to 15,000. By the end of September 1996 the official exchange rate was again at the top of the new range (p. 39). The central bank has allowed banks to carry out transactions on a new interbank exchange where the exchange rate is set at 1.3 times the constrained rate on the Minsk interbank currency exchange, close to the black market rate. ‘Thus the BRB can, for now, be considered to have been devalued to near the free-market rate of BRB 21,000 to the dollar’ (BET, Monthly Update, October 1996, p. 5). In October [1996] the NBB allowed banks to trade currencies on a new offexchange interbank market at an implied devaluation against the dollar of

Belarus

313

30 per cent. This policy has been in response to the straitjacket of the choice of a fixed exchange rate band of 13,100–15,500 for the second half of 1996, and the process of dollarization that was taking place. The current policy implies the existence of three exchange rates in Belarus. (BET, Quarterly Update, December 1996, p. 9) From 1 January 1997 the exchange rate band was fixed at 15,500–21,000 to the dollar. The expected period of duration was the first quarter of 1997 (BET, Monthly Update, January 1997, p. 7). As of 20 January 1997 hard currency could be purchased on the Minsk interbank currency exchange only by importers of fuel and energy, thus excluding previously included items such as grain and medicine (p. 8). On 3 February 1997 a single exchange rate of BRB 22,050 to the US dollar was introduced, replacing the previous multiple exchange rate regime. As of 20 February 1997 the BRB single exchange rate was to be set by the NBB ‘based on supply and demand, taking into account the inflation rate’ (BET, Monthly Update, February 1997, pp. 8–9). By the end of the first quarter of 1997 the BRB/US dollar exchange rate in Belarus was overvalued by 23.9 per cent compared with the exchange rate on the Moscow interbank exchange rate. At the end of March 1997 the central bank ruled that foreign currency trading at the off-exchange market should be carried out at the official central bank exchange rate (BET, Monthly Update, April 1997, pp. 5–6). On 1 December 1997 the cash market for foreign exchange was freed. Entities having a licence for carrying out exchange operations were allowed to buy and sell currency from the public at market rates but were obliged to sell back to the population at least 70 per cent of bought hard currency. (As of 1 December 1997 these entities had to sell 70 per cent of bought hard currency to the population, with the remaining 30 per cent at the disposal of exchange offices: BET, Monthly Update, December 1997, p. 9.) The black market has been reduced in size but there still exists a black market premium over cash rates, thereby reflecting the restrictions on purchases of hard currency. On 22 January 1998 two different sessions were introduced at the MICE (Minsk Interbank Currency Exchange): 1

2

The first session remains basically as before: the exchange rate is set administratively and supply is assured by the 30 per cent surrender requirement. Given excess demand for foreign currency, allocation is based on priority imports (a list narrower than before and confined to some enterprises importing medical products and energy). In the second session the central bank buys foreign exchange from commercial banks and enterprises at a negotiated exchange rate that, in practice, is close to the MICEX (Moscow Interbank Exchange) rate. This allows the central bank to attract part of the remaining 70 per cent of export revenues (BET, Quarterly Issue, October–December 1997, pp. 47, 67).

Owing to the sharp rise in money creation in December 1997, expectations of increased inflation led to a speculative attack against the BRB at the beginning of

314

Belarus

1998. The Asian financial crisis was also a factor. Despite central bank intervention the BRB fell heavily. At the beginning of March 1998, because of the exhaustion of central bank foreign currency reserves, intervention on MICEX was halted. Trading of the BRB on that market was suspended on 20 March. But the value of the BRB continued to fall in private interbank deals in Moscow. Further exchange controls were introduced. The policy response was one of restricting settlements in BRB between non-residents and payments of imported goods in domestic currency. In late February the central bank introduced de facto restrictions on payments to non-residents in the national currency (BET, Quarterly Issue, January–March 1998, p. 45; Monthly Update, March 1998, pp. 5–6, 10). A presidential decree of 20 July 1998 amended the 2 June 1997 decree: legal entities were to sell an additional 10 per cent of their currency revenue at the second trade session of the MICE, effectively raising the percentage to 40 per cent; the measure was supposed to last until the beginning of 1999 (BET, July 1998, p. 9). By the end of October 1998 the central bank was to reduce surrender requirements on the first trade session from 30 per cent to 20 per cent. By the end of 1998 it was planned to introduce one exchange rate in all sectors of the economy (BET, August 1998, p. 9). As of 11 August 1998 the National Bank was to establish a special National Bank exchange rate based on the results of the Inter-Bank Currency Exchange’s additional trading session. The special rate was to be used in enterprises’ accounts and reports to reflect foreign exchange bought at the additional trading session (p. 10). On 25 August 1998 the central bank cancelled restrictions on payments between non-residents in BRB introduced on 30 April 1998. On 28 August the central bank set a unified exchange rate on the MICE (BET, Monthly Update, September 1998, p. 9). ‘In Belarus the lack of progress with structural reform, combined with unsustainable policies to boost output through rapid credit creation and an associated buildup of external arrears, led to a currency crisis in March 1998’ (IMF, World Economic Outlook, May 1998, p. 18). (The Asian/Russian financial crisis is dealt with in detail in the next section.) In 1998 Russia accounted for 65.5 per cent of exports (the CIS as a whole 73.7 per cent) and the EU for 9.2 per cent. The respective figures for imports were 53.8 per cent (66.9 per cent) and 18.0 per cent (BET, Quarterly Issue, July–September 1999, p. 75). In 1997 some 30 per cent of exports were bartered, equivalent to 35 per cent of industrial production. Barter transactions for gas payments account for 80–90 per cent of energy payments (BET, Monthly Update, October 1997, p. 4). From December 1997 Russia’s Gazprom cut gas deliveries by 9 per cent because of gas arrears. In 1998 Belarus was to increase the money/barter payment proportion for gas from 1:9 to 3:7 (BET, Monthly Update, December 1997, p. 8). On 5 February 1998 it was announced that a preliminary agreement had been reached with Gazprom. Payment of gas debt outstanding was to be postponed, while new obligations for gas purchase were to be settled by payment in hard currency (30 per cent) and barter of goods and food products from Belarus (70 per cent) (BET, Quarterly Issue, January–March 1998, p. 62). Starting on 17

Belarus

315

March 1998 Gazprom reduced gas deliveries by 30 per cent as a result of gas arrears and non-payment for current deliveries (p. 64). An agreement with Gazprom was signed on 21 April 1998. For newly emerging debt Belarus was to pay 26 per cent of gas supplied in cash and the remaining 76 per cent in commodities. In addition, Belarus was to pay Gazprom $25 million per month from the second half of 1998 along with a supply of goods worth $243 million. Belarus was supposed to repay immediately some $49 million in hard currency, but Belarus was unable to meet the commitment since the level of net reserves was less than this sum (BET, Monthly Update, May 1998, p. 9). An agreement was reached with Russia’s Gazprom on 22 April 1998. As of 1 May 1998 Belarus pledged to pay for current gas deliveries in full. As for arrears (totalling more than $230 million), they were to be paid off in equal instalments at the end of each month, starting in July 1998. Belarus would be able, for the most part, to continue using the same form of payment as before, namely 26 per cent cash and 74 per cent consumer goods and material resources. Gazprom’s recently imposed restriction limiting fuel deliveries to Belarus to 70 per cent of the country’s needs was lifted (CDSP, 1998, vol. 50, no. 17, p. 20). On 16 June 1998 Gazprom reduced gas deliveries by 40 per cent owing to continued problems with payment (CDSP, 1998, vol. 50, no. 24, p. 17). On 16 October 1998 agreement was reached on the $550 million to be paid to Gazprom by the end of 1998. Payment was to be as follows: the Belarussian government would take out a $200 million loan from a commercial bank which would eventually be used to buy food in Belarus for the Russian army; Belarussian government bonds with a face value of $200 million; $50 million worth of goods; $100 million in cash (CDSP, 1998, vol. 50, no. 42, pp. 15–16). ‘Belarus has reduced its outstanding debt to Gazprom to $207 million’ (EBRD 2003a: 46). The Asian/Russian financial crisis Following the domestic crisis in March 1998 all settlements with non-residents were prohibited. The resulting loss of foreign markets was mainly concentrated on the Russian market and one of the Baltic Republics, where BRB had been circulated and was recognized. The consequent decision, taken at the request of the country leadership, to prohibit BRB quotation at MICEX (Moscow Interbank Currency Exchange) only exacerbated the problem of BRB convertibility. Within a year almost all banking operations of non-residents in BRB have been suspended. (BET, Quarterly Issue, October–December 1998, p. 74) The immediate consequence of the Russian crisis was depreciation of the BRB against foreign currencies on the unregulated exchange markets, both cash and non-cash. The official BRB/USD exchange rate devalued by 65 per cent in the first eight months of 1998. The market rate, taken here as

316

Belarus the interbank Reuters rate, fell by 300 per cent to BRB 121,500 during the same period … BET expects monetary expansion to exceed 250 per cent for 1998 … The impact on financial markets has been limited in size due to the underdeveloped state of financial markets in the country … The real sector is expected to be significantly affected because Russia is Belarus’s main trading partner, accounting for 61 per cent of its trade turnover … Ukraine is the second largest trading partner for Belarus. (BET, Monthly Update, August 1998, pp. 6–7) The state reimposed control over the NBB in early 1998 following the currency crisis. The government dismissed the central bank’s board and put the NBB under direct supervision of the government … In March 1998 the Belarussian rouble plunged by 30 per cent … The currency continued to plunge during the year, especially following the Russian crisis in August. The spread between the official and the parallel interbank market rate widened to 200 per cent by mid-September. Lacking adequate foreign reserves the NBB has been unable to stabilize the rouble. This led the government to pursue a range of administrative interventions in the market to prevent price increases and further devaluation … Since August 1998 exporters are not allowed to accept payments in Belarussian roubles from foreign customers. (EBRD 1998b: 154–5) The banking sector in Belarus remains dominated by state-owned banks, used to channel soft credits to the economy … Due to considerable exposure in the GKO market, the banking sector was severely hit by the Russian crisis with estimated losses of $70 million. (EBRD 1999b: 195)

‘Belarus’s rapid growth has been fuelled by inflationary and unsustainable directed credits to state enterprises’ (EBRD 1999a: 6). GDP growth in 1998, which official statistics placed at 8 per cent, continued to be fuelled by credit expansion and utilization of spare industrial capacity … Throughout 1998 the government increased its control over the economy through restrictions on domestic and external trade and through extensive price controls, leading to shortages of goods in domestic markets and the introduction of food rationing in several Belarussian regions. Since November 1998 exporters have required a special permit from the authorities for a number of goods, including some basic food and consumer products. In late 1998 the government also introduced restrictions on imports and transit of oil and oil products in Belarus, suspending the activity of non-residents in the domestic market. During 1998 and early 1999 numerous regulations and restrictions on currency trade have been imposed and subsequently lifted at the discretion of the authorities. The National Bank of Belarus introduced a new NBB rate in December 1998,

Belarus

317

replacing the official rate, for taxation and accounting purposes. The NBB rate was originally set at 150 per cent above the official rate but the rates were unified at the higher level in March 1999. The NBB rate, however, remains significantly below the parallel market rate. Moreover, commercial banks are still not allowed to buy currency from the NBB and exporters have to surrender 30 per cent of their export earnings at the NBB rate. (pp. 33–4) In March 1999, in the context of talks with the IMF, the government unified the official exchange rate and the ‘rate set by the National Bank’, the latter introduced in November 1988 for accounting purposes, and eliminated the afternoon trading session. However, by September 1999 the government has failed to make further progress towards convertibility. The afternoon trading session was reinstated in September, the interbank market was closed for transactions above 1,000 units of foreign currency, and enterprises were prohibited from buying foreign currency from foreign entities. Moreover, following the unification in January 1999 of currency surrender requirements at 30 per cent of revenues for exporters, commercial banks and domestic retailers, this was subsequently raised to 40 per cent, the rate that had applied to exports prior to the unification .. Although the official exchange rate devalued by over 400 per cent between September 1998 and June 1999, the premium on the parallel market remains high at 77 per cent. (EBRD 1999b: 194) The first part of the exchange rate liberalization programme was implemented at the end of 1999, with the liberalization of the cash market. As a result, the black market rate and the commercial bank rate are virtually the same. The new rate quickly stabilized, but the spread over the official rate remains over 200 per cent. The government intends to unify the rates by the end of 2000 (EBRD 2000a: 42). The stated aims of the policy have been to achieve convergence between the official rate and the rates quoted on the four main non-official markets (cash, interbank, currency and stock market and the non-resident market) and to remove exchange restrictions. The interbank foreign exchange market was partially liberalized in December 1999 with the abolition of restrictions on trading volumes. In March 2000 the central bank liberalized the afternoon session of the currency and stock market by allowing banks to buy foreign currency and by removing the tax on the difference between the official and the afternoon rates. In September the afternoon trading session was unified with the main session and the remaining restrictions were lifted. The black market for foreign currency has almost been eliminated after exchange booths were allowed to set their exchange rates freely and keep their foreign currency surplus in January 2000, when restrictions on

318

Belarus payments in Belarussian roubles for exports were also relaxed. However, special permission of the National Bank of Belarus is still required to make payments in Belarussian roubles to non-residents and the 30 per cent export surrender requirement (which does not apply to all exports) remains in place … The National Bank of Belarus accelerated the depreciation of the official exchange rate in 2000. (EBRD 2000b: 138)

‘In September 2000 the multiple exchange rate system was abolished and a unified market-based exchange rate was introduced. Since the beginning of 2001 the currency has been pegged to the Russian rouble’ (EBRD 2001a: 50). Following liberalization of the foreign exchange market in late 1999 and early 2000, the National Bank further liberalized the market by July 2001. The new measures include ending both a ban on foreigners taking part in interbank trade and a $200,000 per month limit on the amount of hard currency that market participants can buy. The export surrender value regime (which does not apply to all exports) remains at 30 per cent, although the effective rate is lower owing to numerous exemptions … In early 2001 the National Bank introduced a crawling peg exchange rate regime, linking the Belarussian rouble to the Russian rouble … The national currency will be permitted to depreciate by 2.5 to 30 per cent per month against the Russian rouble. The band may be adjusted … Under the terms of the Union Treaty, the Russian rouble is to be used as the common currency from the beginning of 2005 and is to be replaced by a common currency in 2008. (EBRD 2001b: 118) Progress in the liberalization of the foreign exchange market made under the IMF’s staff monitored programme in 2001 allowed Belarus to accept some of the obligations of Article 8 (Sections 2, 3 and 4) in November 2001. However, many restrictive practices remain in place, including price controls and a surrender requirement on foreign exchange transactions. (EBRD 2002a: 44) ‘A surrender requirement on foreign exchange … remains at 30 per cent but does not apply to all exports … The Belarussian authorities appear to be reluctant to enter into [it] as second SMP’ (EBRD 2002b: 122–3). A chronology of important developments: September 2000: ‘In September 2000 the multiple exchange rate system was abolished and a unified market-based exchange rate was introduced’ (EBRD 2001a: 50). January 2001: ‘Since the beginning of 2001 the currency has been pegged to the Russian rouble’ (EBRD 2001a: 50). (‘[The central bank] has maintained the crawling peg to the Russian rouble … The government has proposed that the currency be pegged to the Russian

Belarus

319

rouble from the beginning of 2004, ahead of monetary union with Russia in 2005’: EBRD 2003a: 46.)

Foreign direct investment The volume of foreign direct investment is very small. (See Table 4.1.) Legislation on foreign investment is relatively generous (Deutsche Bank, Focus: Eastern Europe, 1994, no. 100, p. 44). There appears to be little prospect of attracting a large volume of FDI towards the country given the current economic situation in Belarus. The government attempted to do so by granting tax holidays to foreign investors and by setting up free-trade zones in which some of the most unfriendly regulations are removed. However, the lack of economic reform and the non-market oriented stance of economic policy increase the risk for foreign investors, so that there has been little response to the incentives set up by the government. (BET, Quarterly Update, September 1996, pp. 49–50) The first Belarussian–Russian Financial Industrial Group has been registered by the ministry of the economy (BET, Monthly Update, October 1996, p. 7). The Brest Special Economic Zone was officially opened on 20 December 1996 (BET, January 1997, p. 7). The Vitebsk free economic zone was established on 4 August 1999. The other three zones are Brest, Minsk and Gomel-Raton (BET, Monthly Update, August 1999, p. 12). In December 1997 the president amended a law on foreign investments which had been passed by parliament and involved a simplified procedure for registration of foreign companies and tax and customs privileges (five-year exemptions from profit tax, VAT, excises for import-substituting production and ‘goods related to fixed capital’). The amendment cancelled these privileges, ‘which are now to be individually judged and awarded personally by the president’ (BET, Quarterly Issue, October–December 1997, p. 67). ‘In May 2002 the government passed a programme to boost foreign investment, largely by reducing licensing and registration requirements and simplifying tax regulations’ (EBRD 2002b: 123). ‘The president … [on 18 August 2002] ordered Minsk’s most popular McDonald’s restaurant to close and told the chain it cannot open any more. Mr Lukashenko is backing plans for a fast-food chain selling cabbage soup and Soviet-style sausage instead’ (Independent, 19 August 2002, p. 8).

Agriculture A law on the privatization of farms has been deferred (The Banker, March 1993, p. 46). By the end of 1992 there were 2,000 private farms, with an average size of 19 ha (CDSP, 1993, vol. XLV, no. 5, p. 22); they accounted for only 0.41 per cent

-4.7 709.3

Rate of growth of agricultural output ( %)

Inflation rate (consumer, %)

15

Foreign direct investment (net, $ million)

105

-0.516

3.9

-1.6

52.7

2.4

3.5

2.8

1996

349

-0.859

2.8

-0.7

63.8

-4.9

18.8

11.4

1997

201

-1.017

2.3

-0.3

73.2

-0.7

12.4

8.4

1998

443

-0.194

2.2

-2.2

293.8

-8.3

10.3

3.4

1999

117

-0.323

2.1

-0.6

168.9

9.3

7.8

5.8

2000

96

-0.285

2.2

-1.4

61.4

1.8

5.9

4.1

2001

434

-0.391

2.3

-0.4

42.6

1.5

4.3

4.7

2002 (estimate)

2

1

Officially registered

General government balance: includes the state budget, social funds and extra-budgetary funds, excluding inter-budgetary transfers (EBRD)

Notes

Source: Various issues of European Bank for Reconstruction and Development, Transition Report; Belarus Economic Trends; United Nations Economic Commission for Europe, Economic Survey of Europe

-0.458

2.7

Balance of payments (current account, $ billion)

Unemployment rate (end of year, %)

Budget surplus or deficit ( % GDP)

2

-11.7

Rate of growth of industrial output ( %)

-2.7

-10.4

Rate of growth of GDP ( %)

1

1995

Economic indicator

Table 4.1 Belarus: selected economic indicators 1995 –2002

Belarus

321

of total agricultural land (United Nations Economic Commission for Europe 1993: 206). At the end of 1992 there were 2,100 private leaseholders, with an average of 20 ha apiece (Kaser 1995: 37). As of 1 April 1993 there were 9,400 private farms, with an average size of 20 ha (CDSP, 1993, vol. XLV, no. 21, p. 20). Households grow, consume and sometimes sell up to 40 per cent of food on private plots (BET, Quarterly Update, September 1996, p. 33). Collective farms are still organized on the basis of the 1988 Soviet charter. In February 1993 parliament cancelled the development of a restructuring model based on the allocation of shares of land and assets to eligible persons, thus repealing the 1991 act which had enacted the process. At the start of 1996 there were 1,865 collective farms, 28 agricultural production co-operatives, 650 state farms, 97 state agricultural research stations and 676 ‘subsidiary farms’ managed by nonagricultural enterprises. Both collective and state farms ‘are part of the state system, and total production by the state farms covered 83 per cent of agricultural land in 1996, and accounted for 55 per cent of the gross agricultural output’ (BET, First Quarter 1997, p. 15). The Soviet-era distribution and marketing system has been retained (p. 16). While wholesale prices are no longer formally fixed, in reality prices are controlled through ‘recommended’ or ‘indicative’ farm-gate prices (p. 17). A presidential decree of 3 March 1998 outlined measures of support for private farms: credits; state enterprises were recommended to lease idle equipment and buildings; the possibility of 100 ha of land proper for cultivation on lifelong hereditary tenure (BET, Monthly Update, March 1998, p. 10). A presidential decree of 2 September 1998 implied recognition de jure of private land ownership: On approval of the regulation on the order of the turning over of land plots into the property right of legal entities (their owners) and state acts related to the property right of legal entity and foreign country for land. (BET, Monthly Update, September 1998, p. 9) In January 1999 it was announced that the government had formulated a land code offering firms and individuals rights to acquire property rights for land (BET, Quarterly Issue, October–December 1998, p. 93). The Council of Republic has approved a new land code in which both legal and physical entities and foreign states acquire property rights to land. A norm affording people the possibility of leasing their own land plots was introduced (p. 132). The number of private farms increased from 71 to 2,768 in 1994, but the number has not increased since then. In 1998 state farms accounted for 22.1 per cent of agricultural land, collective farms for 60.2 per cent and private farms for only 0.6 per cent. In 1997 the private sector accounted for 40 per cent of gross agricultural output, compared with a peak of 45 per cent in 1996 (BET, Quarterly Issue, October–December 1998, pp. 63–4). Agricultural production in Belarus continues to remain predominantly within the large state-owned and collectively-owned farms (sovkhozes and

322

Belarus kolkhozes, respectively). The share of the private sector in agriculture [output] increased in 1998 compared with 1997 (to 38.5 per cent from 37.4 per cent), though it was significantly lower than the 1996 figure of 48.9 per cent. (BET, Quarterly Issue, January–March 1999, p. 67)

‘In 1998 more than 50 per cent of sugar beet, meat and milk were still sold through state procurement organizations’ (p. 68) Collective farms continue to receive large subsidies (EBRD 1997b: 155). The government continues to subsidize agriculture. Production remains mostly within the large state or collective farms, 40 per cent of which are estimated to make losses. Private farms accounted for 38 per cent of agricultural output in 1998 despite cultivating less than 1 per cent of agricultural land. A new land code adopted in January 1999 allowed legal and physical entities to acquire property rights on land, subject to case-by-case approval by the president (EBRD 1999b: 195). Agricultural producers are heavily subsidized as the government maintains low administered food prices (EBRD 2000a: 42). The presidential decree on private ownership of land signed in February 2000 excludes agricultural land. The agricultural sector remains largely unreformed and production has fallen in recent years, but the president has reiterated that collective farms and state enterprises should remain the foundation of the agricultural sector. (EBRD 2000b: 139) Virtually no changes have been made in the structure and organization of production. The roughly 3,000 private farmers who account, on average, for no more than 1 per cent of total production do not alter the overall picture. As in former times, the republic has 2,500 collective and state farms that are actively run by the state, which works to tighten discipline, tells the farmers what to plant, sets prices and dispatches representatives to the farms during the planting and harvesting campaigns. Artificially low purchase prices barely cover half of the collective farmers’ costs … A model [was developed] that preserved large-scale commodity production but changed the form of ownership. About a hundred farms appeared [using this model] and their directors learned how to make a profit … [But] the project came to a grinding halt. (CDSP, 1999, vol. 50, no. 50, p. 19) ‘In Belarus … only private ownership of household plots is allowed (Macours and Swinnen 2002: 377). The share of peasant farms in agricultural land increased from 0.2 per cent in 1992 to 0.7 per cent in 1999 (Spoor and Visser 2001: 888). The share of private farms and household plots in agricultural production increased from 33 per cent in 1991 to 40 per cent in 1998 (p. 890).

Belarus

323

Economic performance GDP growth has been positive since 1996: -9.6 per cent in 1992; -7.6 per cent in 1993; -12.6 per cent in 1994; and -10.4 per cent in 1995 (EBRD 2001a: 15). (See Table 4.1.) In 2001 GDP was an estimated 91 per cent of the 1989 level (EBRD 2002b: 58). Belarus’s heavy dependence on trade with Russia is reflected in the much reduced figure for 1999 following the financial crisis of August 1998 in the latter country. But doubts have been cast on the meaningfulness of the seemingly impressive GDP figures in general during the latter half of the 1990s: 1

2

3

‘Output has been essentially driven by administrative fiat, backed by access to cheap credit, and bartered for energy debt, thus plugging the financing gap on the balance of payments given lack of external financing’ (BET, Quarterly Issue, January–March 1998, p. 11). ‘The level of inventories as a percentage of industrial production is very high by international standards’ (BET, Quarterly Issue, August 1999, p. 10). ‘Leaps in output [in 1997] partly reflect government directives to increase production, monetary expansion and soft central bank credits to the construction and agricultural sectors’ (Business Central Europe 1997: 48). ‘Output growth in 1997 was based on inflationary credit expansion and a 50 per cent increase in the dollar value of exports to Russia, half of them bartered in exchange for gas’ (EBRD 1998a: 33). ‘Belarus’s rapid growth has been fuelled by inflationary and unsustainable directed credits to state enterprises’ (EBRD 1999a: 6). ‘Growth in 1998, which official statistics placed at 8 per cent, continued to be fuelled by credit expansion and utilization of spare industrial capacity’ (p. 33). Output growth has been fuelled by directed credits, estimated at 4 per cent of GDP in 1998 … Industry is being sustained by state orders and the accumulation of unsold products and energy arrears … Around 90 per cent of gas deliveries [by Russia’s Gazprom] are still paid through barter agreements with Belarussian firms … Despite subsidized prices, gas arrears were at $300 million by mid-1999 … The combination of price controls, exchange rate distortions and the difficulties faced by Russian companies has led to an increase of barter operations with Russia to over 50 per cent of trade turnover during the first five months of 1999. A presidential decree, effective July 1999, introduced a 15 per cent general tax on barter transactions, with a lower rate of 5 per cent applying to imports of raw materials and intermediaries. Some socially important goods (such as medicines and basic foodstuffs) and selected companies are exempted. (EBRD 1999b: 194–5)

‘Pervasive directed credits, as well as explicit and implicit subsidies, allow nonviable enterprises to avoid restructuring … Industrial enterprises are heavily dependent on subsidized inputs, particularly energy’ (EBRD 2000a: 42).

324

Belarus

Performance as regards open inflation has been relatively poor. There was even a marked resurgence in 1999, despite pervasive price controls. The inflation rate declined thereafter, but inflation is still a problem. ‘The official unemployment level of 3.2 per cent is estimated by Western observers to conceal hidden unemployment of up to 27 per cent’ (Business Central Europe, October 1997, p. 82). ‘The level of wage arrears is still very low by comparison with Russia and Ukraine, although the increase in wage arrears will become an issue of concern if it continues to increase’ (BET, Monthly Update, August 1999, p. 8). Male life expectancy fell from 66.3 years in 1990 to 62.9 years in 1995, while infant mortality (per 1,000 live births) rose from 11.9 to 13.3 over the same period (BET, Quarterly Update, September 1996, p. 44).

5

Moldova

POLITICS

The political background Moldova’s biggest problem is not so much the lingering Transdniestre issue as its own lack of direction … Looking to its past – some of the territory as part of eastern Romania until 1940 and then joined to Soviet Moldavia – Moldova has little idea of precisely what sort of country it really is now, let alone what strategy to follow … Many older citizens, but also a number of young people, look to the West and feel the country should reintegrate with Romania, from which it was torn by a Berlin–Moscow agreement in 1940. Others, most notably in the strong and largely unconstructed Communist Party, which currently holds forty seats in the 101-seat parliament, want close relations with Russia and the other former Soviet republics … ‘There is a contradiction about Moldova’s place in the world, which goes to the heart of things here,’ said a Western diplomat in Chisinau. He pointed to the current government, which came to power in December [2000], sustained by far rightists (who favour integration with Romania) and the Communists. (Justin Keay, IHT, 16 June 2000, p. 2) ‘A third of Moldova’s able-bodied population has emigrated since 1991’ (Business Central Europe 2000: 46). Under a corrupt and incompetent political elite, it [Moldova] is now the poorest country in Europe … Leaving is the obvious way ahead for the country’s brightest and best. By some estimates 600,000 Moldovans – a seventh of the remaining population – have left already … Few people, however, now talk of Moldova joining up with its ethnic big brother, the Romanian government would not want it … Yet Moldova remains surprisingly orderly. For all their poverty, most people still pride themselves on education, hard work and tolerance. (The Economist, 15 July 2000, p. 51)

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‘Around 600,000 out of 4.3 million Moldovans are now estimated to be working abroad, mostly illegally’ (The Economist, 23 September 2000, p. 35). ‘A good tenth of the labour force (some say a fifth) now works abroad’ (The Economist, 15 February 2003, p. 42). The population at the end of 1998 was 4.3 million. In 1992 ethnic Russians constituted 13 per cent of the population (The Economist, 10 July 1993, p. 33). Although the Communist Party was banned, the Government of National Accord that emerged after the 1990 election was dominated by former members of the Communist Party (Guardian, 21 September 1993, p. 22). There is now an OSCE mission in the Dniestre region. The self-proclaimed Republic of Transdniestre covers about 12 per cent of Moldova. The 600,000 population of the former is divided between Moldovans (40 per cent), Ukrainians (28 per cent), Russians (26 per cent) and miscellaneous (6 per cent) (EEN, 1995, vol. 9, no. 12, p. 5). Russians are but a quarter of the population. Russian is nevertheless the dominant language, Cyrillic the standard alphabet and the rouble the name of the currency … Just as in Soviet days prices are heavily subsidized … With only 7,500 men in uniform, the region maintains a small-arms factory for what it calls its self-defence. Its products have persistently been linked to conflicts in the Balkans, Chechnya and Africa … More powerful armaments, from rocket launchers to armoured vehicles, are said to have been smuggled out of a 40,000-tonne complex of weapons dumps – Europe’s largest – on a Russian base [in Transdniestre]. The republic claims a share of the aging munitions as its own, blocking international attempts to destroy the stockpiles … After the Transdniestre republic and Moldova briefly set up a joint customs regime, 1998 figures uncovered by [Oazu] Nantoi showed that Transdniestre, with one-sixth of Moldova’s population, imported 6,000 times as many cigarettes as the rest of the country. Nantoi said he believed that most of the cigarettes were illegal knock-offs of Western brands, made in Ukraine and exported through the Transdniestre republic as far as Germany. Experts say the region is a major transit point for smuggled alcohol and up to 700,000 tonnes a year of petroleum products from Russia and Ukraine. The pipeline also runs the other way. The Ukrainian port of Odessa … is said to be a major outlet for the region’s arms and other contraband. There is also compelling evidence of smuggling by Russian companies with financial stakes in industries [in Transdniestre] … Mark Galeotti … said … that the Transdniestre republic maintained an uneasy peace between five and seven international criminal gangs with varying holds on power. The lure of easy money has not only deeply corrupted this enclave, he said, but has penetrated both Moldova and Ukraine. Ukraine has resisted efforts to assert stronger border controls over the region … Galeotti said Transdniestre and Moldova are becoming a ‘turntable’ where illegal

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goods are imported, given a stamp of legitimacy and shipped out for purchase elsewhere. (Michael Wines, IHT, 13 March 2002, p. 2) The Republic of Moldova is an agrarian country with 54 per cent of its population living in rural areas. When allowance has been made for the important food-processing industry, well over 50 per cent of employment in Moldova is, directly or indirectly, dependent upon agriculture. (MET, Quarterly Issue, October–December 1998, p. 11) ‘GDP is overwhelmingly dependent on agriculture and food-processing but the country’s unpredictable climate leaves it open to shocks. Major floods in summer [1997], for example, knocked 1997 GDP down a percentage point or two’ (Business Central Europe 1997: 50–1).

Political developments 11 May 1993: peace talks begin with leaders of the Dniestre region. EEN (2 February 1993, vol. 7, no. 3, pp. 7–8) argued that President Mircea Snegur had accumulated almost absolute power. 27 February 1994: in the general election parties favouring union with Romania are decisively rejected (the Christian Democratic Popular Front, with 7.53 per cent of the vote, and the Bloc of Peasants and Intellectuals, with 9.21 per cent; these parties, with only twenty of the 104 seats in parliament, also claimed that the IMF-approved economic reform programme would now be under threat). The largest percentage of the vote (43.13 per cent of the vote and fifty-seven seats) went to the Agrarian Democratic Party, led by Andrei Sangheli (who subsequently became prime minister) and Petru Lucinschi. (The party advocates improved relations with Russia and making concessions to the Dniestre region.) The Socialist bloc (which favours close links with Russia and the CIS) came second, with 22 per cent of the vote and twenty-eight seats. The Dniestre region largely boycotted the election (and the subsequent plebiscite), but the turnout was still about 75 per cent. 6 March 1994: the question asked in the plebiscite was whether the people supported ‘an independent Moldova within its 1990 borders, which maintains neutrality, established ties with other nations and provides equal rights for all citizens’. The turnout was 65 per cent and the ‘yes’ vote was over 90 per cent. 1 April 1994: parliament suspends the 1989 language law, which made Romanian the official language. (A compulsory test would have been necessary for state employment. Romanians make up 65 per cent of the population: IHT, 2 April 1994, p. 2.) 8 April 1994: parliament ratifies the agreements on participation in the CIS and CIS economic union. 10 August 1994: Russian and Moldovan negotiators come to a preliminary agreement on the withdrawal, over a three-year period, of the 15,000 Russian

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troops from the Dniestre region (whose representatives walked out of the talks). (There was formal approval on 21 October. Russia became a member of the Council of Europe on 28 February 1996 and promised to remove its remaining 6,000 troops from the Dniestre region within six months of joining: Business Europa, April–May 1996, p. 48. ‘Russia [still] keeps about 6,000 troops there [the Dniestre region] despite a 1994 agreement to withdraw them, and demands that Moldova give it permanent basing rights’: IHT, 6 January 1997, p. 7.) (Dniestre plans a currency reform to be introduced on 1 September 1994, in which coupons will replace stamped Soviet rouble notes: IHT, 11 August 1994, p. 9.) 27 August 1994: the new constitution goes into effect. The official language is Moldovan and autonomy is granted to the Dniestre and Gagauz regions. 5 March 1995: a local referendum to determine the borders of the Gagauz region is held in the areas where the Gagauz population is concentrated. In December 1994 the Moldovan parliament adopted a law granting the Gagauz region a special status that allows for its secession from Moldova in the event of a change in the republic’s legal status, such as reunification with Romania. The Gagauz region was to have three official languages (Gagauz, Moldovan and Russian) and its own anthem, emblem and flag (CDSP, 1995, vol. XLVII, no. 16). The law adopted by the Moldovan parliament on 23 December 1994 granted the Gagauzians wide authority for local self-administration. The Gagauzians, Orthodox Christians of Turkic origin, ‘created a republic in August 1990, defending its notional borders with pitchforks. They elected a parliament in October 1990 and a president in December 1991’. Moldova is home to over 153,000 people, of whom 135,000 are settled in the southern districts (EEN, 1995, vol. 9, no. 10, p. 7). 26 March 1995: the Dniestre region holds an unauthorized referendum on preventing the withdrawal of Russia’s Fourteenth Army (under General Lebed). There is an overwhelming 91.3 per cent vote to retain the army. Local elections are also held. 16 April 1995: ethnic Russians and Ukrainians in the Dniestre region boycott official local elections. 5 July 1995: an agreement is reached to use the Moldovan currency (the leu, plural lei) in the Dniestre region. The Dniestrian coupon is to remain in circulation until macroeconomic reform has been carried out in the region and financial legislation conforms to Moldovan law (EEN, 1995, vol. 9, no. 15, p. 6). (The commitment to allow the circulation of the Moldovan leu was reneged upon: EEN, 27 March 1996, vol. 10, no. 7, p. 2.) 15 July 1995: the Party of Revival and Reconciliation of Moldova is established, to be led by President Mircea Snegur. In June he resigned from the ruling Agrarian Democratic Party of Moldova. The split was sparked by the president’s proposal to amend the July 1994 constitution (which refers to the language as Moldovan and the people as Moldovans) in order to make Romanian the official state language (EEN, 1995, vol. 9, no. 15, p. 5). (Thirteen MPs have defected to

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the Party of Revival and Reconciliation of Moldova from the Agrarian Democratic Party: EEN, 1995, vol. 9, no. 18, p. 8.) 24 December 1995: the Dniestre region holds its own parliamentary elections simultaneously with a referendum in which over 90 per cent vote in favour of joining the CIS (EEN, 1996, vol. 10, no. 1, p. 5). The Dniestre region’s referendum approved the draft of a new constitution, negating Moldova’s description of the region as an ‘autonomous entity with broad powers’ and declaring that ‘the Dniestre Moldovan Republic is a sovereign, independent state’. The Dniestre region would thus enter into talks with Moldova on equal terms, the only realistic basis for agreement being a confederation. The voters also approved separate membership of the CIS. The turnout was about 60 per cent and 80 per cent responded to both questions in the affirmative (CDSP, 1995, vol. XLVII, no. 52, p. 21). A 20 January 1996 source reported the Dniestre region again being under a state of emergency, this time because of economic factors. President Igor Smirnov had already declared, in October 1995, that the economy was in a disastrous state. The presidential decree instructed the government and the republic bank to co-ordinate and ensure the implementation of measures to promote economic stabilization. Security was to be tightened at facilities and installations vital to the region’s functioning and the decree called for the introduction of special entry and exit procedures, restrictions on the use of radio and television equipment and copy machines, the establishment of control over the news media, and suspension of the activity of public organizations and parties that are ‘hindering normalization of the situation’ (CDSP, 1996, vol. XLVIII, no. 3, p. 28). By mid–September 1996 a more optimistic report concluded that: The Dniestre region, although it has not fully recovered from the effects of the year-long economic embargo, is beginning to show signs of economic recovery. The exchange rate of the local currency, the Dniestre region rouble, has been stable for six months now. Wages are increasing slowly but surely. Most local industrial enterprises are in active operation. And production in the region has fallen by only 30 per cent in the past five years – a record of sorts for the CIS. Not having received a single dollar in ‘humanitarian’ financial assistance, the Dniestre region is proud of the fact that Western investment in its industries now stands at $100 million, and that virtually all of the investment projects have been successful. (CDSP, 1996, vol. XLVIII, no. 37, p. 25) Smirnov and President Snegur have agreed on a common external border, to be policed by Moldovans. In turn, Snegur is offering an ‘autonomous territory or republic … with its own state symbols’ (The Economist, 9 March 1996, p. 39). ‘Smirnov … declared a state of emergency in January, increasing state powers and scrapping press freedom’ (The Economist, 5 October 1996, p. 58). 17 November 1996: the first round of the presidential election takes place, with nine candidates taking part. The turnout is nearly 70 per cent.

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The Dniestrian authorities tried to prevent polling taking place there. (A separate presidential election is to be held in the Dniestre region on 22 December 1996.) Only 2,000 people managed to vote from the Dniestre region (EEN, 1996 vol. 10, no. 23, p. 6). In the Gagauz region, in a low turnout, Sangheli came first with 37.5 per cent of the vote. Vladimir Voronin was second with 34 per cent (p. 6). The candidates, their share of the vote and their programmes: Mircea Snegur: 39 per cent. The incumbent. He is a populist who is not above exploiting the Transdniestrian dispute to score points with Romanian speakers, two-thirds of the country’s 4.4 million people. His two main rivals for the presidency, Petru Lucinschi, the speaker of parliament, and Andrei Sangheli, the prime minister, are friendlier to Russians. (The Economist, 5 October 1996, p. 55) ‘Snegur, aiming for the support of pro-Romanian opposition parties, has been endorsed by his Party of Revival and Reconciliation of Moldova.’ In order to gain the support of pro-Romanian opposition parties, he promises ‘to enshrine the Moldovan–Romanian identity in the constitution, substitute Romanian for Moldovan as the name of the official language, and even revive the anthem … that Moldova shared with Romania before 1994’. ‘The main hitch to Snegur obtaining the support of the opposition has been removed now that the signing of the memorandum with the separatist Transdniestre region led by Igor Smirnov has been called off.’ The ceremonial signing, on 1 July, of the memorandum, brokered by Russia, was called off owing to Yeltsin’s illness. ‘Though the proposed memorandum did not address the issues of the future of the Transdniestre army, government, currency etc., it acknowledged the region’s status as a republic rather than as an autonomous region’ (EEN, 18 July 1996, vol. 10, no. 14, p. 4). Snegur advocates cautious economic reform and a separate Moldovan identity (EEN, 12 October 1996, p. 8). Petru Lucinschi: 28 per cent. The speaker of parliament ‘was a member of the last Soviet politburo’, but is said to understand the need to ‘collaborate with the West’ (The Economist, 5 October 1996, p. 55). ‘Lucinschi has decide to run as an independent candidate … this is a smart move since his small Party of Social Progress and the Social Democratic Party of Moldova are not strong enough’ (EEN, 18 July 1996, vol. 10, no. 14, p. 4). Lucinschi … promises to sign a memorandum granting autonomy to Transdniestre, to open a Slavic university and to allow minorities more time to learn Romanian … He says Romanian and Moldovan should both be allowed as names for the official language (since both are the same linguistically) … He enjoys the widest support among the cultural elite, mainly in Chisinau, but is remote from the ordinary voter. (EEN, 12 October 1996, vol. 10, no. 20, p. 8)

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Lucinschi has attacked as ‘savage capitalism’ Snegur’s plans for faster market reforms, such as the complete privatization of land (Guardian, 3 December 1996, p. 120). Vladimir Voronin: 10 per cent. The candidate of the Communist Party. Andrei Sangheli: 9.5 per cent. The prime minister. ‘As for Sangheli, whose prospects until recently looked good, his ruling Agrarian Democratic Party of Moldova has split. Most of its MPs are backing Lucinschi.’ The alliance with the Moldovan Socialist Party ‘is in difficulties as well now that the Moldovan Socialist Party itself has split over the issue of which presidential candidate should be supported’ (EEN, 18 July 1996, vol. 10, no. 14, p. 4). (In May 1996 the Party of Socialist Action was created by a former Socialist MP.) ‘Mr Sangheli argues that Moldova’s stable but stagnant economy needs Russian energy, and pledges a more accommodating policy toward Moscow’ (FT, 16 November 1996, p. 2). Valeriu Matei: 9 per cent. The candidate of the Party of Democratic Forces. 1 December 1996: Lucinschi wins the second round of the presidential election, with 54 per cent of the vote compared with Snegur’s 46 per cent. The turnout was 72 per cent. (OSCE observers reported that the elections were generally free and fair, with no serious irregularities: FT, 3 December 1996, p. 2.) 22 December 1996: the incumbent Igor Smirnov wins the presidential election in the Dniestre region with 71.9 per cent of the vote in a turnout of 57.3 per cent. His challenger was Vladimir Malakhov. 15 January 1997: Lucinschi is sworn in as president. 16 January 1997: Ion Ciubuc is appointed prime minister. 24 January 1997: Ion Ciubuc’s cabinet is approved by parliament. Over 60 per cent of the ministers who served in the previous government have kept their posts (EEN, 1997, vol. 11, no. 2, p. 6). 8 February 1997: the Movement for a Democratic and Prosperous Moldova is formed, supportive of Lucinschi (EEN, 1997, vol. 11, no. 3, p. 9). 8 May 1997: Moldova and the Dniestre region sign an agreement in Moscow. Russia, Ukraine and OSCE act as guarantors, the presidents of Russia and Ukraine and a representative of OSCE reaffirming guarantees of the territorial integrity of Moldova as it existed on 1 January 1990. The constitutional status is not specified but the Dniestre region will thus remain part of Moldova. ‘Moldova and the Dniestre region will build their relations in the framework of a common state within the borders of the former Moldavian SSSR as it existed on 1 January 1990.’ President Yeltsin says that Russia is ready to withdraw its troops from the region but only Lucinschi and Smirnov can give ‘the green light for the withdrawal of Russian troops from Moldova’ (CDSP, 1997, vol. XLVI, no. 19, pp. 18–19). 20 June 1997: the Christian Democratic People’s Front (headed by Iurie Rosca) and the Party of Revival and Reconciliation (headed by Mircea Snegur) agree to form the Democratic Convention opposition alliance (EEN, 1997, vol. 11, no. 13, p. 7).

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10 November 1997: Dniestre leader Smirnov and Moldovan premier Ciubuc sign an economic co-operation agreement (EEN, 1997, vol. 11, no. 22, p. 5). 20 November 1997: President Lucinschi meets Smirnov in Chisinau (p. 5). Moldova currently faces legislative gridlock – every reform proposal proposed by President Petru Lucinschi is shot down by a parliament dominated by hardliners and supporters of Mircea Snegur, the reform-minded but self-seeking ex-president … Tensions between parliament and president have slowed development down to a crawl. Parliament is in principle opposed to privatization and has blocked relevant legislation, leading to a delay in payments from the World Bank. (Business Central Europe 1997: 50–1) 22 March 1998: the general election takes place, with candidates competing for 101 seats. There was a 4 per cent threshold. The turnout was about 70 per cent. The results were as follows: Communist Party: about 30 per cent of the vote. Democratic Convention: (nationalist, right-wing; led by former president Mircea Snegur), 19.36 per cent of the vote. Movement for a Democratic and Prosperous Moldova: (centrist) 18.14 per cent of the vote. Party of Democratic Forces: (nationalist, centre-right), 8.82 per cent of the vote. 21 May 1998: parliament endorses the new cabinet, with Ion Ciubuc as prime minister. 25 September 1998: ‘Deputy premier Ion Sturza resigns in protest at the lack of economic reform’ (EEN, 1998, vol. 12, no. 11, p. 5). 30 October 1998: the prime ministers of Russia and Moldova agree that the withdrawal of Russia’s former Fourteenth Army ‘will continue as the necessary conditions for this are created’ (CDSP, 1998, vol. 50, no. 44, p. 17). 1 February 1999: Prime minister Ion Ciubuc said Monday [1 February] that he was resigning because his divided centre-right coalition could no longer function as a team … The prime minister said his resignation statement had been sent to parliament after being agreed to by the president and the deputy prime ministers. (IHT, 2 February 1999, p. 6) 19 February 1999: President Lucinschi appoints Ion Sturza as premier designate. 3 March 1999: parliament endorses Sturza’s cabinet.

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23 May 1999: a referendum is held on the initiative of President Petru Lucinschi. One question is posed: ‘Do you support amending the constitution in order to introduce a presidential form of government in the Republic of Moldova, in which the President of the Republic shall be responsible for forming and leading the government, as well as for the results of the country’s governance?’ The turnout was 58.3 per cent of registered voters, of which over 55 per cent voted for and 30 per cent voted against. The remaining ballots were declared void (MET, Monthly Issue, June 1999, p. 3). An advisory referendum on changing Moldova’s system of government has been declared invalid due to low voter turnout. Preliminary returns indicate that about 55 per cent of voters cast ballots, whereas the minimum requirement was 60 per cent. The referendum, undertaken on the initiative of President Petru Lucinschi, called on voters to respond to the question: ‘Do you support amending the constitution in order to introduce a presidential system of rule under which the president of the republic would be responsible for the formation and supervision of the government, as well as accountable for the results of actions taken in ruling the country?’ The preliminary returns indicated that about 60 per cent of those who voted answered in the affirmative. (CDSP, 1999, vol. 51, no. 21, pp. 15–16) Less than four months after a weak-looking coalition government took office in Moldova, its president, Petru Lucinschi, has started to angle for a different sort of political system. His aim is to switch from Moldova’s parliamentary model – ‘collective irresponsibility’, he calls it, ‘resulting in a mess for ever’ – to a firm-handed, more efficient presidential one … So he held a referendum. Most Moldovans gave the idea their approval, but the turnout was so low that it may be hard for Mr Lucinschi … to have his way constitutionally … [There is a] fractious parliament … Old-guard communists have a large minority in parliament … Ion Sturza, the new prime minister, controls a centrist coalition with a bizarrely scraped up majority of one seat. This it owes to a smuggled note of support sent by Ilie Iliescu, a Moldovan deputy technically under sentence of death in a Transdniestrian prison for advocating a Greater Romania to embrace all of Moldova … There has been little fighting in … Transdniestria … since at least 1,000 people died in a civil war seven years ago … Some trade between Chisinau and Tiraspol [in Transdniestre] has restarted … Ethnic Russian and other Slav secessionists make up more than two-thirds of the population of 670,000. (The Economist, 26 June 1999, p. 59) 16 July 1999: a statement on normalizing relations between Moldova and Transdniestre is signed at a five-side summit in Kiev. The document defines the principles of creating a common economic, social, defence and legal area between Moldova and Transdniestre in the framework of a common state. The next meeting is to be held in Moscow in August 1999 (MET, Monthly Issue, July 1999, p. 3).

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4 August 1999: a draft of constitutional amendments prepared by a special commission set up by the president is published. The draft claims that the existing system of government leads to instability. The draft recommends giving the president the exclusive right to appoint and dismiss the head of government and government ministers. The president would become head of the supreme security council and would appoint prosecutors and judges. It is recommended that the president’s term of office be extended from four to five years. The president would have the right to dissolve parliament if it blocks the passage of any law for more than two months. The number of parliamentary deputies would be reduced from 101 to seventy and they would be elected exclusively from singleseat districts (CDSP, 1999, vol. 51, no. 31, p. 13). 9 November 1999: Ion Sturza loses a no-confidence vote in parliament. 16 November 1999: the withdrawal of the Russian Fourteenth Army from Transdniestre begins (EEN, 2000, vol. 12, no. 21, p. 5). 19 November 1999: at the OSCE summit meeting in Istanbul Russia agrees to remove its troops in Moldova completely by the end of 2002. ‘The CFE Treaty [revised in Istanbul] … requires that a state cannot deploy forces in another state without the host country’s consent … Russia agreed … to pull all its estimated 2,600-strong contingent out of Moldova by 2002’ (FT, 20 November 1999, p. 5). ‘Moscow agreed to withdraw its 2,500 soldiers from Moldova by 2002’ (IHT, 25 November 1999, p. 7). 21 December 1999: parliament approves a new government under prime minister Dumitru Braghis. 12 May 2000: The Communists stage a walkout from parliament on 12 May, protesting the absence of ‘Moldovan language and literature in the curriculum of higher education institutions’ and stressing that the preponderance of ‘Romanian language and literature’ was a violation of the country’s constitution. This is despite the fact the two languages are virtually identical. (IHT, 16 June 2000, p. 2) 5 July 2000: Petru Lucinschi sought more power and as a result lost all the authority he had. The Moldovan parliament yesterday [5 July] rejected the president’s bid to expand his powers and abolished presidential elections in the country. Parliament passed the requisite amendments to the constitution, with ninety-eight of 104 deputies voting in favour. In keeping with the amendments Moldova will change from a presidential parliamentary republic to a parliamentary one. The president will henceforth be elected by parliament, not the public. The government will be endowed with additional powers, but in the event of a fiasco the prime minister runs the risk of losing his post, since the cabinet of ministers will henceforth be formed by parliament, not the president … After a second debate the document will enter into

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force with or without the consent of the head of state … The speaker of parliament will henceforth be the head of state. The prime minister will be the number two figure, while the president will serve as a mere figurehead for the parliamentary regime … The constitutional court approved the draft law proposed by parliament before the vote was held. (Sevodnia, 6 July 2000, p. 3: CDSP, 2000, vol. 52, no. 27, pp. 16–17) In early July President Lucinschi unveiled an initiative to strengthen the powers of the head of state and, at the same time, broaden those of the government. In response the deputies, with rare unanimity – leftist and rightist parties alike closed ranks in this instance – decided to amend the constitution to turn the republic into a parliamentary one and make the president a mere figurehead … The deputies failed to heed the president’s call that they not adopt constitutional amendments too hastily. The day after he issued his appeal to parliament they voted a second time, reiterating their determination to alter the system of government: Moldova was to become a parliamentary republic … By law the president is now required to sign the adopted resolutions and they will take effect. This means that the next president will be chosen by parliament, not the people, by a three-fifths vote … Petru Lucinschi’s term expires on 15 January 2001. (Rossiiskaya Gazeta, 26 July 2000, p. 7: CDSP, 2000, vol. 52, no. 30, p. 14) The political temperature started rising back in May [2000], when the republic’s rightist parties finally came up with a national idea and decided to make admission to the EU their rallying cry … The leaders of twenty rightwing organizations affixed their signatures to a declaration proclaiming this the republic’s number one objective. Among them were former Moldovan president Mircea Snegur, leader of the Revival and Accord Party, and the current parliamentary chairman Dumitru Diacov … The parliamentary leader now controls the Democratic Party, which was born of a split in what was originally the president’s [Petru Lucinschi’s] Movement for a Democratic and Prosperous Moldova … The man who came up with the idea of closely linking Moldova with Romania and Europe [is] Valeriu Matei, leader of the Party of Democratic Forces … The Communists and other leftist parties declined to sign the declaration. Their position is that Moldova should generally orientate itself toward closer ties with the CIS countries, and especially Russia. (p. 7: p. 14) On 20 July 2000 President Lucinschi declined to sign the 5 July constitutional amendment, suggesting a referendum instead. The following day parliament overturned the presidential veto on constitutional amendments, ensuring that the amendments became law (EEN, 2000, vol. 12, no. 24, p. 5). 21 July 2000: ‘The leader of the breakaway Transdniestre region, Igor Smirnov, dissolves the local parliament and unilaterally declares the territory under “presidential rule” ’ (p. 5).

336 Moldova 22–23 July 2000: ‘Russian president Vladimir Putin’s party Medved (Unity) establishes a branch in Dniestre as an apparently pro-separatist party’ (p. 5). 9 August 2000: ‘Dniestre leader Igor Smirnov announces that Russian Fourteenth Army munitions and weaponry can only be withdrawn to Russia with the consent of Transdniestre’ (p. 5). 25 February 2001: the general election takes place. ‘According to the initial returns … voter turnout was 69 per cent, with the Dniestre region boycotting the elections’ (CDSP, 2001, vol. 53, no. 9, p. 16). Communists have swept back into power … finally recapturing control of one tiny part of their old empire nearly a decade after the fall of the Soviet Union … Never before have they won back power in the name of the onceomnipotent party in any of the fifteen countries formed by the dissolution of the union … The Moldovan communists … plan to re-establish Russian as an official language and have talked about joining a quasi-union with Russia and Belarus … ‘We must speak about restoration of our historical, traditional links with Russia and with other former republics of the Soviet Union,’ the communist leader, Vladimir Voronin, said … Monday [26 February]. (IHT, 27 February 2001, p. 5) Russia … has discussed a similar treaty [as that with Belarus] with the proRussian Communist Party in Moldova … Recently, Mr Putin met in Moscow with … Vladimir Voronin; he also met with the centrist prime minister, Dumitru Braghis, apparently seeking agreement to a post-election coalition with the Communists. (IHT, 28 February 2001, p. 4) [This represents] the first comeback to power by Communists in the former Soviet Union … The party won more than half the vote … They trounced reformist and centrist parties … That allows the Communists seventy or seventy-one seats of the 101-seat parliament, vaulting the sixty-one-seat hurdle to elect their candidate as president … The result will end months of crippling political deadlock that has delayed vital legislation and reforms. Partly to allay the worries of foreign investors, the Communist Party leader, Vladimir Voronin, said he would reappoint a rival, the prime minister, Dumitru Braghis, a key player in the country’s economic reforms. ‘We are not going to create a unilateral parliament and government,’ said Mr Voronin. ‘We want to have a technocratic and professional government. We are not going to have a Central Asian regime of personality cults.’ (Independent, 27 February 2001, p. 14) ‘Moldova has become the first former Soviet republic to vote the Communist Party back into power … Mr Voronin has said he is willing to work with the IMF’ (Telegraph, 27 February 2001, p. 18).

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According to the initial returns … the Communist Party won 50.2 per cent of the vote. (Moldova uses the party list method.) The pro-presidential Braghis Alliance, which is named for prime minister Dumitru Braghis, did worse than expected, garnering just 13.45 per cent … The Christian Democratic People’s Party (formerly the People’s Front) … polled 8.18 per cent. The remaining fourteen parties and blocs did not make it into parliament … [The] Democratic party with 4.9 per cent fell just short of the 6 per cent hurdle, as did ex-president Mircea Snegur’s Party of Revival and Accord, with 5.6 per cent … The Communists will get seventy-one seats, the Braghis Alliance will have nineteen and the Christian Democrats will get eleven … For the first time since the fall of the Soviet Union, therefore, the Communists will have complete control over the legislative branch and hence the executive branch. (Moldova is a parliamentary republic.) They will be able to appoint the prime minister and government (which requires fifty-two votes, a simple majority). And they will also be able to elect a presidential candidate whom they find acceptable. (That will take sixty-two votes.) Finally, they will have a twothirds majority, allowing them to amend the constitution … The last parliament was dissolved for having failed to elect a president … Vladimir Voronin fell just a few votes short of being elected … Mr Voronin … has said that he will work to give Russian the status of state language on a par with Moldovan, and he does not rule out the possibility of Moldova joining the Union of Russia and Belarus. ‘Moldova is fated to join that union,’ the Communist leader said. (Kommersant, 27 February 2001, p. 2: CDSP, 2001, vol. 53, no. 9, pp. 15–16) Elections left the Communists with seventy-one seats (out of 101) in Moldova’s parliament, which means they can form the parliament’s administrative bodies and appoint a government … elect a president … and adopt any amendment to the constitution [the last by a two-thirds vote] … Parliament confirmed [on 20 March] Communist leader Vladimir Voronin as the sole candidate for president (the election is scheduled for 4 April) … The Communists, taken aback by their sudden success, have said repeatedly that the government will be formed on the basis of potential members’ professional qualities, not party affiliation, and they have hinted very transparently that the post of prime minister will be offered to Mr Braghis. However, Braghis himself recently announced that he was joining the opposition. (Kommersant, 21 March 2001, p. 11: CDSP, 2001, vol. 53, no. 12, p. 18) According to Vladimir Voronin, the Republic of Moldova Communist Party will study the matter of potentially joining the Union of Russia and Belarus, as stated in its campaign programme. But a final decision will depend on whether Moscow and Minsk want to unite with the poorest country in Europe and the CIS … Vladimir Voronin … [says] it will be necessary to bring back strategic state regulation of the economy … The results of privatization

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Moldova should be analysed in the same context, in order to prevent subsequent privatization deals following the predatory ‘buy–sell–dump’ arrangement. There are no plans to annul the memorandum signed with the IMF or to renounce any other international obligations. The question of making Russian a state language is also on the back burner. It would be appropriate to put this issue up for general discussion and a referendum in the future … Voronin reiterated the new leadership’s willingness to continue working with the West. (Nezavisimaya Gazeta, 3 March 2001, p. 5: CDSP, 2001, vol. 53, no. 9, p. 16)

‘The popularity of Moldova’s previous leadership had been sapped by extremely grave crises in the economy’ (Moskovskiye Novosti, 5 March 2001, p. 12: CDSP, 2001, vol. 53, no. 9, p. 16). ‘Moldova has just asked to join … the Russia–Belarus Union … after the Communists won a landslide victory in elections’ (Business Central Europe, April 2001, p. 56). The Popular Christian Democratic Party, a far-right party favouring integration with Romania, holds eleven seats … The Braghis Alliance, an ad hoc amalgamation of small and almost unknown parties and movements headed by former prime minister Dumitru Braghis, has nineteen seats. (The high threshold of 6 per cent needed to win a seat in parliament prevented any of the other fourteen parties from winning representation in the parliament.) Election turnout was high (69 per cent) and international observers confirmed that voting took place in a democratic, free way, with no fraud reported. (Transition, 2001, vol. 12, no. 1, p. 9) The turnout was 67.52 per cent. Only three parties or blocs out of seventeen won the 6 per cent or more of the vote necessary for representation in the 101seat parliament (seats being decided on the list principle, in proportion to votes received): Party of Communists of Moldova: 50.07 per cent of the votes and seventy-one seats; Braghis Alliance bloc (comprising the small Socialist Party, the Union of Labour and three social and political movements, and backed by business interests), 13.36 per cent of the vote and nineteen seats; the pro-Romanian Christian Democratic People’s Party (led by Iurie Rosca), 8.24 per cent of the vote and eleven seats (Hill 2001: 130–9). Corruption was a frequently recurring motif and it was one that found resonance in the minds of voters, whose economic plight is plain to see, even without the statistics of poverty: amid the clear signs of severe individual difficulties and public decay, some individuals have manifestly prospered, including some leading politicians … [As for] the communists … having been kept out of the governing circles during a decade of steady decline, their hands were relatively clean. (p. 134)

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‘[It was] a campaign in which the integrity of politicians and the economic situation dominated’ (p. 135). ‘The parliamentary elite of the 1990s was devastated: only thirty-four deputies in the newly elected parliament had served in the previous one’ (p. 138). ‘The International Foundation for Electoral Systems … broadly endorsed the election as free and fair’ (p. 137) 4 April 2001: parliament elects Vladimir Voronin as president, winning the votes of seventy-one of the eighty-nine deputies who cast ballots. There were three candidates (including Dumitru Braghis). ‘Moldova’s presidential election law does not allow uncontested elections’ (Kommersant, 5 April 2001, p. 11: CDSP, 2001, vol. 53, no. 14, p. 18). Vladimir Voronin is an ethnic Russian (The Economist, 2 June 2001, p. 44). 12 April 2001: [President] Voronin … has named … Vasile Tarlev, general director of the Bucuria joint stock company (a confectionery factory) … [and head of] the National Association of Goods Producers … for the post of prime minister … After he is confirmed by parliament, the new Moldovan prime minister will have fifteen days to present a cabinet and programme to the lawmakers … On his first working day in office Vladimir Voronin held a meeting – one that he had initiated – with Dniestre region leader Igor Smirnov. Valery Litskai, foreign minister of the unrecognized Dniestre Moldovesan Republic, said that, as a result of the meeting, the presidents had established a good personal relationship … Moreover, at their first meeting the Moldovan and Dniestre region leaders reached agreement on how to deal with several urgent practical problems … The presidents agreed that they would hold monthly meetings from now on. Groups of experts from the two sides will resume weekly meetings as well. (CDSP, 2001, vol. 53, no. 15, pp. 16–17) 17 April 2001: Moldova wants much closer ties with Russia, including a new ‘basic political treaty’ between the countries, Moldova’s newly elected communist president, Vladimir Voronin, said in Moscow yesterday. But he stopped short of calling for Moldova’s immediate entry into the ‘union’ planned between Russia and Belarus, saying only that Moldova was ready for ‘observer’ status … Mr Voronin defended the presence of Russian troops in Transdniestre … Mr Voronin was speaking at the end of a two-day visit to Russia, his first foreign trip as president … A more immediate possibility for Moldova, said Mr Voronin, was membership of the ‘Eurasian community’, a five-nation customs union led by Russia that includes Kazakhstan, Kyrgyzstan, Tajikistan and Belarus … He [Voronin] indicated that he might withdraw from a loose-knit strategic alliance of CIS countries, disliked by Russia, whose other members are Georgia, Ukraine, Uzbekistan and Azerbaijan. The countries involved

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Moldova joined forces in 1996 with the tacit aim of resisting Russian regional dominance. (FT, 18 April 2001, p. 8)

19 April 2001: Vasile Tarlev [is] an ethnic Bulgarian, the 37-year-old manager of the Bucuria confectionery factory … [The] new government received parliamentary endorsement on 19 April … In a further reflection of Voronin’s desire for stability, the new administration’s seventeen members included eleven individuals who had been ministers or deputy ministers in the previous government headed by Braghis. (Hill 2001: 139) 20 April 2001: the new cabinet under premier Vasile Tarlev is sworn in and a military co-operation agreement is signed with Russia (EEN, 2001, vol. 13, no. 5, p. 6). 16 May 2001: [In] the upcoming second meeting between the presidents of the Republic of Moldova and the Dniestre region on 16 May … the two heads of state plan to review progress in implementing the agreements reached at their first meeting. Specifically they will discuss the standardization of tax and customs laws, the dismantling of customs checkpoints, investment protection, steps to make the Dniestre region news media available in the Republic of Moldova, and recognition of documents issued in the Dniestre region. (CDSP, 2001, vol. 53, no. 19, p. 15) [Prior to] the impending 16 May meeting, he [President Voronin] signed a decree in which he declared that solving the Dniestre problem in accordance with the principles of territorial integrity and state sovereignty was a top priority … to the Moldovan government … Vladimir Voronin said that the two sides … signed protocols … [on issues] such as standardization of tax and customs laws, investment protection, the mutual recognition of documents [e.g. certificates, degrees and official documents] issued in Moldova and the Dniestre region, and the availability of Dniestre and Moldovan news media on both banks of the Dniestre … A third round of talks is scheduled for 20 June. (CDSP, 2001, vol. 53, no. 20, p. 15) At a meeting with Moldovan President Vladimir Voronin on 16 May, Mr Smirnov presented him with a proposal asking Moldova to forgo implementation of the resolutions of the 1999 Istanbul summit of OSCE. He even asked Mr Voronin to ‘take necessary steps to prevent the withdrawal of

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Russian troops and arms’. The Moldovan president refused to comment … At the same time … Moldova’s prime minister Vasile Tarlev … [said] that Moldova would maintain a resolute stance on the withdrawal of Russian troops from its territory … Igor Smirnov [then] … announced that his administration is prepared to use force to prevent Russian arms from being removed from the region. (CDSP, 2001, vol. 13, no. 21, pp. 14–15) 18 May 2001: ‘President Voronin says in an interview with a Japanese newspaper that Moldova should join the Russia–Belarus economic union’ (EEN, 2001, vol. 13, no. 5, p. 6). 22 May 2001: ‘Seven right-wing and centrist parties establish the Democratic Forum of Moldova’ (p. 6). 1 June 2001: a CIS meeting takes place in Minsk. Contrary to expectations, a three-way Russian–Belarussian–Moldovan meeting did not take place … President Vladimir Voronin, who had promised his constituents that he would join the Union of Russia and Belarus and then, a bit later, has also thought about joining the new Eurasian Economic Community, concluded in Minsk that it was necessary to belong to a more broadly representative organization. ‘We will be where our state’s interests lie and where our participation can do some good,’ Mr Voronin said. ‘Right now our preference goes to the CIS.’ (CDSP, 2001, vol. 53, no. 22, p. 18) 20 June 2001: Yesterday’s [20 June] meeting between the president of Moldova and the leader of the Dniestre region demonstrated that the two sides’ positions remain as far apart as ever. Chisinau still refuses to recognize Dniestre region passports, while Tiraspol leaders would not even let Vladimir Voronin attend a memorial gathering in Bendery … that the Moldovan army attempted to take [in June 1992] … The final press conference … revealed disagreements … on virtually every key issue … President Voronin reported that the Moldovan side had given Tiraspol a package of proposals on the demarcation of powers, including the proportion that the Dniestre region would be a component of a single, undivided state … Tiraspol insists that the Istanbul accords [from the 1999 OSCE summit] on withdrawing Russian troops from the Dniestre region should be revisited … Moldova is insisting on eliminating peacekeeping posts … Negotiations are thus once again at an impasse … The Dniestre region is being offered the status of an autonomous administrative entity with broad powers … [The Dniestre region] insists that both sides must have equal status as political entities … The next meeting will take place on 8 August. (CDSP, 2001, vol. 53, no. 25, p. 18)

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(The two leaders met again in August. ‘Vladimir Voronin … was harshly critical of the meeting … [He said that] “Igor Smirnov has exhausted his potential as the region’s leader … It is impossible to resolve political issues with him” ’: CDSP, 2001, vol. 53, no. 32, p. 17.) July–August 2001: The long-suffering law ‘On the Rights of Ethnic Minorities and the Legal Status of their Organizations’ was passed by the Moldovan parliament on second reading a few days ago. This bill was submitted to the legislature back in 1994 and the deputies approved it on first reading in 1997’ (Nezavisimaya Gazeta, 3 August 2001, p. 5: CDSP, 2001, vol. 53, no. 31, pp. 16–17) August 2001: The southern part of the country, where the Gagauz Yeri – the Gagauz Lands – ethnic and territorial entity was formed in 1994, is in revolt. The autonomous entity’s popular assembly has suspended a number of Moldovan laws (such as the budget law) on its territory, refused to carry out the privatization programme passed in Chisinau, and accused the Moldovan Communists and their leader, President Vladimir Voronin, of deceiving the entity’s voters. It turns out that during Moldova’s parliamentary elections deputies to the people’s assembly of Gagauzia signed an agreement with the Communist Party of the Republic of Moldova. In it they pledged to deliver the southern vote to the Communists, which they did: 80 per cent of the autonomous entity’s people voted for the Communist Party. In return the Communists pledged to bring Moldovan legislation into conformity with the law on the special legal status of Gagauz Yeri. But once they were in power they completely forgot their campaign promises. Moreover, officials of the autonomous entity’s administration told Vremya Novostei, the Moldovan parliament intends to revisit the law on Gagauzia’s legal status and decide whether the autonomous entity should exist at all … The current imbroglio arose over the Gagauz economy’s most attractive assets: Moldova’s biggest wineries … Chisinau has included the wineries in the national privatization programme … By law the enterprises are regarded as belonging to Gagauzia. (Vremya Novostei, 17 August 2001, p. 6: CDSP, 2001, vol. 53, no. 33, p. 17) 1 September 2001: The Moldovan government confiscated the Dniestre region’s customs stamps, which had been issued in 1995, compelling economic entities in the region to register in accordance with Moldovan legislation, carry out export–import operations only through Chisinau and make all required payments to the republic budget … Exports from the Dniestre region are

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now blocked and imports bound for the Left Bank from Western Europe are being seized by Moldovan customs officers … The Dniestre region authorities categorically refuse to provide funds for the Moldovan treasury … Igor Smirnov … refused to attend a meeting with Vladimir Voronin that … was supposed to take place on 31 August … [and] the Dniestre region Supreme Council decided to suspend talks with Moldova at least until the customs problem is settled … Smirnov expressed a conviction that the Moldovan leadership ‘is pursuing the aim of eliminating the Dniestre region as a state’. (CDSP, 2001, vol. 53, no. 36, p. 16) Customs stamps had been in use since 1995 and had allowed independent exports by Dniestre region enterprises, which account for almost two-thirds of the republic’s industrial potential … Now enterprises in the Dniestre region can export their products only by Moldova’s rules … Tiraspol instantly branded the measure an economic embargo. (CDSP, 2001, vol. 53, no. 41, p. 19) The Dniestre region leadership has accused the Moldovan authorities of imposing an economic embargo and will agree to resume the stalled dialogue only if the embargo is lifted … Moldova feels that one country cannot have two customs systems … The conflict began when Chisinau introduced new customs stamps that Tiraspol did not have … [Some] 65,000 people in the Dniestre region hold Russian citizenship. (CDSP, 2001, vol. 53, no. 40, p. 17) After six years of negotiations Moldova joined the WTO in June 2001 … According to the agreement, companies operating in Transdniestre will have to observe WTO rules and regulations, including the introduction of new customs rules common to the entire country. (EBRD 2001b: 174) 11 September 2001: there are terrorist attacks on the USA. October 2001: agreement is reached on payment of Russian natural gas at discounted prices. ‘Moldova promised to begin paying off its arrears in three years’ (CDSP, 2001, vol. 53, no. 41, pp. 18–19). 9 November 2001: After a break of more than six months the Operational Group of Russian Forces (OGRF) stationed in the Dniestre region is beginning to send trainloads of military equipment and hardware to Russia … The train will head out today [9 November] … Under the Istanbul accords, the OGRF and its weapons have to be out of Moldova by 31 December of next year [2002]. (CDSP, 2001, vol. 53, no. 45, p. 16)

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19 November 2001: President Vladimir Putin … and President Vladimir Voronin … yesterday [19 November] signed an agreement in Moscow calling for a political solution [to the problem of Transdniestre] … President Voronin … said Russia recognized the territorial integrity of Moldova and the need for a political resolution in the breakaway area. Moldova pledged to give a greater status to the Russian language … Gazprom, the Russian statebacked gas group, was also present at yesterday’s talks to discuss restructuring debts from Transdniestre that it says are worth $913 million … Mr Voronin [is] himself from Transdniestre … Only a small percentage of Transdniestre’s population of over 600,000 is ethnically Russian. (FT, 20 November 2001, p. 12) The Treaty of Friendship and Co-operation … [was] signed yesterday [19 November] … [by] the Russian and Moldovan presidents … There had not been a basic document of this kind in the ten-year history of the two states … The two countries … incidentally, are still officially on opposite sides of the split that divides the CIS into the Collective Security Treaty countries [Russia, Armenia, Kazakhstan, Kyrgyzstan, Belarus and Tajikistan] and the GUUAM group [Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova] … Moldova’s accession to the Union of Russia and Belarus has been declared one of the country’s foreign policy priorities and … Russian is now the republic’s de facto official language … Moscow supports the preservation of Moldova’s territorial integrity. Moreover, as Putin said yesterday, Russia is prepared to serve as a guarantor of the Dniestre region settlement process … Both sides regard an arrangement whereby Russia would acquire shares in national enterprises in lieu of the money owed it (Moldova’s debt for natural gas is of the order of $900 million) as fully acceptable. The sides are currently working on issues involving the participation of Russian business in the energy, wine and tobacco industries, as well as in the construction of a port on the Danube. (Vremya MN, 20 November 2001, p. 2: CDSP, 2001, vol. 53, no. 47, p. 19) 9 December 2001: For the third time in a row [1991, 1996 and 2001] Igor Smirnov has been elected president of the unrecognized Dniestre Moldavian Republic, with 79.4 per cent of the vote … Before Sunday’s election Moldovan President Vladimir Voronin promised the public that he would ‘work to remove Igor Smirnov from office’ … [President Voronin] has repeatedly said that he has no intention of holding talks with Smirnov because he considers the Tiraspol administration a ‘criminal regime’. (CDSP, 2001, vol. 53, no. 50, pp. 17–18)

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Igor Smirnov’s recent victory in the Dniestre region’s presidential election has forced Chisinau to reassess its policy in the negotiating process with Tiraspol … Immediately after his re-election Igor Smirnov said he was willing to continue negotiating with the Moldovan president. Earlier officials in Tiraspol had endorsed mediators’ calls to restart the negotiating process in the previous five-party format … Shortly after the Dniestre region election the Moldovan president’s chief adviser … announced that Vladimir Voronin would no longer negotiate with Igor Smirnov directly. Moldova’s plan was to continue talks at the expert level. (CDSP, 2001, vol. 53, no. 51, p. 18) (‘Voronin will no longer meet with Smirnov as president of the selfproclaimed republic. He may receive him as a local chief administrator, but only to deal with vital problems affecting the population of the left bank of the Dniestre’: CDSP, 2002, vol. 54, no. 5, p. 19.) 9 January 2002: there is a demonstration in Chisinau against the Russian language policy of the government organized by the Christian Democratic People’s Front (formerly the People’s Front). The study of Russian as a foreign language became mandatory in Moldovan schools starting with the second semester of this school year. Russian was dropped from the curriculum ten years ago and was studied only in exceptional cases when there wasn’t an English or French teacher … Having declared before the elections their intention to give Russian the status of a second state language, after the voting the Communists, despite having twothirds of the votes in parliament, did not put the matter up for discussion. Instead, they consulted the constitutional court, which six months from now will provide the deputies with an explanation of the legal aspects of the campaign promises to which the Communist authorities are now hostage. (CDSP, 2002, vol. 54, no. 2, p. 16) The demonstrations against ‘Russification of the entire country’ began on 9 January … with Sunday marches by 2,000 demonstrators at most … The Christian Democrats were leading schoolchildren and teachers … to protest the government’s decision to include Russian language classes in the Moldovan school curriculum starting with second grade. (CDSP, 2002, vol. 54, no. 8, p. 1) 28 January 2002: Vasile Tarlev, Moldova’s prime minister, accused the Romanian government yesterday [28 January 2002] of interfering in Moldova’s affairs … Mr Tarlev was reacting to accusations by Adrian Nastase, Romania’s prime minister, and President Ion Iliescu that the Moldovan authorities were being undemocratic for banning an opposition party known for its

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Moldova pro-Romanian stance … Moldova’s authorities temporarily banned the Popular Christian Democratic Party after it organized anti-Russian demonstrations in … Chisinau in response to plans to make Russian an official language. (FT, 29 January 2002, p. 6)

15 February 2002: Thousands of Moldovan students and nationalists defied the Communist government’s threat to crack down on illegal demonstrations, taking to the streets Friday [15 February] to protest against ‘Russification’. In the third day of major protest this week, about 5,000 schoolchildren, students and nationalists marched peacefully to protest plans to force them to learn Russian as a second language and to rewrite history textbooks. The protesters say the proposal would deny Moldova’s common cultural and linguistic heritage with neighbouring Romania. (IHT, 16 February 2002, p. 3) The week began [on 17 February] … with a demonstration in Chisinau attended by more than 10,000 people, by some estimates … The main organizer and ‘architect’ of this and other similar demonstrations is thought to be Iurie Rosca, leader of the Christian Democratic People’s Party, who had advanced the chief political demand: the resignation of the country’s Communist leadership and the holding of early parliamentary elections … In addition to ill-considered actions by President Vladimir Voronin himself, … the situation is being manipulated through intensive political activity on the part of the former nomenklatura , specifically former Moldovan president Petru Lucinschi and … former prime minister Dumitru Braghis, according to the Moldovan press and Voronin’s top aides … Iurie Rosca has been stripped of his immunity as a deputy and criminal proceedings have been initiated against him and his most zealous supporters. (Nezavisimaya Gazeta, 20 February 2002, p. 5: CDSP, 2002, vol. 54, no. 8, p. 2) 24 February 2002: ‘At least 70,000 people continued a string of recent protests against the government. Many Moldovans say they fear losing their cultural and linguistic links with neighbouring Romania’ (IHT, 25 February 2002, p. 3). ‘About 80,000 protesters … [in Chisinau called] on the Communist government to resign. The crowd carried Moldovan and EU flags, chanting “We want [to be] in Europe”, and “Down with the Russians’ servants” ’ (Guardian, 25 February 2002, p. 12). ‘More than 100,000 people … [demanded] the removal of the Communist government and early elections. It was the culmination of daily demonstrations since last month [January]’ (Telegraph, 25 February 2002, p. 14).

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The protests began in January after officials ordered mandatory Russian language training beginning in grade two … Almost daily for six weeks thousands of protesters have jammed [the capital] … the largest protests since Moldova left the Soviet Union in 1991 … Spurred at first by a government edict replacing a Romanian history course with one centred on Moldova, the demonstrators now demand that parliament resign and make way for new elections … The Communists ran on a platform, since shelved, of forming a political union with Russia and Belarus. Some here see the new history course as an effort to recast Moldova’s past in a rosy pro-Soviet light and ignore its Romanian roots. The students are even more solidly proEuropean. (IHT, 26 February 2002, p. 6) 25 February 2002: Moldova’s education minister told [4,000] protestors yesterday [25 February]… that he had made a mistake trying to have schoolchildren … learn Russian as a mandatory foreign language … ‘I made a mistake. I should have been stronger when it came to sacred things: our language and our history’ … The Russian language issue, and plans to rewrite history books, have led to almost daily protests in the capital since early January … A number of Russian companies have been intensifying their links with the country recently, including UES, the state-owned power company which last week said it was to create a joint venture to send electricity via Moldova to the Balkans. Mr Voronin, who is from Transdniestre, last November [2001] signed an agreement with Moscow designed to boost the role of Russian language and culture. (FT, 26 February 2002, p. 8) ‘The government had already backed down from the proposed changes on Friday [22 February]’ (Independent, 26 February 2002, p. 14). The demonstrations … are illegal and must therefore be halted immediately. Moldova’s supreme court of justice has ruled in response to an inquiry submitted by the government … Iurie Rosca declared at a rally, however, that court rulings mean nothing to the opposition … The demonstrations reached their peak last Sunday [24 February], when some 60,000 to 70,000 people gathered … For the first time the students were joined by people from the countryside … Several rightist parties, such as the Social Liberals, declared their support for the Christian Democrats. In order to calm things down the authorities declared a moratorium on introducing the course ‘History of Moldova’ in school curricula to replace the ‘History of the Romanians’ that students have studied for the past ten years, and they rescinded their decision to make the study of Russian mandatory in Moldovan schools. Education minister Ilie Vancea came out

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Moldova on the square and essentially apologized for the ill-conceived decree on the Russian language … Vancea also announced that he intended to resign. (Vremya Novostei, 27 February 2002, p. 5: CDSP, 2002, vol. 54, no. 8, p. 4)

26 February 2002: President Vladimir Voronin dismissed the education minister Tuesday [26 February] over his plan to force schoolchildren to learn Russian and he appointed a new reformist finance minister in a signal to foreign lenders … [The education minister] was moved to another post … Anger over the language plans sparked two months of nationalist-led street protests by thousands of students that developed into mass demonstrations against the communist-led government’s pro-Russian policies. (IHT, 27 February 2002, p. 7) 27 February 2002: ‘Moldova’s interior minister … resigned yesterday [27 February] as thousands of protesters called for the pro-Moscow government to step down and an end to censorship at state television and radio’ (Guardian, 28 February 2002, p. 14). By some estimates up to 20,000 demonstrators have come here to Chisinau’s main square in order to protest ‘Russification’ … [After] the Moldova government announced a decision to remove the course ‘History of the Romanians’ from the academic curriculum and to replace it with ‘History of Moldova’ … the number of demonstrators … instantly increased tenfold … Language and history are truly sore subjects for Moldova. But the cause of the current outpouring of emotion lies elsewhere … In late January parliament approved a decision to abolish the consolidated districts introduced by the nationalists and to restore the republic’s old administrative districts. In other words, the ruling party wanted to form its own vertical chain of authority, since people installed by the opposition … were still in power at the local level. After coming to power the Communists essentially found themselves isolated. Not a single democratic party would co-operate with them. (Obshchaya Gazeta, 21–27 February 2002, p. 3: CDSP, 2002, vol. 54, no. 8, p. 1) 21 March 2002: ‘Vlad Kubryakov, a deputy to parliament from the opposition Christian Democratic Party and a member of Moldova’s delegation to the Parliamentary Assembly of the Council of Europe, disappeared [on 21 March]’ (CDSP, 2002, vol. 54, no. 13, p. 15). 26 March 2002: Moldova’s police said yesterday [26 March] they had found no trace of an opposition deputy five days after he disappeared … Vlad Kubryakov [is] leader of the nationalist Christian Democratic People’s Party and the driving force behind street rallies against the ruling Communists. (FT, 27 March 2002, p. 6)

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28 March 2002: Hundreds of women and children marched through the streets of Chisinau on Thursday [28 March] in a silent protest against what they said was the Soviet-style disappearance of an opposition deputy. Vlad Kubryakov, a leader of the nationalist Christian Democratic People’s Party and the driving force behind rallies against the Communist-led government, disappeared a week ago. (IHT, 29 March 2002, p. 5) 31 March 2002: ‘More than 50,000 Moldovans rallied to demand that the ruling Communists resign and call an early election … amid rising tension over the disappearance of a leading opposition deputy’ (Independent, 1 April 2002, p. 10). 2 April 2002: ‘About 3,000 Moldovans, who had camped overnight outside government headquarters, called Tuesday [2 April] for the immediate resignation of the ruling Communists’ (IHT, 3 April 2002, p. 5). ‘Some 40,000 turned out at Easter to demand Mr Voronin’s resignation … A thousand or so have pitched tents opposite the parliament and say they will stay there until the government goes’ (The Economist, 6 April 2002, p. 42). 3 April 2002: Moldova’s Communist-dominated parliament cleared the way for leaders of the nationalist opposition to face criminal charges for leading mass antigovernment rallies. Nationalists vowed to ignore the move. Thousands of people have marched nearly every day since January through central Chisinau … Protesters say the government wants to drag Moldova … back into Russia’s sphere of influence … The Communists have condemned the rallies as illegal. Yurie Rosca and Stefan Sacareanu, leaders of the proRomanian Christian Democratic People’s Party, said they would disregard the assembly’s vote to strip them of their parliamentary immunity from prosecution. (IHT, 5 April 2002, p. 3) 19 January 2003: ‘About 5,000 people rallied [in Chisinau] Sunday [19 January 2003] … to protest alleged moves by the governing Communist Party to block a referendum on whether Moldova should join Nato and the EU’ (IHT, 20 January 2003, p. 3). 2 February 2003: ‘About 2,000 people marched [in Chisinau] … to call for a referendum on joining Nato and the EU’ (IHT, 3 February 2003, p. 9). 7 February 2003: President Vladimir Voronin made a one-day visit to Moscow yesterday [7 February]… He is engaged in a confrontation with the opposition and Moldova is in the midst of an economic crisis … Supporters of the

350 Moldova Christian Democratic Popular Front of Moldova have renewed their calls for unification with Romania. Today [8 February] they are occupying the Moldovan capital’s central square, as they did a year ago … Lately 3,000 to 5,000 demonstrators have been assembling in the square each weekend. (CDSP, 2003, vol. 55, no. 6, p. 17) 12 February 2003: President Vladimir Voronin has unveiled a plan for a final settlement of the Dniestre region conflict. He proposed to the authorities in Tiraspol that the two sides jointly draft a new constitution establishing a federal structure for the country and then choose a new leadership … He stressed that the initiative is based on the ‘plan … that OSCE and the guarantor states – Russia and Ukraine – proposed in Kiev, a plan that provides for turning Moldova into a federal state’. This marks the first time the Moldovan authorities … have officially talked about the possibility of abandoning the country’s unitary structure … [Chisinau] would also guarantee the region’s right to self-determination should Moldova’s status ever change. That is an allusion to Moldova’s possible annexation to Romania, a prospect that Tiraspol has always feared. (p. 17) 27 February 2003: The EU and America are to impose travel restrictions on some leaders of … Transdniestre to force them to negotiate with [Moldova] … The EU will slap a formal entry ban on seventeen leaders from [Transdniestre]… including its self-styled president, Igor Smirnov … In a joint statement the EU and America said the conflict posed a serious risk to stability and security. (Telegraph, 28 February 2003, p. 16) 20 March 2003: for the US-led war in Iraq, see the summary for Russia. 25 May 2003: ‘The Communist Party consolidated its hold on power … winning over 47 per cent of contested posts for mayor and other municipal offices, according to preliminary results’ (IHT, 27 May 2003, p. 4). ‘[Communist Party] candidates have taken 53 per cent of the 503 mayoral seats in local elections. Run-offs will be held in 395 towns where no candidates mustered more than half the votes’ (Independent, 30 May 2003, p. 14). 8 July 2003: Moldova’s ruling Communist Party has failed to get its candidate, Vasile Zgardan, elected mayor of Chisinau. According to preliminary returns, incumbent mayor Serafim Urechean received almost 54 per cent of the vote … Up until now there was a perception that the president did not have a viable rival. Now such a rival seems to have emerged in the person of

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Chisinau mayor Serafim Urechean, who will very soon become head of the rightist opposition, which has not had a strong leader in the past. (CDSP, 2003, vol. 55, no. 23, p. 15)

THE ECONOMY

Economic background Moldova suffered one of the worst balance of payments shocks of any individual country in the former Soviet Union (FSU). This was attributable not only to the very close interdependence with other parts of the FSU … but was compounded by an adverse terms of trade effect which was exceptional even by the standards of CIS countries. With its lack of energy resources the country is almost totally dependent upon imports from the former Soviet Union … The country’s major economic sectors, agriculture and agricultural processing, are highly dependent upon imported fertilizers and other inputs whose prices rose sharply. In contrast Moldovan major exports of wine and agricultural based products faced generally depressed markets in other CIS countries, the rupturing of the normal market outlets and competition from other suppliers. The position was further exacerbated by the armed conflict in Transdniestre in 1992 and droughts and floods in 1992 and 1994. (MET, Quarterly Issue, August 1996, p. 6) Moldova’s energy resources comprise only two small hydro-stations together with a small amount of wood, supplying under 5 per cent of its total energy requirements. Thus 95 per cent of its energy requirements are imported (p. 66). Moldova has experienced an acute economic crisis since the fourth quarter of 1998 accompanied by rising capital flight, a depreciating exchange rate, rising inflation and external debt payments, critically low foreign currency reserves and budget financing occurring mainly in the form of central bank credits and substantial government payment arrears on wages and pensions. (MET, Monthly Issue, July 1999, p. 12) In February 1998 parliament approved a decision to turn over shares in two Moldovan enterprises (Moldovagas and Gassnabtransit) to Gazprom. Even so, on 16 June 1998 Gazprom reduced gas deliveries by 50 per cent owing to payments problems (CDSP, 1998, vol. 50, no. 24, p. 17). The operations of Moldovagas and the Russian–Moldovan joint stock company Gassnabtransit have been closed and their property is to be transferred to a new organization under the old name Moldovagas. This is a

352 Moldova Russian–Moldovan joint stock company, 50 per cent of whose shares belong to Russia’s Gazprom and 50 per cent to Moldovagas, including 14 to Transdniestrian gas enterprises (MET, Monthly Update, March 1998, p. 21). As of 1 February 1999 Russia’s Gazprom was to reduce the supply of gas to Moldova by 50 per cent and threatened to reduce the supply further ‘until Moldova organizes reliable and regular payments’. Moldovagas was to cut supplies to local defaulting consumers (MET, Monthly Update, February 1999, p. 3). On 30 April 1999 the prime minister issued a directive that all economic agents had to pay off their electricity debts by 15 May 1999. Power supply to debtors would be cut off after that date. The directors of energy enterprises would face severe punishments (up to dismissal) if they supplied electricity to defaulters. The directive forbad energy enterprises from accepting payments through barter or netting operations. In early April Ukraine and Romania temporarily cut off power supplies because of accumulating debts owed by Moldova (MET, Monthly Issue, April 1999, pp. 3, 14). On 16 April 1999 the government signed an agreement with Russia’s Gazprom setting up a joint venture, which absorbed the entire gas sub-sector of Moldova. Gazprom received 50 per cent plus one share in the venture in return for a partial write-off of Moldova’s gas debt (MET, Monthly Issue, April 1999, p. 3). ‘A solution has yet to be found for the $272 million of outstanding energy debt to Russia’s Gazprom’ (EBRD 2003a: 72).

The economic system EEN (2 February 1993, vol. 7, no. 3, pp. 7–8) argued that economic reforms were minimal. But The Banker (March 1993, p. 47) saw some progress. Moldova had gone some way towards creating the legal and institutional infrastructure of a market economy. Privatization laws had been passed and privatization was being extended to agriculture. A free-trade zone had been established with Romania (a committee also liaises between the two parliaments). Industry, like agriculture, faced a collapse in traditional markets, a sharp increase in costs of raw materials and problems in availability. This resulted in significant use of barter for the considerably reduced output. The endemic inter-enterprise indebtedness together with the debts of the budget and social fund … have further exacerbated the problem. (MET, Quarterly Update, November 1996, p. 9) Moldova was once a reform leader, but tensions between parliament and president have slowed development down to a crawl. Parliament is in principle opposed to privatization and has blocked relevant legislation, leading to a delay in payments from the World Bank … Ukraine has imposed punitive tariffs on transit goods, while Russian demand has been weak, stifling the country’s key market over the past year. (Business Central Europe 1997: 50–1)

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‘[The government has a] tendency to intervene in the running of the economy. Persistent government interference increasingly discourages private investment and reduces the value of state assets slated for privatization’ (EBRD 2003a: 72).

Financial reform The IMF (World Economic Outlook, May 1993, p. 67) reported that coupons (used for cash payments) circulated alongside the rouble after June 1992. The coupon became the sole domestically accepted currency in July 1993. Moldova’s own currency, the leu, was introduced on 29 November 1993. The leu is traded on the currency exchange and has been made convertible for residents (Deutsche Bank, Focus: Eastern Europe, 1994, no. 113, p. 7). The exchange rate is now largely market-determined, with thrice-weekly currency auctions. The Dniestre region introduced a separate currency in late August 1994. Most payments and transfers for current transactions and some capital transfers are now free of controls. There has been a reduction in the surrender requirement; repatriation of export earnings is required, but only 35 per cent is compulsorily sold on the domestic interbank market (EBRD 1994: 31). The export-earning surrender requirement, with 35 per cent having to be compulsorily sold on the domestic market, was eliminated in November 1994. Moldova declared its currency convertible for current account transactions at the end of June 1995 (EBRD 1995b: 51). The macroeconomic stability which had characterized the Moldovan economy in recent years was lost in 1998, partly as a result of the economic crisis in Russia. GDP contracted by 8 per cent, the exchange rate depreciated sharply and inflation has accelerated … The National Bank of Moldova attempted to prevent moves by banks into the foreign exchange market by imposing, in October 1998, a reserve requirement of 25 per cent as an interim measure. This requirement was reduced in November 1998 to 15 per cent with a condition that banks hold 10 per cent of all assets in Treasury bills. (EBRD 1999a: 40–1) Moldova maintains few currency restrictions (EBRD 1999b: 246). There are no restrictions on current account transactions. The exchange rate is determined daily at auctions on the Moldovan interbank foreign currency exchange market. The National Bank of Moldova intervenes in the foreign exchange market in accordance with its overall monetary targets and with the aim of smoothing out the fluctuations in the exchange rate (MET, Quarterly Issue, August 1996, pp. 25–6). The central bank is independent of the government (p. 38). Moldova has agreed with the IMF to a stabilization programme (e.g. a budget deficit of no more than 3.5 per cent of GDP in 1994), the complete liberalization of consumer goods prices by July 1994, trade liberalization and accelerated privatization (CDSP, 1993, vol. XLV, no. 46, p. 30).

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Moldova and Kyrgyzstan have implemented successful stabilization programmes, reducing monthly inflation to 2–5 per cent in May–June 1994 in the wake of tough fiscal and credit adjustments over the previous six months (Economics of Transition, 1994, vol. 2, no. 3, p. 405). Moldova ‘has surprisingly emerged as one of the economic success stories of the former Soviet Union’. On 14 March 1995 a memorandum of intent was signed by the central bank and the IMF, with Moldova pledging to keep the budget deficit below 3.5 per cent of GDP and annual inflation down to 10 per cent in 1995. As a result of the austerity programme launched in 1994 the monthly inflation rate was 2.3 per cent in February 1995 (FT, 15 March 1995, p. 3). The cancellation for the second day running [on 3 November 1998] of the daily currency auction … led the Moldovan central bank to withdraw from the official interbank currency exchange, where it has been losing around $2 million a day propping up the leu. (FT, 4 November 1998, p. 2) The consolidated (central and local) budget balance (which showed deficits as a percentage of GDP of 6.2 per cent in 1993, 4.8 per cent in 1994 and 4.9 per cent in 1995) excludes the Dniestre region, while the GDP figures refer to the whole of Moldova (MET, Quarterly Update, November 1996, p. 26–7). Thus the budget deficit remains modest. Furthermore, the deficit is financed less and less by credit provided to the government by the central bank and more and more by the sale of government securities and foreign loans (p. 53). A bankruptcy law was adopted in 1992, but was hardly used in 1993 (EBRD 1994: 30). The March 1995 bankruptcy law made it easier for creditors to trigger bankruptcy proceedings. Proceedings have been initiated against twenty state enterprises and ten cases have been completed (EBRD 1996b: 164). There was a downward trend in the nominal exchange rate in early 1997. The leu has been persistently depreciating since August 1997. Monetary policy envisages a gradual lowering of the leu’s exchange rate down to five lei to the US dollar by the end of 1998. The depreciation of the leu is directly related to the Russian financial crisis. Within a month of the financial crisis breaking out in Russia almost two-thirds of the 1997 annual sales volume of US dollars has been sold on the Moldova Interbank Currency Exchange (MET, Monthly Update, September 1998, p. 11). ‘Given the large trade deficit in Moldova – currently at an unsustainable level of 50 per cent of GDP – Moldova will face a more serious crisis should the financial market move into deeper trouble’ (p. 18). The negative impact of the Russian crisis on Moldovan financial markets and expectations towards a worsening of the financial situation pushed the exchange rate to lei 5.75 to the US dollar by mid-October and close to six later in the month. The unofficial rate of exchange, which was in fact the more widely practised one, was considerably higher, even bordering on seven

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for a few days. After a weekend of practically freezing the exchange of dollars for lei by the authorities … [the rate was] closer to 5.4 in the third week of October. (MET, Monthly Update, October 1998, p. 11) The growth in the volume of dollar sales is certainly a by-product of the Russian financial crisis. The direct consequence of the depreciation [of the leu] was the enormous demand for dollar cash in late August and early September. However, the next stage of the crisis took a surprising turn in mid-October. With the exchange rate reaching 7 lei per dollar in some exchange offices, the authorities placed a temporary freeze on the availability of lei in an attempt to bring the exchange rate back to five … While the exchange rate, as a result, started to slip back closer to the officially predicted exchange rate of five by the end of 1998, it did not prove sustainable. The exchange rate started to slide … soon after bordering on six in the third week of October … Some shops selling imported goods were closed for several days in October, when the exchange rate fluctuated each day unpredictably. In order to keep the exchange rate more stable and decrease the demand pressure for dollars by the commercial banks, the National Bank has decided to increase their obligatory reserve ratio from 8 per cent to 25 per cent. This brought about an acute shortage of cash lei in the exchange offices, the controversial situation observed during October. (p. 19) During September to late November 1998 the Moldovan leu dropped dramatically from 4.7 to over 9.0 against the dollar … During the month of November alone the exchange rate of the Moldovan leu has registered a persistent drop from 6.4 down to 9.6 against the dollar … In order to keep the exchange rate more stable and decrease the demand pressure for dollars by the commercial banks, the National Bank decided in October to increase their obligatory reserve ratio from 8 per cent to 25 per cent. At the same time the NBM withdrew from the interbank currency exchange … The NBM also decided to reverse its earlier requirement of increasing the reserve ratio, and replaced it with a lower rate of 15 per cent … The gradual withdrawal of the NBM from regulating the money market since late summer is evident in other respects too … Since the NBM refused to hold credit auctions in July 1998 it has accordingly stopped setting the refinance rate for credits to commercial banks. The interest rate is then subject to demand and supply in the credit market and hence is no longer an instrument of control of money supply and monetary aggregates. It is therefore up to the commercial banks now to set their interest rates at which they will grant credits. (MET, Monthly Update, December 1998, p. 19) In October 1998 the NBM decided to cut its dollar interventions on the local foreign exchange market and finally withdrew from this market. As a

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Moldova result the exchange rate is now calculated as a weighted average of all transactions in foreign currencies concluded by commercial banks. (MET, Quarterly Issue, July–September 1998, p. 5)

‘In November [1998] … the exchange rates screen at the Moldovan interbank foreign exchange showed ten lei for one US dollar.’ In mid-November a provisional agreement was reached with the IMF for a tranche of some $35 million under the three-year $189 million extended fund facility programme approved in May 1996 (p. 49). The agreement covers the remainder of 1998 and the first half of 1999 (p. 46). [The year] 1998 has been a very difficult year for Moldova. By the last quarter of 1998 … an acute economic crisis [occurred] in the country. The crisis was characterized by capital flight, a depreciating exchange rate, international reserves at critically low levels, rising expenditure arrears and budget financing only through central bank credit … The crisis in Russia has not only influenced output by devastating the major export market for Moldova, but also put pressure on the leu causing the annual inflation rate for 1998 to stand at 18.2 per cent and therefore ending the excellent anti-inflation record of the previous years. Years of easy financing, especially foreign, and slow and incomplete structural reforms have resulted in excessive budget deficits and increased indebtedness of the country. (MET, Quarterly Issue, October–December 1998, p. 3) In January 1999 the IMF released a $35 million tranche of the three-year loan (p. 4). ‘The official exchange rate [was pushed] to 8.3 lei per US dollar by the end of November [1998]. In December the exchange rate fluctuated from 8.6 to 8.3 per US dollar’ (p. 23). In order to finance the budget deficit the ministry of finance uses internal sources through borrowing from the National Bank and commercial banks and issuing state securities, as well as external sources … In 1997 internal sources constituted 43.6 per cent (or 290.4 lei, including 168.8 million lei from state securities) and external sources 56.4 per cent. In 1998 Moldova had no access to external financing and was obliged to resort to loans from the National Bank of Moldova (471.6 lei) and financing from Treasury securities (103.5 million lei). (p. 40) On 11 January 1999 the IMF resumed lending with a $35 million tranche (MET, Monthly Update, February 1999, p. 3). ‘Parliament … [has adopted] a tight budget and approved a law on privatizing the wine and tobacco industries. The government has also promised to

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sell a controlling stake in the national phone monopoly Moldtelecom. That has cleared the way for a new $150 million loan agreement with the IMF. (Business Central Europe 2000: 46) ‘The IMF resumed its funding … in December 2000 but suspended it in May 2001 pending a review of the new government’s policies’ (EBRD 2001b: 174). The IMF’s poverty reduction and growth facility programme remains suspended. This is due in part to insufficient progress in key structural reforms, including the privatization programme for wineries, tobacco and infrastructure sectors, although some of the conditions for resumption of the programme have been implemented recently. (EBRD 2002a: 72) ‘This year [2002] Moldova, already desperately poor, will spend about 75 per cent of its government income on debt repayments’ (Joseph Stiglitz, FT, 23 September 2002, p. 23). The need to repay about $35 million out of a $75 million Eurobond is the main reason for the sharp rise in scheduled external debt repayments in 2002, which amount to over 60 per cent of central government revenues. However, the government was unable to meet these obligations and was forced to reschedule its debt with private and official creditors … The restructuring of the Eurobond [took place] in August 2002 … The IMF resumed loan disbursement under the poverty reduction and growth facility in July 2002. (EBRD 2002b: 178)

Prices In January 1992 most consumer goods prices were liberalized. The exceptions were the prices of bread and dairy products, some transport prices and utility charges. Initially indirect price control remained through heavy producer regulation and strict retail margin controls, but 1993 saw some liberalization and an increase in milk prices to 75 per cent of production costs (EBRD 1994: 31). By 1 January 1995 the government had removed margin controls on most goods. Energy prices, among others, remain well below cost (EBRD 1995b: 51). By the start of 1995 margin controls on most goods had been removed. Prices are still controlled for a small number of public services, electricity and gas, and (in the form of margin controls) for some basic goods. As a result of substantial price increases average gas and electricity tariffs are at operating cost recovery levels (EBRD 1996b: 164). Moscow News (12 November 1993, p. 81) talked of the first steps having been taken towards free prices, e.g. most jewellery and some goods made of natural fur and leather. The mark-up on the prices of twenty-five types of socially

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important goods (such as meat, dairy products, bread, fruit and vegetables and children’s clothing and shoes) is limited to 20 per cent of the wholesale price. There has been some significant adaptation of energy prices to reflect market conditions (except in the Dniestre region). The prices of petroleum products and coal are now unregulated for the private importers who are currently responsible for some 30 per cent of such imports. For the state sector a cost-plus system is adopted. This does not fully cover depreciation but is close to cost recovery levels. The major problems occur with electricity and heating tariffs, with households subsidized by industrial consumers. As with industry in general, the energy sector suffers from problems of non-payment (MET, Quarterly Issue, August 1996, p. 71). There have been sharp increases in energy prices in 1997. The cross subsidy between industry and households will be eliminated and prices will reflect the true cost of supplying both energy and gas (MET, Quarterly Issue, August 1997, p. 23). An independent energy sector regulator has been established and legislation adopted to authorize the cutting-off of non-payers. This should help improve payments discipline (EBRD 2000a: 68). ‘Significant [energy] tariff increases occurred recently’ (EBRD 2001a: 29).

Privatization Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 10 per cent; 1991, 10 per cent; 1992, 10 per cent; 1993, 15 per cent; 1994, 20 per cent; 1995, 30 per cent; 1996, 40 per cent; 1997, 45 per cent; 1998, 50 per cent; 1999, 45 per cent; 2000, 50 per cent; 2001, 50 per cent. The private sector now accounts for 60 per cent of industrial output, 70 per cent of retail trade and 44 per cent of capital construction works and transport. The unofficial economy has grown to an estimated 35 per cent to 40 per cent of GDP (EBRD 1999b: 24, 248; 2000b: 14, 192; 2001b: 12, 176; and 2002b: 20, 180). ‘The shadow economy [is] equal to some 60 per cent of official GDP’ (Transition, 2001, vol. 12, no. 1, p. 10). The private sector is thought to account for 10–25 per cent of GDP, including an allowance for informal sector activity. The March 1993 large privatization plan envisaged the privatization within two years of about 1,600 enterprises (accounting for 40 to 45 per cent of state assets), mostly through the distribution of ownership vouchers to the whole population. The programme also includes 124 medium-sized and large enterprises under the control of the ministry of privatization and state property. Some state corporations are to remain in state ownership, including some utilities, scientific institutes and large food-processing companies. The sale to private entities of small units began in September 1993 with the first, relatively modest auctions. No property restitution for pre-communism owners has taken place (EBRD 1994: 30). The target of privatizing 35 per cent of the total value of state-owned assets by the end of 1994 was not achieved. But by then four public auctions had been organized to

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privatize around 700 medium-sized to large state enterprises, 408 of which passed into private hands. Further small-scale privatization had been undertaken (EBRD 1995a: 61). Since June 1994, 874 state enterprises have been sold, of which 472 were large or medium-sized ones and 402 were small ones. In 1995 the pace of privatization accelerated further. The 1995–6 privatization programme, approved in March 1995, scheduled another 1,450 enterprises for privatization (804 were to be privatized for vouchers, 183 for cash and the remainder for a combination of vouchers and cash). Voucher privatization was to finish by November 1995. The 1995–6 programme envisaged the privatization of virtually all small enterprises (EBRD 1995b: 51). The first voucher-based part of the programme was completed by November 1995 (with the sale of about half of all state holdings in enterprises: p. 23). But the planned cash privatizations have not so far met expectations. By the end of 1995 only forty-four enterprises (out of a planned 183) had been sold. The first international tender (in the tobacco sector) was initiated in December 1995. Other tenders, partly aimed at international investors, are being prepared, with the aim of selling (for cash) some forty strategic enterprises in various sectors (including the state telecommunications company). Workers, former workers and management own majority stakes in 186 medium-sized and large enterprises. No property restitution has taken place (EBRD 1996b: 163). Enterprise restructuring is a priority of the authorities (p. 164). The mass privatization programme was essentially completed by 1996. But cash privatization has proven to be more difficult (EBRD 1997a: 31). In 1996 the private sector accounted for 70 per cent of total retail trade and services and for 60 per cent of industrial output. Cash privatization of larger enterprises via tenders has virtually stalled, e.g. negotiations for a tobacco enterprise were cancelled in January 1997. ‘Privatization and enterprise restructuring have not yet produced effective corporate governance’ (EBRD 1997b: 187). Cash privatization of large enterprises via tenders virtually stalled in the second half of 1997. A privatization programme for 1997–8 was finally agreed in September 1997 and covered practically all productive assets left in the hands of the state. The gas industry was privatized early in 1998 with 50 per cent of shares being acquired by Russia’s Gazprom in lieu of debt, 35 per cent by the Moldovan government and 14 per cent by the Transdniestre region (EBRD 1998a: 39). In March 1998 parliament approved a plan to consolidate the gas industry into one company (Moldovagas), comprising the Moldovan and Transdniestre region distribution networks and a pipeline joint venture with Russia’s Gazprom. The new company would be owned 50 per cent by Gazprom (in a debt-for-equity swap), 36 per cent by the government and 14 per cent by the Transdniestre region. The Gazprom stake only partially settled Moldova’s gas arrears and in June 1998 supplies were cut in half. By the beginning of 1997, 60 per cent of industry, 70 per cent of trade and services, 44 per cent of construction and transport, 40 per cent of agricultural products and 85 per cent of public housing had been privatized. There was little further progress during 1997 and the first half of 1998, when only a fraction of the small enterprises offered in cash auctions were actually sold and not one large enterprise was

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privatized. Foreign interest has been low, following cancellation of the tender for the state tobacco company in 1996. The number of shares traded on the stock exchange rose sharply in 1997 as compared with the year before. Around 70 per cent of transactions involved share swapping between privatization investment funds which followed a new law limiting the holding of a fund in a firm to a maximum of 25 per cent. Dispersed share ownership gives a high degree of insider control, which stands in the way of enterprise restructuring … Since the bankruptcy law was amended in mid-1997 proceedings have started against only three companies and these were initiated by the state rather than creditors. Some restructuring is taking place through the state agency for enterprise restructuring which works with large firms heavily indebted to the state … Of the sixty companies that had registered with the agency twenty-eight had completed the programme by mid-1998. (EBRD 1998b: 180–1) ‘Dispersed ownership and the lack of governance provided by investment funds have limited restructuring in privatized companies.’ In December 1998 parliament passed a law allowing the sale of the five regional distribution companies (EBRD 1999b: 246–7). Trade sales have accelerated following improvements in the tendering process. Parliament’s failure to approve the privatization of the wine and tobacco industries in April 2000, however, has delayed the resumption of the IMF programme. (Parliament voted against the government’s privatization bill for five state wine enterprises and tobacco enterprises on 17 April: EEN, 2000, vol. 12, no. 23, p. 9.) In February 2000 a Spanish strategic investor concluded an agreement to purchase three of the five power distribution companies, having won the tender at the end of 1999. Following the removal of restrictions on majority foreign ownership of insurance companies, the largest insurance company in Moldova (Asito) was acquired in September 1999 by an Australian strategic investor (EBRD 2000a: 68). With the essential completion of the small and medium-scale mass privatization, the government has continued with the policy of selling shares in larger enterprises for cash under the privatization programme for 1999–2000 … Restructuring among privatized companies has been limited … [A] survey revealed that the main constraints on the development of small and medium-sized enterprises remain high taxes, conflicting legislation and arbitrary bureaucratic administration of taxes and regulations. (EBRD 2000b: 190–1) Privatization results in 2000 were disappointing, with only a few of the planned 120 sales completed. However, the recent adoption of legislation that allows the privatization of five strategic wineries and all tobacco companies through open tender, and the successful privatization of the

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energy sector are encouraging … Substantial progress in reforming the energy sector was made in 2000, in terms of privatization and the creation of an independent regulator … Significant [energy] tariff increases occurred recently. (EBRD 2001a: 29) Privatization advances … In July 2001 the privatization programme, including the sale of thirteen wine and tobacco companies, was enacted … The government recently approved a new tender for the privatization of energy companies … However, in August 2001 the government postponed its plan to privatize the power distribution companies due to a legal dispute with a Ukrainian power company and a lack of investor interest … In June 2001 the government selected an advisor for the privatization of the fixed-line monopoly, Moldtelecom. An international tender to sell a 51 per cent stake in Moldtelecom is expected to be launched by the end of the year. (EBRD 2001b; 174–5) Implementation of the privatization programme is moving slowly … The privatization of two electricity distribution companies has been delayed … but the tender for the privatization of Moldtelecom … the fixed-line monopoly … was announced in June 2002 … The winner of the tender will acquire 51 per cent of the shares and management control. (EBRD 2002b: 179) The mass privatization programme was completed by the end of November 1995. Two-thirds of the non-agricultural sector has now been privatized. In total 2,235 enterprises (1,137 large or medium-sized and 1,098 small) have been privatized under the programme. National Patrimonial Bonds were issued to 3.5 million citizens, of whom 3.1 million (98 per cent) participated. Around 6 per cent (146 enterprises) of the total destined for privatization have not been privatized. Of the total shares subscribed under the programme, only 20 per cent were from individual investors and 80 per cent were from either fiduciary or investment funds. Investment funds are important even in the case of small enterprises. As regards strategic enterprises, tenders are being prepared for around forty enterprises. The privatization of Moldtelecom is under way. The stock exchange started operating in June 1995. The privatization of housing is close to completion. Some 191,000 dwellings have been privatized. This represents over 80 per cent of the total number of dwellings to be privatized (54 per cent were privatized free of charge, 41 per cent for National Patrimonial Bonds and 5 per cent for cash) (MET, Monthly Update, July 1996, pp. 27–9). Since around 11 per cent of the vouchers distributed among the population were not invested, in July 1996 parliament prolonged the mass privatization programme until 1 November 1996. ‘Workers, former workers and managers only own direct 186 of the large or medium-sized companies, or around 16 per cent. Ownership very largely rests

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with the investment funds and trust companies.’ In July 1996 parliament passed the second reading of the law on investment funds. Previously they were not allowed to hold more than 25 per cent of the shares of an enterprise. Henceforth 25 per cent of a privatization fund’s net wealth may be invested with no such restriction. The privatization of 40 per cent of Moldtelecom to a strategic investor is currently under way (MET, Quarterly Issue, August 1996, p. 49). Parliament extended the mass privatization programme until 1 November 1996. In all around 100 enterprises and 37,000 dwellings were not privatized. The government has started to privatize for cash (MET, Monthly Update, September 1996, p. 15). The government has selected forty-one enterprises which it expects to sell for cash via tender (MET, Quarterly Update, November 1996, p. 37). By early 1996 over 80 per cent of the number of dwellings available for privatization had actually been privatized (54 per cent free of charge, 41 per cent for National Patrimonial Bonds and 5 per cent for cash) (p. 39). The Privatization Investment Funds, which are the main shareholders in the privatized enterprises, have been swapping shares ‘to ensure adequate shareholdings in individual companies’ (MET, Monthly Update, February 1997, p. 2). The 1997–8 privatization plan was passed by parliament at the end of June 1997. This permitted the sale of enterprises for cash (MET, Quarterly Issue, August 1997, pp. vi, 49). The 1997–8 privatization programme was finalized on 11 September 1997 (MET, Quarterly Issue, July–September 1997, p. 4). Objects included in the third programme were to be sold only for cash. Progress in respect of the forty-one enterprises to be sold by tender has been disappointing (p. 65). ‘The search for viable buyers for the privatized entities continues but developments have been relatively slow’ (MET, Monthly Issue, December 1997, p. 20). The 1997–8 privatization programme allows local investors to pay for an object in instalments (spread over three years), whereas foreigners have to pay the total sum on the spot (MET, Quarterly Issue, October–December 1997, p. 66). The 1998 plan assumes the effective privatization of large enterprises (such as Moldtelecom) and of those spheres in which the state plays a major role (such as air and road transport, energy and tobacco). Local investors have previously been deterred by an obligation to declare their resources. At the end of 1997 participants in privatization auctions were exempted from this obligation. It is very important to conclude the Telecom tender as soon as possible to reverse the damage caused by the cancellation of the tobacco tender. There have also been other failures to sell (MET, Quarterly Issue, January–March 1998, pp. 66–7). ‘During the first nine months of 1998 … only 9 per cent of all offered objects [were] sold. Poor interest by foreign investors is the main obstacle. Only Rezina cement factory and Farmaco have been sold to foreign strategic investors’ (p. 5). ‘A winner of an investment tender is a company which proposes to invest more … Between November 1997 and November 1998 a total of fourteen enterprises have been sold through investment tenders out of the ninety offered.’ Those bought by local investors included two hotels and a carpet factory. Four enterprises were bought by foreign investors, namely a sewing factory, a cement factory, Farmaco and Agro-Petrol (p. 58).

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The government has elaborated a privatization programme for 1999–2000 and presented it to parliament. During the last privatization programme for 1997–98, which was planned to be the last one, less than 50 per cent of all items included in the lists have been privatized. (MET, Monthly Update, February 1999, p. 14) During 1998 a total of seventeen enterprises were sold through investment tenders out of the 102 offered. Some of the items, including two hotels, a carpet factory, movie houses, etc., were bought by local investors. Five enterprises were bought by foreign investors, including a sewing enterprise, a cement enterprise and a leather enterprise (MET, Quarterly Issue, October–December 1998, p. 59). ‘As of early 1999 about 60 per cent of the economy is in the private sector … About 91 per cent of the country’s housing stock is in private hands’ (p. 57). Parliament has extended the validity of the privatization programme for 1997–98 for two more years and has introduced some amendments to this programme. These amendments include an allowance to sell bankrupt enterprises or unfinished construction items for a symbolic price, to increase the period of instalment payments from three to five years etc. (MET, Monthly Issue, April 1999, p. 14) Other sources dealing with privatization Only housing and agriculture have been partly privatized to date. But a privatization law has been passed recently by parliament. A third of state property is to be privatized by issuing vouchers to citizens (allocation depending on years of work), who have two years to exchange them for shares in the 1,600 enterprises (Business Central Europe, September 1993, p. 74; and November 1993, p. 60). The aim was to privatize one-third of state property by the end of 1994 (FT, 1 March 1993, p. 3). Vouchers are to be used in the privatization of 1,200 enterprises, accounting for 45 per cent of the total value of state property (Moscow News, 24 September 1993, p. 7). The mass privatization programme was completed by the end of November 1995. Two-thirds of industry had been transferred to the private sector. The government was also planning to speed up remaining privatization with a list of enterprises (wineries, tobacco, canned foods and textiles) to be sold for cash (Business Central Europe 1995: 53–4). By December 1995, 2,230 smaller enterprises had been privatized, putting 60 per cent of the economy into private hands. Forty big enterprises were to be put up for sale in the autumn of 1996. Banks have been privatized (Business Central Europe, November 1996, p. 78). The mass privatization programme finished on 30 November 1995 after the sale of 1,132 large enterprises and 613 shops in voucher auctions over a period of fifteen months. ‘The auctions, the last of which closed yesterday, transferred

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two-thirds of the country’s non-agricultural economy to the private sector’ (FT, 1 December 1995, p. 3).

Foreign trade The state monopoly on foreign trade was abolished in 1992. There are few import licences, but there are licensing requirements for seventy-seven export categories and some export quotas (EBRD 1994: 31, 111). On 1 December 1995 the last export quotas on grains and grain products were lifted and the maximum tariff (with very few exceptions) was lowered to 20 per cent. Import licences have been eliminated, with a few exceptions regarding national security and goods subject to medical and cultural regulations. The government committed itself to repeal excise taxes on wine and unprocessed tobacco by July 1996 (EBRD 1996b: 164). In 1996 import tariffs for key intermediate and capital good inputs were increased. But in June 1997 tariffs were reduced again to an average 5 per cent (EBRD 1997b: 187). Moldova has a fairly liberal trade regime (EBRD 1998b: 180). The immediate reaction of individual CIS countries, including Moldova, to the rupturing of flows of trade and payments between countries of the former Soviet Union was the imposition of barriers on exports. But by the end of 1993 measures had been taken in Moldova to liberalize the trade regime. These included the elimination of export taxes and a decrease in quotas. At present there is no import licensing besides the usual provisions covering certain national security, medical and cultural items (MET, Quarterly Issue, August 1996, p. 63). With its lack of energy resources Moldova is almost totally dependent on imports from the countries of the former Soviet Union, especially oil and natural gas from Russia and coal from Ukraine. The main economic sectors, agriculture and agricultural processing, are highly dependent on imported inputs such as fertilizers (MET, Quarterly Update, November 1996, p. 5). Moldova accounted for 30 per cent of the former Soviet Union’s tobacco production, 20 per cent of table grapes and wine, 13 per cent of fruit and 10 per cent of vegetables (p. 7). Duties on trade with CIS countries are applied on the principle of country of origin, i.e. Moldovan exports are subject to Moldovan VAT, while zero duties are imposed on imports from other CIS countries. A free-trade agreement between CIS countries was instituted from the end of 1993. In trading with other countries the principle of country of destination is applied, i.e. duties are imposed on imports at the border (pp. 49–50). Until January 1998 duties on trade with the CIS countries were applied on the principle of country of origin, i.e. Moldovan exports were subject to Moldovan VAT while no duties were imposed on imports from CIS states with the exception of Ukraine, which changed to country of destination rules as part of its preparation to apply for membership of the WTO. Major difficulties appear to relate to differing VAT regimes. Russia operates a regime applying VAT and excise duties by country of origin. This means that exports of energy to Moldova include certain taxes (MET, Quarterly Issue, January–March 1998, p. 85). Since January 1998 the principle of country of destination has been

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generalized to calculate duties and VAT, with the exception of trade with Russia (p. 86). That is, duties are imposed on imports at the border (p. 85). In August 1994 Moldova signed a partnership and co-operation agreement with the EU. The EU has granted Moldova a generalized system of preference scheme which enhances Moldova’s access to the EU market. Goods classified as ‘nonsensitive’ are granted duty-free access to the EU. ‘Semi-sensitive’ goods benefit from a 35 per cent reduction in tariffs, while ‘sensitive’ receive up to a 30 per cent reduction and ‘very sensitive’ receive a 15 per cent reduction. Moldova’s exports of wines to the EU do not benefit from this agreement (MET, Quarterly Issue, August 1996, p. 63). ‘This week Moldova … joined … the WTO’ (The Economist, Saturday 28 July 2001, p. 75). After six years of negotiations Moldova joined the WTO in June 2001 … According to the agreement, companies operating in Transdniestre will have to observe WTO rules and regulations, including the introduction of new customs rules common to the entire country. (EBRD 2001b: 174)

Foreign direct investment The volume of foreign direct investment is very small. (See Table 5.1) Net direct foreign investment was $12 million in 1994 and $64 million in 1995 (United Nations Economic Commission for Europe 1996: 149). The number of registered ‘enterprises with foreign capital participation’ rose from ninety-seven at the end of 1991 to 622 at the end of 1995 (operational enterprises numbering sixty-seven and 237 respectively). Authorized foreign capital amounted to $45.9 million by the end of 1995 (MET, Monthly Update, July 1996, pp. 8–9). A free-trade zone was established in Chisinau in July 1996 (MET, Quarterly Update, November 1996, p. 45). Estimated figures for 1996 show that enterprises with foreign participation accounted for 5 per cent of total industrial output, compared with 3.3 per cent in 1995 (MET, Monthly Update, February 1997, p. 16). ‘Foreigners have invested just $50 million in Moldova’s largely agrarian economy’ (The Economist, 5 October 1996, p. 58). By the end of 1995 Moldova had attracted just $48 million in foreign investment (Business Central Europe, November 1996, p. 78). Foreigners or foreign-owned enterprises are allowed to lease but not own land (EBRD 1996b: 165). In July 1997 parliament passed amendments to the land code. All citizens of Moldova and Moldovan legal entities without foreign participation would be able to buy land, although resale would be allowed only five years after purchase. Foreigners would not be able to buy agricultural land (MET, Quarterly Issue, August 1997, p. 49).

1.9 30.2

Rate of growth of agricultural output ( %)

Inflation rate (consumer, %)

73

Foreign direct investment (net, $ million)

23

-0.188

1.8

-15.2

23.5

-11.6

-6.5

-5.9

1996

78

-0.275

1.5

-14.1

11.8

11.4

0.0

1.6

1997

76

-0.324

1.9

-5.7

7.7

-11.0

-15.0

-6.5

1998

154

-0.047

2.3

-5.4

39.3

-8.0

-11.6

-3.4

1999

128

-0.121

2.1

-2.6

31.3

-3.3

7.7

2.1

2000

149

-0.119

—

-0.5

9.8

4.0

14.2

6.1

2001

95

-0.124

—

-1.3

5.3

—

10.6

7.2

2002 (estimate)

General government balance: includes the state, municipalities and extra-budgetary funds (EBRD)

Registered unemployment (EBRD). The end-year unemployment rate according to the International Bureau of Labour was as follows: 1998, 9.2 per cent; 1999, 11.1 per cent; 2000, 8.5 per cent; 2001, 8.5 per cent; 2002 (estimate), 9.3 per cent (EBRD 2003a: 73)

2

1

Notes

Source: Various issues of European Bank for Reconstruction and Development, Transition Report; Moldovan Economic Trends; United Nations Economic Commission for Europe, Economic Survey of Europe

-0.115

1.4

Balance of payments (current account, $ billion)

Unemployment rate (end of year, %)

Budget surplus or deficit ( % GDP)

2

-3.9

Rate of growth of industrial output ( %)

-13.1

-1.4

Rate of growth of GDP ( %)

1

1995

Economic indicator

7DEOH0ROGRYDVHOHFWHGHFRQRPLFLQGLFDWRUV±

Moldova

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Agriculture Moldova is heavily dependent on agriculture and agricultural processing. In 1997 agriculture, hunting and fishing alone accounted for an estimated 28 per cent of GDP. When allowance is made for the important agricultural processing industry, well over 50 per cent of employment is directly or indirectly dependent on agriculture (MET, Quarterly Issue, January–March 1998, p. 10). Agriculture and related industries are the basis of the economy, accounting for almost 40 per cent of GDP and 75 per cent of exports. Over half of the population live in the countryside. Around 46 per cent of the labour force is directly engaged in primary agricultural production (Davis 1998: 89). Under the first stage of agricultural reform the size of household plots was increased and the tenure changed from use right to ownership. This stage was completed by 1995 and encompassed 325,000 ha, 10 per cent of total land area and 13 per cent of agricultural land. Of the remaining agricultural land 1.9 million ha was designated as subject to privatization. These transfers proceeded slowly but accelerated in later 1993 and 1994. By October 1994, 75 per cent of claimants had been issued with certificates for land ownership. A number of state farms and collectives have been transformed into joint stock companies. Groups of farmers are allowed to leave and become private farmers (MET, Quarterly Issue, August 1996, p. 54). The 1 million or so household plots, producing largely for subsistence, are thought to account for 36 per cent of agricultural output. The number of private farmers and farmers working through small-scale associations is quite small (around 43,000). Their share of total agricultural output is probably above the 2 per cent originally estimated, but still remains modest. The major part of output continues to come from the existing and former state farms and collectives. Although these farms have been turned into joint stock companies, they are still in an early stage of restructuring (p. 11). Among the major constraints on private sector activity have been the validity of land title and the restriction on the sale of land until 2001. There have been two important developments: (1) in October 1996 the restriction on the sale of land was declared unconstitutional and (2) the success of an experiment in one district which showed that using current legislation it is possible to provide valid land titles to farmers (MET, Quarterly Update, November 1996, p. 40). The major part of agricultural output is still contributed by existing and former state farms and collectives. The share of joint stock companies and co-operatives continues to rise and that of collectives to fall, but in January 1996 over half of agricultural land remained under collective farms. Individual farms and farmers’ associations cultivated 3.7 per cent of agricultural land in January 1995, 4.4 per cent in January 1996 and 6 per cent in September 1996 (MET, Monthly Update, February 1997, p. 10). By January 1997, 9.4 per cent of the land area was under private farms (6 per cent) and farmers’ associations (3.4 per cent). By April 1997 the respective figures were 12 per cent, 8 per cent and 4 per cent (MET, Quarterly Update, May 1997, p. 48)

368

Moldova Agriculture, which is the main economic resource of the country, is still in the early stages of restructuring. It is currently faced with semi-monopoly positions in the supply of its inputs of fertilizers and fuel and similarly largely unrestructured marketing outlets. Further liberalization of these is envisaged under the proposed 1997–98 privatization programme. Under current conditions, with its heavy indebtedness, agricultural enterprises are unlikely to be able to take advantage of this possibility. (MET, Monthly Update, June 1997, p. 6)

In January 1997 the area under private farms or farmers’ associations was 10 per cent (MET, Quarterly Issue, August 1997, p. 9). By July 1996 some 90 per cent of all those entitled had received certificates, the figure rising to 93 per cent by 1 April 1997 (p. 53). In July 1997 parliament passed amendments to the land code. All citizens of Moldova and Moldovan legal entities without foreign participation would be able to buy land, although resale would be allowed only five years after purchase. Foreigners would not be able to buy agricultural land (p. 49). Under a law published in September 1997 all citizens of Moldova both physical and legal have the right to buy a land plot. Foreigners can buy non-agricultural land. All land plots are sold through land auctions (MET, Quarterly Issue, July–September 1997, pp. 5, 67). In 1997 individual farmers and householders produced around half of agricultural output, including 66 per cent of animal production (MET, Quarterly Issue, October–December 1997, p. 13). (The first auction for the sale of non-agricultural land took place on 10 November 1997: p. 68.) The year 1998 has been declared the final year of agrarian reform. Land titles are to be given to every citizen having the right of land ownership (MET, Monthly Update, March 1998, p. 4). (The third municipal land auction took place at the beginning of March 1998: p. 21.) The share of agricultural land under individual farms and farmers’ associations rose from 9.9 per cent in January 1997 to 14.7 per cent in January 1998 (MET, Quarterly Issue, January–March 1998, p. 4). The share of agricultural land under private ownership increased from 77.75 per cent in January 1995 to 95.64 per cent in January 1998. But private ownership does not mean individual ownership. Most of the privatized land remains in collective ownership … This is reflected in the growth of co-operative forms of agricultural land ownership … The figure represents a complex set of changes, including some of the old kolkhozes and sovkhozes, which have only nominally changed into enterprises with private ownership, and later formed into co-operatives … In 1997 large-scale former state-owned and collective farms still dominated the farm structure. (p. 12) The share of agriculture in the arrears of the agro-industrial complex is the highest, the majority of these arrears belonging to large agricultural enterprises (p. 13). Newly emerging peasant farms face severe difficulties, e.g. inadequate

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369

inputs, machinery and equipment, skills, information, finance and marketing. With World Bank assistance encouragement is being given to the development of savings and credit associations (whose function is ‘almost equivalent to credit unions’); funds are raised from their members as well as being borrowed (p. 15). ‘Private agriculture is becoming increasingly important in Moldova. In 1998 the share of individual farmers and households in agricultural output was 61 per cent’ (MET, Quarterly Issue, October–December 1998, p. 12). ‘The average area of a land plot belonging to one farm is 1.9 ha’ (p. 64). On 10 February 1999 parliament, at the first reading, adopted amendments to the land code, stipulating the abolition of the right to a land plot if it is not cultivated (p. 64). Agricultural privatization is under way (but not subject to the voucher scheme), with the transfer of shares in some state and collective farms to present and former farm employees. At least 10 per cent of state holdings in agriculture were transferred to private owners in 1992 and further sales took place in 1993. The intention is to privatize nearly two-thirds of farm assets. The privatization of agro-processing enterprises is to involve 50 per cent share distribution to suppliers, 20 per cent to employees and 30 per cent to the Ministry of Privatization (EBRD 1994: 30). Since December 1994 it has been possible to sell land to domestic investors and to use land as collateral (EBRD 1995a: 61). Privatized land will not be tradable until January 2001 (EBRD 1995b: 51). Land privatization has been slow. In the first stage of land privatization household plots of an average size of 0.3 ha were distributed to the population. The second stage was initiated in 1992, suspended the same year and resumed in 1995. Land certificates are being distributed to collective farm members. There are strong limitations to the exit of individuals from collective farms enforced by the land code, which was introduced with the explicit objective of softening the effects of privatization. These limitations have been challenged by a ruling of the constitutional court. By the end of 1995, 10 per cent of the total land of the country (13 per cent of agricultural land) had been privatized. Excluding land held by individuals that continues to be part of collective farms, ‘true’ private farming is estimated to cover only 3.7 per cent of agricultural land. The land code forbids trading of land until 2001, but this ban has been lifted for small plots and urban land (EBRD 1996b: 163). Progress in land privatization has been slow. In July 1997 parliament approved a law allowing the sale and purchase of land (EBRD 1997b: 187). Individual private farms accounted for about 10 per cent of total farmland at the beginning of 1998, while most land is owned by collective farms, joint stock companies with state ownership and co-operatives. Land was made tradable in 1997. Since 1997 land has been able to be used as collateral. (Purchases of land under non-farm enterprises have been slow, partly due to high prices demanded by the state and partly because companies with partial state ownership are not allowed to purchase land.) As of early 1998 seventy out of 1,000 large farms had been broken up and privatized under a pilot project. The intention is to break up and then privatize 650 farms by 1999 (EBRD 1998b: 180). Some 80 per cent of agricultural land is owned by either the state or collective farms. ‘Although collective farms are nominally private, they

370

Moldova

continue to operate along the lines of the old state enterprises.’ In July 1999 parliament adopted a legal framework for the breakup of large collective and state farms. By that date 480 farms had already been restructured; by May 2000 a further 850 farms are due to be broken up. Indirect subsidies to agriculture, provided through cheap inputs, energy and credits, are being replaced by cash grants (EBRD 1999b: 247). By the end of 1999 almost 900 of the 961 state or collective farms at independence had either been privatized or were going through the process. Land titles have now been distributed to 1 million farmers and it is estimated that some 60 per cent of agricultural output is now produced by farmers either in the private sector or on collectives that are being transformed into private farms. Important progress has also been made with the land registration programme … During the first half of 2000 … a severe flood resulted in a 10 per cent fall in agricultural output. (EBRD 2000b: 190) ‘[The] registration of land advances’ (EBRD 2001b: 174). Other sources dealing with agriculture As of 1 April 1993 there were about 500,000 private farms, with an average size of 3 ha. Almost 40 per cent of the collective and state farms and inter-farm and other enterprises and organizations had been reregistered by the start of 1993. The collectives of 94 per cent of the enterprises decided to retain their current status, while the rest were transformed into lease-based enterprises, joint stock companies, co-operatives or other arrangements (CDSP, 1993, vol. XLV, no. 21, p. 20). Agricultural investment is hampered by a ban on the sale of land until 2001 (Business Central Europe 1995: 53–4). In September 1996 land reform laws were introduced to make land tradable (Business Central Europe, November 1996, p. 78). Since the end of July 1997, Moldovan citizens and 100 per cent Moldovanowned legal entities have had the right to buy land without restrictions at free-market prices. Foreigners are not permitted to acquire land for agricultural use. The resale of land is not allowed until five years after the initial purchase (Deutsche Morgan Grenfell, Focus: Eastern Europe, 5 September 1997, p. 81). ‘In Moldova … many large farms are breaking up into independent multifamily units that occupy an intermediate position between individual farms and former collectives’ (Lerman 1999: 273). The disintegration of the CMEA trade and payments system led to a collapse of export markets and the process of decollectivization has been slow. The government has continued to subsidize agriculture. This has proved to be very costly and in the case of kolkhozes (collective farms) counter-productive as they remain among the most indebted enterprises in the sector. The prevalence of soft budget constraints,

Moldova

371

inter-enterprise arrears, debt write-offs and direct commodity credits to the agricultural sector are costly incentive-distorting interventions … Private farmers are comparatively disadvantaged as they do not have access to adequate financing on preferential terms, face high input supply costs and often operate on small plots in the least viable areas, despite contributing 52 per cent of agricultural output. (Davis 1998: 89) (Most private land plots are very small, 1.5 ha, and economically unviable: p. 90. The lack of credit is a major obstacle to private farming. In January 1998 the World Bank provided the private agrarian sector with a credit line worth $5 million to be distributed through the network of local savings and credit associations, which operate like credit unions: p. 92.) In 1997 peasant and private subsidiary farms produced 51.7 per cent of agricultural output. The proposed privatization of the main state input suppliers is a step in the right direction for introducing more competitive input and output markets (p. 89). The fact that alternatives to the state procurement organization channels exist is indicative of positive improvements in the food marketing chain. However, at present only large-scale farms have been able to take advantage of these developments, as private farms generally sell 60 per cent of their produce on local markets. The persistence of a state order system for grain (accounting for approximately 35 per cent of grain production) will continue to distort competition, the development of grain markets and producer incentives … Although anti-monopoly and anti-trust legislation exists, none of it is actually being implemented. Monopolistic structures in the agricultural sector are strong and largely unregulated. (p. 90) A panoply of land reform legislation has been introduced but reform has been hindered by the lack of an adequate law enforcement mechanism, the resistance of specific groups and red tape. A land market is not yet in operation (p. 90). ‘Some 500,000 former workers on collective or state farms are each due to get about a hectare’ (The Economist, 26 June 1999, p. 59). ‘Consolidating small parcels into larger farms on a voluntary basis has only just begun’ (Transition, 2001, vol. 12, no. 1, p. 10). The share of peasant farms in agricultural land increased from 0.0 per cent in 1992, to 0.1 per cent in 1993 and to 5.8 per cent in 1999 (Spoor and Visser 2001: 888). The share of private farms and household plots in agricultural production increased from 24 per cent in 1991 to 61 per cent in 1998 (p. 890).

Economic performance Only in one year (1997) during the 1990s was the GDP growth rate positive: -2.4 per cent in 1990, -17.5 per cent in 1991, -29.1 per cent in 1992, -1.2 per cent in

372

Moldova

1993 and -31.2 per cent in 1994 (MET, Monthly Update, July 1996, p. 3). (See Table 5.1.) ‘Moldova suffered a second year of deep recession in 1999, the result both of continued weakness in some of its main export markets and of the slow pace of reform’ (EBRD 2000a: 7). Positive growth resumed only in 2000: ‘[Moldova was] the last country to return to growth after the break-up of the Soviet Union’ (EBRD 2003a: 72). In 2001 GDP was estimated to be still only 37 per cent of the 1989 level (EBRD 2002b: 58). Hyperinflation in 1992 (1,276.4 per cent) was gradually reduced to 788.5 per cent in 1993 and 329.7 per cent in 1994. There was a plunge in 1995 (to 30.2 per cent) and consumer inflation was in single figures by 1998. In 1999, however, there was a significant increase. The inflation rate returned to single figures in 2001. ‘The Centre for Strategic Research in the capital, Chisinau, has ranked Moldova as one-hundred-and-twentieth economically among the world’s 191 nations, with about 80 per cent of the people living below the poverty level’ (IHT, 16 June 2000, p. 2). According to a World Bank study, 87 per cent of the population have disposable incomes of less than the monthly subsistence minimum … Poverty rates have risen since the 1998 crisis and about 20 per cent of the population are considered ‘newly’ poor, that is, they fell into poverty between 1999 and 2001. (EBRD 2002b: 179) Registered unemployment, while increasing, remains very low. But there is widespread hidden unemployment (MET, Quarterly Update, November 1996, p. 2). ‘A representative survey of Moldova, excluding Transdniestre, which took place in June 1995, indicated that the unemployment rate is close to 11 per cent’ (p. 16). Official statistics put the sum of people registered as unemployed, in part-time work and on unpaid leave in the last quarter of 1996 at 15 per cent of the active population (MET, Monthly Update, February 1997, p. 21). Of the estimated 28 per cent unemployed, only 4 per cent are registered and receiving benefit (EBRD 1999b: 247). ‘More than 600,000 Moldovans work abroad. That is about one-third of the people of working age – the highest proportion in Europe’ (FT, 20 December 2001, p. 26). The department of statistics in Moldova declare that they make adjustments to take account of the shadow economy in calculation of GDP, e.g. 15 to 16 per cent of GDP in 1996. But an analysis carried out by the Centre of Strategic Studies in March 1998 showed that the share of the shadow economy ranged between 55 and 65 per cent (MET, Quarterly Issue, January–March 1998, p. 8).

6

Russia

THE ECONOMY Gorbachev: ‘The old system fell apart even before the new system began to work.’ Yegor Gaidar: In 1985 the Soviet economic and political systems were becoming more and more sclerotic, stagnant and inertia-bound … The collapse of [the Soviet system] and the subsequent political crisis stemmed from the fact that political control began weakening at the same time oil prices started falling … After August 1991 the state was non-existent. A state presupposes a set of functions, including control over its territory and borders. Soviet laws were not being observed in the republics and the USSR was not in control of its money (fifteen republic central banks were operating at that time). A second characteristic of that period was that there was no functioning economy. The socialist system was based on supplanting markets with the command-based, targeted distribution of goods. But supplanting the market with in-kind distribution on the basis of targeted deliveries is possible only in a strictly regimented system. As soon as the threat of punishment is taken away, the system cannot operate … In 1992 the management teams in place at most enterprises were absolutely incapable of operating under market conditions. (Izvestia, 14 November 2001, pp. 1, 6: CDSP, 2001, vol. 53, no. 45, pp. 6–7) The question about how to handle the transition from plan to market (from ‘communism’ to ‘capitalism’) in Russia has led to immense controversy and problems. There are two broad approaches in theory, ‘gradualism’ and ‘big bang’/‘shock therapy’. While China chose the former course, Russia chose the fast track approach to changing its economic system. (But it took three attempts to bring inflation under control and the implementation of reforms was often slow. ‘We are bogged down halfway between a planned, command economy and a workable market one. We have created a freakish model, a hybrid of the two systems’: President Boris Yeltsin, state of the nation speech delivered on 30 March 1999, CDSP, 1999, vol. 51, no. 13, p. 14; IHT, 31 March 1999, p. 6. The EU recognized Russia as a market economy on 7 November 2002.)

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Russia

A word about terms is in order. ‘Big bang’/‘shock therapy’ is a programme of rapid and comprehensive market transformation, comprising a package of interdependent measures. The terms ‘big bang’ and ‘shock therapy’ are often used interchangeably, while the term ‘shock therapy’ is more often than not used in a broad sense to cover both (1) severe austerity measures and (2) a rapid and comprehensive change in the economic system. But at times the term has been used in a narrower sense, referring only to (1). This point is dealt with in the section on macroeconomic stabilization. Leading exponents of ‘big bang’/‘shock therapy’, such as Sachs, Åslund and Balcerowicz, advocate the following measures: Liberalization: This includes the end of central planning and the freeing of prices in the context of a liberal international trade regime. Rapid current account convertibility of the currency is recommended. Privatization: The rapid expansion of the private sector through deregulation (i.e. freedom of entry into sectors of the economy by new enterprises) and the privatization of state enterprises is recommended. It is recognized that large privatization will take longer than small privatization. In the meantime the remaining state enterprises will need to be disciplined by measures such as demonopolization, exposure to domestic and foreign competition, and the ending of ‘soft budget constraints’. Stabilization: Macroeconomic stabilization is needed in order to bring inflation under control. Proponents such as Jeffrey Sachs also recommend a ‘social safety net’ (especially an unemployment compensation scheme) and see the need for a generous international aid (and trade) policy.

Liberalization This section deals with the nature of Russia’s economy (‘virtual economy’, the enrichment of the minority, crime and corruption, and the 1999 McKinsey Global Institute report), prices and foreign trade. The ‘virtual economy’ Most of the Russian economy has not been making progress toward the market or even marking time. It is actively moving in the other direction. Over the past six years Russian companies, especially in the manufacturing sector, have indeed changed the way they operate, but to protect themselves against the market rather than join it. What has emerged is a new kind of economic system with its own rules and its own criteria for success and failure. The new system can be called Russia’s virtual economy because it is based on an illusion about almost every important parameter: prices, sales, wages, taxes and budgets. At its heart is the pretence that the economy is

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much larger than it really is. This pretence allows for a larger government and larger expenditures than Russia can afford. It is the real cause of the web of wage, supply and tax arrears from which Russia cannot seem to extricate itself. The virtual economy is robust, deep-rooted and broadly popular. (Gaddy and Ickes 1998b: 53–4) ‘The share of barter payments among all industrial enterprises in Russia has now reached more than 50 per cent’ (p. 56). At its [the virtual economy’s] heart are many enterprises that produce goods but take away rather than add value. This sector has survived six years of market reform. The reasons are complex, but the most important is that enterprises can now operate in Russia without paying their bills. This is possible because value is redistributed to them from other sectors of the economy. One way this is done is through tax arrears, which are a form of continued budget subsidies. More important, however, is direct redistribution from the value-producing sectors of the economy, primarily the natural resources sector. (pp. 56–7) The virtual economy masks the non-viability of the value-subtracting manufacturer … The virtual economy has arisen for two fundamental reasons: most of the Russian economy, especially its manufacturing sector, takes away value, and most of its participants in the economy pretend that it does not. Barter, tax arrears and other non-monetary methods of payment turn out to be the main mechanism used to sustain the pretence. The pretence is what causes all the non-payment difficulties. There is less value produced than there are claims on it … At the same time the system dictates a certain minimum requirement for cash, called the cash constraint. Most enterprises must sell their products for cash in order to pay wages. (pp. 59–60) ‘The unprecedented reliance on non-monetary exchange (NME) among industrial enterprises is one of the most remarkable features of Russia’s postSoviet economic transformation’ (Tompson 1999: 256). ‘Enterprises have tended to avoid the rouble in transactions not because it is too weak and inflation-prone but because it is too valuable – too valuable, at any rate, to be employed at prevailing nominal prices’ (p. 261). Industry’s ‘virtual’ prices are too high. Too high, that is, to pay in money: rather than lowering prices, Russian industrial enterprises avoid paying one another in roubles. The result is the emergence of the ‘virtual economy’ … in which official [virtual: p. 257] prices do not reflect the actual values at which transactions take place. (p. 262)

376 Russia Firms engage in NME in order to discount nominal prices which remain well above market-clearing levels. The mechanisms which prevent a convergence between formal and actual transaction values include asset valuation rules, depreciation schedules, tax regulations and an inadequate bankruptcy mechanism. (p. 256) In the absence of recourse to bankruptcy, barter has become the only way for many enterprises to recover debts … The seller may be in a position where cutting off deliveries to bad debtors is effectively impossible, as has tended to be the case with the gas, electricity and rail monopolies in recent years. (p. 271) ‘The virtual economy … is primarily an industrial phenomenon’ (p. 262). The virtual economy is in essence a non-transparent system of subsidies which, by grossly distorting prices and concealing the true relative costs of various activities, has helped many enterprises that would otherwise have failed to maintain the appearance that they are both larger and more profitable that they are. (p. 273) Non-monetary settlements basically involve the settling of transactions at effective prices that are below the recorded prices: because agents are often unable, for various reasons, to lower their nominal prices, de facto discounts are extended by accepting payment in forms other than money. Every Russian manager knows that a rouble in ‘live money’ (cash or bank money) is worth more than a rouble in any other form (barter, offsets or bills of exchange). (Tompson 2000b: 617) The central problem of the Russian economy is simple. The country has a large number of enterprises that are continuing to operate even though they are producing obsolete products of little value … A complex web of barter transactions and subsidies keeps inefficient companies alive. Under current law many resource-producing companies are forced to continue supplying inputs to technically bankrupt enterprises … Instead of payments the resource supplying companies are given a credit against their tax liability. (James Gwartney, FT, 9 May 2000, p. 27) ‘The “virtual economy” [is] the system of barter and non-payments which held back economic growth for much of the 1990s’ (Business Central Europe, April 2001, p. 54). Companies that ought to be bankrupt were kept afloat through a system dubbed the ‘virtual economy’, based on a complex web of barter and non-

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payment. That system is now being rapidly dismantled … The problem with the ‘virtual economy’ was not barter itself, but the hidden subsidies the system channelled to firms. For example, the Russian government would allow energy suppliers not to pay taxes, and in return the energy suppliers would allow companies not to pay their bills or to pay with barter at phony prices. The World Bank reckons these hidden subsidies were worth 10 per cent of GDP … According to the World Bank … those subsidies … were snaffled by plant directors and shared out with their cronies in local government and the mafia. Little wonder, then, that no one wanted to close down unviable factories, or sell them to new owners willing to restructure them. (p. 58) There are many explanations for the ‘barter’ phenomenon … Accounting practices, including an extraordinarily inept tax provision, refusing to recognize that goods might be sold at a loss, helped to conceal price cutting by using a different and discounted ‘currency’. In this they were aided and abetted by both local and central government. No one trusted the banks, who … took weeks to transfer funds, in a depreciating currency, and, given the taxfree returns available on GKOs [Gosudarstvenniye Kratkosrochniye Obyazatelstva: Treasury bills with maturities of less than one year], the banks had no incentive to lend to industry. The tax authorities had the right to collect money from companies’ bank accounts, which discouraged companies from paying their sales proceeds into them. The credit crunch created arrears on business payments (including tax payments) and these were systematized as barter transactions and veksels [bills of exchange]. Government exacerbated this by, in effect, using the system to provide soft credit to industry. (John Chown, Times Literary Supplement, 28 January 2000, p. 5) (According to Goskomstat, about 70 per cent of industrial shipments are exchanged through barter. Another survey of medium-sized manufacturing enterprises gives a figure of 40 per cent, compared with only 6 per cent in 1992: RET, Monthly Update, 17 March 1997, p. vi. By June 1998 overdue payables on company balance sheets totalled 1,126 billion roubles or over 40 per cent of GDP and barter accounted for 50 per cent of industrial sales: EBRD 1998b: 16. Nonmonetary forms of payments accounted for about 60 per cent or more of the average industrial firm’s sales: p. 186. ‘The 1998 financial crash seems to have been a catalyst for more profound change … The much-publicized barter economy is dwindling. From August 1998 to August 1999 barter dropped by onethird. Non-payments of most kinds have fallen by at least one-half ’: Anders Åslund, IHT, 19 January 2000, p. 8. ‘The share of barter transactions in Russian industry peaked at 54 per cent in August 1998, but the financial crash curtailed this system of hidden subsidies that had been the norm for Russian enterprises. Non-monetary transactions fell like a stone once Russian industry realized it could no longer depend on the state and would have to earn real money in the marketplace. Today the virtual economy is marginal’: Anders Åslund, Transition, 2001,

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vol. 12, no. 3, p. 13. ‘Barter and arrears are declining rapidly as the economy switches to cash’: Business Central Europe 2000: 41. ‘In 2000 … barter accounted for 20 per cent of economic transactions, down from 30 per cent the year before’: IHT, 11 April 2001, p. 13. ‘According to the Russian Economic Barometer survey in December 2000, managers reported the share of barter in sales of their enterprises to be 19 per cent, which is 17 per cent lower than last year’s level of 36 per cent’: RET, 2000, vol. 9, no. 4, p. 57. ‘The barter phenomenon [persists] … The share of barter in enterprise payments has declined sharply, but is now holding steady at a level somewhat below 20 per cent’: RET, 2001, vol. 10, no. 1, p. 2. ‘Business surveys show that the use of barter and other non-monetary means of payment continue to decline in favour of money-based transactions, and the share of cash in enterprise payments is well above 70 per cent. However, the share has stayed at roughly the same level for some time already. That points to serious structural problems due to lack of restructuring of enterprises, which is hampering further decline in the share of non-monetary forms of payment’: RET, Monthly Update, 17 September 2001, p. 1.) The enrichment of the minority The core problem is that Russia has had far-too-slow reforms and has allowed a small group of big businessmen to become too rich … The very rich in Russia made their fortunes on rent-seeking from 1991 to 1993. The two most important sources of revenues were export rents and subsidized credits… Thanks to low state-controlled prices for commodities, people with connections could … get permission to sell them at world market prices … [while] subsidized credits were issued on a discretionary basis to certain companies in 1992 … With their riches these businessmen have bought into Russian politics in order to attain a degree of state intervention that is to their liking. If commodity prices and export prices had been deregulated earlier, interest rates been brought up to a market level earlier and the exchange rate been unified earlier, most of the initial rents could have been avoided. (Åslund 1999a: 84–5) Many argue that Russia has fared badly because its ‘shock therapy’ reforms were too fast and radical. But all measures show that Russia’s economy is not very liberalized, and the financial collapse [of August 1998] made it obvious that Russia’s problems were actually caused by reforms that were too slow and partial. A small group of businessmen enriched themselves and then corrupted many of Russia’s politicians and officials. They have conspired to stymie economic reforms, which would stimulate growth and help the overall population, because reform threatens their domination. Russia suffers not from too free a market but from corruption thriving on their excessive regulations erected by a large and pervasive state. (Åslund 1999b: 64)

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Russia’s elite started making their fortunes in the Soviet Union’s last years, mostly from three sources: commodity exports, subsidized credits and food imports. The best way of making a killing between the late 1980s and 1993 was to buy commodities such as metals or oil at low, statecontrolled prices in Russia and then sell them abroad at world prices … Gorbachev’s partial liberalization let thousands of enterprises pursue foreign trade. In 1988 state enterprise managers were allowed to set up private co-operatives for arbitrage with ‘their’ government-owned businesses. Managers of state companies bought oil from their enterprises privately, extracted export licences and quotas from corrupt officials, and sold the oil abroad at the market price … In 1992 the Russian price of oil was still 1 per cent of the world market price. A few state enterprise managers, government officials, politicians and commodity traders amassed no less than $24 billion, or 30 per cent of Russia’s GDP, in this peak year of gains from commodity trading. These profits gradually dwindled. Eventually the reformers succeeded in deregulating commodity prices, but only after managers had extracted billions of dollars from their state enterprises. Business elites had an alternative way of making money in the early 1990s: cheap credits from the Russian central bank … In 1992, while inflation was 2,500 per cent, the bank issued credits at 10 or 25 per cent a year … Many Russian bankers became rich … Only in late 1993 did the reformers manage to end this pilfering. A third way of making big money in the transition period was through food-import subsidies … A food importer paid only 1 per cent of the going exchange rate when purchasing essential foods from abroad, but could easily resell them relatively freely on the domestic market and pocket the subsidy. These imports were paid for with Western ‘humanitarian’ export credits that were added to Russia’s state debt. Total import subsidies were 17.5 per cent of Russia’s GDP in 1992. These profits were highly concentrated, benefiting a limited number of traders in Moscow who operated through the old state agricultural monopolies … Altogether, the gains from these three parasitic business activities amounted to no less than 79 per cent of GDP in 1992 … The rise of the oligarchs was the result of slow and partial reforms. If commodity prices, exports and imports had been allowed to prevail, these fortunes would never have been made. Russian enterprises would have been forced to restructure to survive … The managers of companies … in total obtained at most 4 per cent of GDP from privatization, a trifle compared with the profits made through regulated exports, subsidized credits and import subsidies. (pp. 65–8) Clearly privatization has not caused Russia’s economic problems … The problem is that businesses are formally private but that state officials’ extensive and arbitrary interventions limit property rights … Russia’s greatest problem is that a few operators have made fortunes on inconsistent government

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Russia regulations and subsidies. True, widespread corruption in the late 1980s sealed the fate of the communist dictatorship and facilitated its peaceful end, as many members of the elite became more concerned with creating their own wealth than with promoting socialism. But the Soviet directors made so much money that they soon bought the state. Today the Russian bureaucracy, government, parliament and regional governments are deeply corrupt … The first crop of corrupt big businessmen has lost most of its money. (pp. 69–70)

‘The financial crash [of August 1998] brought huge losses to almost all big Russian businessmen’ (p. 73). (Note that some financial oligarchs fared better than others, e.g. Boris Berezovsky retained his wealth and temporarily regained his political influence.) (‘The crisis tore through the ranks of the oligarchs, the heads of the big business groups. Groups with skilful managers and/or access to export earnings survived but those with big exposures to banking and other loss-making activities are struggling’: FT, Survey, 10 May 2000, p. ii.) While Russia has its economic success stories, many aspects of the economy suggest that it is moving toward a corporatist market in which corruption is rampant. The most important of these trends is the rise of the Russian oligarchs, who have created a form of robber-baron capitalism. Far from creating an open market, Russia has consolidated a semi-criminal oligarchy that was already largely in place under the old Soviet system … These nomenklatura capitalists’ … market of insider deals and political connections stands in the way of an open economy that would benefit all Russian citizens … Those who believe that the capitalism of the robber barons will eventually give way to a market economy that benefits all in society, as occurred in the United States at the turn of the century, are mistaken. America had an established middle class with a work ethic and a government that remained largely free of robber-baron infiltration. The American tycoons were still investing in their own country. Russia’s robber barons are stifling their homeland’s economic growth by stealing from Russia and investing abroad. In the late 1990s Russia has no emerging middle class and the oligarchy, which is deeply involved in the government, can alter policy for its private benefit. (Yavlinsky 1998: 69–70) (Wealth redistribution via mechanisms such as the ‘shares-for-loans’ scheme are dealt with in the section on privatization, p. 419.) Crime and corruption Among the causes of crime and corruption (the abuse of public office for personal gain) are the weakness of central government in certain respects (such as ensuring the rule of law) coupled with often copious regulations in other respects (such as licences). Other causes include a poorly developed civil society.

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President Vladimir Putin (8 July 2000): In our country … we have too much government intervention in spheres where there should not be any and a lack of intervention in areas where they are needed. Today there is too much government involvement in property ownership, entrepreneurship and, to some extent, consumption. On the other hand, the government remains passive when it comes to the creation of a single economic space in the country, the mandatory enforcement of laws, and protection of property rights. (CDSP, 2000, vol. 52, no. 28, p. 6) In transition economies corruption has taken on a new image – that of the so-called oligarchs manipulating policy formation and even shaping the emerging rules of the game to their own, very substantial advantage. We refer to this behaviour as ‘state capture’ … State capture refers to corrupt efforts to influence how laws, rules and regulations are formed … [e.g.] bribes to parliamentarians to ‘buy’ their votes on important pieces of legislation, bribes to government officials to enact favourable regulations or decrees, bribes to judges to influence court decisions. (Hellman and Kaufmann 2001: 31–2) The people are burdened by an unending economic and social crisis. They resent the staggering government corruption that has compromised economic reform and led to several years of inflation and privations. Russia has always lacked a political tradition, even the rhetoric, of civic-mindedness. Few politicians even profess a standard of public service or public morality. Although virtually all post-communist states have experienced corruption scandals (largely because civil society is weak and still unorganized), Russia’s corruption is singularly deep. One reason is that the Communist Party Central Committee, the breeding ground of much of today’s leadership, was profoundly corrupt … In the Soviet Union’s waning years senior apparatchiks converted political power into financial stakes in the emerging market economy. (Jeffrey Sachs, IHT, 6 December 1995, p. 10) ‘The post-Soviet state is so corrupt that the only way back to economic growth seems to be by restricting and minimizing it’ (Anders Åslund, IHT, 19 March 1997, p. 8). Specialists divide it [the shadow economy] into ‘grey’ (legitimate enterprises that engage in such shenanigans as concealing income, submitting fraudulent export claims [for value-added tax refunds] etc.) and criminal (drug trafficking, weapons trafficking, racketeering, prostitution). The volume of the ‘grey’ segment of the economy was estimated at $50 billion, or 18 per cent of GDP, by government experts in 2001 … [In 1999 it amounted to 25

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Russia per cent of GDP] … For comparison $50 billion is equal to the entire revenue side of Russia’s federal budget for last year [2001]. Moreover, another $40 billion to $60 billion circulates in the criminal business community. According to the latest figures from the prosecutor-general’s office, organized crime groups control up to 60 per cent of Russia’s enterprises and organization. The shadow economy as a whole has reached fantastic proportions: $90 billion to $100 billion. Many officials, politicians and entrepreneurs have ties to the shadow economy … Bribes have become something we practically take for granted … According to Andrei Illarionov, economic adviser to the Russian president, ‘corruption is occurring on an even larger scale than before; it used to be sort of an amateur affair, but now corruption is becoming institutionalized’. (Trud, 10 January 2001, p. 6: CDSP, 2002, vol. 54, no. 3, pp. 10–11)

‘The Russian mafia now controls more than 40 per cent of the total economy’ (Louise Shelley, Transition, February 1997, vol. 8, no. 1, p. 7). Stephen Handelman (1994) describes a deeply disturbing degree of criminality. According to the Russian Ministry of Internal Affairs (MVD), organized crime controlled as much as 40 per cent of the turnover in goods and services by 1993. No criminal enterprise of this complexity could have succeeded without the support and encouragement of officials at every level. According to government investigators, more than half the criminal gangs in 1992 had ties with government. (p. 84) ‘Russia’s policy-makers committed a fundamental mistake: they tried to develop a free market before constructing a civil society in which such a market could safely operate’ (p. 89). ‘The danger is especially apparent outside the urban centres of Moscow and St Petersburg, where local crime lords and their government allies have filled the vacuum created by the departure of communist authority’ (p. 90). Probably the most damaging aspect of Russian organized crime activity is its contribution to large-scale capital flight … A specialist on capital flight reported at a recent Ministry of Interior conference in Moscow that $150 billion had been exported from Russia since 1991. This figure may be high but conservative estimates are still more than $50 billion. A minimum of 40 per cent of the estimated $2 billion in monthly capital flight is attributable to organized crime groups … Russian organized crime secured a massive transfer of state property because the privatization occurred rapidly, on a huge scale, without legal safeguards, and without transparency … The Russian mafia now controls more than 40 per cent of the total economy. In some sectors, such as consumer markets, real estate and banking, their role is even greater … Organized crime

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groups are dominating both legitimate and illegitimate economic sectors simultaneously. The new owners, often uninterested in making their enterprises function, drain the resources and transfer the proceeds abroad, exacerbating the problems of both capital flight and nonpayment of wages. (Louise Shelley, Transition, February 1997, vol. 8, no. 1. p. 7) A survey of top executives and directors of US, British, German and Scandinavian companies revealed that Russia is considered to be the most corrupt country, followed by Nigeria (IHT, 4 November 1997, p. 14). In 1997 a group called Transparency International ranked corruption in fifty-two countries as judged by global executives and country specialists. Russia ranked fourth (IHT, 10 September 1998, p. 8). In 1998 the survey by Transparency International placed Russia twelfth out of eighty-five in terms of corrupt countries to do business (IHT, 24 September 1999, p. 23). Of the ninety-nine countries ranked in 1999 Cameroon was the most corrupt at number ninetynine. Russia was ranked at eighty-two. Denmark, at number one, was the least corrupt (Transition, 1999, vol. 10, no. 5, pp. 1–3). In 2000 Russia again came in at number eighty-two (Business Central Europe, October 2000, p. 63). In 2001 Transparency International’s corruption perception index ranked ninety-one countries. Finland was the least corrupt at number one. China was ranked at sixty-one, Russia at seventy-nine and Ukraine at eighty-three (The Economist, Survey, 21 July 2001, p. 13). In 2002 Russia’s ranking improved, coming in jointly with India at number seventy-one out of a total of 102 countries. China was ranked at fifty-nine and Hungary at thirty-three (The Economist, 31 August 2002, p. 82). Companies from Russia and China are the most likely to bribe foreign officials to win contracts … according to a survey released [on 14 May 2002] … by Transparency International … The Bribe Payers Index, based on a gallop poll of 835 business executives in fifteen emerging economies, showed that companies from Russia and China were paying bribes on an ‘exceptional and intolerable scale’. Russia and China scored worst in the survey of twenty-one major trading countries. (IHT, 15 May 2002, p. 14) The Indem Fund, a social research organization, estimates that corruption costs Russian businesses $33 billion in bribes every year. In a survey of Russians published in March [2002] by the fund, nearly half of respondents said bribery is either a necessity or makes life easier … In June … [Putin raised by presidential decree] the salaries of all civil servants by 50 per cent. (IHT, 19 July 2002, p. 2) In 2002 Georgi Satarov, an adviser to President Boris Yeltsin in the period 1992–7, published two studies.

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Russia Satarov left the government in 1997, when, in his words, being an intellectual and remaining a bureaucrat were mutually exclusive … His research institute, Information for Democracy, surveyed 7,504 Russians to piece together the first comprehensive picture of Russian graft. The researchers estimated that Russian citizens pay about $3 billion in bribes annually – about half of what they pay in income tax. Business owners were found to fork over a whopping $33 billion to keep things running smoothly, a sum just less than half of … federal budget revenues [in 2002]. (IHT, 11 February 2003, p. 5)

‘Prosecutor-general Vladimir Ustinov has estimated that Russia’s rampant corruption costs the country $15 billion a year’ (Mark Galleotti, The World Today, 2002, vol. 58, no. 8/9, p. 37). There is general concern about crime and corruption, even though the picture is not entirely negative. Some [criminal groups] fill market gaps created by inadequate government institutions, providing security services for new private businesses or helping to enforce contracts (for example by collecting debts for banks, a significant number of which maintain close links with organized crime). But the value of these services is dwarfed by the sums these powerful criminal groups extort from private businesses. (World Bank 1996: 97) A common argument is that today’s criminals will eventually turn into advocates of law and order in order to protect their gains from future criminals. The absence of effective and legitimate public institutions to enforce contracts and compel enterprises to meet their economic obligations, stimulates the appearance of agencies for private protection … Of course, ‘protection’ can become prohibitively costly as it blends into extortion … The mafia, its coercive means notwithstanding, provides a service without which many economic transactions might not take place. (Burawoy 1996: 1111) The 1999 McKinsey Global Institute report In order to identify the most important causes of low economic performance in Russia, we studied in detail ten representative economic sectors. Specifically, we examine why Russian companies are not restructuring and expanding faster, and why foreign companies are not investing more in Russia. (McKinsey Global Institute 1999: 1) The ten sectors together account for over 15 per cent of total employment (p. 11).

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In an attempt to understand why economic reform has failed in Russia we looked at the performance of ten representative sectors – software, steel, general merchandise and food retailing, hotels, oil, housing construction, cement, confectionery and dairy – and related their performance to that of the overall Russian economy … In Russia the more productive companies are often the least profitable. Thus, more productive companies are not gaining market share and not pushing less productive firms out. In nine out of the ten sectors the direct cause of low economic performance is market distortions that prevent equal competition. The distortions come from attempts to address social concerns, corrupt practices and lack of information. In the manufacturing sectors regional governments channel implicit federal subsidies to unproductive companies. Such subsidies take the form of lower tax and energy payments, and are allegedly intended to prevent companies from shutting down and laying off workers [distortions can also take forms such as different import tariffs and differential access to government-controlled export infrastructure: p. 19]. This puts potentially productive companies at a cost disadvantage, blocking investments and growth on their part … We found the other often mentioned reasons for Russia’s economic problems to play a much smaller role (e.g. poor corporate governance and lack of a transport infrastructure). (pp. 8–9) Because the products of Russian packaged software companies are systematically pirated they lack the resources to invest in the development of innovative products … The other sub-sector in the software industry, project services, proves by reaching 72 per cent of the US productivity level that, with equal conditions, of competition, a whole economic sector can reach high productivity. There are no market distortions in this sector for two reasons: first, it is completely new, with no incumbents to be protected, and, second, its customized nature makes it immune to piracy. (p. 23) Price liberalization In theory, transitional economies are faced with the choice of releasing prices from state control at once (in ‘big bang’ fashion) or of allowing the market to determine gradually more and more prices over time. In reality, of course, not all prices are released at once even in the case of a ‘big bang’ strategy, with energy prices and housing rents being typical exceptions. On 2 January 1992 Russia broadly took the former course of action and began the transition to a market economy in earnest by liberalizing many prices. Yegor Gaidar was the main architect of Russia’s economic reform programme. He was appointed deputy prime minister and minister of economics and finance in the Russian federation on 7 November 1991. On 21 February 1992 he lost the economics portfolio. But having been made joint first

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deputy prime minister, he retained control of overall economic strategy even when he lost the finance ministry on 2 April 1992. He was acting prime minister from 15 June 1992 until 14 December 1992. The specific reasons why most prices were liberalized in early 1992 were revealed in articles written by Gaidar in 1992 (FT, 22 January 1992, p. 15, and 4 March 1992, p. 17): 1

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To reduce queues and to restore confidence in the rouble (much of the trade between enterprises having become barter). (In a general sense queues and forced substitution of goods are eliminated when price controls are ended. The benefits of the elimination of queues include more leisure time and greater incentives to work since money income can command control over goods and services. State subsidies are reduced as prices are allowed to rise. There is the argument that the welfare costs of monopoly are less than those of queues. Controls over prices and the consequent shortages encourage corruption and ‘rent-seeking’, i.e. the seeking of favours such as subsidies from the government.) Once expected, price rises must take place right away because otherwise supplies would be withheld from the market in anticipation of future rises, while consumers would try to speed up purchases. The rapid liberalization of prices would increase supplies in the market as both dishoarding and increased production ensued. Prices would then start to fall. To reduce the ‘monetary overhang’. Repressed inflationary pressures are eased as the ‘monetary overhang’ (forced savings) is eroded. The release of most price controls leads to an immediate increase in open inflation. (In January 1992 the monthly inflation rate was 245.3 per cent.) Tight fiscal and monetary policies would be needed to ensure that inflation would be gradually brought under control. Gaidar argues that it was not possible to privatize or even introduce antimonopoly policy before price liberalization. (Note that a liberalization of foreign trade provides competition in the shape of imports.)

There are arguments in favour of ‘big bang’ price liberalization not specifically mentioned by Gaidar: (1) the need to make use of a political ‘honeymoon’ period to make painful economic decisions; (2) market-determined prices lead to a more efficient allocation of resources; (3) with price controls it is difficult to determine the reasons why some enterprises perform poorly and this encourages ‘rent-seeking’. The critics of rapid price liberalization put forward the following arguments: Factors such as the decimation of the real value of savings could lead to social unrest The danger is enhanced when increases in money wages and pensions are not kept in line with price rises. (Widespread social unrest did not occur. Reasons include the patience of the long-suffering Russian people and the impediments to the development of civil society during the Tsarist and Soviet periods.)

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The Soviet legacy was a structure of industry dominated by large state-owned enterprises Releasing most prices in these circumstances would not bring forth the desired increase in output, while monopoly profits on a large scale would be made. Thus prices are best released gradually, in line with privatization (defined broadly to include the creation of new firms) and restructuring, such as the creation of more competitive conditions through demonopolization and the regulation of remaining monopolies. (As discussed below, monopoly was one of the reasons why some price controls were maintained.) Grigori Yavlinsky was one of the strongest defenders of this line of reasoning and he also feared that hyperinflation would follow in the absence of demonopolization and privatization. He also stressed the need for real economic co-operation and co-ordination among the former Soviet republics (CDSP, 1992, vol. XLIV, no. 5, p. 3). Note that there are dissenting voices on the question of monopoly One of the greatest myths is that Soviet production was enormously monopolized. The truth is the opposite. In the USSR, there were surprisingly many producers of various goods and the big enterprises were not dominant and not even particularly big by any international comparison. The problem was instead the regulation of the market that created trade monopolies … Since the Russian belief was that the economy was dominated by gigantic producer monopolies, the anti-monopoly policy was characterized by price regulation, which further entrenched the trade monopolies. In reality, however, more liberalization and stabilization were needed, so that enterprises could compete and would feel forced to compete, as otherwise they would run out of money. (Åslund 1996: 8) Boone and Fedorov (Fyodorov) (1997: 173) cite the findings of Brown et al. (1994) that Russian industry is no more monopolized than that in the West. They found that only forty-three out of 21,391 civilian manufacturing enterprises constituted monopolies at the national level, and enterprises with 35 per cent of market share accounted for only 4 per cent of all employment. Broadman, however, maintains that: There remains considerable potential for abuse of market power, not only in Russia’s infrastructure monopoly (‘utility’) sector … but also in the manufacturing (‘non-utility’) sector. Many manufacturing firms are shielded from competition because of structural and institutional impediments, including significant seller and buyer concentration – ‘horizontal dominance’ – in regional markets, a high degree of vertical integration and exclusive buyer–seller relationships in certain industrial sectors, geographical segmentation, interregional barriers to trade and investment, and policies that make entry difficult for new firms … At the national level the degree of concentration does not indicate that the lack of competition is a structural problem. (Broadman 2001: 22–3)

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The four-firm concentration ratio (the sum of the market shares of the top four producers) in many industries averages about 60 per cent (which is similar to that in the United States) and the largest Russian manufacturing enterprises (measured by number of employees) are not unusually large, compared with US firms. However, this aggregate analysis of structural dominance masks three underlying attributes of Russia’s industrial landscape. First, large Russian enterprises tend to be configured as single, multi-plant establishments located in or near the same city, whereas enterprises in industrialized countries usually have multiple establishments at several different locations domestically and, often, abroad as well. (pp. 22–3) Thus the establishments of the largest Russian enterprises are, on average, significantly larger (in terms of number of employees) than their counterparts in other countries, including the United States. Because of the limits of conventional measures of national market share and concentration, the true extent of horizontal dominance in many Russian markets is probably understated. Data on a variety of Russian sectors suggest that at the oblast (regional) level, the average market share for a typical firm is about 45 per cent and the average fourfirm concentration ratio is greater than 95 per cent. Such [horizontal] integration appears to be increasing … due not to new corporate expansion, however, but to mergers and acquisitions. Second, many of the dominant enterprises in Russia are also highly vertically integrated (or have exclusive buyer–seller relationships) … In Russia, because the enforceability of contracts still cannot be taken for granted, there are strong incentives for vertical integration … Vertical integration … is increasing – again usually through mergers and acquisitions rather than expansion … Third, significant political and economic power is wielded by regional authorities in Russia … Local authorities engage in a variety of practices to limit the interregional movement of goods, including charging duties on the ‘import’ and ‘export’ of certain alcoholic beverages … granting tax or credit preferences to support the building of local ‘business champions’ and supporting arbitrarily exclusive licensing. (pp. 22–3) Large enterprises typically enjoy privileged regulatory treatment by the regional and local authorities and the degree of monopolization remains large. According to a recent World Bank study, the top four firms in regional markets typically account for more than 95 per cent of sales. (EBRD 2002b: 191) There is also the general point that tight fiscal and monetary policy is needed to prevent hyperinflation from occurring (Hyperinflation did occur in 1992.) McKinnon (1994)

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believes that ‘it was a major mistake for the Russian Federation, in January 1992, to suddenly decontrol virtually all prices within the state sector and to stop trying to enforce normal patterns of delivery within that sector’ (p. 459). The big bang argument for total price decontrol is flawed if the important actors bidding for scarce resources have soft budget constraints … until budget constraints are hardened, uncontrolled bidding by state enterprises will cause the producer price level to increase indefinitely. (p. 462) The liberalization of most prices should have been synchronized with the start of large-scale Western aid China’s generally successful policy of gradual economic reform after 1978 showed that gradual price liberalization is feasible (The counter-argument is that China’s circumstances were different from those of Russia and hence the Chinese model is not relevant.) Approximately 90 per cent of consumer goods and 80 per cent of producer goods were freed from direct administrative regulation (CDSP, 1992, vol. XLVI, no. 9, p. 1). In early 1992 about 80 per cent of wholesale prices and 90 per cent of retail prices were freed of administrative controls (EBRD 1995a: 55). Prices were liberalized for most goods on 2 January 1992. Most federal controls were lifted, except on utilities, transport, telecommunications, energy and certain foods (RET, 1993, vol. 2, no. 1, pp. 7, 23; and no. 4, p. 28). (As regards wages and salaries the aim was that these should not be raised commensurately in most cases. Deputy prime minister Alexander Shokin remarked that ‘One of the fundamental principles of the concept of social protection during the changeover to a market is that increases in income should not lag behind increases in prices by more than 30 per cent’: CDSP, 1992, vol. XLIV, no. 14, p. 30.) Housing rents were frozen pending privatization. (German Gref, minister of economic development and trade, said on 18 July 2001: ‘It will be another ten years before we can require Russian citizens to pay 100 per cent of their housing and municipal service costs’: CDSP, 2001, vol. 53, no. 29, p. 9. ‘By the start of this year [2002] households were paying a nationwide average of roughly 48 per cent of the cost of housing and municipal services … In 1993 [the figure] was no more than 10 per cent … [But there has been] an increase in the number of people getting government subsidies … German Gref said [in February 2002] … that a universal switch to 100 per cent by 2003 is unrealistic and is being postponed’: CDSP, 2002, vol. 54, no. 8, pp. 4–5.) In some cases even those prices that remained controlled were raised substantially, e.g. basic consumer goods such as bread and milk. (Yegor Gaidar stated that basic consumer goods were raised by 300 per cent on average: FT, 22 January 1992, p. 15.) Even so-called ‘contract’ prices were subject to guidelines, such as a maximum 25 per cent trade mark-up on the producer’s price for state trade enterprises not converted to ‘commercial operations’ (CDSP, 1992, vol. XLIV, no. 9, p. 3). On 16 January 1992 Yeltsin set a 50 per cent maximum producer’s margin.

390

Russia

On 7 March 1992 all federal controls on consumer goods (and federal subsidies) were abolished. Local authorities retained the right to impose maximum prices on consumer goods, but subsidies had to be met from local budgets. Local authorities increasingly reduced their own control. Local authorities directly control municipal transport prices and public housing rents. Indirect price controls through profitability limits also affect many industries, e.g. the 600 enterprises officially designated as monopolies face a profitability limit of 25 per cent (RET, 1992, vol. 1, no. 2, p. 16; 1993, vol. 2, no. 1, pp. 7, 23; and 1993, vol. 2, no. 4, p. 28). The majority of goods and services are now sold at free-market prices. Since the beginning of 1994 there have been no price controls on goods and services officially designated as monopolies (other than those considered natural monopolies, e.g. gas and some transport and communications). Previously monopoly prices were controlled either by setting an upper limit, a maximum coefficient of price increase or a marginal profitability level (although there was frequently evasion of these controls) (RET, 1994, vol. 3, no. 1). The prices of products and services of natural monopolies continue to be regulated at the federal and local levels (e.g. electricity and heating supply, railway tariffs, basic communication services, housing and communal services). Since the beginning of 1994 other monopolies have not been subject to price regulation, but the authorities interfere if monopoly power is abused. At the regional and local levels there is price regulation of basic foods, some non-food goods and some services (e.g. direct price-fixing and limits on trade mark-ups and profitability). But there were fewer of these by mid-1994 (RET, 1994, vol. 3, no. 2). The prices of commodities such as oil and gas are still controlled. ‘Gazprom sells its gas for $110 per thousand cubic metres on world markets, but it charges only $15 at home’ (Business Central Europe, July–August 2001, p. 21). The EU complains that Russian energy subsidies to the rest of the economy amount to $5 billion a year (FT, 30 May 2002, p. 8). The World Bank has suppressed an internal study contradicting EU claims that Russia should raise its domestic gas prices ahead of joining the WTO. The analysis, which concludes that Russian prices are already close to long-term marginal costs – taking into account production and future investment – flies in the face of the EU argument that the domestic market benefits from annual gas subsidies of about $5 billion … Pascal Lamy, the EU trade commissioner, calls Russian energy prices ‘artificially low’ and insists that Moscow must agree to end dual pricing and bring tariffs towards international standards – as much as six times current Russian levels … However, the World Bank study suggests that there is no single international market for gas and normal world practice for a regulated monopoly should be long-term marginal costs, which it estimates at up to $40 per thousand cubic metres of gas for Russia, or less than twice current levels. (FT, 10 March 2003, p. 6)

Russia

391

The World Bank and other studies by foreign analysts suggest that Russia’s current gas prices of less than $20 per thousand cubic metres are closer to a reasonable price than the EU demands … The World Bank study … argues that as long as Gazprom remains a monopoly, the world practice adopted by regulators of long-term marginal cost pricing – including sufficient revenues for reinvestment and some profit – would suggest Russian domestic gas prices should be about $35 to $40 … A senior EU official said yesterday [13 March] that Brussels was seeking an increase in Russian domestic gas prices for industrial consumers to ‘full cost recovery’ levels, which he estimates at $50 to $60 per thousand cubic metres. (FT, 14 March 2003, p. 10) Foreign trade between 1992 and the financial crisis of August 1998 Foreign trade has been liberalized and the rouble made more convertible. Russia’s trade has become far more orientated towards the advanced Western countries. Foreign trade has been liberalized, although on occasion there have been reversals. It is worth stressing here that quantitative restrictions on trade (such as import and export quotas) are a major source of corruption. Export quotas, for example, may be deemed necessary when domestic prices are legally restricted below world market levels. But selling at higher world market prices gives rise to large profits and thus the administrators who deal with licences become targets for bribes. Important stages in the deregulation of foreign trade are as follows: 1 January 1992: a presidential decree came into force which drastically limited the requirements on licensing and mandatory registration of participants in foreign trade transactions, extending the right to conduct foreign trade operations to all domestic enterprises (RET, 1997, no. 3, p. 133). 1 July 1992: up to 1 July 1992 exporters had to sell 10 per cent of their hard currency earnings to the central bank at the market exchange rate. As of 1 July 1992 this was increased to 20 per cent and at the same time exporters became obliged to sell 30 per cent of their earnings to commercial banks (RET, 1993, vol. 2, no. 4, pp. 41–2). (For later developments, see the exchange rate below.) 11 June 1993: Russia formally applied to join Gatt (which was replaced by the WTO – the World Trade Organization – in 1995). 1 July 1993: the rules governing the mandatory sale of 50 per cent of hard currency earnings were changed. Henceforth all 50 per cent had to be sold on currency exchanges rather than 20 per cent (the remaining 30 per cent having previously been bought by the central bank) (CDSP, 1993, vol. XLV, no. 26, p. 25). 1994: in 1994 and 1995 the export regime was increasingly liberalized. The 1995 law banned all quantitative restrictions except for cases in which national security and domestic market exigencies dictate otherwise. Quantitative restrictions on imports could be introduced under certain circumstances. The government has eliminated the category of special exporters as well as privileges to various economic entities and regions (RET, 1997, no. 3, pp. 133–4).

392

Russia

December 1995: export taxes were to be eliminated as of 1 January 1996, except for oil and gas for which taxes were to be halved (RET, Monthly Update, 15 December 1995, p. 7). 1 April 1996: export taxes on oil were halved and abolished for all other products, including natural gas. 1 July 1996: export taxes on oil were eliminated. By the fourth quarter of 1996 the maximum import tariff had been reduced to 30 per cent (except for alcohol) (EBRD 1997a: 32). Important developments in exchange rate policy are as follows: 5 May 1992: a single (unified) exchange rate for the rouble was to be established on 1 July 1992 and the rouble was then to float for a month in order to find a defendable level of perhaps eighty to the US dollar. The rouble was to become internally convertible as regards current account transactions on 1 August 1992 at a rate fixed against the US dollar, with the rouble allowed to move 7.5 per cent either side of par. A stabilization fund provided by the West would be available to defend the rouble if necessary (FT, Survey, 13 May 1992, p. iv). 1 July 1992: the unified rate for the rouble was actually set at 125.26 to the US dollar. This was based on the average market rate over the previous month and compared with a market rate of 144 on that particular day on the Moscow Interbank Currency exchange. But the rate quickly became that established on the exchange at its twice-weekly auctions. The rouble soon plummeted against the US dollar in nominal terms, as can seen in Table 6.1. (Table 6.1 shows the nominal value of the rouble on the Moscow Interbank Currency Exchange. An appreciation of the rouble in real terms against the US dollar means that rouble depreciation in nominal terms has been slower than the differential between the Russian and US inflation rates.) The exchange rate was unified in mid-1992 and the rouble was allowed to float. The rouble is convertible for most current account purposes, including profit repatriation for foreign investors. There are restrictions on the capital account (EBRD 1994: 35, 111). 5 July 1995: it is announced that for the period 6 July–1 October 1995 the central bank will keep the exchange rate within a band of 4,300–4,900 roubles to the US dollar (IHT, 6 July 1995, p. 13). On 24 August 1995 the duration of the band was extended to the end of 1995 (The Economist, 2 September 1995, p. 103). (On 24 August a banking crisis began, with banks ceasing to lend to each other. In order to ease the liquidity crisis the central bank stepped in with shortterm loans to a number of large banks and with purchases of government bonds.) 30 November 1995: it was announced that between 1 January 1996 and 30 June 1996 a band of 4,550–5,150 roubles to the US dollar would apply. ‘A gradual managed devaluation of the rouble … is the declared policy of the government and the Central Bank of Russia’ (United Nations 1996: 62). In 1995 the rouble appreciated 72 per cent against the US dollar in real terms (p. 29).

180 170 161 155 128 119 136 163 204 338 448 416 — —— — — — — — — — — —

14 Jan. 18 Feb. 17 Mar. 14 Apr. 14 May 16 June 16 July 18 Aug. 15 Sep. 15 Oct. 17 Nov. 17 Dec. — — — — — — — — — — —

14 Jan. 18 Feb. 18 Mar. 15 Apr. 18 May 16 June 16 July 18 Aug. 15 Sep. 15 Oct. 17 Nov. 17 Dec. — — — — — — — — — — —

1993 Date

442 559 667 779 934 1,104 1,020 985 1,010 1,116 1,201 1,247 — — — — — — — — — — —

Roubles 14 Jan. 18 Feb. 18 Mar. 15 Apr. 18 May 16 June 15 July 18 Aug. 15 Sep. 10 Oct. 2 11 Oct. 12 Oct. 13 Oct. 14 Oct. 17 Oct. 17 Nov. 29 Nov. 9 Dec. 12 Dec. 14 Dec. 15 Dec. 16 Dec. 29 Dec.

1994 Date 1,356 1,567 1,722 1,793 1,880 1,959 2,024 2,141 2,301 3,081 3,926 3,736 2,994 2,988 2,996 3,157 3,232 3,261 3,323 3,368 3,383 3,395 3,550

Roubles 13 Jan. 18 Jan. 25 Jan. 26 Jan. 16 Feb. 15 Mar. 11 Apr. 12 Apr. 29 Apr. 2 June 8 June 9 June 20 June 27 June 7 July 11 July 24 Aug. 7 Sep. 15 Sep. 16 Oct. 8 Nov. 16 Nov. 31 Dec.

1995 Date 3,776 3,883 3,988 4,004 4,293 4,744 4,991 5,008 5,130 4,943 4,911 4,943 4,546 4,516 4,581 4,550 4,428 4,479 4,465 4,506 4,523 5,534 5,570

Roubles 9 Jan. — — — 26 Feb. — — — — — — — — 28 June — — — — — 18 Oct. — — —

1996 Date 4,668 — — — 4,793 — — — — — — — — 5,105 — — — — — 5,434 — — —

Roubles 9 Jan. — — — 18 Feb. — — — — — — — — 30 June 31 July — — — — — — 4 Dec. 10 Dec.

1997 Date

3 ‘Black Thursday’

2 ‘Black Tuesday’

1 The currency reform of 1 Jan. 1998 knocked three zeros off the denomination rouble, e.g. 1,000 old roubles equals 1 new rouble

Notes

Roubles

1992 Date

Table 6.1 Russia: the nominal value of the rouble on the Moscow Interbank Currency Exchange (no. of roubles to $1)

5,595 — — — 5,659 — — — — — — — — 5,766 5,809 — — — — — — 5,945 5,924

Roubles

1

— — — — — — — — 27 May — — — — 29 June 21 July 3 13 Aug. — — — — — — —

1998 Date — — — — — — — — 6.18 — — — — 6.22 6.26 6.36 — — — — — — —

Roubles

394 Russia 16 May 1996: a new exchange rate regime was announced. The ‘crawling corridor’, to be implemented as of 1 July 1996, would start at the 5,000–5,600 roubles to the US dollar range and be adjusted on a daily basis until the range 5,500–6,100 rouble to the US dollar range was reached by the end of 1996. The rouble would be allowed to fall by about 1.5 per cent a month. 1 June 1996: the rouble was made convertible on current account in line with Article 8 of the IMF. (Tight restrictions would remain on the capital account.) This would mean the end of regulations requiring exporters to surrender part of their exchange earnings (FT, 17 May 1996, p. 2; IHT, 17 May 1996, p. 16). 26 November 1996: it was announced that the ‘crawling corridor’ would start 1997 at 5,500–6,100 roubles to the US dollar and end the year at 5,750–6,350 roubles to the US dollar. To stabilize exchange rate expectations the central bank introduced an exchange rate band in July 1995. The band’s shape was changed one year later to allow for a gradual depreciation of the rouble. The rate of exchange rate depreciation slowed steadily, from 23.5 per cent in 1995, to 16.5 per cent in 1996 and to only 6.7 per cent in 1997. (Balino 1998: 39) 1 January 1998: three zeros were knocked off the denomination of the rouble on 1 January 1998. From the beginning of 1998 until the end of 2000 the rouble was to have a ‘central’ exchange rate of 6.2 new roubles to the US dollar, inside a corridor with rates 15 per cent either side of the central rate (i.e. the band would be 5.25 to 7.15 new roubles to the US dollar). It was also an aim to achieve an average exchange rate of 6.1 new roubles in 1998 and in the following two years if conditions allowed. ‘The announcement [on 10 November 1997] was made earlier than expected in order to help reduce the pressure the rouble had come under from world financial turbulence’ (RET, Monthly Update, 24 November 1997, p. 4). (The world financial turbulence started in July 1997 in Thailand: p. iv.) ‘The monetary authorities continue to target the exchange rate in order to achieve financial stabilization’ (RET, 1997, no. 1, p. 51). ‘Over the course of the year [1996] there was on average an appreciation of the real rate, compared to the whole of 1995’ (p. 53). ‘Between 1992 and 1996 the RUR [rouble] appreciated massively versus the dollar in real terms … in 1995 and 1996, respectively, [by] 38 per cent and 26 per cent’ (Deutsche Bank Research, Russia, 12 March 1998, pp. 6–7). On 31 March 1998 the governor of the central bank said that the rouble had to be devalued in line with inflation in order to help exporters to compete globally (FT, 1 April 1998, p. 2). (For later developments, see the Russia and the Asian financial crisis, p. 481.) In 1992 the volume of foreign trade fell by 23 per cent (CDSP, 1993, vol. XLV, no. 6, p. 10). In 1995 domestic production of consumer goods fell to 48 per cent of its 1991 level and was still shrinking at the start of 1996. The market

Russia

395

share of imports has soared from an average of 12 per cent in 1991 to 56 per cent in 1995, by official reckonings. When smuggled goods and ‘personal imports’ are added the true proportion of foreign consumer goods is probably higher still (The Economist, 13 April 1996, pp. 71–2). Russian [oil] output has risen by about 15 per cent over the past two years and now accounts for nearly 10 per cent of world production. Moscow is presently the world’s second largest oil exporter, and if its considerable exports of natural gas are added in overall Russian energy exports are nearly as high as Saudi Arabia. (IHT, 1 December 2001, p. 8) [As regards] natural gas … Russia is already the dominant producer by far … When you combine Russia’s proven oil and gas reserves it is already the world’s leading energy nation, with about 15 per cent more proven reserves than Saudi Arabia. (IHT, 24 December 2001, p. 6) The Russian oil industry accounts for about 17 per cent of the country’s GDP and a quarter of its export revenue … Last year [2000] Russia earned $3.68 billion in weapons exports … The United States, with annual exports worth nearly $20 billion, is by far the world’s largest arms seller … Russia’s arms exports jumped almost 20 per cent to $4.4 billion in 2001. (IHT, 27 December 2001, p. 14) In 2000 mineral fuels accounted for 58.7 per cent of exports (FT, 27 March 2002, p. 9). ‘Russia’s oil and gas industries account for 50 per cent of export revenues, 40 per cent of gross fixed investment, and provide through taxes 25 per cent of government revenues’ (FT, Survey, 1 April 2003, p. ii). ‘Oil and gas make up over two-fifths of exports; adding metals puts the figure at more than a half; counting oil products it goes up to 63 per cent’ (The Economist, 8 February 2003, p. 43). ‘Each $1 decline in Russian oil prices would lower GDP growth by 0.5 percentage points, export revenues by 0.6 per cent of GDP and government revenues by 0.4 per cent of GDP’ (IMF, World Economic Outlook, 2002, pp. 46–7). Trade with the former Comecon countries fell by more than 56 per cent in 1992. Trade with other socialist countries also fell sharply, but that with industrial economies was similar to 1991 (RET, 1993, vol. 2, no. 4, pp. 41–2). Nearly twothirds of exports now go to the West and two-thirds of imports come from the West (RET, 1994, vol. 3, no. 2, p. 7). ‘The EU accounts for almost 40 per cent of all Russian external trade’ (FT, 26 May 2000, p. 21). ‘The EU accounts for 40 per cent of Russia’s total exports’ (IHT, 29 March 2001, p. 8). ‘In 2000 more than one-third of Russia’s foreign trade was with EU countries. By contrast only a little over 1 per cent of total EU foreign trade was with Russia’ (RET, 2001, vol. 10, no. 2, p. 6).

396 Russia In 2000 36 per cent of Russian exports and 33 per cent of (registered) imports were traded with the EU. However, exports to Russia are only 2 per cent of total EU exports … EU exports to Russia de facto consist only of manufactures, whereas around half of Russian exports to the EU consist of energy and raw materials. And even within manufacturing trade energy-related products, basic metals and fabricated metal products account for about 70 per cent of Russian exports to the EU. By contrast, more than 40 per cent of Russian imports from the EU consist of machinery, transport and electrical equipment, 13 per cent are chemicals and 11 per cent are food, beverages and tobacco … The enlarged EU will account for more than half of Russian exports … Russian real GDP (in terms of purchasing-power parity) amounts to less than 13 per cent of that in the EU … [Russia’s] per capita real GDP is just one-third of the EU average … Even after enlargement to [ten] less advanced Central and East European countries Russian per capita GDP will be less than 40 per cent of the EU average … The EU population is now 375 million and will grow to more than 480 million after enlargement. (RET, 2002, vol. 11, no. 3, p. 2) On 24 June 1994 Russia and the EU signed a partnership and co-operation agreement, which involved a strengthening of political and economic ties. Russia was recognized as an economy in transition rather than a state trading country. On 17 July 1995 the EU and Russia signed a trade agreement (delayed by the EU as a protest against the handling of the Chechen crisis). On 27 April 1998 the EU agreed to remove Russia from a list of ‘non-market’ economies. The decision revised the EU’s criteria for judging ‘dumping’. The EU would henceforth use Russia’s own price information rather than prices from Western producers to determine (on a case-by-case basis) whether Russia was selling goods below cost. Russia was not designated as a market economy, but the new policy would enable the EU to take account of cases where market conditions exist. EU anti-dumping actions affected 1.1 per cent of Russian trade and only fourteen out of 146 existing EU anti-dumping duties targeted Russia. EU exports to Russia in 1997 amounted to Ecu 18.7 billion ($20.61 billion). Russia’s exports to the EU were worth Ecu 21.5 billion (IHT, 28 April 1998, p. 13). ‘The EU Commission … announced [on 29 May 2002] that the EU will grant Russia market economy status in the autumn’ (RET, 2002, vol. 11, no. 3, p. 104). Capital flight has been a serious problem, but the situation is improving. There are many reasons why some Russians have chosen either to take their savings abroad or to hold them domestically in dollars. The collapse in the value of the rouble in the early 1990s and the accompanying annihilation of savings in banks have made people justifiably wary of the rouble as a store of value. Second, capital flight has been driven by the desire to avoid Russian taxes. Third, poor definition and protection of property rights during privatization has led managers and entrepreneurs to launder their gains abroad. (RET, Monthly Update, 3 April 1998, p. 7)

Russia

397

Capital flight has been a sign of Russia’s failure to establish a functioning market environment. Macroeconomic instability and institutional deficiencies, such as the lack of confidence in the domestic banking system and disincentives to reinvest company profits, have encouraged companies and individuals to move their money offshore. Efforts to combat the problem by introducing capital restrictions have had limited success. (RET, Monthly Update, 11 February 2000, p. 3) The real solution to the problem of capital flight is to improve the investment climate by continued reforms, especially institutional reforms that would protect any investor, foreign as well as domestic; tax reform to ensure transparency and equal treatment; and the introduction of international systems of accounting to create a better framework for capital investments. In addition, a main priority should be to speed up bank restructuring and to increasingly allow foreign banks into the retail market, creating a competitive pressure on Russian banks … As long as companies and individuals do not have trust in the domestic banking system, and there is a lack of other investment opportunities, it must be considered rational behaviour to either keep one’s money outside the banking system or to move it abroad. (p. 9) Estimates of capital flight vary considerably, not least because it is difficult to define, let alone measure: 1

Capital flight rose from a cumulative total of $10.6 billion in 1991 to $43.1 billion in 1994. The legally held portion rose from $7.6 billion to $24.9 billion; this consists of enterprises’ hard currency deposits in Russian banks plus cash dollars, held mostly by individuals, including those operating in the grey economy. The illegal portion increased from $3 billion to $18.2 billion; this consists of assets mainly held abroad, as cash, securities or real property. In 1994 most of the increase was in interest earned and there was little new export of illegal capital (RET, Monthly Update, 14 April 1995, p. 4). Capital flight was running at roughly $10 billion a year in 1992, 1993 and 1994. But it stopped in 1995 as normal financial conditions developed, with positive real interest rates on rouble assets (RET, Monthly Update, 22 April 1996, p. 5). ‘A recent encouraging sign is that flight capital appears to have begun to return in the form of loans to the banking and corporate sectors’ (RET, Monthly Update, 3 April 1998, p. 7). A large share of the money moved abroad has left Russia via the trade account by use of false contracts, over-reporting imports and under-reporting exports. Several attempts have been made to quantify the amount of money that has left the country illegally or semi-legally

398

Russia … Estimated capital flight between 1993 and 1998 was $68.3 billion according to [RET’s] estimate 1 and $77.6 billion for estimate 2. (RET, Monthly Update, 11 February 2000, p. 3)

2

3

4

5 6

7 8

The figure for estimate 2 reached a peak of nearly $20 billion in 1997 (with estimate 1 reaching a peak in 1996). In 1999 the estimated figure for estimate 2 is about $14 billion (p. 4). ‘On top of capital flight an estimated $30 billion to $40 billion is held in “mattresses” inside Russia’ (p. 9). According to the World Bank’s definition, capital flight includes not only illegal capital exports but also currency substitution in the domestic economy. Capital flight amounted to $8.2 billion in 1992, $10.6 billion in 1993 and $7.4 billion in 1994 (DIW, Economic Bulletin, 1996, vol. 33, no. 2, p. 13). Official figures for capital flight show a fall from $25 billion in 1998 to $15 billion in 1999 (FT, 5 February 2000, p. 6). According to Russian central bank estimates, capital flight was $26 billion in 1997 and $21 billion in 1998 (Post-Soviet Affairs, 2002, vol. 18, no. 1, pp. 6, 12). ‘By central bank estimates, over $10 billion continued to leave the country in 2000 in legal and illegal capital flight’ (OECD, Economic Outlook, 2001, vol. 1, no. 69, p. 142). ‘According to Russian central bank estimates, capital flight was $19.2 billion in 1999 and $12 billion in 2000 (Post-Soviet Affairs, 2002, vol. 18, no. 1, pp. 6. 12). According to the United Nations Economic Commission for Europe, capital flight was $26 billion in 2001 (FT, Survey, 17 May 2002, p. i). ‘Capital flight [is running at] over $10 billion a year’ (The Economist, 23 March 2002, p. 88). ‘The government says that capital outflows [capital flight] last year [2002] fell to over $11 billion, down from $16 billion in 2001 and $24 billion in 2000’ (The Economist, 8 February 2003, p. 43). ‘Capital flight has slowed from $24 billion in 2000 to $10 billion in 2002’ (New Statesman, Survey, 3 February 2003, p. v). ‘[Prime minister] Mikhail Kasyanov … said that capital flight had converted into a net inflow of funds from abroad’ (FT, 12 June 2003, p. 8). There will be more investment into Russia than capital flight this quarter – for the first time in post-Soviet history. The Central Bank of Russia expects a net inflow of private capital of $2 billion in the second quarter of this year [2003] after a net outflow of $1.2 billion in the first quarter and despite a long history of capital flight. (FT, 23 June 2003, p. 10)

Privatization in the non-agricultural sectors General comments Since in the Soviet period the industrial sector was almost entirely state-owned, privatization has been a gigantic undertaking. As in other transitional economies,

Russia

399

a distinction is made between ‘small’ and ‘large’ privatization (the latter category including both medium-sized and large enterprises). Specifically, a ‘small’ enterprise in Russia is one with fewer than 200 employees and with assets of less than 1 million roubles as of 1 January 1992. A ‘medium-sized’ enterprise employs between 200 and 1,000 people and had assets worth between 1 million and 50 million roubles as of 1 January 1992. The respective figures for a ‘large’ enterprise are over 1,000 employees and over 50 million roubles of assets. The speed of Russian privatization was extremely rapid and the earlier methods employed in large privatization were highly controversial. Before embarking on the process of privatization it is worth mentioning the problem of the social welfare services (including housing). (See Healey et al. 1999; Cook 2000.) The first stage of privatization (1 October 1992–1 July 1994) The first stage of privatization (1 October 1992–1 July 1994) is often referred to as the ‘voucher’ (‘mass’) stage of privatization. But it is better described as the stage of ‘insider’ privatization, the term ‘insider’ referring to existing workers and managers. The return (restitution) of property to former owners or their heirs was ruled out (owing to factors such as its probable general unpopularity and the relatively long period that had elapsed since property was expropriated). The privatization programme was passed by parliament on 11 June 1992 and President Yeltsin outlined the voucher scheme on 19 August of that year. All citizens (including children born before 1 September 1992) would be eligible and vouchers could be used (1) to buy shares in privatized enterprises or private investment funds, or (2) sold (even to foreigners). For a small registration fee of 25 roubles, vouchers worth 10,000 roubles (corresponding to the historical book value) could be obtained. Although in nominal terms the vouchers were worth only around two months’ average salary (earned in mid-1992), they would be used ‘to acquire property at the old prices on the last balance-sheet appraisals of enterprises’ (CDSP, 1992, vol. XLIV, no. 34, p. 7). Sales of regional property are carried out locally. The process of privatization has taken on a decidedly regional character, with reformist Nizhny Novgorod, for example, attracting considerable attention. The mayor of Moscow, Yuri Luzhkov, was powerful enough to reject the government’s voucher privatization programme and enriched the capital with sales and leasing. Small enterprises (many in domestic trade) are typically the property of municipal governments, with privatization largely decentralized. Small enterprises are sold either through unconditional auctions or tender offers (in which the purchaser accepts some stipulations regarding such things as employment). Preference is given to workers by granting a 30 per cent discount on the auction price to successful bids from workers’ collectives. The collectives are also allowed to spread 75 per cent of their payments over three years at zero interest. It is, therefore, not surprising that at the end of 1992 worker collectives owned 60 per

400

Russia

cent of the shares in privatized small-scale enterprises, other firms owned 27 per cent and individuals owned 13 per cent. (See RET, 1993, vol. 2, no. 1, pp. 5, 8, 50–2, for the details of both small-scale and large-scale privatization.) ‘Small’ privatization is naturally easier than ‘large’ privatization and the process has been very rapid. By the end of March 1994 more than 70 cent of all small-scale retail, catering and personal service enterprises were under private ownership (RET, Monthly Update, 30 April 1994, p. 14). More than 75 per cent of smallscale activity was in private ownership by mid-1994 (RET, 1994, vol. 3, no. 2, p. 82). At the end of June 1994 the market share of private enterprises was 75 per cent in retail trade, 66 per cent in catering and 77 per cent in personal services (RET, 1994, vol. 3, no. 3, p. 96). The first stage of the large privatization process involved employees deciding upon one of the three options. If the enterprise collective was unable to agree on any option, Option 1 was selected by default. The three options were as follows: 1

2

3

In Option 1 workers were given 25 per cent of (non-voting) shares, with the option of buying 10 per cent of (voting) shares at a 30 per cent discount on 1991 book value. A three-year instalment plan was available and vouchers could be used. Managers had the option of buying 5 per cent of the voting shares at 1991 book value. In Option 2, subject to a two-thirds majority vote, workers and managers could buy 51 per cent of the voting shares at a discount and with deferred payments. Employees had the right to buy up to 51 per cent of their enterprise’s capital at 1.7 times 1991 book value. Up to 50 per cent of the value of the stock could be paid for with vouchers. Shares not given or sold to employees were to be sold at auction to the general public. Thirty-five per cent of shares were to be sold in exchange for vouchers. The remainder were to be sold for cash. Workers and managers were free to use their vouchers and cash to buy these shares too. In Option 3 a group of employees (not necessarily the entire work collective) could agree to reorganize an enterprise. The agreement had to be approved by at least two-thirds of the work collective and had to be in effect for one year. The group was obliged to reorganize the enterprise within one year, investing the employees’ personal money in an amount at least 200 times the minimum wage for each member of the group. If the terms of the agreement were met, the group members would receive the right to acquire 20 per cent of the ordinary shares at face value. In addition, all enterprise employees, including members of the group, could acquire an additional 20 per cent of the shares on the same terms as Option 2.

Option 2 proved to be by far the most popular of the three. By July 1994 more than 70 per cent of all enterprises had been privatized under Option 2. Another 21 per cent of enterprises chose Option 1 (RET, 1994, vol. 3, no. 2, pp. 79–80). By the end of June 1994, workers and managers at 73 per cent of all privatized

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large enterprises had selected Option 2 whereas only 25 per cent had chosen Option 1 (McFaul 1996a: 293). Some 70 per cent of industrial enterprises have been privatized. Two-thirds of shares ended up in the hands of employees of those enterprises (Åslund 1994b: 68). In over 65 per cent of the 18,000 privatized medium-sized and large enterprises, management and employees have majority ownership, whereas non-state outsiders control only 20 per cent of these enterprises (EBRD 1997b: 195). On average employees received about 50 per cent of the shares, management about 9 per cent and the government or other outside shareholders 41 per cent … [There was] an early trend among managers to buy shares cheaply from employees, often using the company’s funds. (FT, 6 August 2002, p. 16) The speed of privatization has been very rapid (enterprises being considered privatized if they are over half privately owned). (‘It is generally forgotten that nearly half of Russian industry is still really owned by the state’: Business Central Europe, November 1999, p. 41.) The following estimates give some idea of the speed: 1

2

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By 1 July 1994 some 14,000 medium-sized and large enterprises had been privatized. Two-thirds of the industrial labour force is now employed by privatized firms. More than 40 million Russians became shareholders in either privatized enterprises or investment funds (Maxim Boycko and Andrei Shleifer, Transition, 1994, vol. 5, no. 9, p. 8). ‘By now two-thirds of Russian industry, big and small, is in private hands’ (Richard Layard, FT, 3 June 1994, p. 17). Around 86 per cent of Russia’s industry is in mainly private hands (Richard Layard, FT, 14 March 1995, p. 20). By 1 July 1994 more than 40 million Russians became share owners in enterprises or in investment funds. More than 75 per cent of the industrial labour force had moved into the private sector. The government has retained a controlling share in some 358 enterprises and a ‘golden share’ (with veto power over strategic enterprise decisions) in 211 enterprises (RET, 1994, vol. 3, no. 2, pp. 79–80).

Various estimates have also been made of the importance of the private sector as a whole in the economy. For example, rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 5 per cent; 1991, 5 per cent; 1992, 25 per cent; 1993, 40 per cent; 1994, 50 per cent; 1995, 55 per cent; 1996, 60 per cent; 1997, 70 per cent; 1998, 70 per cent; 1999, 70 per cent; 2000, 70 per cent; 2001, 70 per cent (EBRD 1999b: 24, 260; and 2002b: 20, 192). The first stage of large privatization was mired in controversy. Among the common objections to this and other aspects of privatization were the following:

402 1

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Russia Rapid and more equitable privatization could have been achieved by means of a more conventional and thus more extensive voucher (mass) privatization programme in order to gain public support. (In such a programme all eligible citizens are allocated vouchers, for free or at nominal cost, which can be used to buy the bulk of shares in the enterprises on offer.) (Alexander Solzhenitsyn concluded thus: ‘The [privatization] campaign’s first step was the government’s issuing of vouchers to each citizen that supposedly represented his “share” of all the national wealth accumulated under the communists. In reality, the total value of all the vouchers represented only a small fraction of 1 per cent of that wealth’: IHT, 7 January 1997, p. 8.) There was often ignorance about the value of vouchers and shares among ordinary people. Valeri Bykov … seized control of Kras [Krasnoyarsk aluminium smelter] … the second largest in the world … earning $1 billion a year … ‘They were privatizing it,’ he says. ‘All the workers were given shares, but no one believed in them. You could buy them for almost nothing at the factory gates. My partner and I bought 20 per cent.’ (Andrew Harding, Guardian, 27 November 1999, p. 18)

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Pressure was also sometimes put on workers to sell against their will. The preference given to existing workers and managers (‘insiders’) would hinder the necessary adaptation of enterprises to harsher market conditions, especially when ‘soft budget constraints’ and payments arrears operate (and thus bankruptcy is not a serious threat). It was felt that investment would be neglected at the expense of wages. (See, for example, Sutela 1994; The Economist, 20 November 1993, p. 48, and 12 March 1994, p. 46; Brzezinski 1994; Boris Fyodorov, IHT, 17 October 1994, p. 2.) The Russian experience is the most powerful example of the damaging consequences of insider ownership, which are particularly severe when insiders have inherited or developed strong ties to government. (EBRD 1998b: 3–4) Financial discipline, would, it was anticipated, start to force secondary trading in shares of insider-dominated companies and introduce outside ownership … First [however], insiders – particularly the workers in the newly privatized firms – deeply feared outside ownership and a loss of control (and jobs). Second, because the financial and physical conditions of many firms were unattractive, not many outsiders were interested in acquiring their shares. Third, there was an acute lack of defined property rights, institutional underpinnings, and safeguards for transparent secondary trading; this further discouraged outside investors. Fourth, various Russian governments failed to put in place supporting policies and institutions – such as hard budget

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constraints, reasonable taxes and services, and mechanisms to permit and encourage new business entrants – that might have channelled enterprise activity to productive ends. (Nellis 1999: 17) Filatotchev et al. (1999a) surveyed more than 300 enterprises of different sizes in the period 1995–6. It has sometimes been argued that insider ownership in Russian firms will be a short-lived phenomenon, because the tradability of shares combined with insiders’ desire for portfolio diversification will ensure a fairly rapid dilution of their equity stake. Our findings suggest that this is a simplistic view – insider control may exist for quite long periods of time. (p. 500) (See also Filatotchev et al. 1999b: 129.) Subsequent sales of blocks of shares have been quite slow, as have secondary sales of shares by workers’ (Brown and Earle 1999: 30). ‘While the original rationale for Russia’s rapid privatization was to prevent asset stripping by managers in state-owned enterprises, ownermanagers have significantly degraded their firms’ assets. (Desai and Goldberg 2000: 15) Economists such as Andrei Shleifer, who recognized the importance of the institutional infrastructure for a market economy, believed that privatization, no matter how implemented, would lead to a political demand for the institutions that govern private property. Shleifer’s argument can be thought of as an (unwarranted) extension of [Ronald] Coase’s theorem … Even if one distributed assets to someone who did not know how to manage them, in a society with well-defined property rights that person would have an incentive to sell to someone who could manage the assets efficiently … It is now recognized that the conditions under which Coase’s conjecture is valid are highly restrictive – and certainly were not satisfied in Russia as it embarked on its transition … Today, in Russia, we do not see demands for strong competition policy forthcoming from the oligarchs, the new monopolists. Demands for the rule of law have come from these oligarchs, who obtained their wealth through behind-the-scenes special deals within the Kremlin, only as they have seen their special influence on Russia’s rulers wane. (Stiglitz 2002: 15–16) (The infamous ‘shares-for-loans’ scheme is dealt with on p. 419.)

404 Russia Joseph Stiglitz [then chief economist of the World Bank] restated his disapproval of Russia’s privatization programme, saying the system encourages ‘asset stripping’ that has seen ‘billions and billions of dollars taken out of the country’ … Mr Stiglitz said that privatization had gone ahead without a sufficient legal framework. (IHT, 27 January 2000, pp. 1, 17) ‘Although Russia formally has privatized most of its industrial sector, the pace of economic restructuring is still grossly inadequate to ensure stable economic growth’ (Gaddy and Ickes 1998a: 1). While Boone and Fedorov (Fyodorov) see many positive features of the privatization process, they are not unaware of some problems. There are several incentives operating today that suggest insider owners may still wait before they restructure enterprises or divest assets. When there are outstanding shares held by the state, or by workers with weak control rights, it is only normal that a director would want to take actions to limit the market value of these shares so that management or friendly entities can buy up the remaining shares at low prices. (Boone and Fedorov 1997: 181) 4

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‘Insiders typically focus on maintaining control over their firms than on restructuring. Maintenance of “pocket” share registrars (i.e. registrars controlled by the firm), manipulation of voting procedures and obstacles to board representation of outside shareholders have been widely used as defence mechanisms to preserve insider control’ (EBRD 1997b: 195). ‘Most large enterprises are run by insiders who disregard the owners’ rights’ (Yavlinsky 1998: 78). The World Bank: ‘During the 1990s powerful industrialists frequently hampered the work and enforcement efforts of the Securities and Exchange Commission to strengthen the rights of small shareholders’ (Transition, 2002, vol. 13, no. 1, p. 13). ‘The insiders who came out well from the initial wave of liberalization and privatization fiercely opposed the Securities and Exchange Commission’s efforts to strengthen the rights of minority shareholders or creditors’ (p. 16). ‘A 25 per cent stake in a Russian company is widely regarded as the minimum requirement to wield any influence over the management’ (FT, 27 June 2000, p. 23). Corporate governance (control) would also be hindered by the newness and fewness of investment funds. Whereas Czech investment funds collected 70 per cent of privatization vouchers, Russian investment funds attracted only 6 per cent (Business Central Europe, May 1996, p. 48). Some investment funds (such as MMM in 1994) were essentially pyramid schemes (which rely on new subscriptions to pay off existing investors and are therefore inherently doomed to fail).

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Existing managers would become increasingly powerful given the weakness of trade unions and the fear of unemployment among workers. (See, for example, McFaul 1996a.) ‘The decision to move fast was made by the Russian government. In a different political environment more gradual privatization, after the creation of legal and institutional frameworks for a market economy, could have made more sense’ (Stanley Fischer, first deputy managing director of the IMF, FT, 27 September 1999, p. 26). ‘The scarcity of de novo private firms in Russia is particularly striking in comparison with other transitional economies … Barriers hinder new domestic and foreign firms from entering the Russian market … [such as] the anti-competitive market structure and the anti-competitive conduct of existing dominant firms, which is often sanctioned or supported by local governments … [the insecurity of] private property rights … [financing problems and] … corruption … Most new entrants in Russia are ownermanager firms – mainly small and medium-sized enterprises. There are about 1 million registered small and medium-sized enterprises (generally defined as business establishments with fewer than 250 employees); they employ about 13 per cent of the Russian labour force and produce about 12 per cent of GDP. These figures are likely to be inaccurate because much small business activity is still in the informal sector and thus goes largely unreported. Nonetheless, … the percentage of national employment accounted for by small and medium-sized enterprises is 37 per cent in the Czech Republic, 58 per cent in Georgia and 37 per cent in the former Yugoslav Republic of Macedonia’ (Broadman 2001: 23–4). ‘Eight million Russians now work in new small businesses, producing – even according to official statistics, which are certain to understate the figure – 5 per cent of all industrial goods and 15 per cent of all services in the country’ (The Economist, Survey, 21 July 2001, p. 9). In many CIS countries where growth remained low until the end of the decade [the 1990s], the share of employment in small enterprises hovered around 20 per cent. In fast-growing Central Europe, in contrast, that share reached 50 per cent. In Russia it remained virtually stagnant toward the end of the decade, while it doubled in Poland. The evidence suggests that new enterprises must reach a threshold of around 40 per cent in their contribution to employment before becoming the engine of aggregate growth. (Mitra and Selowsky 2002: 49)

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Andrei Illarionov: Large-scale institutional reforms like privatization should never have been undertaken in an economy that was not fully liberalized and not stabilized financially … When budgetary and institutional constraints

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Russia are negligible, privatization reduces the efficiency of the enterprises being privatized … Out of all the potential methods of privatization the most ineffective one was chosen: voucher-based privatization … If a resource, commodity or service is obtained for free, it is also used inefficiently … In 1992–3 there was no sea of private companies operating under strict rules in Russia. On the contrary, there is a sea of inefficient enterprises that, moreover, were still being subsidized on a massive scale, receiving budget loans and central bank assistance, among other things. (CDSP, 2001, vol. 53, no. 45, p. 8)

Arguments in favour of the method of privatization adopted in stage one include the following: 1

2

Rapid privatization was essential to make the transition to a Western-type economy irreversible. The political situation, especially the weakness of the central government in a country not generally enamoured with privatization, meant that there was no option to in effect the bribing of ‘insiders’ (especially the powerful managerial lobby). (See, for example, Boycko et al. 1994.) Once clear private property rights have been established (especially in conditions of tight monetary policy), market share dealing will empower ‘outside’ owners (including foreigners) to exercise corporate governance. There will be changes in management and a more efficient use of resources in general. (See, for example, Åslund 1994b; Joseph Blasi, IHT, 1 July 1994, p. 4, and The Economist, Survey, 12 July 1997, p. 12; Fan and Schaffer 1994; Maxim Boycko and Andrei Shleifer, Transition, 1994, vol. 5, no. 9, p. 8; Buck et al. 1994; EBRD 1994: 34; and 1996b: 170.) Although privatization has not been as successful as the reformers hoped, some positive changes have been implemented. Many Sovietera managers have been replaced, which is often a precondition for restructuring … A recent broad survey shows substantial marketdirected restructuring, although this process has been much faster in countries with more radical reforms. (Åslund 1999b: 70)

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‘Barter is abating, from 54 per cent of industrial firms’ sales in August 1998 to 46 per cent in January 1999’ (p. 76). Some see positive aspects in the increasing power of managers. ‘Managers now own around a third of shares in the typical firm, which gives them a powerful incentive to maximize shareholder value, and restructuring is going ahead fast’ (Richard Layard, FT, 14 March 1995, p. 20). When enterprises are controlled by their rank-and-file employees, they tend to be slow to restructure and likely to accumulate inter-enterprise

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and tax arrears; but when management has control, firms have been far more likely to reorient themselves towards success in the new market conditions. (RET, 1996, vol. 5, no. 2, p. 123)

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Krueger (1995) believes that the ability of Russian managers to adjust to new circumstances has generally been underestimated. Corporate governance is being improved, e.g. through greater legal protection for the rights of ‘outside’ shareholders and through the activity of Financial–Industrial Groups (FIGs). Problems in the area of corporate governance, resulting from a combination of privatization to insiders and the lack of shareholders’ rights, are often mentioned as key to Russia’s underperformance. The existing governance environment gives the current managers more incentives to divert the company cash flow to their own trading firms, than to restructure or invest. Such cash diversions have been commonly mentioned in the steel, cement and oil sectors. However, in these industries battles for corporate control are now coming to an end in most of the viable assets, allowing management to focus on increasing longterm value of the company. (McKinsey Global Institute 1999: 27)

The registration of official FIGs began soon after the adoption of a presidential decree on FIGs in December 1993. By 1998 the official registry of FIGs listed seventy-five groups, including a total of 1,212 firms with 3,330,000 employees. A great number of informal FIGs have also emerged (RET, 1999, vol. 8, no. 3, p. 6). Corporate governance remains handicapped by the continued concentration of ownership in the hands of insiders (workers and management). However, commercial banks are an increasingly active influence. They have taken large equity stakes in many enterprises and are exercising external control, partly in the framework of Financial–Industrial Groups. Recent evidence suggests that real restructuring is coming mainly from this source. (EBRD 1996b: 170) ‘Recent high-profile cases of enforcing improved corporate governance and respect of shareholder rights (Gazprom, Unified Energy System, Mosenergo and Novolipetsk) are encouraging signs’ (EBRD 1997b: 195). (But the impact of FIGs has not been seen entirely in a positive light. ‘The seven major FIGs control over 40 per cent of the economy and 1997 has seen a clear tightening of this grip’: Business Central Europe 1997: 32. On 20 February 1998 Boris Nemtsov declared that the failure to establish control over monopolies had already resulted in a ‘dictatorship’ of FIGs. ‘Unless we

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establish control over monopolies and rebuff the increasingly insolent industrial groups a gloomy end awaits us. We can expect economic collapse, as happened with the Asian Tigers’: IHT, 21 February 1998, p. 9.) FIGs are officially defined as ‘a group of enterprises, institutions, organizations, lending and financial institutions and investment institutions’ (Johnson 1997: 334). Johnson breaks FIGs down into two major groups: 1

2

Industry-led FIGs tend to be based on old industrial ties or branch ministries, concentrated in depressed industrial sectors (especially defence) and located in the regions. Banks have joined these FIGs but they are usually weak local banks (often so-called ‘pocket banks’ directly controlled by the enterprises involved) or banks that have provided little actual support to other members of the group. ‘Most industry-led FIGs have engaged in almost no active enterprise restructuring on their own’ (p. 334). ‘The member-enterprises have banded together at the behest of the state in hopes of finding a way out of their restructuring dilemmas without yielding control to outsiders’ (p. 361). Bank-led FIGs emerged as the largest banks began to acquire shares of privatized or privatizing enterprises, tending to focus on lucrative export or consumer industries and succeeding in gaining control over many leading enterprises (p. 334). We find that, whereas industry-led FIGs for the most part represent failed efforts by enterprise managers and conservative politicians to salvage uncompetitive industrial ventures without restructuring them, bank-led FIGs have acquired powerful and potentially pivotal positions in the Russian economy today. (p. 351) ‘In the mid-1990s financial–industrial groups (FIGs) were created when Russian banks acquired oil and metals companies through dodgy privatizations. But the FIGs became notorious – instead of investing in the companies, or fattening them up for resale, they simply ground them into the ground by whisking cash offshore. This time, though, the new conglomerates are putting their money where their mouth is … The main reason for this shift in attitude is the devaluation of the rouble in 1998. Before then it was easy to make money by diverting cash offshore, ripping off minority shareholders and the tax authorities. But the new profit opportunities in Russian industry have made it worthwhile to invest. (Business Central Europe, April 2001, p. 61) ‘The spread and strengthening of vertically integrated business conglomerates may constitute a barrier to enterprise reform. These institutions,

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created partly because of the lack of trust among independent businesses, serve to concentrate economic and political power’ (EBRD 2002b: 190). (There have been important later developments in corporate governance. ‘Corporate behaviour is improving … The “oligarchs” … claim to recognize the role of good corporate governance – meaning financial transparency, managerial accountability and equality of all shareholders … Their lingering fears of renationalization under a new regime have been claimed by the arrival of President Vladimir Putin … [who] has signalled willingness to let the oligarchs keep their wealth if they pay taxes and stop trying to run the country … They want to keep money in the company for reinvestment. They want to talk up the stock price. They want access to capital markets. Yukos, the oil company, has been a leader in raising standards … Professional investors, a smaller but tougher constituency since Russia’s financial crash of 1998, also play their part … Investors also give the government high marks for its tax reforms. A new 13 per cent income tax will soon be followed by a 24 per cent profits tax. Clear rules for taxing oil companies have replaced opaque ones. The improved tax regime should encourage companies to account fully for their true profits and pay dividends reflecting those profits … Sceptics worry that improvements in corporate behaviour coincide with a buoyant economy’: FT, 18 September 2001, p. 21.) Developments after the first stage of privatization After the first stage of privatization ended on 1 July 1994 attention switched to sales for cash. Other key changes included the attraction of ‘strategic private investors’ for the sake of corporate governance. The scheme would allow investors to acquire ‘substantial stakes’ in enterprises (RET, 1994, vol. 3, no. 3, p. 93). Special attention needs to be paid to the privatization of the oil and gas industries. Oil and gas are key sectors in the Russian economy. Russia is the third largest producer of oil in the world, behind Saudi Arabia and the USA (IHT, 6 July 1994, p. 6). In 2000 Russia was ‘in third place after Saudi Arabia and the USA’ (The Times, 14 November 2001, p. 22). ‘Russia … is the world’s second largest exporter after Saudi Arabia’ (IHT, 30 January 2002, p. 15). The oil industry has been split up into a number of corporations, with the state holding company Rosneft acting as overseer. In contrast, the natural gas industry is still dominated by Gazprom (which was turned into a joint stock company). The company is huge, although estimates of its importance vary somewhat: ‘Gazprom … is the world’s largest natural gas producer, with about a quarter of the world’s reserves’ (IHT, 1 July 2000, p. 11). ‘Russia as a whole accounts for 32.7 per cent of the world’s natural gas reserves’ (Business Central Europe, July–August 2001, pp. 21–2). ‘Gazprom … supplies a third of Europe’s gas’ (The Times, 31 May 2001, p. 12). ‘Gazprom [is] the world’s largest gas company … [and accounts for] 8 per cent of GDP’ (FT, 1 June 2001, p. 18).

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The ownership of Gazprom shares, especially by individuals, is not entirely clear. ‘It is hard to know who owns Gazprom, the partly privatized natural gas giant, whose first chairman was Viktor Chernomyrdin, the prime minister’ (Jeffrey Sachs, IHT, 6 December 1995, p. 10). The government now owns a 38.37 per cent stake in Gazprom (FT, 7 August 1999, p. 2). Gazprom has been accused of transfer pricing much of its profits away to Itera, a little-known Florida registered company which the Russian press links to top Gazprom management. Itera denies that it is owned by Gazprom management and says it is the victim of a political vendetta. (FT, Survey on the World Economy, 22 September 2000, p. xvi) ‘The directors of Gazprom … yesterday [27 October 2000] banned their top managers from transferring assets or making any transactions involving its shares without the approval of the board’ (FT, 28 October 2000, p. 10). Severe critics include even former advisers such as Sachs and Åslund: 1

Jeffrey Sachs (IHT, 6 December 1995, p. 10) draws a contrasting picture of privatization in various sectors. When the economic reforms got underway in 1992 Russia’s vast natural resources provided unparalleled opportunities for theft by officials. Oil, gas, diamond and metal ore deposits were nominally owned by the state and thus by nobody. They were ripe for stealing – or for ‘spontaneous privatization’ as Russians cynically call it. The main method of legal privatization, a combination of selling and giving shares to the people, was amazingly honest when it involved manufacturing enterprises, although some managers later abused it. But when natural resource enterprises were privatized the system was often skirted or compromised by ad hoc decrees and hidden arrangements. The biggest plums, the oil and gas enterprises, are worth tens of billions of dollars. The Soviet state earned vast sums on sales, especially exports, but much of this income now flows to a few private pockets, creating shortfalls in the government’s budget. Until recently government licences to export oil were given free to insiders, at a cost to the budget of billions of dollars a year. In a later article Sachs wrote: In the past three years, under IMF auspices, Russia has been borrowing short-term funds from abroad to keep a corrupt and mismanaged government afloat. The Fund stood by as the government squandered tens of billions of dollars by transferring state-owned oil and gas companies to cronies at cut-rate prices. (IHT, 5 June 1998, p. 8)

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Åslund (Business Central Europe 1995: 15) makes similar points. The oil and gas company executives were the prime advocates of low oil and gas prices. They bought oil at the domestic price on their own account and sold it abroad at the world market price … The low domestic prices caused their companies losses, but that made shares in loss-making enterprises cheaper and the oil executives bought undervalued stock in the companies they managed for their illicit personal gains. This double fraud came to light in 1995 and it cannot survive for much longer.

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‘The [energy] industry’s present managers are mostly the people who ran the energy industry when it was the property of the state. They were handed it virtually as a gift, in the guise of its privatization, and at a stroke were made rich and powerful. Their principal political ally is Mr Yeltsin’s prime minister, Viktor Chernomyrdin’ (William Pfaff, IHT, 13 June 1996, p. 8). ‘ “Oligarchs” have profited from what were described as privatizations of Russian industry but were actually appropriations of Russia’s state assets by people in power and their associates’ (William Pfaff, IHT, 2 September 1999, p. 8).

Later developments in oil and gas privatization include the following: 4 November 1997: a presidential decree lifts the 15 per cent limit (established in 1992) on foreign shareholding in Russian oil companies (CDSP, 1997, vol. XLIX, no. 45, p. 15). 17 November 1997: BP buys a 10 per cent stake in Sidanko (for $571 million). Oneximbank is the main shareholder in Sidanko, Russia’s fourth largest oil company. Royal Dutch/Shell announces a strategic alliance with Gazprom, one aspect of which is a commitment by the former to invest $1 billion in a convertible bond to be issued in early 1998 (i.e. convertible into Gazprom shares in the future). Joint development projects are planned in both cases (FT, 18 November 1997, p. 1; The Economist, 24 January 1998, p. 76). 29 October 1999: An obscure Cyprus-based business on Friday [29 October] appeared to have won the bidding for a significant stake in Lukoil … in a partial-privatization process that had been criticized by some observers as being geared towards a bid from the company’s own executives. Reforma Investments bid just over $200 million for a 9 per cent stake in Lukoil … Under the terms of the auction the privatization process required two competing bids and a minimum tender price of $200 million … The sale required partial payment in cash, with the remaining half of the money coming in the form of investment commitments … The sale, plus a further 1 per cent stake, will also reduce the Russian state’s stake from 28 per cent to 18 per cent. A further 9 per cent of Lukoil is owned by Arco [Atlantic Richfield

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Russia Company], 6 per cent by the staff pension fund, and the remainder by a range of individuals and funds. (FT, 1 November 1999, p. 29) In October the state property ministry sold a 9 per cent government equity stake in Lukoil … The parties standing behind the offshore firm were not disclosed. Under the terms of the auction the winner has to invest $240 million in the company in the next six months. (RET, Monthly Update, 12 November 1999, p. 13)

‘The buyer, a Cyprus-registered company, is thought to be owned by Lukoil itself ’ (RET, 1999, vol. 8, no. 4, p. 99). 26 November 1999: BP Amoco yesterday [26 November] raised the prospect of cutting back its activities in Russia after what it claimed was the illegal forced sale of its principal oil investment in western Siberia to a local competitor. Chernogorneft, the main oil producing subsidiary of Sidanko, the Russian group in which BP Amoco has taken effective control, was sold out of bankruptcy to the Tyumen Oil Company (TNK) for $176 million … BP Amoco purchased a 10 per cent stake in Sidanko in 1997, but both the Russian company and a number of its subsidiaries were pushed into bankruptcy in the wake of the financial crisis in August last year [1998] … Sidanko, along with leading Western creditors including the EBRD and the US Ex-Im Bank, found themselves squeezed into a minority on the creditors’ committee of Chernogorneft, over which TNK exercised increasing control in the past few months. A series of court appeals by the foreign creditors failed, and in spite of their claims that the rise in oil prices over the past few months meant Chenogorneft ought to have easily been able to pay off its debts, a court-appointed bankruptcy administrator pushed ahead with his plan to hold an auction. (FT, 27 November 1999, p. 15) ‘The bankruptcy process itself is often used as another channel for asset-stripping, with the appointment of lenient administrators’ (EBRD 1999b: 259). [On 22 December] BP Amoco and OAO Tyumen Oil Company settled a dispute over control of a Siberian production unit, helping the Western giant salvage a $571 million investment in Russia. The accord returns the unit, which controls part of Russia’s biggest oil field, to Tyumen Oil’s rival OAO Sidanko, of which BP Amoco owns 10 per cent. Tyumen Oil’s shareholders will get 25 per cent of Sidanko and work with BP Amoco to develop the field. (IHT, 23 December 1999, p. 11) Shareholders in the Russian oil group TNK scored a victory over the multinational BP Amoco by persuading it to co-operate in future operations within

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the country and to acquire over a quarter of the equity in Sidanko. In an agreement signed yesterday [22 December], TNK’s principal shareholders – Alfa Group and Access/Renova – will receive 25 per cent plus one share in Sidanko, the Russian oil group in which BP Amoco holds a 10 per cent stake. In exchange TNK’s shareholders will hand back debt-free Chernogorneft, Sidanko’s principal oil-producing subsidiary … The deal has cost TNK about $200 million compared with $484 million paid by BP Amoco for a 10 per cent stake in Sidanko acquired in 1997, since when a sharp rise in world oil prices has helped increase the value of the investment … The deal means that TNK’s owners, including ‘oligarchs’ Mikhail Friedman and Peter [Pyotr] Aven, will be co-operating with another oligarch, Vladimir Potanin, whose Interros group has the largest shareholding in Sidanko. (FT, 23 December 1999, p. 25) (‘Shareholders of OAO Sidanko … have agreed to return $484 million in assets of its subsidiary OAO Chernogorneft to BP Amoco PLC’: IHT, 26 August 2000, p. 11.) (‘BP is to spend $375 million to increase its stake in Sidanko … from 10 per cent to 25 per cent [plus one share]… BP is buying the extra Sidanko shares from Alfa Bank of Moscow and Access–Renova, a US–Russian investment group, with which it has had a bitter wrangle. In 1997 BP paid $484 million for 10 per cent in Sidanko, only to see that company’s chief asset, the Chernogorneft oil field, disappear into the hands of Tyumen Oil (TNK), also controlled by Alfa and Access–Renova, in a controversial bankruptcy case. Last year [2001] BP got Chernogorneft returned, and had its contract to manage Sidanko renewed for another three years … Alfa and Access–Renova still control 56 per cent of Sidanko. These two investor groups have talked about merging Sidanko into TNK, of which they own 99 per cent … With 25 per cent plus one share BP could block such a merger’: FT, 17 April 2002, p. 24.) 29 January 2001: ‘BP Amoco PLC plans to sell its 7 per cent stake in Lukoil Holding OAO’ (IHT, 30 January 2001, p. 14). BP said it was selling the stake because it had no representation on the board of directors of Lukoil and no control over its assets … The stake … was inherited from Arco, the US group that BP purchased in April last year [2000]. (FT, 30 January 2001, p. 36) ‘BP Amoco PLC raised $657 million from the sale of its 7 per cent stake in Lukoil Holding PLC … after finding greater-than-expected demand for the stocks and bonds’ (IHT, 31 January 2001, p. 15). 1 August 2001: BP PLC … has reached an agreement with two Russian financial groups over Sidanko … BP will regain control of a Siberian oil field it lost in a bankruptcy auction to Tyumen Oil Co. in 1999. Tyumen will also buy out

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Russia BP’s original Russian partner in the project, a once-powerful financial group called Interros … owned by Vladimir Potanin … On Wednesday [1 August] Tyumen agreed to buy out Interros’s 44 per cent stake in Sidanko. (IHT, 2 August 2001, p. 14) [Mikhail Friedman’s] Alfa [is] TNK’s leading shareholder. Under the expected agreement TNK is set to return Chernogorneft … to Sidanko … Separately, TNK would merge its licence to operate in part of the Kovytka gas field in eastern Siberia into the assets of Rusia, the principal operator in the region. BP has a 28 per cent stake in Rusia. In exchange, TNK will receive substantial equity interests in both Sidanko and Rusia, giving it and BP joint management and control over both. Mr Potanin is expected to relinquish his dominant stake in Sidanko … BP paid $571 million for its stakes in Sidanko and Rusia acquired from Mr Potanin in 1997. However, it found itself embroiled in a feud between Mr Potanin and Mr Friedman, who had lent Mr Potanin money in exchange for a promised stake in Sidanko that he never received. TNK forced Chernogorneft and another Sidanko subsidiary into bankruptcy, took control over the companies, and managed to win a licence to operate alongside Russia’s exploration fields. (FT, 2 August 2001, p. 30)

December 2002: ‘The government owns 13.5 per cent of the shares in Lukoil and planned to sell 5.9 per cent earlier in 2002 (The Economist, 7 December 2002, p. 9). On 5 December 2002 Lukoil sold 5.9 per cent of its shares on the London stock exchange for Euro 775 million (Baltic Times, 12–18 December 2002, p. 15). ‘[The government] has agreed to sell 5.9 per cent of its shares [in Lukoil] … for $775 million … through an offering of American depositary shares, each representing four ordinary Lukoil shares’ (IHT, 5 December 2002, p. 15). ‘The sale would reduce the state’s stake in Lukoil to 7.6 per cent … The shares are intended to be offered in the form of American depositary receipts but will be sold on the London stock exchange’ (IHT, 18 December 2002, p. 15). In fewer than five minutes of bidding Russia sold off one of its largest remaining oil companies on Wednesday [18 December 2002] in an auction whose outcome seemed rigged from the start … [The sale raised] $1.86 billion for 75 per cent [74.95 per cent] of Slavneft AO, Russia’s ninth-largest oil company. The final price fell short of expectations, even though it exceeded the government’s minimum requirement. Slavneft was the secondlargest post-Soviet privatization, after the controversial sale of Russia’s telephone conglomerate in 1997 … Two companies joined forces to win … Sibneft OAO and Tyumen Oil Co., Russia’s fifth- and fourth-largest companies [by reserves]. The joint bid was agreed several days in advance … Instead of a vigorous bidding session with all seven contenders fighting for the prize, onlookers witnessed a brief back-and-forth between two companies … The seven contenders, it appeared, all belonged to the same two

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companies – Sibneft and Tyumen. Other bidders – two private Russian companies, China’s national oil company, and a state-owned Russian oil company – had already dropped out … [Rosneft was barred as a contender by a court decision] … The state-owned company … said it had been willing to spend $2.5 billion on the stake and said it would take legal action … Over the past two weeks all serious contenders dropped out, primarily because Tyumen and Sibneft already own a portion of Slavneft’s assets … Only three companies out of seven actually took part in the bidding. (IHT, 19 December 2002, p. 13) (‘Slavneft produces just under 5 per cent of Russia’s overall oil output and is one of two oil companies that remain in state hands … The state has sold a major asset – a smaller oil company called Onaco AO – since Putin was elected’: IHT, 19 November 2002, p. 11. ‘Slavneft … [is] seventh in reserves and in crude production … Already, Sibneft, with Tyumen, controls nearly a quarter of Slavneft’: The Economist, 14 December 2002, p. 71.) The reserve price was $1.7 billion … Questions remain about the privatization process… The [televised] auction itself began nearly one hour late … There were only two serious bidders … One was … the head of Sibneft (formally representing an intermediary called Invest-Oil) and the other, two unknown women representing a company believed to be linked to another leading group … After the result, however, TNK … announced that it jointly controlled Invest-Oil and both it and Sibneft would share the financing and ownership … Russia’s other largest oil companies – Lukoil, Surgutneftgaz and Yukos – first expressed interest and then changed their minds. Russian politicians launched a campaign last week rejecting the idea that a Chinese government entity [China National Petroleum Corporation] could acquire a strategic Russian company … [There] were concerns … that some of the subsidiaries theoretically controlled by Slavneft had recently disappeared … That left four more companies, excluded from the auction on Tuesday evening [17 December] after a series of court orders disqualified them. (FT, 19 December 2002, p. 6) The Russian government was aiming to set a new benchmark for transparency … [But] the end result … is a stitch-up … [All that was] left [was] an apparent duel between Sibneft and TNK – except that the two turned out to be in cahoots … securing the stake for a fraction more than the reserve price. (p. 20) Rosneft [Russian Petroleum] declared yesterday [18 December] that ‘the Russian Federal Property Fund turned the auction into a farce. The run-up to the auction and the way it was held were clearly reminiscent of the

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Russia “loans-for-shares” deals of the first half of the 1990s, in which the major assets of our industrial base were turned over to private owners for a song, without the slightest regard for public opinion’. Rosneft now intends to challenge in court the RFPF’s actions in barring Finansprofit [Rosneft’s bidding entity] from the bidding and to file a complaint with the prosecutorgeneral’s office … Finansprofit Expert … [is] a subsidiary of a subsidiary of [government-owned] Rosneft … The prime minister made it very clear to the heads of the major state-owned companies a month ahead of time that the Slavneft auction was none of their business … Slavneft is Russia’s ninthlargest oil company. (CDSP, 2002, vol. 54, no. 51, pp. 7–8) [There was] strong political pressure on the Chinese to stay away from the auction … Sibneft and Tyumen Oil bought Slavneft for $1.86 billion. That was far short of the $3 billion that some analysts said the China National Petroleum Corp. was prepared to pay. (FEER, 13 February 2003, p. 28)

(‘[On 6 December] the Belarussian government sold its 10.3 per cent stake in Slavneft [Slavic Petroleum] to the sole participant in a bidding competition – Slavneftebank, which represents the interest of [Roman Abramovich’s] Sibneft [Siberian Petroleum] – for $207 million’: Nezavisimaya Gazeta, 9 December 2002, p. 3: CDSP, 2002, vol. 54, no. 49, p. 14.) February 2003: BP PLC on Tuesday [11 February 2003] agreed to pay $6.75 billion to form a new Russian oil company … Under the terms of the agreement – the largest in Russia’s post-Soviet history – BP will pay cash and equity for a 50 per cent stake in the new company, which will become the third-largest Russian oil producer … BP’s reserves [will be increased by] 30 per cent … The owners of Tyumen, the Russian conglomerate Alfa Group and the Russian–American Access Industries/Renova Group, are BP’s partners in the new venture. As co-owners of Sidanko, they have been working with BP executives since 2001 … BP’s investment in this deal is equal to a quarter of all foreign investment in Russia since 1992. (IHT, 12 February 2003, p. 9) ‘The investment is equal to a quarter of all foreign direct investment in Russian since 1992’ (IHT, 15 February 2003, p. 11). BP announced plans for a further $20 billion of investment in less traditional fields yesterday [11 February] after confirming a $6.75 billion deal to buy a half share in TNK, Russia’s third largest oil company … BP will assume management control of a new joint venture [TNK–BP], formed from existing investments in TNK and Sidanko, but said it had turned

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down the chance to take more than 50 per cent of the equity because it wanted Russian investors to feel equal partners and help lobby the government. BP will pay $3 billion in cash to Alfa Group and Access–Renova, its existing partners in Russia, and three annual tranches of $1.25 billion in BP shares. (FT, 12 February 2003, p. 19) ‘BP announced the creation of a $16 billion joint venture that will become Russia’s third largest oil company’ (FT, 18 February 2003, p. 26). British Petroleum … said it would pay for half of the Tyumen Oil Company (TNK), Russia’s fourth largest oil producer … Strictly, BP is not buying half of TNK, but joining in as half-owners of a new firm that will include all of the existing TNK plus BP’s existing Russian assets … It is the biggest single foreign purchase of Russian equity ever, on its own worth more than double … total foreign direct investment [in 2002] … … BP’s deal is seen, both in Russia and abroad, as stamping a seal of approval on the country’s progress … Rather than a cautious 25 per cent plus one share – the minimum blocking share – BP went for an equal partnership with the Russians, probably the maximum foreign ownership that is politically acceptable in Russia. (The Economist, 15 February 2003, p. 66) (‘BP PLC … signed an agreement with … Alfa Group and Access–Renova on Thursday [26 June 2003] to invest $6.15 billion to form the tenth largest producer of oil and gas. But the investment was $600 million less than BP envisioned when the deal was originally announced in February because of additional debt taken on by its partners’: IHT, 27 June 2003, p. 13.) (‘A Russian official announced last week that Russia’s export capacity had reached its limit last year [2002] … After months of wrangling about whether to lay the [oil] pipeline to China to Russia’s Pacific coast, the government last week struck a compromise. The route will stretch to Nakhodka, a port on Russia’s eastern coast … as a way to jump-start development in eastern Siberia … But first it will reach south into China, a route backed by the largest Russian oil producer, Yukos … Final details will be resolved by 12 March, when the government will convene to discuss the issue … The decision also seemed to answer the question of ownership in Russia. The government has been reluctant to give up control over the 48,300-kilometre network, the world’s largest. It fears losing revenue and influence over decisions of geopolitical importance. Russian companies, eager to export, are chafing at the approach’: IHT, Tuesday 11 February 2003, p. 10. ‘Yukos Oil Co. and China National Petroleum Corp. signed a deal Wednesday [28 May] that will pave the way for a pipeline to China … The volumes of supply will represent 10 per cent of China’s oil needs in the period from 2005 to 2030’: IHT, 29 May 2003, p. 12.)

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April 2003: The owners of the largest Russian oil company, Yukos, and of the number five producer, Sibneft, are close to a deal on merger … If completed, the merger would create one of the world’s largest oil companies … [producing more oil] than the current fourth-largest publicly held company in the world, Chevron–Texaco … The new company would be majority owned by the current owners of Yukos, including Mikhail Khodorkovsky … Roman Abramovich and other large private shareholders now own 87 per cent of Sibneft. The rest is publicly owned … The two companies tried to merge assets in 1999. Sibneft, then controlled by … Boris Berezovsky, agreed to join Yukos in a company called Yuksi. The deal was never completed because the owners could not agree on terms. (IHT, 22 April 2003, p. 14) The two Russian oil companies confirmed Tuesday [22 April] that they would merge in a deal worth about $3 billion, creating a company that would … [be] the fourth-largest private oil company in the world … Yukos will buy 92 per cent of Sibneft, paying $3 billion in cash and the rest in shares of the combined company. That stake is the amount held by Sibneft’s core owners, and they will get a 4 per cent premium for their holding … Mikhail Khodorkovsky … will manage the new company, to be called YukosSibneft … Roman Abramovich and other core owners [of Sibneft] will retain about 29 per cent of the company … For the first time a Russian company is paying a premium to buy another Russian company … The deal … will leave Abramovich and other core Sibneft shareholders with a minority stake in the new company. (IHT, 23 April 2003, p. 11) [There was] a previous round of failed discussions in spring 1998 … Yuksi was still-born largely because neither side wanted to relinquish control. The key owners on both sides were in favour, but one level down it was impossible to get people to agree … One powerful group of Russian owners – those at Sibneft – [are willing] to relinquish control. (FT, 22 April 2003, p. 24) Yukos and Sibneft … yesterday [22 April] announced plans for a $36 billion merger … Yukos plans to pay $3 billion in cash and offer 29 per cent of the equity in the combined group to buy out Sibneft’s shareholders … YukosSibneft would have the world’s largest proven reserves among private oil companies … and would be the fourth largest producer … Nearly 90 per cent of Sibneft’s shares are held by ‘core shareholders’ – believed to be Roman Abramovich, the politician and business tycoon – who will receive $3 billion for a 20 per cent stake, followed by 0.36125 per cent of the new company for each 1 per cent of Sibneft … Mr Abramovich is set to hold a

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minority blocking stake of just over 25 per cent … The team of Mr Khodorkovsky [is] likely to control just over 50 per cent of the combined group … Eugen Shvidler, Sibneft’s chief executive, [is to be] chairman of YukosSibneft … Yesterday’s transaction stymied discussions under way for a participation by Total and Shell … [YukosSibneft] will account for almost 30 per cent of Russian oil production … As much as 90 per cent of Russian oil production … [but] lacks the presence of gas that distinguishes the current crop of supermajors … Western supermajors are now oil and gas companies … As much as 90 per cent of Yukos’s reserves are within Russia and all of Sibneft’s are in western Siberia. (FT, 23 April 2003, p. 29) YukosSibneft will still make most of its money from pumping out and exporting crude … The proposed terms of the deal … [include] $3 billion in cash to the main Sibneft shareholders, Roman Abramovich and his associates, for a 20 per cent stake (the rest to be converted by a share swap), plus extra-large dividends to Yukos shareholders before the deal is completed … There has been no louder critic than Mikhail Khodorkovsky … of the Russian government’s refusal – until recently – to allow private hands to build and own more pipelines … Just a week earlier the government reversed its position on pipeline ownership, giving him and his peers a provisional green light to build a 2 million-barrel-a-day link from the oilfields of western Siberia to the northern port of Murmansk. (The Economist, 26 April 2003, p. 67) The ‘shares-for-loans’ scheme On 31 August 1995 a presidential decree described what was to prove a highly controversial ‘shares-for-loans’ scheme, allowing certain Russian banks to assume management control of state shares in selected enterprises for use as collateral in return for loans. The low level of privatization revenue raised by that time was a major consideration. (In 1995 the government raised only 6 trillion roubles from privatization, compared with the 9.3 trillion roubles expected: The Economist, 6 January 1996, p. 63.) Interest was to be paid and the loan was to be repaid within three years at the original value ‘adjusted’ for the intervening change in the rouble value of the Ecu. If the lender and the state property committee agreed, the former could at any time sell the shares and keep the ‘adjusted’ value of the loan plus 30 per cent of the excess of the sale price over that value. For each block of shares there would be a competition and the block would be awarded to the one offering the largest loan. For strategic decisions the voting rights of shares could be exercised only with the agreement of the state property committee (RET, Monthly Update, 19 September 1995, p. 11). On 2 November 1995 the president signed a decree deferring the earliest date when investors could be given permission to sell the acquired shares from 1 January 1996 to 1 September 1996 (RET, Monthly Update, 14 November 1995, p. 10). In certain

420 Russia cases foreign investors were not allowed to participate in the auction (announced on 17 October 1995) and the winner was required to invest in the enterprise and pay its tax arrears (RET, 1995, vol. 4, no. 3, p. 93). The first round of mortgage auctions began on 17 November 1995. But the ‘shares-for-loans’ scheme was ended on 28 December 1995 owing to vociferous criticism: 1

‘The complications and lack of transparency engendered by this measure will probably decrease the value of the shares to be sold and reduce interest in the auctions. There are also concerns that the auctions will not be free and competitive: banks which are charged with management of the auctions are also permitted to take part in the auction.’ Despite the fact that large blocks of shares in some of the best-known enterprises were on offer, there were few bidders (owing to collusion among the potential bidders: see below), leading to low bids. The 38 per cent stake in the largest nickel producer in the country, Norilsk Nikel, was won by Oneximbank (United Export–Import Bank), Russia’s largest private commercial bank and the bank responsible for organizing the auction. One bidder who offered a much higher price was not allowed to take part in the auction, allegedly ‘because the bank that guaranteed the bid had insufficient capitalization’. A 40.1 per cent stake in the oil company Surgut was sold to its pension fund. One concern is that the government will lose control over state shares which it continues to own under this scheme. While there are safeguards, and limits on the decision rights of winners … there may still be problems in overseeing enterprises during this period. (RET, 1995, vol. 4, no. 3, pp. 93–4, pp. 100–2). The most controversial feature of the auctions was that banks acting as depositors and organizers of the auctions were also allowed to participate in them. Out of the twelve auctions which actually took place (four were stopped because of lack of bids), six were won by the banks acting as depositors for companies affiliated with them. Another four of the companies were won by organizations linked to the companies themselves and only two companies ended up in the hands of outsiders. The distribution of the winning bids around the starting price shows the degree of competition on these auctions. The lack of transparent procedures, and restrictions on participation and competition, have led to widespread concerns over corruption … The proceedings illustrate how the controversy over the shares-for-loans scheme also reflects a struggle by management to avoid outside control of their enterprise. (RET, 1995, vol. 4, no. 4, pp. 101–2) ‘The banks were allowed to impose tender conditions [such as future investment] on the buyer of the stake that would be difficult for any unaffili-

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ated company to fulfil’ (RET, 1997, no. 1, p. 151). ‘In each of the shares-forloans sales the winner of the mortgage auction skewed the subsequent sale in its own favour by imposing conditions that would be extremely expensive for outside bidders to fulfil’ (RET, 1997, no. 3, p. 103). (Since late 1996 in a few cases the state shares held as collateral under the shares-for-loans scheme have been auctioned off, typically to a connected party of the original loan: EBRD 1997a: 32.) Contrary to expectations, the government has so far decided not to pay back any of the loans, so it is almost certain that the banking groups will opt to buy up the shares themselves in order to consolidate their control over the enterprises … It remains to be seen how the banks decide to treat their new acquisitions. There is some anecdotal evidence that some banks are making serious attempts to improve the management of the enterprises in their possession. (RET, 1996, vol. 5, no. 3, pp. 123–4)

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(The government did not repay loans by 1 September 1996: Business Central Europe, October 1996, p. 63.) ‘Russia’s big financial–industrial groups limited competition among themselves, ensuring they all bought state assets at knock-down prices in the controversial “shares-for-loans” privatization schemes’ (John Thornhill, FT, 8 April 1998, p. 30). ‘[In] earlier auctions … the tycoons collaborated to gain huge shares of industry for a fraction of their actual worth’ (Yavlinsky 1998: 70). ‘In practice, there may be little competition, and lenders will probably have understandings with the management of the companies involved. The result may well be a series of de facto management buy-outs, mostly at belowmarket prices’ (The Economist, 18 November 1995, p. 100). ‘The scheme became bogged down in accusations that it [the government] was handing over Russia’s best companies to a small group of insiders at a fraction of their market price’ (Business Central Europe 1995: 34). Russia’s largest private bank, Oneximbank, was the initiator of the loansfor-shares scheme whose blatant favourism ignited a political scandal that inflamed the presidential campaign and cost Anatoli Chubais … his job … When the auctions began last fall it became all too obvious that a fix was in. Foreign investors were barred from bidding for the most desirable assets, and the same banks that were assigned by the government to organize the auctions ended up winning them, and usually at only a fraction over the minimum bid. Shares in some of Russia’s largest oil conglomerates, including Lukoil and Yukos, were sold off for what Western analysts considered to be a fraction of their real value. (Alessandra Stanley, IHT, 29 January 1996, p. 11)

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‘When the time came for the government to decide whether to repay the loans and thus reclaim their shares (in late 1996 or in 1997 depending on the shares in question), it declined to do so for financial reasons. The bankled FIGs [financial–industrial groups] that had acquired the shares in trust were thus required by law to sell them via a tender to complete the privatization process. In all four instances the bank-led FIGs ‘sold’ the shares back to themselves in auctions they also organized. Such sales represented a way of circumventing the government because, according to the terms of the original 1995 shares-for-loans deal, whenever the auction winners sold their shares the government was entitled to 70 per cent of the profits. These incestuous transactions released the bank-led FIGs from that obligation, leaving them free to sell these companies later and keep the profits for themselves. Conducting such closed auctions necessitated that no other group be willing or able to submit a competitive bid’ (Johnson 1997: 355). ‘Afraid that it had no political allies, the desperate Yeltsin administration decided to create some. The Kremlin’s vehicle was the shares-for-loans privatization scheme, which, over a few months in the autumn of 1995, transferred controlling stakes in some of Russia’s most valuable companies to government insiders at a fraction of their potential worth. The programme provoked instant and outraged attacks at home and abroad. But it paid dividends at the ballot box on 3 July 1996, when Mr Yeltsin cruised to victory, aided by the vigorous organizational and material support of the small group of bankers he had made into billionaires’ (Chrystia Freeland, FT, Survey, 9 April 1997, p. i). Loans-for-shares strutted on to the political stage … at a cabinet meeting of the Russian government on 30 March 1995 … Thanks to the scheme he was about to pitch to the cabinet, within two years Business Week would estimate that his empire accounted for 10 per cent of Russia’s GDP … [Vladimir] Potanin’s proposal amounted to … a crude trade of property for political support which promised to keep the communists out of the Kremlin in exchange for wildly enriching Potanin and the business cartel he has assembled … By the end of the year [1995] the government had privatized the behemoths of the Russian economy, including the world’s dominant producer of nickel and several reserve-rich oil companies, selling them for a fraction of their potential market value … For Russia’s market reformers it was a necessary pact, made morally permissible by their absolute faith in the curative powers of private property, however it may have been acquired. Shortly after the loans-for-shares deal, [Anatoli] Chubais explained … ‘They steal and steal and steal … They [the country’s businessmen] are stealing absolutely everything and it is impossible to stop them. But let them steal and take their property. They will then become owners and decent administrators of this property’ … In Vladimir Putin’s Russia there is not very much left to steal. (Chrystia Freeland, FT, Weekend, 27 May 2000, p. ix)

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The scheme was so brazen and so byzantine that it was months, if not years, before the rest of the world woke up to it. At heart loans-for-shares was a crude trade of property for political support. In exchange for some of Russia’s most valuable companies (including several oil firms and the world’s largest nickel mine), a group of businessmen – the oligarchs – threw their political and financial muscle behind the Kremlin. (Chrystia Freeland, FT, Weekend, 27 May 2000, p. 14) (‘It is highly unlikely that seven bankers control 50 per cent of the Russian economy, as the deputy secretary of the “security council” [Boris Berezovsky] recently boasted to a Western newspaper’: RET, 1996, vol. 5, no. 3, p. 118.) The oligarchs extorted a heavy price for their support of Yeltsin. They received shares in the most valuable state-owned companies as security against loans they made to the state budget in an infamous ‘loans for shares’ scheme. After Yeltsin won the election these companies were put up for auction and the oligarchs divided them up among themselves. (George Soros, The New York Review of Books, 2000, vol. XLVII, no. 6, p. 12) 8

Pyotr Aven, the president of Alphabank and former minister of foreign economic relations (CDSP, 1999, vol. 51, no. 7, p. 3): Based on Alphabank’s experience participating (on the whole unsuccessfully) in such auctions, I can assert that in all the ‘major’ deals the winner was known in advance, before the bidding. The whole thing really amounted to a select group of businessmen being ‘appointed’ millionaires (or even billionaires), with the idea that they would become the main sources of support for the current regime.’

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‘The “loans-for-shares” scheme, in which major Russian banks obtained shares in firms with strong potential as collateral for loans to the state – turned into a fraudulent shambles, which drew criticism from many, including supporters of the first, mass phase of Russian privatization’ (Nellis 1999: 17). 10 ‘The loans-for-shares deals at the end of 1995 were a scandal … A few large banks were allowed to privatize some large enterprises in auctions they themselves controlled. In fact, only fifteen enterprises were involved and in some cases sold only a small share of their stocks. But a few huge cash cows did change hands, most notably three big oil companies: Yukos, Sibneft and Sidanko. No qualitative change accompanied these takeovers. The new majority owners did not behave like self-interested proprietors but just continued the management theft, primarily by selling the products below market prices to their own trading companies, letting the old companies deteriorate’ (Åslund 1999b: 69–70).

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11 In a reference to privatization as a whole in Russia, Martin Wolf cites the following estimate: ‘One estimate is that in Russia assets worth between $50 billion and $60 billion were privatized for just $1.5 billion’ (FT, 10 November 1999, p. ii). ‘Five years ago state properties worth at least $5 billion were given away for only $1 billion’: Andrei Illarionov, economic adviser to President Putin, Kommersant, 16 December 2000, p. 1: CDSP, 2000, vol. 52, no. 51, p. 7.) 12 ‘Sibneft [Russia’s sixth largest oil company] is only about four years old … Like a number of leading oil companies, Sibneft sprang from a nownotorious programme called “loans for shares” in which the Kremlin handed out stakes in major industries – almost always to insider friends – as collateral for loans it never repaid. In Sibneft’s case a company tied to Boris Berezovsky … won the rights to 51 per cent of the stock in 1995. In return for a $100 million loan he got control of a company then valued at roughly $600 million, including Russia’s best oil refinery and proven petroleum reserves larger than those of Texaco Inc.’ (Michael Wines, IHT, 29 December 1999, p. 13). 13 Vladimir Potanin bought Norilsk Nickel for $170 million in 1997. The company is now worth $1.5 billion (The Times, 22 June 2000, p. 16). Vladimir Potanin (president of the holding company Interros): I am known as an oligarch … [one of the ones who] were first called the ‘seven bankers’ and later the oligarchs … [Privatization] vouchers were either bought up by the financial institutions or ended up in the hands of the old nomenklatura, the so-called ‘red directors’ who became the real owners of many factories. More often than not these red directors happened to be hopeless owners … So in 1995 the state decided it had to sell property to effective owners. This was when the idea of ‘loans-for-shares’ emerged. Although I do not deny that I was the author, I would like to point out that the concept was changed to a great extent as a result of political pressure on government from the red directors. The original scheme was simple: the government gained loans collateralized by shares of the companies for sale. The government was supposed to draw up an agreement that included a commission for sale within three years … instead of selling a company for a low price the sale was postponed for three years, during which the company was prepared for flotation. The reward for this task was 30 per cent of the increase in price during that period. There was supposed to be tender, with the winner being the company willing to work for the least remuneration. Participation in the shares would not be limited … In some case the scheme worked as it was originally planned. For example, 38 per cent of Norilsk Nickel was used as collateral for a $170 million loan in 1995. The shares were sold in 1997 at a far higher price, with $250 million going to the state budget, more than $300 million invested in the company and about $130 million used to

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pay off company debt. But that came later. During the initial loans-forshares auctions the red directors and the old nomenklatura pressured the government, which was itself far from united. Red directors lobbied for the sale of non-controlling stakes, no access to foreign investors and other measures. The government gave in and changed the scheme. This was later criticized and rightly so. (FT, 29 June 2000, p. 27) Vladimir Potanin’s Interros company is the controlling shareholder in the Norilsk Nickel mining complex, the world’s largest producer of palladium and nickel, ‘accounting for 2 per cent of Russia’s GDP’ (FT, 1 July 2000, p. 8). ‘By his own account, Interros, his holding company, paid $600 million for 38 per cent of a group that now has a market valuation of about $4 billion, valuing his stake at about $1.6 billion’ (FT, Weekend, 6 April 2002, p. i). [In the] ‘loans-for-shares’ transfers (ostensibly auctions) … significant stakes were handed over to Russian commercial banks, all apparently owned by a group of financial oligarchs connected to the presidency, in a manner that was neither competitive nor transparent nor lucrative to the state … For a loan of $170 million Oneximbank obtained 38 per cent of Norilsk Nickel, a firm that is reportedly making annual profits of $2 billion. (Nellis 2002: 20) 14 ‘[The oil company] Yukos was controversial from the day of its privatization in 1995. Mr [Mikhail] Khodorkovsky and his partners won control of their first 45 per cent of the company for just $159 million … Then, following Russia’s 1998 financial crash, Mr Khodorkovsky threatened legal but grossly unfair schemes to beat down the claims of bank creditors and to force out a minority investor. He proposed asset shuffles and share dilutions that would lock up Yukos’s wealth beyond the reach of outsiders. He won his battles and consolidated his control. But he also made the Yukos name a byword for bad business. In the past two years, however, he has turned Yukos into one of the most open and admired companies in Russia … Analysts have come to view it as one of Russia’s best-managed companies This week Mr Khodorkovsky … the richest man in Russia … and other main shareholders in Yukos … broke one of the biggest taboos in Russian business by disclosing their stakes and fortunes. Mr Khodorkovsky, 38, has a 36.3 per cent interest worth about $7 billion … Yukos has traditionally disguised its ownership using offshore shell companies and nominees. It has ended that practice because it wants a New York Stock Exchange listing later this year [2002] and so must meet US disclosure requirements … Group Menatep [is] a private vehicle through which Mr Khodorkovsky and his partners hold their shares in Yukos … Bank Menatep was created [in 1989]’ (FT, 21 June 2002, pp. 19, 28).

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Further developments in privatization A new law on privatization was passed by the State Duma on 24 June 1997. It was passed by the Council of the Federation in early July and signed by the president on 25 July 1997. Under the constitution laws passed by the State Duma override presidential decrees and government resolutions (RET, 1997, no. 3, p. 105. Previously, privatization had proceeded on the basis of presidential decrees and government resolutions. The new law endorses most existing methods of privatization, but bans shares-for-loans auctions and investment tenders. In addition, it makes it easier for the government to reclaim property in cases where privatization laws were violated or tender conditions not fulfilled. (p. 100) Competitive tenders are to be held for the right to manage state shares in the run-up to privatization and then to organize the auction. The new law explicitly prohibits any side deals between the organizer of the auction and any one of the participants (p. 103). Continued depressed asset prices and unclear policies resulted in modest and controversial privatization achievements over the past year. The few high-profile privatization deals, including the sale of minority government stakes in Lukoil and Tyumen Oil Company, were characterized by limited transparency and favours to insiders. The reform programme promises a new approach to privatization and foresees a reduction of the 27,000 stateowned companies to about 3,000 over the next few years … Privatization of twenty major companies is currently earmarked for 2001, including large shareholding blocks in Slavnest and Rosneft and the sale of smaller stakes in Gazprom, Lukoil, Svyazinvest and Aeroflot … Over the past year the level of payments arrears has substantially declined, while the share of barter transactions in industrial sales dropped from 46 per cent at the start of 1999 to 31 per cent by April 2000. (EBRD 2000b: 202–3) ‘A bill now going through parliament will reduce from 340 to 104 the types of business requiring a special licence from government’ (FT, 25 July 2001, p. 11). President Putin has declared that corrupt and overlapping bureaucracy is choking the growth of the kinds of small businesses that have breathed life into other post-communist economies … Alexei Moisseyev of the brokerage Renaissance Capital said about 17 per cent of Russians worked in small business, compared with 54 per cent of Americans. Mr Putin calls the state of Russian small business ‘alarming’. (IHT, 31 December 2001, p. 9)

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‘The state statistics committee reports that the number of small and mediumsized enterprises has declined … [But Yegor Gaidar says that] “The proportion of small enterprises is large. It is just that many of them operate in the grey economy” ’ (CDSP, 2001, vol. 53, no. 45, p. 7) Official data suggest small and medium businesses account for 10 per cent to 15 per cent of GDP in Russia, against 50 per cent in advanced transition countries … A new report from the World Bank and the Moscow-based Centre for Economic and Financial Research [Cefir] suggests the problems for small business are easing, even if they remain daunting in many ways. (FT, Survey, 1 April 2003, p. iii) ‘A study sponsored by the World Bank found that small businesses now rate each other’s competition, rather than bureaucracy, as their biggest challenge’ (The Economist, 31 May 2003, p. 39). The law ‘On the Licensing of Particular Types of Activity’ … went into effect yesterday [11 February 2002] … Yesterday was also the deadline for bringing all laws and regulations into conformity with another law: ‘On Protecting the Rights of Juristic Persons and Individual Entrepreneurs during the Process of State Control (Oversight)’ … The number of types of activity requiring a licence has been reduced … from 4,000 to 120 and oversight agencies’ freedom of action has been restricted to a minimum … The new laws make it possible to penalize government agencies for causing unwarranted material damage to businesses, and also regulate the number of regularly scheduled inspections (limiting them to one every two years, at most). (CDSP, 2002, vol. 54, no. 7, p. 13) ‘[The law] reduces the number of activities requiring licensing to 120 and cuts the number of organizations issuing licences’ (RET, 2002, vol. 11, no. 2, p. 90). A phenomenon has transformed the economy in the last three years. A handful of large business groups have been moving through systematically, buying up entire industries. Using their financial might and political connections, the groups have swallowed the coal industry, steel, car manufacturing, aluminium and now timber. The result has been a concentration of Russia’s wealth: just eight businesses control 85 per cent of revenue from Russia’s sixty-four biggest private companies, according to a recent report by Peter Boone and Denis Rodionov, economists at the Moscow-based subsidiary of UBS Warburg, a Swiss investment bank. (IHT, 14 August 2002, p. 3) According to Peter Boone and Denis Rodionov … an analysis of Russia’s biggest non-government companies shows that ‘85 per cent of the value is controlled by just eight shareholder groups’ … Mr Boone and Mr Rodionov

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Russia have analysed ownership of sixty-four of Russia’s biggest companies, with total sales in 2000 of $109 billion. They found that $47 billion in sales was attributable to government-controlled companies, mainly Gazprom and UES. The privately controlled companies had sales of $62 billion, equivalent to 25 per cent of GDP. Eight groups of investors and managers controlled the companies, accounting for 85 per cent of those sales … After Russia’s default and devaluation in August 1998 … foreign investors and bankrupt Russian banks sold their stakes in Russian industrial companies. The tycoons who controlled exports of oil and other natural resources had the cash to buy those assets at fire-sale prices … The dominance of the tycoons is being reinforced by the underdevelopment of the Russian banking system. The shortage of credit makes it difficult for newcomers to mobilize cash for acquisitions and investment. A second factor deterring new competition is the weight of red tape that suffocates small business in Russia. (FT, 6 August 2002, p. 16) A bill protecting companies from spurious bankruptcy proceedings passed its final reading yesterday [1 July 2002] in the Duma … The law, if approved by the upper house of parliament and signed into law by President Vladimir Putin, should end ‘disorderly seizures of property through artificial bankruptcy proceedings’, according to … the chairman of the Duma’s property committee … Under Russia’s current bankruptcy law a creditor can persuade a court to declare a company bankrupt on the basis even of a token debt. The company’s management can be removed and its assets liquidated by creditors, with no opportunity for the company or its shareholders to repay the debt in question. The system has allowed corporate raiders to seize the assets and wreck the business of rivals. Under the new law a creditor will have to show that he has tried and failed to get his debt repaid before a court will consider a bankruptcy petition. The company will be able to escape liquidation if its shareholders can repay the debt in question or find somebody else to repay it, even after a court action has begun. (FT, 2 July 2002, p. 7)

‘The new bankruptcy law is intended to protect enterprises from hostile takeovers via bankruptcy’ (RET, Monthly Update, 15 July 2002, p. 2). [The new bankruptcy law … sets up a barrier to predatory bankruptcies, which are easy to orchestrate under the present law. To all the barriers proposed by the government and deputies (for example, provisions making it impossible to begin bankruptcy proceedings without notifying the owner, and giving the owner the right to pay off his debts at any time and terminate the bankruptcy proceedings), a new one has been added in the final version of the law, a mandatory thirty-day period between the issuance of a court order to pay a debt and the initiation of bankruptcy proceedings … Receivers will now be appointed by the creditors. The new law requires that the debtor and

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the creditors reach agreement on a candidate for receiver. But lobbyists for the creditors’ interests succeeded in winning for creditors the right to choose a self-regulated organization to propose a candidate for receiver. (CDSP, 2002, vol. 54, no. 27, pp. 8–9) A long-running controversy surrounded proposals to restructure UES, whose chief executive is Anatoli Chubais. [On 14 February 2003] the Russian parliament approved six bills that allow the government to break up RAO Unified Energy System (UES) … that supplies 70 per cent of the country’s power … Lawmakers passed the bills in the second and most important of three readings … To take effect the bills need to be signed by President Vladimir Putin … The legislation defines the government’s role in regulating the companies carved out of UES and setting guidelines for the industry during the change to free markets … The package of laws aims to create a competitive electricity market and help attract as much as $50 billion to upgrade the UES network. (IHT, 15 February 2003, p. 11) UES will be split between a transmission system and a series of competing generation and distribution companies, replacing price regulation and opening up the sector to fresh investment … But prospects for imminent Gazprom reform similar to the UES project receded on Friday [14 February] when President Vladimir Putin made clear his reluctance to see the company move out of state control. ‘As the main Gazprom shareholder the state will … not support any plans for dismemberment or division,’ Mr Putin [said]. (FT, 17 February 2003, p. 7) ‘Gazprom … accounts for 8 per cent of GDP’ (FT, 18 February 2003, p. 29). Russia’s electricity sector is run almost entirely by one vast and partly privatized company, UES. The key proposal in the new plan is to hive off UES’s high-voltage transmission grid into a state company, and turn its seventy-odd regional generation and distribution arms into independent companies. This follows the increasingly standard practice around the world of separating transmission from power supply so that rival generators of electricity get equal access to the grid and can compete fairly with one another for customers. (p. 20) Plans to reform Russia’s electricity monopoly yesterday [21 February] cleared a third and final reading in the Duma … UES will be broken up into a transmission system and competing generation and distribution companies. The law includes government-backed clauses to protect consumers from price increases. (FT, 22 February 2003, p. 8)

430 Russia The nub of the UES restructuring is splitting the monopoly into two parts. One part consists of assets earmarked for permanent state control. These are the national transmission grid, and the nuclear and hydro power stations accounting for a third of Russia’s generating capacity. The second part consists of UES’s other assets, which include controlling stakes in thirty big thermal generating plants and seventy-two local generating and power distribution companies. As the breakup proceeds the assets of these companies are due to be consolidated into ten big ‘wholesale’ power-generation companies, thirty regional power-generation companies, seven distribution companies, and a network of regional supply companies … Early drafts of the legislation had fixed 1 July 2005 as the date for launching a competitive market for wholesale power across Russia. The new laws fix no firm date … A significant amendment … [involves] a clause forbidding an operator of generating assets from acquiring a market share of more than 40 per cent in any region. (FT, Survey, 1 April 2003, p. iv)

Agriculture Laws and decrees relating to private land ownership 3 December 1990: the Russian Federation’s Second Congress of the People’s Deputies adopted legislation permitting private land ownership, although individuals were able to sell land only after ten years and even then only to the state. Private land ownership was codified in the Land Code of April 1991. The 27 December 1990 Law on Peasant Farms allowed ‘every able-bodied citizen’ who possessed ‘specialized agricultural knowledge or past specialized training’ to organize a peasant farm. (Jeffries 1993: 69; Wegren 1994: 222; and 1997: 961.) (Note that the legislation is an example of the so-called ‘war of laws’, since the Soviet constitution banned private land ownership.) 27 December 1991: Yeltsin’s land decree specified that collective and state farms were to reorganize themselves and decide their future forms of organization by 1 March 1992. They were to re-register by 1 January 1993. (More than threequarters of state and collective farms had actually been reregistered by the beginning of 1993: CDSP, 1993, vol. XLV, no. 5, p. 22.) Unprofitable farms were to be declared bankrupt by 1 February 1992 (to be taken over by profitable enterprises or, as a last resort, have their assets sold at auction). The options were as follows: to form a joint stock company (where farmers hold shares); to form an agricultural co-operative; to divide the farm into individual private farms; to remain as before as state or collective farms. The chairman of any farm was obliged to allow individual farmers to withdraw with a share of the land and of property such as equipment. Land was to be divided up equally, but, in the case of property, factors such as past wages, age and qualifications were to be taken into account. If a member’s request for a plot

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of land was not satisfied within a month of submission, the farm chairman could be fined three months’ salary. Recipients of land shares were allowed to exchange their shares or to lease the rights to their shares. Farm members were permitted to sell their land plots ‘to other citizens’ if they retired from farming, inherited the plot, wanted to organize a farm elsewhere, or intended to invest the proceeds in rural processing, retailing, construction or other businesses. The Russian Land Code of 1991 stated that any citizen at least 18 years old who had experience in agriculture and the corresponding skills, or who had past specialized training, could receive land. (Jeffries 1993: 94; Wegren 1992b: 657–61; 1994: 222; and 1997: 961–2.) March 1992: a presidential decree allowed the sale of the plots of privatized state and municipal enterprises (Wegren 1997: 962). October 1992: a presidential decree allowed the sale, on an experimental basis, of private garden and housing plots in Ramenskii raion in Moscow oblast (p. 962). December 1992: the Russian Supreme Soviet legalized the sale of land. But agricultural land could only be sold if used for subsidiary agriculture (private plots), dacha (building) plots, collective gardening or plots around individual housing. If land was used for these types of agricultural production then it could be sold without a moratorium. In other cases, if the land was used for purposes other than those stated above, had been received free, and was held in ownership, then the owner had to wait for ten years before the land could be sold. If the land plot in question had been purchased then a five-year wait was required. In both cases the price of land would be at negotiated market prices. However, market prices would only apply to the sale or purchase of land up to the size norms established by local soviets (councils). If the size of land plot exceeded established norms then the owner could retain the excess in lifetime use with the right of inheritance, or, if he wished to sell, he could do so through the local soviet at a ‘negotiated price’ determined by the local soviet. (p. 962; Siszov 1993: 500.) 27 October 1993: a presidential decree reinforced the legal status of land shares within an agricultural enterprise and reiterated the right to conduct land transactions. The right to buy land would be given to all existing members of collective and state farms, including pensioners and children. Members of state and collective farms would receive a certificate (voucher in effect) of land ownership entitling them to a share of the farm’s land based on share sizes that had been previously established during farm organization. (According to The Economist, the first certificate entitled each holder to a certain number of hectares, calculated by dividing the area of the farm by the number of claimants, while the second certificate entitled the holder to a share of farm assets such as buildings and machinery, the value of each individual certificate depending on how many years the holder had worked on the farm: The Economist, 18 June 1994, p. 55.) These certificates would be used in auctions to bid for farmland and property or could be sold to their fellow farmers (the first certificates being issued on 23 October 1993). But physical land plots continued

432 Russia to be held by the collective and were only distributed if a person decided to leave the parent farm. The decree annulled previous restrictions on land sales and allowed the owner to sell his land shares. The decree stated that: Citizens and juristic persons who own land have the right to sell, bequeath, give away, mortgage, lease or exchange land, or pass it wholly or in part as a contribution to the authorized capital of joint stock companies, associations and co-operatives, including those with foreign investments. The owners of land have the right … to sell shares in land to other members of the collective, as well as to other citizens and juristic persons, for the production of agricultural products. At the same time, members of the collective are to take preference over other purchasers in acquiring shares of land. Regions would decide the maximum amount of land an individual could own. The use of hired farm labour would not be allowed, i.e. owners must work the land themselves or form co-operatives. Potential owners would have to have an agricultural education and some farming experience. Local authorities would have the right to take back land left uncultivated or used ‘irrationally’. (The decree was primarily aimed at agricultural land, but local authorities would be allowed to change the use to commercial). The aim was to promote viable private farms. Foreigners would be allowed to rent land (‘under certain conditions’), but not to buy land themselves (although joint ventures would be able to buy land). (Wegren 1997: 962–3, 966; Jeffries 1996a: 220.) The 27 October 1993 decree also said that ‘as of [1 January] 1994, compulsory deliveries and other forms of forced taking of agricultural products for state resources are to be abolished’. Yeltsin signed a decree entitled ‘Liberalizing the grain market in Russia’ on 27 December 1993 (CDSP, 1993, vol. XLV, no. 52, p. 24). Before this decree Wegren was able to report that ‘Although in reality the state continues to require obligatory deliveries to it, state prices are much more influenced by market prices’ (Wegren 1994: 217). Early in 1993 the government created a federal grain fund to which farms of all types were required to deliver grain. The Law on Grain, signed by Yeltsin in May 1993, states that the government will select, on a competitive basis, purchasers who will buy grain at negotiated, market prices … In reality, state purchasers are simply the state grain elevators … and there is no competitive selection process. Grain elevators are issued state credits to buy grain. The prices offered by these grain elevators are state-set firm prices … The federal grain fund requires a farm to deliver about one-third of its grain to state elevators, while the local grain fund requires another 10–12 per cent … in October 1993 obligatory deliveries were abolished, although food funds will remain during 1994. (p. 237)

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The central reforms in 1993 were the freeing of grain prices, the decision to procure grain, meat and milk at market prices, and the lifting of the time limit on the sale of land (RET, 1993, vol. 2, no. 4, p. 52). 7 March 1996: a presidential decree restated that a person had the right to bequeath, sell, give away, exchange, lease, transfer the rights of, or use his land shares without the consent of other shareholders. The owner of land shares was allowed to request conversion to a physical plot of land for the operation of a private farm. A land share owner could also sell or lease the physical plot of land to a private farmer, rural household or agricultural enterprise for agricultural use. As before, the share owner could invest his shares in a farm enterprise, or (if he decided to retain possession of his shares) to lease use rights to an agricultural producer. New stipulations allowed localities to increase the maximum size of a land plot for use as a private plot. The amount of land that could be leased was ‘unlimited’. Municipalities were permitted to obtain land shares from individuals in order to redistribute to citizens or to sell to corporate enterprises engaged in agricultural production (Wegren 1997: 963). The presidential decree of 7 March 1996 entitled any agricultural worker to claim his share of the farm’s land and to sell, bequeath or mortgage. The same applied to private plots and dachas. The aim was to introduce registration procedures by mid-1996. As regards urban land, enterprises would have the right not only to buy their land but also to sell it. Condominiums would be given their land and have the right to sell it (RET, Monthly Update, 21 March 1996, p. 3). According to the 7 March 1996 decree, land defined as agricultural could only be used for this purpose (RET, 1996, vol. 5, no. 1, p. 107). The decree made it easier for farmers to buy and sell their holdings and for the first time allowed the trading of privately owned ‘household plots’ (p. 129). The decree, which parliamentarians challenged as unconstitutional, says that the owners of farmland (including those who hold it indirectly through shares in collective farms) can buy, sell or mortgage their land, provided it stays in agricultural use and in Russian hands. The decree also allows a free market in the smallholdings tended by some 40 million people, which have until now been passed on only through inheritance (The Economist, 16 March 1996, p. 104). Yeltsin’s March 1996 decree means that every peasant who rents a garden plot now owns it. The sale of land to foreigners and the sale of any urban land are prohibited (Michael Specter, IHT, 19 March 1996, p. 2). Despite the fact that the right of private ownership of land was guaranteed by the Congress of People’s Deputies in late 1990, in reality the exercise of this right ran up against serious legal and administrative restrictions. Since early 1991, as a result of reforms aimed at the transformation of former collective farms and state farms into joint stock companies and the legal registration of private land ownership, about 40 million people have acquired ownership of plots of land. Another 12 million residents of rural areas have become owners of shares in newly formed agro-industrial associations and joint stock companies. The most important restriction on the rights of owners of property shares (such as farm equipment, animals and buildings) and land shares in disposing of their

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property was that when they wanted to withdraw and sell those shares, they had to obtain the consent of other former members of the collective farm. The new decree guarantees that the owners of shares of land in reorganized collective farms and state farms are free to exercise their rights (to bequeath the land, use it to engage in private farming, sell it, give it away or exchange it) without the consent of the other former members of the collective farm (CDSP, 1996, vol. XLVIII, no. 10, pp. 1–2). The only thing that cannot be done with a share is to use it for a purpose other than agriculture (p. 4). Of the 12 million, only 8 million have received certificates of ownership (p. 3). The executive branch must issue certificates to all 12 million members of collective farms, joint stock companies and limited liability partnerships by the end of 1996 (p. 5). The method that was used to distribute farmland in the early 1990s … [was] to take all the former collective farms, state farms and other agricultural enterprises, divide them into shares and hand the shares out to everyone in the village equally and free of charge. It was not just the people working the land who got equal shares in it; it was everyone in any kind of proximity: doctors, teachers, policemen and so forth … Today … at best 15 per cent to 20 per cent of the people who own shares are actually working the land. (Viktor Semyonov, former minister of agriculture and food in the Primakov government, CDSP, 2001, vol. 53, no. 30, p. 13) The Nizhny Novgorod experiment The October 1993 presidential decree dealt with the distribution of certificates (vouchers) to farm members, entitling them to bid for land and property (see p. 431). A pilot scheme involving six collective and state farms in the Nizhny Novgorod area was announced on 26 October 1993. Help was given by the International Finance Corporation. Encouragement was given to form co-operatives (in order to create viable units) and most in fact did this (John Lloyd, FT, 2 April 1994, p. 26). The resulting farms were large-group farms (Van Atta 1994: 185). The employees in all five farms decided to split the farms into smaller ‘enterprise farms’. But none were divided into individual family farms (EBRD 1996b: 23). On 10 March 1994 prime minister Chernomyrdin paid a visit and said that ‘I am convinced this programme should become the national programme for all Russia. I have supported it and will support it’; he also said, however, that the scheme would be used ‘as the basis’ for the national programme. Agriculture minister Alexander Zaveryukha also expressed support. As of early February 1995 seven agricultural enterprises in Nizhny Novgorod province had gone through a reform process based on this model. Heavy pressure from the agrarian lobby had postponed the plan to make the programme a national one (CDSP, 1995, vol. XLVII, no. 7, p. 12). But ‘efforts to repeat it [the Nizhny Novgorod scheme] across the country have got nowhere’ (The Economist, 11 March 1995, p. 36). ‘Nizhny Novgorod is

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the only region in Russia to have tried systematically breaking up its collective farms – ninety of them so far’ (The Economist, 25 March 1995, p. 52). In 1993–4 the members of five collective farms agreed to rearrange their assets into fortytwo smaller farms run on commercial lines (The Economist, 16 March 1996, p. 104). By April 1996, 103 collective farm auctions had been conducted in Nizhny Novgorod, yielding 372 private farms, 114 joint stock companies and fifty-nine mixed partnerships (The Economist, 29 June 1996, p. 99). (By mid-1995 sixty-eight farm enterprises had gone through the process. In the period 1993–4 there were created, out of five farms, twenty collective enterprises, seventeen family farms and six individual businesses: World Bank 1996: 59.) ‘Although the scheme was repeated in other regions, it did not become regular practice. Because the mechanism is voluntary, it does not provide much incentive for managers who often prefer to keep the present structure unchanged’ (RET, 1996, vol. 5, no. 1, p. 107). (Further regional developments are dealt with below.) The new Land Code A new code for agricultural land was not approved by the State Duma until June 2002. The Yeltsin era The State Duma and President Boris Yeltsin did not come to an agreement on a code for agricultural land. On 14 July 1995 the State Duma passed the first reading of the new land reform bill. ‘Agricultural land would remain the property of the state or legal entities. Private individuals would be able only to lease it or have the right to use it for life. The sale of agricultural land would be prohibited’ (RET, 1995, vol. 4, no. 2, pp. 129–30). On 22 November 1995 the State Duma refused to support the Land Code on second reading. The text had undergone no conceptual changes in comparison with the version adopted on first reading on 14 July 1995. The Land Code, while recognizing in principle the existence of private land ownership along with state and municipal ownership, for all practical purposes reduces it solely to the right to own garden plots. The law allows only these parcels of land to be bought and sold without restriction, taking all other land out of real circulation. Parcels of land transferred to agricultural organizations that were created from former collective farms are the organizations’ property, along with the land shares held by the organizations’ members. Private farms are granted parcels of land for lifetime possession and the landholders may pass the land on to their heirs, but they do not have the right to sell or lease it. Sub-leasing of agricultural land is restricted to a five-year period

436 Russia and is possible only in cases specifically stipulated by law. The government spoke out categorically against adoption of the Land Code. (CDSP, 1995, vol. XLVII, no. 47) In November 1997 Saratov province adopted a law on land, which, for the first time anywhere in Russia, authorized the buying and selling of agricultural land. The province did this in the absence of a federal land code, which the province will adapt to when passed (CDSP, 1997, vol. XLIX, no. 47, p. 17). On 26 November 1997 Yeltsin signed a presidential decree ‘On the sale to citizens and juristic persons of parcels of land on which construction will be done in urban and rural communities or of leasing rights to that land’. This decree would remain in force until a land code was passed. The decree covered only land in cities and settlements, i.e. about 3 per cent of all land (CDSP, 1997, vol. XLIX, no. 47, pp. 13–14). The presidential decree has not brought about a revolution in the area of land legislation. After all, today more than fifty regions have normative acts regulating land relations, many of which, in one way or another, permit the buying and selling of land. For example, Saratov-model draft laws on the unrestricted sale of land have been prepared in the Jewish Autonomous Province, Tataria, Sverdlovsk province and Samara. In the regions opponents of buying and selling land are in the minority. (p. 13) St Petersburg, Novgorod, Barnaul, Nizhny Novgorod, Tver and several other cities … already have functioning markets in land intended for construction purposes … In a number of cities local decisions have also granted this right to juristic persons, including foreign ones. For instance … St Petersburg … [and] Novgorod. (p. 14) ‘In the absence of a federal law members of the federation have the right to regulate land relations as an object of joint jurisdiction’ (CDSP, 1998, vol. XLIX, no. 52, p. 7). On 5 March 1998 the first land auction was held in Balakovo (Saratov province). Governor Dmitri Ayatskov began to implement the president’s decree on the sale of plots of land for private construction, reaffirming his loyalty to the president’s land policy. The auction was for twenty-four plots of land, including land earmarked for the construction of cafés, shops and private homes. A 20 ha plot of farmland was sold to a grain products joint stock company which intended to grow vegetables and grain. Eighteen of the twenty-four plots of city-owned land were sold. Proceeds went into the municipal treasury. (CDSP, 1998, vol. 50, no. 10, p. 15)

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The Saratov administration does not allow the sale of land to foreigners, but foreign investors can lease land for fifty years (FT, Survey, 15 April 1998, p. viii). On 26 December 1997 Yeltsin offered to compromise with the State Duma and a working party was set up. Yeltsin suggested a free market for land in urban areas and a more tightly controlled system for the private ownership of agricultural land. He proposed a ban on selling agricultural land to foreigners, a requirement that land may only be sold to people who prove their ability to cultivate it, and that land must be used for farming for up to fifteen years following a sale (IHT, 27 December 1997, p. 4). On 26 December 1997 Yeltsin delivered an opening statement at the first roundtable meeting: In our country different regions have different types of land. I believe that our approach should be diversified too. Commercial transactions in urban industrial land must be introduced right away. This land makes up only 3 per cent of Russia’s territory … We should introduce transactions in farmland only under strict state oversight … In general we know what this should entail: a complete ban on the sale of any tract of land involving a change in its designated use during the first few years after its acquisition, and restrictions on the categories of persons having the right to acquire land. If you want to operate a farm, show us your skills, your qualifications. A ban on the sale of land to foreigners. I could go on with this list. (CDSP, 1998, vol. XLIX, no. 52, p. 6) The State Duma approved a new version of the Land Code on 23 April 1998. But the president’s representative stated that all the president’s proposals had been interpreted ‘exactly contrary to their intent’; the new version ignored both the priority of federal over local laws and citizens’ rights to private ownership of land (CDSP, 1998, vol. 50 , no. 17, p. 18). The Council of the Federation approved the new version on 20 May 1998. The new version would legalize the ‘right of ownership without the right to sell’, or ‘the right of permanent (indefinite) use or lease’, which in effect would abrogate the right of inheritance. In addition, if a landowner changes his mind about being a farmer, property would be returned to the state or municipal ownership, with no reimbursement except for money spent on improving property. The regions are not waiting for a federal law. Saratov province and Tatarstan are not the only places where private ownership of land has been legalized. Either the buyout of farmland already being used by the purchaser or lifetime leasing (sometimes with the right of inheritance) has been authorized in almost fifty regions (CDSP, 1998, vol. 50, no. 20, p. 15). On 26 June 1998 the Samara Province Duma adopted a law on land. On the question of buying and selling land the law settles in favour of active capitalist relations. It also gives citizens and juristic persons the right to acquire parcels of land as property, enjoy lifelong possession with the right

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Russia of inheritance, lease land or use it on a permanent and indefinite basis. There is provision for the possibility of confiscating parcels of land from owners or tenants if the land is being used for purposes other than those intended or if significant environmental deterioration results from its use. A provision making it possible to sell land to foreign citizens was proposed by the Samara province administration but did not make it into the final version approved by the Duma. (CDSP, 1998, vol. 50, no. 26, p. 15) The first auctions are to take place in October 1998. In recent years Samara province has totally abolished the government monopoly on land. More than 70 per cent of agricultural land and 11 per cent of the land in cities and towns has been turned into private property. The Samara law is based on Chapter 25 of the Russian Federation Civil Code, which states that Russian Federation citizens and juristic persons have the right to own parcels of land. It grants the right of hereditary ownership, permanent use (without a time limit) and leasing. No one may oblige citizens or juristic persons to purchase parcels of land and no one may be denied the purchase of land unless stipulated otherwise by federation legislation. The Samara law stipulates that foreign citizens, persons without citizenship and foreign juristic persons may only hold plots of land as established by federal and province legislation on leasing rights. (CDSP, 1998, vol. 50, no. 29, p. 17)

The Moscow city government and Duma announced on 10 December 1998 that from January 1999 land in Moscow would be eligible for sale to private owners, but only for capital construction within the framework of specific projects of the Moscow authorities. Land laws exist in forty-eight regions of Russia and they are in the process of being adopted in two more (Kaliningrad and Rostov provinces). All these laws differ from one another. For example, in fourteen regions (including Dagestan, Kalmykia and the republic of Sakha) farmland may not be bought or sold. Regional laws also differ substantially in the restrictions they place on buying and selling parcels of land, especially agricultural land. (CDSP, 1999, vol. 50, no. 50, p. 17) ‘[On 2 October 2000] an experiment in selling land … [began in Moscow]’ (CDSP, 2000, vol. 52, no. 40, p. 15). The Putin era Yesterday [25 January 2001] the State Duma … legalized the sale of land in Russia, passing on first reading a bill putting Chapter 17 of the Civil Code

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into effect. Agricultural land will not be affected. At present land relations in Russia are still regulated by (in addition to the constitution) presidential decrees, government resolutions and local laws, because for six years now the Duma has been unable to adopt a Land Code … When the Civil Code was adopted in 1994 the relevant chapter of it was frozen until a Land Code could be adopted. (CDSP, 2001, vol. 53, no. 4, pp. 11–12) [It was reported on 9 February that] a compromise had been reached between the government and the governors on the issue of land … What will be submitted to the Duma is a draft ‘framework’ Land Code that does not address the buying and selling of agricultural land. The government plans to get this taken care of [later]. (CDSP, 2001, vol. 53, no. 6. p. 15) Vladimir Putin … yesterday [21 February] … gave his government until 1 April to complete a new Land Code, which, he said, should give Russia’s regions as much freedom as possible to sell and purchase land. He said the new code would give the regions the right to manage land resources themselves within limits established by Moscow. He also gave the government until 1 June to determine a framework of law that would enable the regions to privatize agricultural land. The Russian government decided last month [January] that farmland should be brought under legislation independent of the Land Code … The absence of clear land property laws has prevented many farmers from mortgaging their land, receiving new credits and investing. (FT, 22 February 2001, p. 8) ‘Agricultural land will be governed by a separate law, due to be drafted in June. This second law will probably leave regional governments to decide for themselves whether they want a free market locally in agricultural land’ (FT, 13 March 2001, p. 22). ‘President Vladimir Putin scrapped a draft Land Code and told Russia’s government to write a new one that would give regions the right to decide whether the agricultural land market should be deregulated’ (The Economist, 24 February 2001, p. 6). ‘In order to resolve the question of agricultural land ownership, the president proposed [on 3 April 2001] a compromise, according to which regions could have their own rulings within the framework of federal legislation’ (RET, Monthly Update, April 2001, p. 2). Vladimir Putin is prepared to agree not to impede the developments of land markets in regions where they already exist and, after a special law has been passed, to ‘allow federation members to establish at their discretion timetables for introducing the sale of agricultural land’. (CDSP, 2001, vol. 53, no. 14, p. 11)

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Russia After fists flew and outraged shouts echoed through parliament, Russian lawmakers on Friday [15 June 2001] gave preliminary approval … the first of three required readings … to limited land sales … There were varying estimates of how much land would be affected by the bill, with some officials saying 3 per cent, others 10 per cent. The code would set up legal procedures for land sales, including a system of registering deeds. (IHT, 16 June 2001, p. 2)

‘Estimates … of the country’s property [that] will be opened up for sales … vary between 2 per cent and 10 per cent … Foreigners will be permitted to buy property, except in border areas and “problem” regions such as Chechnya’ (IHT, 27 October 2001, p. 5). [On 14 July 2001] the State Duma passed the draft Land Code on second reading … It permits the land on which industrial enterprises are sited to be purchased as private property … The code grants foreigners the same rights as Russians with respect to owning non-agricultural land (except in border areas, a list of which will be spelled out by the government in a special document) … After final passage of the Code, any enterprise and any building owner will be able to buy land, even in Moscow … The purpose for which land is being bought will be spelled out in the purchase contract. Changing its use will lead to a significant increase in taxes. (CDSP, 2001, vol. 53, no. 29, p. 6) German Gref (minister of economic development and trade): [Russia] basically has more than 40 million landowners – 44 million of our citizens own property … The [present] code pertains only to urban and industrial land and dacha plots … We are planning to submit a bill on the buying and selling of agricultural land after the Land Code … goes through its third reading and is approved by the Federation Council and signed by the president. I think we’ll submit the bill … in October or November … Right now, as you know, farmers do not own any actual land, they just have shares in it, and the shares are not marked out in the fields in any way … It is extremely hard, basically impossible, to leave a collective farm and take your share of land with you … We are proposing letting land be bought and sold, but keeping it under strict oversight, so that nobody will be able to change its category, to turn the land on paper from farmland into dacha or industrial land … People will be taught a lesson if they try to destroy the fertile layer. We’ll also spell out procedures for confiscating land and buying it back. (p. 8) The State Duma gave final approval Thursday [20 September 2001] to a long-disputed bill allowing limited sales of land, despite furious protests

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from the Communist Party and its allies. The Land Code was adopted in the third and final reading by a 257 to 130 vote with one abstention. The measure allows for the sale of land … accounting for 2 per cent of all land. (IHT, 21 September 2001, p. 5) The new draft Land Code, which now requires submission to the Federation Council and then ratification by Mr Putin, does not cover those living and working on agricultural land, but only that which is classified as urban or industrial, making up an estimated 2 per cent of Russia’s total surface area. (FT, 21 September 2001, p. 16) ‘The present law deals only with commercial and residential land and the allotments around country cottages’ (The Times, 21 September 2001, p. 19). The Code now goes to the Federation Council … on 10 October … The rightists … said that such a code would not actually regulate anything, because even without the Land Code the buying and selling of urban land was legalized in April when Chapter 17 of the Civil Code went into effect … The Code subdivides land into seven categories … Land can be transferred from one category to another either by the [federal] government or by local authorities, depending on which level of government it belongs to. But the procedures for transferring land from one category to another are to be established by federal laws … Agricultural land may be moved to another category by the executive branch of a Federation member, and land designated for other uses may be moved to another category by a body of local self-government. (CDSP, 2001, vol. 53, no. 38, p. 11) The seven types of land and their importance, in percentage terms, are as follows: forest land, 62.0 per cent; agricultural land, 25.7 per cent; reserve land, 6.7 per cent; water-resources land, 1.6 per cent; land used for industry, transportation, communications and other purposes, 1.0 per cent (affected by the Land Code); land in specially protected areas, 1.9 per cent; land within municipal boundaries, 1.2 per cent (affected by the Land Code) (p. 11). Article 7 [of the law on putting the Code into effect] says that until a special law on commercial transactions involving farmland is enacted, no such transactions will take place, that changing the designated purpose of farmland when there is a change of owner is prohibited, that foreign citizens, foreign juristic persons and stateless persons may only lease land, not own it, and that state- and municipally-owned farmland may not be privatized … The Land Code … [says] that foreigners – both individual citizens and juristic persons, as well as stateless persons – may not own land in border areas or certain other areas to be determined by the president. (p. 11)

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‘Buy-out prices for land on which industrial facilities are situated … [are to be based on] the land tax’ (p. 12). ‘[On 26 October 2001] President Putin signed [the Land Code] into law … The code applies to commercial and residential land only – a mere 2 per cent of the total’ (Guardian, 27 October 2001, p. 17). The Council of the Federation approved the Land Code on 10 October 2001 and it came into force on 30 October 2001 (RET, 2002, vol. 11, no. 1, pp. 88–9). According to the new Code, all land has to be registered … and assigned to one of several categories (e.g. agricultural land, residential land and industrial land). Limited possible uses are specified for each category … [As regards] land plots under buildings and constructions … from now on they are indivisible from the buildings on them. A building can be sold only together with its land plot, and if they currently belong to different owners the owner of the building has a privileged right to privatize, buy or rent the land … The Land Code gives foreign firms and individuals equal rights with Russian firms and individuals to purchase and rent land except for certain specified plots (including plots close to the state border). (p. 83) Yesterday [24 December 2001] the Duma held hearings on the buying and selling of farmland … Because the Communists refused to compromise on the question of selling agricultural land … the president and the government decided to delete that issue from the code and devote a separate law to it. Now the Land Code has been passed, but the transactions involving land are still regulated by presidential decrees and government resolutions. For all practical purposes 70 per cent of farmland is already potentially available for sale, but some 30 per cent of it is being used for purposes other than farming, such as to build luxurious country homes … About a third of the country’s arable land is not being used at all. Because of this as much as 35 million hectares of arable land could become government property. (Kommersant, 25 December 2001, p. 1: CDSP, 2002, vol. 54, no. 1, p. 8) [There are] nearly 400 million hectares of farmland, or nearly a quarter of the entire country … A good third of Russia’s farmland is considered to be already under the ownership of rural residents. In actuality, however … so far these people are owners in name only. The former collective farmers basically have no control over their land. They cannot sell it, mortgage it, give it away as a gift, or lease it out, because no one has drawn property lines or made any official determination of whose parcel is where. Granted current law on the reorganization of collective and state farms seems to indicate that when all the members of collective farms were assigned land shares (on paper), they also gained the right to split their shares off from the overall tract without the consent of the other owners. However, the Civil Code nipped those feeble first steps in the bud, decreeing that shares could

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be split off only with the consent of all the other landowners. Moreover, the laws on reorganizing collective and state farms stipulate the right to dispose of shares is to be regulated by a special list. But the Civil Code does not establish any restrictions. The upshot is total legislative paralysis … The land is to be divided up by local assemblies … Agricultural officials have long since turned land into a very lucrative business by taking state- and municipally-owned farmland (which accounts for about two-thirds of the total) out of the category of agricultural land and selling it for upscale homes or other use unrelated to agricultural production. More than a million hectares have already been ‘plunderized’ in this way. (Vremya MN, 25 December 2001, p. 3: CDSP, 2002, vol. 54, no. 1, p. 9) The agrarian sector currently accounts for about 24 per cent of all the country’s land. Some 12.5 million rural residents received land shares in 1991, irrespective of whether they were actually working the land … [As regards] the current status of these shares … 20 per cent of this land was transferred to the charter capital of agricultural enterprises or sold to such enterprises … about 70 per cent has been leased and the remaining 10 per cent belongs to people who have not yet decided what to do with their shares or have not yet received them … Today land shares [allocated to members of former collective and state farms] are both securities, similar to shares of stock, and documents conferring the right to hold land. However, the owners of these shares still cannot actually touch a piece of land that belongs specifically to them. (CDSP, 2002, vol. 54, no. 8, p. 7) ‘[There are] 12 million Russians who own plots and land shares’ (CDSP, 2002, vol. 54, no. 9, p. 13). At present 62 per cent of arable land is in private hands … Thirty regions have passed their own laws … In the Kuban … officials have managed to sell half the region’s black-earth farmland without any law at all … [according to the] chairman of the Duma’s agriculture committee. (CDSP, 2002, vol. 54, no. 25, p. 1) [In] Tatarstan foreigners may own land … [In] Saratov province all enterprises in which there is foreign investment may lease land regardless of the size of the foreign-owned share … [In] Samara province enterprises with less than 50 per cent foreign capital have the right to lease land … [In] Voronezh province foreigners are permitted to buy land; there are limits on the size of farms. (p. 4) ‘The deputy minister of property relations … explained that 30 million hectares of farmland, or a quarter of all the country’s cropland, is currently lying unused’ (p. 2).

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Russia The Voronezh province experiment … [involves] gradually putting land in the hands of ‘effective owners’ … A state-owned enterprise called Voronezhinvest takes over failed collective farms and supplies them with equipment, seeds and fuel. It installs new managers and transfers a 10 per cent share to them each year. Within a few years the strengthened farms should belong to ‘effective owners’ with the right to pass the business on to their heirs. (CDSP, 2002, vol. 54, no. 9, p. 13) The State Duma [on 16 May 2002] voted 256 to 143, with one abstention, to approve the government sponsored bill … that would allow the sale of Russia’s farmland … in the first of three required readings … The government bill would leave it up to the local authorities to decide whether foreigners can buy most farmland, but bars foreigners from buying farmland in border areas. (IHT, 17 May 2002, p. 6) [Since private ownership of land was first introduced in 1993] land has been briskly passing from hand to hand without any laws. It has been inherited, leased ‘in perpetuity’, and bought and sold. Several ‘progressive regions’ have even passed their own laws delineating the land market. By various estimates between 20 per cent and 40 per cent of the country’s land has changed hands since the new Russia started allowing private land ownership … The government’s bill … ‘On transactions involving agricultural land’ … is a framework document … It sets forth the basic rules, while the details are to be filled in by laws passed by the Federation members … [There is a] provision stating that any additional restrictions on land transactions other than those imposed in the federal law are prohibited … [As regards] the question of the maximum percentage of land in an administrative district that can belong to a given owner (an individual or a legal entity) … The government’s bill lets the regions set the upper limit themselves, but with the stipulation that it must be no lower than 35 per cent. (Vremya Novostei, 23 April 2002, pp. 1–2: CDSP, 2002, vol. 54, no. 17, pp. 14–15) [The] smooth passage of a new law on agricultural land ownership [has taken place] … [The law, which] was passed on first reading by the Duma on 16 May … introduces the (revolutionary for Russia) concept of agricultural land as an object for purchase and sale. The second reading, during which the law will be discussed in detail, is likely to be more problematic, but the successful first reading means that general principles have now been approved. (RET, Monthly Update, 20 May 2002, p. 2) [This] important law was adopted by the Duma on 27 June 2002, despite fierce protests from the Communist Party. The law ‘On turnover of agricultural land’ supplements the Land Code, which was adopted last year [2001]. The new bill allows free purchase and sale of agricultural land, provided

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that buyers continue to use the land for agriculture. Government proposals to allow foreigners to own Russian agricultural land provoked particularly heated debate … A compromise was found by allowing foreigners to enter long-term rent agreements … Significant rights are given to regional authorities, for example the right of first refusal in any land sale transaction, so the law is likely to pass the Federation Council without difficulties and be enacted before 2003. (RET, Monthly Update, 15 July 2002, pp. 12–13) The chief demand of the Duma opposition is that owners of land shares not be given actual parcels of land, but that the law maintain the status quo in which farm workers (with the exception of independent farmers) have to be content with abstract property rights. A farm worker may lease his land share, pass it on to his heirs, sell it or give it away not in actuality but only on paper … [But] in the version approved by the centrists, the problem was solved by making a major change in the ground rules. People can convert their land shares to actual parcels of land and dispose of them in any of the aforementioned ways. (CDSP, 2002, vol. 54, no. 25, p. 1) Shares in communally-owned land … or rather the rights to them … were handed out to all members of collective and state farms when the farms were converted into joint stock companies and partnerships … The consent of the other holders of shares is not required … If you want to sell your share without having it demarcated as a specific parcel of land, the rest of the shareholders have the first right to purchase it, followed by the local government … The right to demarcate a share must be made at a general meeting of the shareholders. (p. 4) The land put up for bids can be either state- or municipally-owned … or privately owned … Minimum requirements for the size of parcels that may be sold will be determined by the regions in accordance with their own land use laws … Land may be sold by or bought from the owners directly. But in that case … the bill gives the right of first refusal to local government bodies. (p. 3) ‘Regional and local authorities have preferential rights in buying farmland, unless the plot is auctioned’ (EBRD 2002b: 190). The ceiling on the proportion of a region’s farmland that can be owned by an individual citizen (including land owned by the person’s relatives or by companies in which he owns a controlling interest) cannot be set at less than 10 per cent. (p. 3)

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Russia Foreigners will be banned from buying Russian farmland under a bill which passed its second reading in the Duma … yesterday [21 June]. The bill gives full legal authority for private sale of farmland throughout Russia for the first time since 1917, but the Duma struck down a clause allowing foreign ownership of farmland except in border areas. Instead, foreigners may only lease farmland. (FT, 22 June 2002, p. 7) [The State Duma] approved a bill Friday [21 June] to create a legal system to buy and sell farmland only after … [the] government agreed to a late amendment prohibiting foreigners from owning agricultural property … The legislation would ban farm sales to any company in which foreigners have a majority stake. But it would allow foreigners to lease land for up to forty-nine years … Another amendment tightened restrictions on the amount of land any one owner can buy, allowing local authorities to cap ownership at 10 per cent within any one district … The vote establishing a framework for buying and selling farmland … [involved] 245 deputies voting for it, only nineteen more than the minimum needed, while 150 voted against the bill … The vote Friday was the second on the legislation and the last in which significant amendments can be made … The bill would extend considerable power to local authorities to zone land exclusively for agriculture … [and] to limit the maximum amount a single owner can purchase … One of the most contentious provisions of Putin’s proposed legislation would do away with the system that allows shareholders to lease their properties to large, new agricultural companies in return for annual rent, usually paid in grain or wheat. These enterprises would have to operate the properties in trust, turning over all profits to the owners. Economists and the owners of these new enterprises agree that such a provision would effectively shut down the nascent industry. Individuals own less than 10 per cent of Russia’s 400 million hectares of farmland. The rest remains under the control of the state or former collectives, said Yevgenia Serova … There is virtually no property trade … Since few of the former collectives’ shares represent actual plots, the prospect of dividing the sprawling collectives fairly into a patchwork of smaller plots seems nearly impossible. (IHT, 22 June 2002, p. 2)

‘Russian lessees [as opposed to foreign lessees] will have the right of first refusal if the land they are leasing is offered for sale’ (CDSP, 2002, vol. 54, no. 25, p. 3). ‘Courts will have the right to seize land sold for farming but used for other purposes’ (FT, 27 June 2002, p. 7). After the law goes into effect regions that have introduced the sale of land by laws of their own over the past few years, will have to change their legislation … However, regions that oppose private ownership of farmland will not be required to introduce it. (CDSP, 2002, vol. 54, no. 25, p. 3)

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Regions … will have to bring their laws into compliance with federal law, as the constitution requires … The law … goes into effect six months after publication … The privatization of state- or municipally-owned land in a given Federation member will begin when introduced by the Federation Member’s own laws. In regions that oppose private ownership of land, all land belongs to the state. Ownership was never turned over to former state and collective farms. So the law fulfils the president’s injunction – to allow regions to decide when to introduce the sale of farmland and whether to do so at all. (p. 4) ‘The bill on farmland … [allows] regional governments to decide the pace of privatization locally’ (FT, 2 July 2002, p. 7). Nearly 90 per cent of Russia’s 190 million hectares (470 million acres) is now privately owned. But without a legal framework for buying and selling, the land market is small, bureaucratic and murky. For private farmers, consolidating small plots into sensibly sized holdings is all but impossible. So is using land to borrow money for new equipment … Ownership is unclear. There is no proper land registry, detailing the physical boundaries of each piece of land … Last year’s [2001] urban land code … has had little practical effect. Parts of the code are so badly drafted and vague that even experts argue about what they mean. Local government still has huge discretion. In Moscow … the city authorities have barely implemented the new law at all. (The Economist, 29 June 2002, p. 37) The Land Code was approved by the State Duma on its third reading on 26 June 2002 by 258 votes to 149. President Putin signed it on 25 July 2002. [On 27 January 2003] the chairman of the Federation Council’s agriculture committee, Ivan Starikov, said: ‘Federation members have not yet enacted their own laws on the sale of land’ … The federation law gives regions six months to bring their own laws into conformity with it. But this does not apply to regions that until last year [2002] had not begun to privatize farmland … The law gives these regions the right to decide for themselves when to begin selling farmland … [Thus] the charges are levelled instead at the thirty to forty regions that have enacted land sale laws over the past several years. Only a few of them have allowed sales of farmland; the rest … have only allowed leasing or ‘lifetime inheritable possession’ … Some regions have permitted foreigners to purchase land, while federal legislation allows them only to lease it … The law itself fails to stipulate mechanisms for mortgaging farmland, and this makes it impossible to create a market. It has to be spelled out how and to whom banks may lend money secured by land, how the value of that land is to be assessed and what banks are supposed to do with land that they end up acquiring from defaulting borrowers. (Kommersant, 28 January 2003, p. 15: CDSP, 2003, vol. 55, no. 4, p. 11)

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Russia [On 20 June a law was passed by the State Duma] on the financial reorganization of enterprises that produce agricultural output … [which] involves the restructuring of farms’ debts to the state and the natural monopolies and the writing off of fines and penalties, which, according to figures provided by … [the] chairman of the Duma’s agriculture committee, account for more than 50 per cent of the entire debt. The remaining arrears may be paid over a period of nine years, with no payments required for the first five years and an interest rate of 0.5 per cent during the last four. When inflation is taken into account that is an interest-free loan. Restructuring will begin before the end of the year; it has been authorized for 10,500 out of 12,300 farms. (CDSP, 2002, vol. 54, no. 25, p. 1) The farms, for their part, will commit themselves to participate in a recovery programme focussing primarily on bringing in new managers and adopting new management principles … No one will force farms to participate in the recovery process. The entire process will be completely voluntary … Penalties and fines currently account for 65 per cent of total agricultural debt … Only one farm in four turns a profit … Almost half of our agricultural enterprises are bankrupt. (CDSP, 2002, vol. 54, no. 27, p. 9) Two weeks ago … the State Duma [adopted] … a fundamental amendment that had previously been rejected … It compels regions that have not yet enacted their own laws to begin privatizing farmland on 1 January 2004. The amendments were approved by the Federation Council [on 26 June] … The president has two weeks to either sign the amendments or reject them. (CDSP, 2003, vol. 55, no. 25, p. 16)

The development of private farming A clear distinction needs to be made between private plots (which accounted for about a quarter of agricultural output in the Soviet period) and newly formed private (‘peasant’) farms. There were two main ways for an individual to receive land free from the state in order to begin peasant farming operations: (1) from a Special Land Fund; initially this consisted of land that state or collective farms did not want, were not using, or which had been used unproductively in the recent past; only this sort of land was available under Gorbachev, but in early 1991 Yeltsin signed a decree that allowed up to 10 per cent of a farm’s land to be withdrawn and placed in this fund; and (2) from a state or collective farm (Wegren 1994: 222). Private (‘peasant’) farms refer to farms which were created voluntarily by individuals who withdrew from state and collective farms or who obtained land from state land funds that were established at the local level. Collective or state farm members were able to obtain land directly from the parent farm free of charge during farm reorgani-

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zation (1992–4), while urban dwellers who wished to undertake private farming received land from a land fund. Prior to December 1993 urbanites received land free, but after that date they had to purchase the land. Farm members wishing to withdraw from a parent farm continue to be able to obtain land free of charge, but once reorganization was completed this land was allotted from land funds, not from the farm itself (Wegren 1996: 114–15). Note that private farmers do not own all their land. Some 39 per cent of the land allotted to private farming had become the farmers’ own property, 32 per cent was held in lifelong heritable possession and 29 per cent was leased (CDSP, 1993, vol. XLV, no. 5, p. 22). Private (‘peasant’) farms have made slow progress, in contrast to rapid privatization in the non-agricultural sectors. This can be seen in Table 6.2 and in the figures provided by RET. The percentage contribution to gross agricultural output for 1990, 1991, 1992 and 1993 respectively by type of enterprise was as follows: agricultural enterprises (such as collective farms, state farms, joint stock companies, partnerships and co-operatives, which together had 90 per cent of cultivated land at the beginning of 1994), 76, 72, 66 and 62; household plots (5 per cent of cultivated land), 24, 28, 33 and 36; new private farms (5 per cent of cultivated land), 0, 0, 1 and 2 (RET, 1994, vol. 3, no. 2, pp. 62–3). The number of private farmers has remained at roughly 280,000 for a long time now. The amount of land they are tilling is not increasing either. It is now 6 per cent of all farmland, although 49 per cent of the land used for agriculture has technically been divided up among shareholders. (Izvestia, 14 January 1998, p. 2; cited in CDSP, 1998, vol. 50, no. 2, p. 8) 7DEOH Russia: private farms End of year

Number of private farms

Average size (ha)

Agricultural land ( %)

Agricultural output ( %)

Average number employed

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

4,432 49,013 182,787 270,000 279,200 — 280,000 274,000 — —

46.3 42.0 42.5 43.0 43.0 — — — — —

— 0.6 1.0 3.8 5.4 5.7 5.7 5.8 6.3 6.8

— — 1.0 2.0 1.7 — 1.9 2.2 2.1 —

— — 3 — — — — — — —

Source: Russian Economic Trends (various issues); United Nations Economic Commission for Europe (1993: 206); Wegren (1992b: 646, 665; 1998: 83); Siszov (1993: 501); Shaw (1992: 554); Nikonov (1992: 1159 –60); CDSP (various issues); Pallot (1993: 112); Amelina (1999: 20); Spoor and Visser (2001: 888, 890)

450

Russia The number of individual farms … decreased from a peak of 280,000 in 1996 to 274,000 at the end of 1997. Individual farms produce just 2 per cent of recorded agricultural output on 6 per cent of agricultural land. The remaining 48 per cent is produced on tiny private plots – averaging onethird of a hectare – by rural and urban workers for whom this is a part-time occupation or by pensioners for whom it supplements retirement benefits. (Amelina 1999: 19)

The shares, respectively, of agricultural production and agricultural land use accounted for by collective enterprises are as follows: 1991, 68.8 per cent and 91.2 per cent; 1994, 54.5 per cent and 82.8 per cent; 1997, 49.9 per cent and 80.4 per cent. The number of collective enterprises was 27,000 in 1997, roughly the same as in 1991 (p. 19). Ellman (2000: 1418–19) provides figures for the percentage contribution to agricultural output by type of producer for the years 1992, 1993, 1994, 1995, 1996 and 1997, respectively: agricultural enterprises: 67.1 per cent; 57.0 per cent; 54.5 per cent; 50.2 per cent; 49.0 per cent; 46.5 per cent; the household sector (‘the “individual sector” … [comprising] private plots, gardens, allotments, dachas etc.’): 31.8 per cent; 39.9 per cent; 43.8 per cent; 47.9 per cent; 49.1 per cent; 51.1 per cent; family farms (‘peasant/farmer farms’): 1.1 per cent; 3.1 per cent; 1.7 per cent; 1.9 per cent; 1.9 per cent; 2.4 per cent. The share of private farms and household plots in agricultural production increased from 31 per cent in 1991 to 55 per cent in 1998. ‘It was estimated by the OECD that … by the end of 1996 … 3 per cent … of the land … represented household plots … and 6 per cent peasant farms’ (Spoor and Visser 2001: 890). Wegren (1992a: 120) argues that collective and state farmers have overwhelmingly preferred to devote their energies to their private plots rather than venture into outright private farming. Only 3 per cent of agricultural workers are private farmers, and their number is falling. Moreover, because farmland is deemed to have no value, banks will not treat it as collateral, so credit is almost unobtainable. The countryside is starved of investment … Russians are likely to be dependent on their … little family plots for some time to come. These plots are now thought to provide 50 per cent of the food produced in Russia … illustrating the way that Russia really is a subsistence economy. (The Economist, Survey, 12 July 1997, p. 17) ‘Yeltsin has been largely successful in creating a new set of rural institutions in the Russian countryside. But the underlying culture has changed very little … a collectivist and egalitarian culture still exists in the countryside’ (Wegren 1994: 216). One of the most striking features of land reform in Russia is the lack of spontaneous decollectivization by collective and state farm workers themselves …

Russia

451

By 1 July 1993 over 90 per cent of all state and collective farms had reorganized. Of those farms which had reorganized … collective forms of organization retained much more popularity than expected … The most popular forms of reorganization were: joint stock companies, which retain collective ownership; the retention of a farm’s previous status, chosen by more than one-third of reorganized farms; and the creation of ‘comrade societies with limited responsibility’, a form chosen by more than half of the farms undergoing reorganization … Of the farms that remained intact after reorganization … an overwhelming 92 per cent chose a form of collective labour organization. (p. 219) Despite the increased ease of land acquisition, most economic regions in European Russia had not more than 10 per cent of cultivated land allocated to private farmers. Thus, even after five years of land reform the Russian agricultural sector was still dominated by large collective farms and their successors which controlled around 90 per cent of agricultural land, with private farmers possessing only about 5 to 6 per cent of all agricultural land. The remaining land was used for small individual farming such as private plots. (Wegren 1996: 120–1). In most cases the farm and farm property remained intact. Former state and collective farms remained intact by forming joint stock farms, limited partnerships, or retaining their previous status. For example, about 83 per cent of former state and collective farms either retained their previous status or reorganized as a joint stock farm. Most farmers transferred their land shares to the parent farm … On 1 January 1995 former state and collective farms and their legal successors held about 87 per cent of agricultural land (not including land reserves and forest funds), although technically this land was now private, not state, property. (Wegren 1997: 970) The option preferred by the overwhelming majority of land share owners/agricultural workers in Russia to date has been to lease their land back to the enterprise which issued it for a predetermined period (often five years) in return for an annual rental payment made by the enterprise in cash or kind. That is, the vast majority of rural workers have not opted to try private farming on their land shares either individually or in groups. (Kitching 1998: 18) But the importance of the private plot has increased (p. 20). There has been a tendency, certainly in the Western media and scholarly literature, to assume that over the majority of Russia, where more ‘radical’ reforms of the Nizhny Novgorod type have not occurred, there must have been ‘stagnation’ and the ‘mere continuation’ of old Soviet collective and

452

Russia state farms in a slightly new juridical guise … The result of the slump [in agricultural production] has been to turn the majority of these farms into more or less pure ‘subsistence’ entities engaged in the self supply of food for their members and (as far as possible) of the inputs necessary for that food production – but withdrawing mainly or totally from market supply. At the same time, however, a small minority of these former state and collective farms (about 10–15 per cent of them in all four regions studied) have come to dominate marketed production of food and other agricultural crops …. The clue to the survival of this small minority of enterprises has been their success in a form of ‘crisis management’, a success determined largely (in my view) by the contacts and abilities of their farm management. (pp. 19–20) The survey data show that a much higher proportion of private plot output is marketed on ‘survivor’ farms than ‘collapsing’ farms. ‘On ‘collapsing’ farms … private plot production increases … are almost entirely for subsistence use … In effect … such farms have become little more than ‘servicing agencies’ and ‘input providers’ to ‘subsistence’ private plot production … The 10–15 per cent of ‘survivor’ farms in our four survey regions do not merely dominate the marketed production of collectively produced grain and feed crops … their work forces now also dominate the marketed production of fruit, vegetable and livestock products coming from private plots in these regions. (pp. 21–2) The term ‘collective farm’ may not disappear for at least another fifty years, although the term ‘state farm’, closely related in meaning, has already practically gone out of use … In the first years of reform … it was illegal even to call oneself a collective farm. Farms came up with such curious names as Lenin Collective Farm Closed-Type Joint Stock Company or 22nd Party Congress Collective Farm Limited Liability Partnership. After a few years collective farms were once again allowed to call themselves collective farms … There are actually a lot more collective farms than it appears. Only 13.6 per cent of the country’s 27,300 agricultural enterprises are officially called collective farms … almost 4,000 of them … But, with very rare exceptions, all the rest of the open-type joint stock companies, limited liability partnerships, closed-type joint stock companies, agricultural co-operatives, associations and silent partnerships are actually collective farms. The collective farms are currently losing the economic race. Not to privately owned farms, though, but to private plots. (Yelena Yakovleva, Izvestia, 15 March 2000, p. 2: CDSP, 2000, vol. 52, no. 12, p. 16) Two weeks ago … the State Duma [adopted] … a fundamental amendment that had previously been rejected … It compels regions that have not

Russia

453

yet enacted their own laws to begin privatizing farmland on 1 January 2004. The amendments were approved by the Federation Council [on 26 June] … The president has two weeks to either sign the amendments or reject them. (CDSP, 2003, vol. 55, no. 25, p. 16) A number of factors have hindered the development of private farms: 1 2 3

The uncertainties of life in the new market economy. Resistance from many of the Soviet-era managers. Wegren (1996) argues that Private farmers have not been successful in defending their interests because they are politically weak, a fact that led them to seek out urban alliances whose interests differ from private farmers, and because of intrarural divisions that have weakened the efforts by agrarians to defend their interests. (p. 106) What has been crucial to the private farming movement is state financing and access to state-subsidized credits … The rise and fall of the private farm movement correlates with the financial support shown by the Russian government. The political weakness of rural liberals has meant that private farmers have not fared well in defending the issues that are most critical to the fate of private farming. (p. 122)

4

5

6

(At the close of September 1993 state-subsidized credits to private farmers were ended: p. 111.) Factors hindering the development of private farming include the lack of an adequate rural infrastructure, problems of input supplies (‘channels of trade for farm inputs have remained highly monopolized’: p. 117), state payment arrears, underdeveloped market trade channels, and the quantity and quality of land allocated (pp. 116–20). A lack of machinery suitable for small farms (as well as difficulties in obtaining other inputs) hinders the development of the 260,000 private farms (The Economist, 7 August 1993, p. 64). In a survey 80 per cent of farmers named high prices for equipment and building materials as the chief hindrance to the development of their farms (CDSP, 1993, vol. XLV, no. 5, p. 23). ‘A study by the World Bank last year [2001] concluded that individual farmers often suffered because of the distortions caused by debt write-offs provided to state farms. Tough economic conditions often drew them into schemes sponsored by regional authorities, which required them to buy inputs by named suppliers at above-market rates and sell their output to the state at low prices’ (FT, Survey, 15 April 2002, p. vi.)

454

Russia

Direct foreign investment Peitsch draws attention to the distinction between direct foreign investment and foreign portfolio investment. ‘An investment is considered to constitute direct foreign investment when a lasting relationship is established between a legal person or entity resident in one country (the foreign investor) and an entity resident in another country (the foreign investment enterprise) in which the foreign investor obtains a controlling interest. This type of investment can be contrasted with (foreign) portfolio investment, in which the investor is not interested in exerting significant influence over management decisions’ (Barbara Peitsch, The OECD Observer, April–May 1995, no. 193, p. 32). What is striking about Russia is that the volume of direct foreign investment (DFI) is relatively small for such a huge country, even taking account of the noticeable increase since 1996 (and especially after the rapid recovery from the financial crisis of August 1998). The most obvious comparison is with China. Actual (utilized) DFI in China was $33.8 billion in 1994 and $38 billion in 1995 (second in the world behind the USA’s $60 billion out of a world total of $315 billion). In 1996 DFI was $42 billion and the cumulative total at the end of that year was $177.2 billion. In 1997 the figure was $45 billion. (FT, 6 February 1996, p. 5; 9 January 1997, p. 3; 27 May 1997, p. 10; 21 October 1997, p. 18; and 16 February 1998, p. 2; The Economist, 26 August 1995, p. 60.) Utilized DFI in China was $45.6 billion in 1998 and $40.4 billion in 1999. In 2000 the figure was $40.7 billion (FT, 1 March 2001, p. 10). (See Table 6.3 for EBRD figures for net foreign direct investment in Russia.) ‘In 1996 Russia received only slightly more than Hungary, a country with the population less than a tenth of the size of Russia’s. In 1995 Hungary received twice as much FDI [DFI] as Russia’ (RET, Monthly Update, April 1998, p. 5). Various estimates for Russia include the following: 1

2 3

4

5

By the end of 1993 direct foreign investment totalled around $2 billion (in 1992, $290 million flowed in, and in 1993, $400 million) (Deutsche Bank, Focus: Eastern Europe, 1994, no. 107, pp. 1–6). At the end of 1993 total foreign investment amounted to $2.7 billion, an increase of $1.4 billion for the year (Transition, 1994, vol. 5, no. 6, p. 19). Foreign direct investment amounted to $2 billion in the period 1990–3: $100 million in 1991, $800 million in 1992 and $1.1 billion in 1993 (EBRD 1994: 123). At an international conference held in Moscow on 27 June 1994 it was revealed that the cumulative total of foreign investment was $2.7 billion (IHT, 28 June 1994, p. 2). Net direct foreign investment was -$400 million in 1990, -$100 million in 1991, -$112 million in 1992, $682 million in 1993, $256 million in 1994 and $920 million in 1995 (United Nations Economic Commission for Europe 1996: 149). According to the United Nations Economic Commission for Europe, the stock of foreign direct investment was valued at just over $3 billion at the end of 1994 and $3.3 billion at the end of June 1995. About

-5.0 -8.0

-3.7

100.3 —

—

4.100

0.100

— 643

462 89.1 —

-4.0 -0.1

-3.6

5.3 —

—

—

—

— 641

516 116.7 —

Rate of growth of GDP ( %) Rate of growth of industrial output ( %) Rate of growth of agricultural output ( %) Inflation rate (consumer, %) Budget surplus or deficit ( % 1 GDP) Unemployment rate (end of 2 year, %) Balance of payments (current account, $ billion) Foreign direct investment (net, $ billion) Gross fixed investment Natural gas output (billion cubic metres) Oil output (million tonnes) Grain output (million tonnes) Population (million; date as of 1 January of the following year) 399 106.9 148.7

-41.5 641

0.800

-1.200

5.2

1,526.0 -18.9

-9.0

-14.5 -18.0

1992

354 99.1 148.4

-25.8 619

0.682

12.800

6.1

875.0 -7.3

-4.4

-8.7 -14.1

1993

316 81.3 148.3

-26.0 607

0.409

8.431

7.8

311.4 -10.4

-12.0

-12.7 -20.9

1994

— 63.5 148.0

-7.5 —

1.460

7.487

8.9

197.7 -6.1

-7.6

-4.1 -3.3

1995

— 76.0 147.5

-19.3 —

1.657

11.753

10.0

47.8 -8.9

-5.1

-3.5 -4.0

1996

— 89.0 147.1

-5.7 —

1.679

2.060

11.2

14.7 -8.0

0.1

0.9 1.9

1997

302 47.9 146.4

-11.2 —

1.496

0.680

13.3

27.6 -7.9

-12.3

-4.9 -5.2

1998

— 54.7 145.7

-9.8 —

1.103

24.526

12.2

86.1 -3.3

2.4

5.4 8.1

1999

— — 145.4

4.7 —

-0.496

45.805

9.8

20.8 3.0

4.0

9.0 9.0

2000

— 85.5 144.8

13.2 512

-0.137

33.513

9.0

21.6 2.9

6.8

5.0 4.9

2001

— 86.0 145.5

2.6 520

0.000

31.800

—

15.7 1.4

1.7

4.3 3.5

2002 (estimate)

United Nations Economic Commission for Europe: based on ILO definition, i.e. including all persons not having employment but actively seeking work. EBRD figures for the period 1994 – 2001 in consecutive years are as follows: 7.8 per cent; 8.5 per cent; 9.6 per cent; 10.8 per cent; 11.9 per cent; 12.6 per cent; 10.5 per cent; and 9.0 per cent (EBRD 2002b: 193). For the period 1997 –2001 the unemployment rate (ILO) was as follows: 10.8 per cent; 11.9 per cent; 13.7 per cent; 10.5 per cent; 9.0 per cent (RET, Monthly Update, 20 May 2002, p.2)

2

Notes 1 General government balance: includes the federal, regional and local budgets and extra-budgetary funds and excludes transfers (EBRD). The federal budget balance as a percentage of GDP was as follows: 1997, -6.7 per cent; 1998, -4.9 per cent; 1999, -1.7 per cent; 2000, 2.5 per cent; 2001, 2.9 per cent; 2002, 2.1 per cent (RET, Monthly Update, various issues)

Source: Various issues of Russian Economic Trends; European Bank for Reconstruction and Development, Transition Report; United Nations Economic Commission for Europe, Economic Survey of Europe; United Nations, World Economic and Social Survey; IMF, World Economic Outlook

1991

1990

Economic indicator

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456

6

7 8

9 10

11 12

13

14

15

Russia 60 per cent was in mining and manufacturing, notably in energy and engineering (Frances Williams, FT, 18 January 1996, p. 5). Goskomstat estimates that foreign direct investment in 1995 came to $2.8 billion. Of this $1.9 billion was direct foreign investment and the remainder mostly in the form of private credits (RET, Monthly Update, 13 June 1996, p. 7). Foreign direct investment was $2.5 billion in 1996 and $2.8 billion in the first half of 1997 (RET, 1997, no. 4, p. 4). By 1 November 1995 foreign investment amounted to over $6 billion (Transition, 1996, vol. 7, no. 1, p. 17). Cumulative direct foreign investment in the period 1992–5 amounted to a mere $4 billion, much of it by food and drink manufacturers with international brands and ready-made markets (The Economist, 13 April 1996, p. 72). Direct foreign investment was $6.2 billion in 1997 (RET, 1998, no. 2, p. 24). The Asian financial crisis brought this rapidly improving situation to an end. In 1998, according to the UN, direct foreign investment in Russia was $2.2 billion or only $15 per capita. In the Czech Republic the figure was $243 per head. In Poland, which attracted $5.1 billion in 1998, the figure per head was $132 (FT, 19 January 2000, p. 21). ‘According to official figures, direct foreign investment across the country was just $4.2 billion in 1999, up from $3.3 billion in 1998 and down from a peak of $5.3 billion in 1997’ (FT, 4 April 2000, p. 23). Direct investment in 1998 was $3.361 billion and in 1999 it was $4.26 billion (CDSP, 2000, vol. 52, no. 11, p. 17). In 2000 foreign direct investment was $4.4 billion (RET, 2000, vol. 9, no. 4, p. 41). In 2000 foreign direct investment was $2.7 billion (RET, Monthly Update, 21 January 2002, p. 2; FT, 7 September 2001, p. 19). In 2001 foreign direct investment was $2.9 billion (RET, Monthly Update, 21 January 2002, p. 2). ‘Although these data are not comparable with those published by the CBR (the central bank) … Goskomstat [estimates] that in 2001 Russia received … $4 billion of foreign direct investment’ (RET, Monthly Update, 18 March 2002, p. 4). ‘The total … [of] inward foreign investment … since 1991 amounts to only $22 billion – half the figure for Poland’ (The Economist, Survey, 21 July 2001, p. 17). In 2000 foreign direct investment per person was as follows: Russia, $2.7; USA, $316.5; China, $39.0; Poland, $9.6; Ukraine, $0.6 (The Economist, Survey, 21 July 2001, p. 5). In 2000 direct foreign investment was $4.429 billion. Earlier figures were as follows: 1994, $0.549 billion; 1995, $1.877 billion; 1996, $2.090 billion; 1997, $5.333 billion; 1998, $3.361 billion; 1999, $4.260 billion (RET, 2002, vol. 11, no. 1, p. 35). ‘Goskomstat data show that gross foreign direct investment inflows increased marginally in 2002 to $4 billion’ (EBRD 2003a: 78).

In 1998 world direct foreign investment amounted to $430 billion (RET, Monthly Update, 11 March 1999, p. 1). Between 1993 and 1998 Russia attracted $9.2 billion. Close to 50 per cent of direct foreign investment came

Russia

457

from the USA (mainly in the oil and mineral sectors), followed by Germany and other EU countries (increasingly focused on the consumer goods sectors). In 1995 food processing was the largest recipient (mainly to supply the domestic market), followed by the fuel and oil sector (p. 5). The significance of DFI can be judged in other ways: 1

2 3

4 5

In 1992 joint ventures accounted for 11 per cent of total exports (Moscow News, 29 October 1993, p. 7). In 1994 enterprises with foreign investment were responsible for 17 per cent of exports (Barbara Peitsch, The OECD Observer, April–May 1995, no. 193, p. 32). Enterprises with foreign capital accounted for only 1 per cent of the ‘total production of goods and services’ (CDSP, 1993, vol. XLV, no. 40, p. 33). ‘Foreign investment enterprises’ accounted for 0.5 per cent of total employment and more than 2 per cent of total output (Frances Williams, FT, 18 January 1996, p. 5). In 1997 foreign companies and joint ventures accounted for 3 per cent of GDP and 9 per cent of exports (FT, Survey, 15 April 1998, p. ix). A Moscow bank reckons that about $4.3 billion of foreign investment in Russia has gone to Moscow, some two-thirds of the total (The Economist, 6 September 1997, p. 38). It is interesting to look at where most of the cash [direct foreign investment] has been going. The Moscow region is the easy answer. The capital has attracted almost half of Russia’s $10.3 billion foreign investment to date. But some intrepid foreigners have ventured further, mainly to the second city of St Petersburg or the oil-rich Krasnoyarsk. The far east of the country has also attracted investment, to exploit its proximity to Asia. Russia’s heavy industrial interior, meanwhile, remains largely untouched. (Business Central Europe, February 1999, p. 60) ‘[In 2002 Moscow] got $1.5 billion in foreign direct investment, over a third of the national total’ (The Economist, 12 April 2003, p. 44). Foreign investment is dominated by companies from the USA and the EU, plus countries such as Cyprus and Switzerland which represent returning Russian capital flight … Initial investment flows were dominated by market-orientated investment in Moscow city and investment in the resource regions; post 1998 financial crisis there is evidence of import substituting investment in consumer orientated sectors, most notably the food industry … The shift in motivation after 1998 brought with it an acceleration of a trend towards investment beyond Moscow city. That said, FDI remains highly concentrated in a relatively small number of regions. (Michael Bradshaw, RET, 2002, vol. 11, no. 1, pp. 39–40)

458

Russia

(Note that on 21 November 1996 Russia raised $1 billion on the international bond market. This was the first international issue since Tsarist times.) Changes have been made to the regulations governing direct foreign investment: 1

2

3

4

Direct foreign investment in some sectors (such as banking, insurance and heavy industry when damage to the environment could result) requires authorization. The defence sector is closed to foreign investment, as is gambling (Barbara Peitsch, The OECD Observer, April–May 1995, no. 193, pp. 32–4). The laws on joint ventures have been repeatedly changed over the past year and foreigners have lost any shred of preferential treatment (The Economist, 27 February 1993, p. 100). A presidential decree of 23 May 1994 awarded a three-year profit tax holiday for joint ventures registered after 1 January 1994 with at least 30 per cent foreign ownership and worth at least $10 million, provided that they are not liquidated within six years. In the fourth year enterprises would pay a quarter of the usual tax rate and half in the fifth year (CDSP, 1994, vol. XLVI, no. 21, p. 9). There have been changes in the regulations governing banks. Crédit Lyonnais Russie (St Petersburg) was the first to obtain a licence in December 1991. New regulations were published on 15 April 1993. Foreign banks could open only one branch office besides their head office, while the total capital of all foreign banks operating in Russia could not exceed 12 per cent of the aggregate capital of the Russian commercial banks in 1993 (the annual limit would vary). Parliament was due to consider finalizing a bill excluding, until January 1996, banks with more than 50 per cent foreign participation from dealing with Russian customers, including joint ventures, i.e. confining them to transactions with foreign nationals and non-resident legal entities. But parliament was dissolved by Yeltsin on 21 September 1993. The ban finally came into force on 19 November 1993, although those banks already dealing with residents as of 15 November were allowed to continue. Of the twelve foreign banks that had by then received licences, only two (Crédit Lyonnais Russie and BNP–Dresdner) already had resident clients (Moscow News, 19–25 August 1994, p. 10). Finance minister Fyodorov justified the move in terms of protecting Russian banks from losing their best clients and staff during the transitional stage. A presidential decree of 10 June 1994 lifted the restrictions on banks from those countries with which Russia had signed investment protection agreements. The partnership and co-operation agreement with the EU of 24 June 1994 immediately lifted the restrictions on the five EU banks which had already been given licences prior to the November 1993 decree, namely Crédit Lyonnais Russie and Société Générale of France, Ing and ABN–Amro of the Netherlands, and Dresdner of Germany. The restrictions would be scrapped for other banks by 1996. The drawbacks of shielding generally weak, poorly regulated and even corrupt domestic banks from the competition provided by foreign banks

Russia

5

459

were clearly illustrated when the financial crisis hit Russia in August 1998. Depositors need to have confidence in banks and loans have to be allocated with profitability rather than cronyism in mind. ‘Viktor Gerashchenko announces [27 April 1999] that the share of foreign capital in the Russian banking system may be increased from the current 12 per cent to 25 per cent’ (RET, 1999, vol. 8, no. 2, p. 96). A Russian law on ‘production sharing’ became operational in January 1996. The law concerns the exploitation of natural resources, including oil and minerals. Under production sharing an investor enters into a contract with the state, which grants it exploitation rights for a particular geographical area together with an exemption from all present and future taxes other than those expressly defined in the agreement. In return the state receives an agreed percentage of the production after the investor has recouped his investment costs (EBRD 1996a: 10). Production-sharing agreements are recognized in international law (RET, Monthly Update, 11 March 1999, p. 6). The contentious new law on ‘production-sharing agreements’ was signed by Yeltsin at the end of December 1995. It sets a framework for contracts between the state and private domestic and foreign investors in oil and other mineral resources, fixing the general principles under which private investors have to cede a proportion of output to the government in the form of taxes and royalties. The resulting text is vague and rambling and satisfies nobody … foreign oil companies … fear that the provisions for rewriting agreements in the wake of ‘changed circumstances’ will enable the Russian government to claw back profits from investors who do better than expected … [and foreign oil companies] … also dislike the law’s insistence on specific, separate parliamentary approval of ‘strategic’ agreements, and also of any agreements that the government wants to reach without going through an open tender or an auction. (The Economist, 20 January 1996, p. 80)

Other worries include a restriction on any investor’s freedom to transfer or mortgage property rights, the law saying that this will require the state’s consent. Provisions relating to the settlement of disputes fail to guarantee an investor’s right to international arbitration (merely making this one possible option) and Russia is not obliged to waive its sovereign immunity in any dispute. Some of these shortcomings may be remedied by writing clauses into individual agreements (p. 80). The Duma has been dragging its heels on production-sharing legislation for three years. It has approved a mere seven agreements out of a list of 230, and has yet to amend a dozen other laws that conflict with the principle of production-sharing. (The Economist, 15 November 1997, p. 96)

460

Russia

The production-sharing law requires parliament’s approval to exploit certain areas, including the continental shelf. Russia has the right to cancel deals if world oil markets move sharply and Western companies’ ability to sue in international courts is limited. The law is unclear on some tax issues (FT, 29 March 1996, p. 7). On 9 December 1998 the State Duma passed amendments to oil production-sharing legislation that removed the main obstacles confronting foreign investors. The new law opens up 30 per cent of Russia’s hydrocarbon resources for production-sharing agreements. Under the old law only 10 per cent of Russia’s strategic minerals were eligible. ‘Production-sharing agreements will now prevail over both existing and future Russian legislation. Until now foreign companies have been worried that new laws could undermine any deals they might make’ (FT, 10 December 1998, p. 3). Production-sharing agreements (PSAs) were designed to attract foreign investment in the energy and raw materials sectors. These agreements also seek to assure Russian control and at least 70 per cent involvement in the exploitation of natural resources, with corresponding benefits. These rules and the prevailing business climate explain why only three, or possibly four, of the twenty-eight PSA contracts approved since the introduction of the PSA regime in 1996 are operational. (Transition, 2001, vol. 12, no. 1, p. 36) One consequence of a more stable business environment in Russia is that production-sharing arrangements (PSAs) have become less vital for Western oil companies. PSAs, in which all financial arrangements are settled in advance and payable in oil, are often demanded by oil companies operating in developing countries to protect their projects from the hazards of frequent fiscal or legal changes … Only three PSAs were fully approved in the mid1990s before the Duma … started complaining that they gave undue preference to foreign companies … While there is a list of PSAs for twentysix more projects they can only be effective if they are formally exempted from the tax code. And such exemptions seem increasingly unlikely … In the longer run Russia’s significance to Europe and the world energy market may lie less in oil, of which it holds 5 per cent of world reserves, than in gas … Russia [is the] holder of a quarter of the world’s gas reserves. (FT, 25 April 2002, p. 20) Typical PSAs [production-sharing agreements] lock in tax regimes, clarify resource ownership and guarantee payments in fungible exportable assets (such as oil) that are not so vulnerable to changes in exchange rates. The need for stability is hardly new to Russia and, in fact, a Russian PSA regime has been in place since 1996. In practice, however, that regime has not eliminated the uncertainties that deter investors and legislation for an improved PSA mechanism remains stalled in the Duma. (Victor and Victor 2003: 56)

Russia

461

Since the [February 2003] BP deal, the government’s statements that it intends to cancel future production-sharing agreements – or long-term stable tax and legal frameworks for oil development – have proved a setback to foreign investors (FT, 10 April 2003, p. 17). The trend towards more favourable regulations has helped increase volume of DFI. But significant obstacles remain. Burton and Juzaitis, for example, point to a number of these. There are heavy VAT and profit taxes imposed on direct investments by foreigners. Alternative forms of investment have arisen in response, such as placing money in special tax-free investment funds or making capital contributions to existing Russian companies. The newness of the relevant investment laws, the unknown status of numerous proposed laws and the volatile political situation are hindrances (Rodney Burton and Diane Juzaitis, IHT, 25 March 1995, p. 21). Investment is so risky in Russia that investors require an extremely high expected return. A survey was carried out in February 1995 of twenty Western investment banks, brokerages and accounting firms, along with several major companies engaged in direct foreign investment. The disincentives, in order of ranking, were as follows: 1 2 3

4

5 6

Legal disincentives were the most serious (average rank 1.7), especially fears about shareholder rights, weak contract enforcement and securities regulation. Economic disincentives (2.9), especially high inflation, the incoherence of the tax system and exchange rate fluctuations. Political disincentives (3.0), especially scepticism about commitment to reform, fears about renationalization and doubts about parliamentary elections. Financial disincentives (3.7), especially lack of information about potential business partners, repatriation of profits and lack of a credit rating in Russia. General disincentives (4.1), especially the worldwide retreat from emerging markets, fear of crime/the mafia and discrimination against foreigners. Logistic disincentives (5.6), especially the communications infrastructure, the transport infrastructure and technological constraints. (RET, Monthly Update, 21 March 1995, pp. 3–4) Russia, which has prevented foreigners from participating in many privatization auctions, banned them from owning land, and limited their role in the banking sector, has been receiving a correspondingly small amount of FDI. In 1996 Russia received only slightly more than Hungary, a country with a population less than a tenth the size of Russia’s. In 1995 Hungary received twice as much FDI as Russia … However, FDI into Russia has been growing. (RET, Monthly Update, 3 April 1998, p. 5)

462 Russia The main problems stated by foreign investors and importers are as follows: 1

A high tax burden and unfair taxation combined with a complicated tax system. One investor revealed that the tax burden for investors could be as high as 55 per cent to 66 per cent, but the actual tax burden depends very much on one’s connections. A well-connected business can significantly reduce its tax bill. This ad hoc system creates uncertainty and risk, thus discouraging much needed investments. (p. 5)

2

3 4 5 6 7

A lack of international accounting standards. (‘Russian accounting makes it very difficult for foreign companies to evaluate the financial situation of potential acquisitions or partners’: p. 6.) An unclear and over-bureaucratic system of standards, licensing and certification. Crime and corruption. Unsatisfactory protection of property rights. Problems with customs and checkpoints. The devaluation of August 1998 hurt investors relying on imports (RET, Monthly Update, 11 March 1999, p. 7). Russia has lost out because of the inability or unwillingness of its government to tackle a huge number of fiscal, legal and cultural obstacles that frighten away investors of all kinds. Taxation is so complicated and changeable that it verges on the arbitrary, the more so when administered by a bureaucracy within which corruption is endemic. Exchange controls and customs regulations operate similarly. Anything connected with property is fraught with uncertainties over title and contract. Civil law is full of loopholes. (The Economist, 13 April 1996, p. 72) By the summer of 1995 no more than $1–2 billion of the $50–70 billion which the [oil] industry needs to arrest its decline, and which foreign oil companies were reportedly ready to invest in Russia, had actually been committed. Oil output from joint ventures in 1995 accounted for less than 6 per cent of the Russian total … I examine those factors – inadequate legal guarantees, high taxes and export regulation – which have deterred foreign oil companies from making greater investments in Russia. (Watson 1996: 429) The annual flow of foreign direct investment into Russia was only an average of $20 per capita between 1994 and 1999, substantially less than the annual $220 received by Hungary or the $134 received by the Czech Republic … With the help of the European Business Club in Moscow we

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surveyed [in the spring of 2000] almost fifty European enterprises that conduct business in Russia … Our survey shows that … the most pressing problem foreign direct investors in Russia face is connected neither with criminality, nor corruption, but simply an inadequate and ever changing tax law. Next in line come problems with property and creditor rights, customs, the risk of political change, macroeconomic instability, a weak banking sector, the Russian accounting system, and only then corruption. The risk of expropriation, harassment from federal and local government, and payment arrears from clients are considered to be of medium-level importance. Finally, problems with the Russian work force or management, Russian suppliers, crime, racket and barter are seen as being of moderate significance … Even though improvements in a wide range of areas will be required before Russian can create a good investment climate, foreign direct investment … appears to be a much more attractive prospect than the general view in the Western press would suggest. Still there should be swift progress on at least the most pressing issues. Improving the tax law seems an absolute priority. As indicated by the low significance of tax incentives for investment and location decisions, foreign companies are not asking for temporary better treatment or tax rates far below international standards; however, they are looking for a reasonable, transparent and predictable tax system. A strengthening of the banking system is also very important for increasing the attractiveness of foreign direct investment … Finally, improving customs authorities – still too often perceived as arbitrary and corrupt – is one of the more urgent tasks. (RET, Monthly Update, 14 June 2000, pp. 3–11) (See the section on macroeconomic stabilization for improvements in the tax system, p. 476.) Russia’s impressive GDP growth from 1999 onwards was matched by significant investment agreements. For example: 1

‘An international consortium developing two oil fields off Sakhalin Island said Tuesday [17 July 2001] that it had approved an $8.9 billion plan to build what would be the world’s largest liquefied natural gas plant. The Sakhalin Energy Consortium, led by Royal Dutch/Shell and its two Japanese partners, said the plant would be built by 2006 on the island off Russia’s Pacific coast. The plan represents a record for foreign investment by a single energy group in Russia, which has already granted its approval’ (IHT, 18 July 2001, p. 14). Royal Dutch Shell, Mitsui and Mitsubishi yesterday [15 May 2003] gave the final go-ahead for a $10 billion investment to develop gas production from the Sakhalin 2 offshore field in Russia’s far east, representing what the three companies heralded as the biggest foreign direct investment in the country … The project … will be operated by

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Russia Sakhalin Energy Investment, which is 55 per cent owned by Shell, 25 per cent by Mitsui’s Sakhalin Holdings and 20 per cent by Mitsubishi’s Diamond Gas Sakhalin … Sakhalin Energy has extracted oil since 1999 but approval for the critical second phase had been delayed by problems in obtaining sufficient long-term contracts … The project also required final authorization by the Russian government, which had authorized Sakhalin 2 as one of three production-sharing agreements (PSAs), which offer long-term legal and tax protection in exchange for a share of the revenues … New PSA legislation has been stalled. (FT, 16 May 2003, p. 26)

2

‘[In October 2001] a consortium led by Exxon Mobil Corp. agreed to spend $12 billion developing Russian oil and gas fields’ (IHT, 14 November 2001, p. 11).

For further developments in the oil sector, especially BP’s massive investment announced in February 2003, see the section on privatization (p. 416).

Macroeconomic stabilization before the financial crisis of August 1998 The major concerns of this section are to analyse how hyperinflation was conquered, to discuss remaining problems as regards macroeconomic stabilization and to study the role of the IMF. Hyperinflation (conventionally defined as an annual inflation rate of at least 1,000 per cent) occurred in 1992. Macroeconomic stabilization here refers to an acceptable inflation rate, achieved especially by means of appropriately tight fiscal and monetary policy. Before explaining how hyperinflation was conquered, it may be helpful to say something about the meaning of the term ‘shock therapy’. It was argued that before hyperinflation had been overcome Russia had not implemented ‘shock therapy’, e.g. Åslund and Layard (1993). Here it is important to bear in mind that a narrow definition was being used, namely macroeconomic stabilization measures (as opposed to a broad definition which includes rapid and comprehensive change in the economic system). ‘The reformers have been completely stymied in macroeconomic stabilization’ (Jeffrey Sachs, Independent, 11 October 1993, p. 18). In his state of the nation speech on 16 February 1995 Yeltsin stated that: ‘Two serious attempts were made to curb inflation in the years of reform … For various reasons the job was not implemented in full. The third attempt must be a success.’ The early failure can be explained by a number of factors behind the increase in the money supply: Powerful lobby groups were catered for The then finance minister Yegor Gaidar (CDSP, 1994, vol. XLVI, no. 6, p. 9) admits that although ‘in those first months of 1992 a serious step was taken … within just a few months our policy began to

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spin its wheels. Under pressure from lobbying groups, particularly in the former Supreme Soviet, our firm line in budget and monetary policy was broken.’ Mikhail Berger of Izvestia thinks that ‘shock therapy’ (in the narrow meaning of the term) in Russia lasted just sixteen days. It ended on 18 January 1992, when the decision to provide state subsidies to the coal mining industry was taken (CDSP, 1994, vol. XLVI, no. 3, p. 3). The period of liberal reforms per se lasted only seventeen or eighteen days, from 2 January 1992 to 18 January 1992, when the first mini-crisis confronting the government – namely the miners’ strike – ended in a shameful agreement to grant enormous subsidies. After that each new compromise became broader and broader in scope … The entire six-year period that followed – from January 1992 through August 1998 – was marked by weak and inconsistent attempts at reform that alternated with wholesale retreats. (Andrei Illarionov, CDSP, 2001, vol. 53, no. 45, p. 7) The high growth of money in the third quarter of 1994 was due to a large credit injection at the end of the summer for agriculture, the northern regions and the defence industry (RET, Monthly Update, 17 November 1994, p. 7). In late summer 1994, 4,200 billion roubles’ worth of soft credits went to defence and investments (FT, 12 October 1994, p. 25). In early October 1994 the ministry of defence was awarded extensive credit to cover its energy debt (IHT, 11 October 1994, p. 11). Sachs argued that the general cause of the rouble’s downward trend is easy to pinpoint. After pursuing a tight monetary policy for half a year, the government and the central bank flooded the market with new credits in the last three months to cover the government’s budget deficit and relieve favoured enterprises of bulging debts. (IHT, 17 October 1994, p. 8) Russian monetary policy has been in the hands of a few powerful people who understand little and care little about normal monetary policy and instead view central bank credits as a resource to be manipulated at will for short-run advantage. (p. 8) There were early attempts (encouraged by the IMF) to preserve the rouble zone In 1992–5 Russia suffered extreme rates of inflation of over 1,000 per cent in 1992 (annual average) and not falling below 100 per cent until 1996 … What were the reasons behind this development? Russia in 1991 inherited an economy characterized by a monetary overhang and repressed inflation,

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Russia signified by a rapid increase in aggregate demand and shortages … The budget deficit reached … 19 per cent of GDP in 1991. The decision to liberalize 90 per cent of prices in January 1992 led to a price jump of 245 per cent and by the summer the monetary overhang had been eliminated. Efforts to tighten monetary policy in 1992–4 failed mainly due to attempts to preserve the rouble zone which after the break-up consisted of fifteen independent countries, each with their own central bank. And although the CBR [Central Bank of Russia], under the leadership of Viktor Gerashchenko, was the only one allowed to print roubles the central banks of other CIS countries (and initially also the Baltic States) could issue credits. This meant that monetary policy spun out of control … More countries started to introduce their own currency or issue monetary surrogates. Furthermore, much of the credits issued by CIS central banks were used to finance imports of Russian commodities, mainly oil and gas, which meant that pressure was also put on the CBR and the Russian government by Russian exporters to continue looser monetary policy. As a result by mid-1992 the granting of concessional credits to agriculture and industry intensified. At the same time Russia was unable to increase tax revenues or reduce expenditures and as a result continued to run a large budget deficit. And without access to domestic capital markets and a lack of willingness by the West to lend money to Russia, the only source of finance was the printing presses. This policy resulted in a rapid growth of the money supply. (RET, Monthly Update, 8 December 1998, pp. 1–2) There are, however, other ways for the CBR to increase the money supply than simply printing new notes. Whenever the CBR grants direct credits to commercial banks this has an expansionary effect on the money supply. But this would also show up as an increase in base money [consisting of currency in circulation – designated as MO – and commercial bank reserves required to be held at the CBR: p. 11] … Equally, the CBR can reduce the reserve–deposit ratio, enabling commercial banks to use additional funds for their own purposes. (p. 4) Poorly designed monetary arrangements following the collapse of the Soviet Union impeded an effective monetary policy. The Gosbank disappeared and monetary policy functions were vested in the central banks of the countries in the rouble area. Russia and the former republics (except the Baltics) agreed to maintain the rouble as their common currency. The central bank of Russia became the sole issuer of cash, but all the central banks could grant credit. Those credits increased rouble deposits with the central banks in the area, which could be used for both interregional and intraregional trade … Because payments between rouble area countries were automatically settled, the central bank of Russia could not control them … Several

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attempts to co-ordinate monetary policy among central banks in the rouble area failed. To deal with this problem the Russian central bank centralized all interstate transactions in Moscow and decided to settle them only to the extent that each other country in the rouble area had funds in its bilateral account with Russia. If a country had a deficit it had to negotiate a ‘technical credit’ to cover it. (Balino 1998: 37) In July 1993 the problems of the rouble area led Russia to introduce the Russian rouble and demonetize the pre-1993 roubles. This marked the end of the rouble area and the beginning of Russia’s full monetary independence … The central bank of Russia made all its lending more expensive by making the interbank lending rate the basis for its lending. This encouraged banks to rely on the central bank only as a lender of last resort … In early 1996 the central bank introduced two Lombard facilities (which provided short-term credit, collateralized with government securities, to banks): one in the form of an auction and the other in the form of a standing facility at a fixed (nonpenal) rate … In 1996 … the central bank allowed bank primary dealers to get uncollateralized overnight credit at a penal rate … [Since] 1996 the central bank [has] … monitored interbank market rates, and if they fall below the level it deems desirable, it offers overnight deposits to selected banks … In late 1996 it started repurchase operations (using Treasury bills) … In addition to developing market-based instruments the central bank continued to use changes in reserve requirements … It extended them to foreign exchange deposits. (p. 38) Currency reforms The July 1993 currency reform may be seen as a bungled anti-inflationary move, which reduced confidence in the rouble. (See Jeffries 1996a: 161–5.) In contrast, the currency reform of 1 January 1998 (announced on 4 August 1997) was a success. It knocked three zeros off the denomination of rouble notes, e.g. a 1,000 rouble note became one new rouble note. The kopek was reintroduced, replacing the ten-rouble note. Old notes were to be used until the end of 1998, while they could be exchanged for new notes at banks until the end of 2002. (Since 1 January 1998 there has been a 2 per cent tax on money converted from dollars to roubles: IHT, 3 January 1998, p. 11.) Enterprise arrears Inter-enterprise debt is worth discussing at this point because monetary policy is weakened. ‘The attempt to impose a tight credit policy in a financially underdeveloped economy is the fundamental cause of the explosion of interenterprise arrears’ (Ickes and Ryterman 1993: 250).

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Russia An outcome of the debt accumulation has been a breakdown in economic stabilization. And, more ominously, arrears have proven to be a safety valve that enables enterprises to postpone adjustment … To prevent the creation of new arrears, their primary underlying cause – the absence of financial discipline due to the underdevelopment of the financial system – must be addressed. (pp. 232–4)

Inter-enterprise debt (arrears) grew from 48 billion roubles at the beginning of 1992 to over 3,000 billion (70 per cent of GDP) by mid-1992 (IMF, World Economic Outlook, May 1993, p. 61). Inter-enterprise debt was essentially eliminated during the payments crisis in summer 1992 by a massive credit injection, but by summer 1993 the debt had reportedly reached 60 per cent (in real terms) of the pre-crisis level (OECD, Economic Outlook, December 1993, p. 116). Inter-enterprise debt is the largest category of total enterprise arrears, amounting to 63.8 per cent as of 1 June 1994. The second largest category is tax arrears, followed by bank loan arrears and then wage arrears (Transition, 1994, vol. 5, no. 9, p. 5). The conquering of hyperinflation: the budget deficit and its financing A budget deficit occurs when a government spends more than it raises in tax revenue. The size of the budget and the way it is financed have a crucial bearing on the control of inflation. The budget deficit can be financed by (1) increasing the money supply, (2) borrowing from the private sector of the economy and/or from foreigners, or (3) some combination of (1) and (2). (‘When government spending exceeds tax revenues the difference is financed by selling government bonds. If these are sold to the public then the net effect on the money supply is zero. But if they are purchased by the central bank the money supply rise that accompanies the deficit is not offset: this is known as “printing money” or “monetizing the deficit” ’: The Economist, 20 November 1999, p. 142.) Basically what happened in Russia is that the budget deficit was reduced as a percentage of GDP and (1) was decreased while (2) was increased in importance. Inflation was consequently brought under control by 1997. ‘The method of stabilization has been straightforward: the end of monetary financing of the budget deficit. This was accomplished … by issuing short-term Treasury bills (GKOs), longer-term Treasury bills (OFZs) and other notes, along with lending from the IMF’ (Ickes et al. 1997: 110). Hyperinflation in 1992 was caused by a massive budget deficit that was financed entirely by printing money. The money supply was swollen by a factor of 7.4 in 1992 and 4.8 in 1993 (Gaidar, CDSP, 1994, vol. XLVI, no. 6, p. 9.) According to Andrei Illarionov, the money supply increased by 130 per cent in 1991, 640 per cent in 1992 and 380 per cent in 1993; Illarionov resigned as chief

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economic adviser to the prime minister on 8 February 1994 (CDSP, 1994, vol. XLVI, no. 6, p. 14). Central bank credit in the second half of 1992 increased dramatically, with devastating implications for the government’s stabilization programme … Between June and October central bank credit to commercial banks trebled … These credits were then lent on to enterprises, often at interest rates that were highly subsidized. (Ickes and Ryterman 1993: 238–9) By 1997 inflation was at a relatively modest level (an estimated 14.7 per cent). This was achieved by gradually reducing reliance on the printing press to finance persistently high (though generally declining) budget deficits. Tighter control was gradually attained over the money supply. A positive interest rate was achieved in November 1993 and after February 1994 Russia had ‘a real interest rate of about 100 per cent a year – the highest rate in the world’ (Åslund 1994b: 63). ‘For the past year Russia has had some of the highest real interest rates in the world’ (The Economist, 8 October 1994, p. 24). Both nominal and real interest rates went down as inflationary pressures abated. The nominal interest rate the central bank charged commercial banks for credit rose from 20 per cent on 1 January 1992 to 210 per cent on 15 October 1993. It then fell, reaching 21 per cent on 1 October 1997. Russia then had to react to the effects of the Asian financial crisis, which had begun in July 1997 in Thailand. The interest rate was increased to 28 per cent on 10 November 1997 and reached 42 per cent on 2 February 1998. The interest rate was then reduced to 39 per cent on 17 February 1998, to 36 per cent on 2 March 1998 and to 30 per cent on 16 March 1998. (Later developments will be discussed in the Asian/Russian financial crisis.) The federal budget deficit remained stubbornly high, however, with problems on both the tax and spending sides (despite, as regards the latter, delays in the payment of state wages and pensions, a policy which is non-sustainable in the long run: see below). The federal budget deficit (according to the IMF definition) was 7.9 per cent of GDP in 1996, 7.0 per cent in 1997 and 5 per cent in 1998 (RET, Monthly Update, 20 January 1999, p. 24, and 10 February 1999, p. 10). (The federal budget deficit was 5.8 per cent in 1993, 9.8 per cent in 1994 and 5.2 per cent in 1995: RET, 2000, vol. 9, no. 1, p. 118. The federal budget deficit, according to the IMF definition, was 5.4 per cent in 1995 and 1.7 per cent in 1999: RET, Monthly Update, 11 August 2000, p. 25.) (IMF definition: ‘Privatization receipts and net sales of state gold reserves are counted as deficit financing’: RET, 10 February 1999, p. 24. The EU’s Maastricht criterion as regards the budget deficit is a maximum of 3 per cent of GDP.) The federal budget deficit in 1995 was financed almost entirely by bond sales and external credits (RET, 1995, vol. 4, no. 4, p. 5). But heavy dependence on short-term borrowing ultimately proved to be unsustainable, as will be seen in the section on the Russian/Asian financial crisis (p. 482).

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It is important to stress that it is now the federal budget (rather than the consolidated state budget, which includes the regions) which is now the central focus of debate (RET, 1994, vol. 3, no. 2, p. 9). Unlike local budgets, the federal budget can be financed by money creation (RET, 1994, vol. 3, no. 3, p. 10). ‘The concern is not that the government does not collect enough taxes. In fact, it collected 32 per cent of Russia’s GDP last year [1997], the same proportion that the United States does’ (Anders Åslund, IHT, 29 April 1998, p. 10). The media reports Russian tax revenues at about 10 per cent of GDP. However, that is only federal tax revenues, which are less than one-third of the total. In 1997 revenues were no less than 32 per cent of GDP when the regional and local budgets, as well as extra-budgetary funds (notably the pension fund), are included. The Russian state collects as large a share of GDP as the American state does. One serious problem is that taxes tend to stop at the regional level, where budgets are extremely wasteful. About one-third of those expenditures are on subsidies to enterprises, which tend to converge on corruption. Another third is housing and communal support which is directed to the wealthiest, and barely one-third goes to socially desirable purposes. Cleaning up corruption at the regional level will be a complex task lasting years. In the short term the only plausible solution is to try to starve regional authorities of funds. (Anders Åslund, The World Today, July 1998, vol. 54, no. 7, pp. 185–6) The budget deficit, its financing and the role of the IMF before the financial crisis of August 1998: a chronology The definition of the budget deficit varies between countries and can vary over time in the same country, as it has done in Russia. A distinction has been made, for example, between the budget deficit on a ‘rouble cash flow basis’ and that on an ‘overall government deficit on an accrual basis’. The former excludes (1) extra-budgetary funds such as the pension fund, (2) off-budget interest rate subsidies and import subsidies, and (3) unpaid obligations to the domestic economy and to foreign creditors (RET, 1993, vol. 2, no. 4, p. 10). In 1992 the large budget deficit was financed entirely by increasing the money supply (‘monetization’ of the budget deficit). This caused hyperinflation. Conquering hyperinflation meant reducing the budget deficit as a proportion of GDP and reducing the proportion of the deficit financed by printing money. Russia began issuing domestic debt in the spring of 1993. GKOs are short-term (less than one year) Treasury bills, while OFZs are longer-dated federal bonds. (Foreigners were banned from investing in GKOs until late 1996: IHT, 9 March 1999, p. 8.) Critics of IMF loans expressed concern that Russia often failed to meet conditions laid down and yet aid was still forthcoming. Russia suffered only periodic delays in receiving aid. Those in favour of continued aid to Russia pointed, for example, to the wider political benefits of maintaining stability in Russia. Not least, Russia has a large number of nuclear weapons!

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An international aid package worth $24 billion was announced on 1 April 1992 to be financed by the G7 and other Western countries (in part via institutions like the IMF). It was not clear how much was new or what each country was to contribute. The aid package was conditional (including targets for reducing the budget deficit and inflation rates) and the main monitoring agency was to be the IMF. On 5 August 1992 the IMF agreed to release $1 billion in spite of considerable concern about Russia’s progress in meeting its commitments. A G7 meeting in Tokyo on 15–16 April 1993 agreed on a $43.4 billion aid package, which was larger than expected. There was more old than new, but the exact proportion was not clear. Included was a $3 billion ‘systemic transformation facility’ from the IMF. Not only was this new, but some of the conditions laid down were new. The first instalment of $1.5 billion was to be disbursed simply when a commitment to economic change was made (the IMF actually approved the first tranche on 30 June 1993), although the second depended on the curbing of inflation and the budget deficit. The second tranche, due in September, was delayed because of the IMF’s concern that its conditions were not being met (IHT, 21 September 1993, p. 13). It was not until 22 March 1994 that Michel Camdessus, the managing director of the IMF, agreed in principle to the second tranche; formal IMF approval had to wait until 20 April 1994. The agreed conditions included cutting planned expenditure programmes in the event of tax deficiencies and/or spending overruns and a target monthly inflation rate of 7 per cent by the end of 1994. It is now the federal budget, rather than the consolidated state budget (including the regions), which is the central focus of debate. The federal budget has now been adjusted to include all interest rate subsidies, all foreign currency income and outlays and the formerly extra-budgetary production funds (the social funds, which are larger, remaining outside the budget) (RET, 1994, vol. 3, no. 2, p. 9). Unlike local budgets the federal budget can be financed by money creation. The federal budget deficit (on a cash flow basis) in 1993 was 10.4 per cent of GDP (RET, 1994, vol. 3, no. 3, p. 10). The IMF approved a $6.8 billion stand-by loan on 11 April 1995. The federal budget deficit in 1995 was 2.9 per cent of GDP, the lowest since reforms began in 1992. The deficit was financed almost entirely via bond sales and external credits (RET, 1995, vol. 4, no. 4, p. 5). In 1995 the budget deficit was financed primarily by non-inflationary means and included sales of securities (48 per cent) and foreign credits (52 per cent) (RET, Monthly Update, 13 February 1996, p. 7). The 1996 federal budget deficit (excluding interest payments on domestic government debt) was 3.3 per cent of GDP, below the 3.85 per cent target. But high yields on government securities pushed the more inclusive IMF definition deficit up to 7.7 per cent of GDP, which was above target (RET, 1997, no. 1, pp. 5, 8, 18). In 1996 the federal budget deficit (including interest payments on short-term debt and excluding privatization revenues) was 7.7 per cent of GDP (RET, Monthly Update, 23 September 1997, p. vi).

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On 22 February 1996 Michel Camdessus announced that he was recommending that the IMF board permit (which it did on 26 March) a $10.2 billion stand-by loan over three years (with $4.1 billion allotted for 1996). Once again the loan would be paid out in monthly tranches in order to ensure compliance with the terms. But on 22 July 1996 the IMF announced that it was to delay the July tranche of $330 million largely because of unsatisfactory tax revenue. The federal budget deficit for 1997 (counting privatization receipts and net sales of state gold reserves as government revenues) was 6.1 per cent of GDP, with a ‘primary deficit’ (deficit minus interest payments) of 1.7 per cent of GDP (RET, Monthly Update, 3 March 1998, pp. 1–2). (The general government budget deficit, including deficits run by regional and local governments, was over 6.5 per cent of GDP: p. 1.) The federal budget deficit for 1997 according to the IMF definition came to 6.8 per cent of GDP (p. 9). In 1997 the federal budget deficit was 6.8 per cent of GDP, compared with 7.7 per cent in 1996 (RET, 1998, no. 1, p. 73). On 31 October 1997 the IMF delayed issuing a $700 million tranche of the three-year $10 billion loan until at least early 1998 because of unsatisfactory tax collection. The State Duma did not pass the (amended) 1998 budget (on its fourth and final reading) until 4 March 1998. The vote was 252 to 129. There was to be a federal deficit of 5 per cent of GDP and a primary deficit of 0.6 per cent of GDP. The Duma approved a clause that allowed the government to implement proportional spending cuts across all items if revenue was lower than planned (RET, 1998, no. 1, p. 74). The budget law allowed the government to make proportional spending cuts (i.e. to ‘sequester’) without submitting a revised budget to the Duma (p. 80). On 29 May 1998 the IMF recommended that $670 million be released by the end of June 1998. Problems of expenditure control and of raising tax revenue Even before the financial crisis of August 1998 dramatically exposed the dangers of relying too heavily on short-term borrowing, questions were raised as to the sustainability of macroeconomic stabilization through such means of expenditure control as delays in paying state wages and pensions. Some arrears have been paid off periodically before building up again, e.g. state pension arrears were paid by 1 July 1997. A credible threat of bankruptcy is necessary to turn ‘soft budget constraints’ into ‘hard budget constraints’, i.e. managers must be convinced that a stage will be reached when the state will no longer automatically bail out loss-making enterprises. Boris Fyodorov: ‘What kind of shock therapy is it if inflation runs at 20 per cent a month? If the whole nation had just five bankruptcies during a year?’ (IHT, 2 February 1994, p. 4). ‘Even though insolvency procedures are becoming more commonplace, the number of bankruptcies today is not particularly high given the number of enterprises that use overdue debts to finance

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operations and cover losses’ (RET, 1998, no. 1, p. 94). ‘Formal bankruptcy proceedings remain relatively rare’ (EBRD 1996b: 170). By mid-1997 only about 1,000 enterprises had been declared bankrupt. The federal bankruptcy service has been unable to implement most of its decisions (EBRD 1997b: 195). Russia’s inability to raise sufficient tax revenue to finance the central (federal) government’s essential activities is crucial to gaining an understanding of the financial crisis which hit Russia on 17 August 1998, as can be seen from the following dramatic comments: 1 2

3

4 5

6

On 23 June 1998 Sergei Kiriyenko (prime minister 23 March–23 August 1998) stated: ‘If the state does not learn to collect taxes it will cease to exist.’ Anatoli Chubais had earlier (17 April 1997) thought likewise: ‘Russia is experiencing a monstrous state budget crisis, whose parameters, if truth be told, call into question the ability of the state to perform its functions’ (FT, 18 April 1997, p. 2). ‘The government is basically bankrupt. New York City collects more in municipal taxes than Russia collects federal taxes’ (Boris Fyodorov, FT, 18 February 1999, p. 14). ‘The federal government collects taxes equal to 10 per cent of GDP, one of the lowest tax collection levels in the world’ (FT, 15 July 1998, p. 2). ‘Russia’s inability to collect taxes is rapidly becoming the greatest threat to its economic and political stability. The current government cannot raise the revenues needed to run a modern state. Since economic reforms began in 1992 federal tax revenues have fallen from about 18 per cent of Russia’s GDP to less than 10 per cent in 1997 – compared with about 31 per cent in Austria, 27 per cent in Germany and 18 per cent in the USA’ (Treisman 1998: 55). ‘A different model is now gaining currency among political and economic analysts, who say that Russia is in imminent danger of becoming a “failed state”, not breaking into pieces as the Soviet Union did in December 1991, but simply ceasing to function as a cohesive federal government … Hobbled by economic decline, the government has become dysfunctional in some of its core responsibilities, including such pillars of central authority as the military, the courts and tax collection’ (David Hoffman, IHT, 27 February 1999, p. 1).

Tax revenues have fallen short of forecasts. Budget revenues account for about 30 per cent of GDP, whereas in some East European countries the share is approximately 50 per cent (Yegor Gaidar, CDSP, 1998, vol. 50, no. 22, p. 4). High tax arrears are due to three factors: (1) low tax discipline; (2) excessive tax rates on many sectors (encouraging evasion) coupled with inadequate taxation of some goods (such as alcohol); and (3) a failure to prohibit barter (RET, Monthly Update, 17 March 1997, p. iv). ‘One reason for the fall in revenues … is the rapid growth of the untaxed shadow economy’ (RET, Monthly Update, 22 October 1996, pp. 5–6).

474 Russia ‘The main structural distortion of the tax system by international comparison is the excessive role of profit taxation and the low share of taxes on individuals and the energy sector’ (EBRD 1996b: 171). Until it is widely acknowledged that taxes have to be paid, I am afraid we are going to go on having problems with budget revenues. At present paying taxes is – to put it mildly – regarded as strange (or else as an obligation one does not have to meet in full) … The irresponsibility of our government is the major cause of our low tax collection rate … It was no accident that the federal default [of August 1998] was followed by a series of defaults by regional administrations – even by some that could easily have paid their debts. And if the government fails to meet its commitments to the people the people are not going to be in any hurry to pay their taxes either. Beside, what do they get for them? Free health care? Anyone who has ever had a relative in hospital … knows exactly what they have to pay attendants and nurses under the table. Education? But who does not have to spend money to keep a kid at school? Law and order? I do not even want to say how much Alphabank has to spend on its private security service. All these services essentially amount to a second ‘shadow’ system of taxation. So why bother with the first one, the legitimate one? (Pyotr Aven, president of Alphabank and former minister of foreign economic relations in Russia, Kommersant, 29 February 2000, p. 8: CDSP, 2000, vol. 52, no. 12, pp. 12–13) Russia has no actual tax system. In practice, taxation is a free negotiation between the ubiquitous tax inspectors and taxpayers, meaning that the strong win and small entrepreneurs are chased out of business. Hence Poland and Hungary, for example, have six times more enterprises in relation to their population than Russia. This means feeble competition, leading to substandard products and service, high prices and little economic growth. Russia needs radical tax reform before significant growth is possible. (Anders Åslund, IHT, 29 April 1998, p. 10) The IMF has been greatly concerned with Russia’s failure to meet revenue targets and has demanded higher tax rates. The problem is an arbitrary tax system, with excessively high rates and ruthless government officials. Russia needs a new tax system, with lower – not higher – rates, which should defend the rights of honest taxpayers, so that it is meaningful to pay taxes. The present system is so arbitrary that you are more likely to be forced to pay a penalty if you pay your taxes than if you ignore them altogether. Moreover, excessive rates make it impossible to collect taxes. Until recently penalties have been extraordinarily high and big enterprises presume they can be negotiated away … Apparently many big

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companies enjoy immunity … The main offenders should be compelled to pay up, sell off parts of their enterprises, face bankruptcy or go to jail. (Anders Åslund, The World Today, July 1998, vol. 54, no. 7, pp. 185–6) The real problem is not that Russia cannot collect taxes, but that the government collects too much. These revenues are spent improperly and aggravate corruption. According to the World Bank, at least 16 per cent of Russia’s GDP went to enterprise subsidies in 1998. (Anders Åslund, Transition, 2001, vol. 12, no. 3, p. 14) The central problem of the Russian economy is simple. The country has a large number of enterprises that are continuing to operate even though they are producing obsolete products of little value … A complex web of barter transactions and subsidies keeps inefficient companies alive. (James Gwartney, FT, 9 May 2000, p. 27) ‘Between 1995 and 1997 as federal tax revenues dropped by 1.4 per cent of GDP, regional and municipal tax revenues have increased relative to GDP by about 1 per cent’ (Treisman 1998: 57). ‘Available evidence suggests a kind of implicit or covert collusion between regional governments and big taxpayers to keep roubles from leaving their regions’ (p. 59). The evidence suggests the growing importance of … perverse incentives created by the way Russia’s evolving federal system divides tax revenues and control over tax collectors between central and regional governments … Federal, regional and local governments compete with one another to conceal and divert revenues that they would otherwise have to share. Yet commercial enterprises, such as Gazprom and Yukos, which have divisions spread out across Russia, make billions of roubles at the government’s expense by exploiting these rivalries. (p. 57) Tax-sharing rates [are] adjusted yearly by the Duma … Regions that collected lower taxes in previous years are permitted to retain a larger share of VAT (or are allocated larger central transfers) to help cushion their losses. These regions, in turn, punish municipalities for their fiscal success. A study of thirty-five Russian cities found that … in response to better collection regional governments adjusted downward the proportion of tax that cities could retain. Weaker incentives to support the growth of economic activities – and thus taxable revenue – are hard to imagine. (p. 63) Measures have been taken to improve revenue collection. For example, the 19 January 1996 decree established that enterprises which keep up with their current tax obligations after 1996 would be eligible for a deferral of past liabilities

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(RET, 1995, vol. 4, no. 4, p. 18). On 11 October 1996 an emergency tax committee was set up. One of the first steps it took was to threaten to liquidate six enterprises if they did not pay their tax arrears (RET, Monthly Update, 22 October 1996, p. 5). A presidential decree stated that as of 1 January 1998 all forms of offsets were suspended (CDSP, 1998, vol. 50, no. 2, p. 5). The 8 November 1997 decree stated that as of 1 January 1998 the government would be prohibited from cancelling mutual debts between the budget and enterprises, a practice known as ‘offsetting’ (RET, 1998, no. 1, p. 100). The government has stopped accepting tax ‘offsets’ (the practice of allowing enterprises to deduct from their tax bills money owed by the state) as a legitimate form of payment and is insisting on cash. In 1997 tax offsets accounted for a quarter of all revenues (FT, Survey, 15 April 1998, p. viii). ‘At the IMF’s request Russia eliminated all federal budget offset operations from January 1998. However, up to 20 per cent of taxes continued to come in the form of promissory notes or other surrogate payments’ (Malleret et al. 1999: 115). Tax reform in the Putin era ‘The state Duma recently passed [on 7 June 2000], at the second reading, the chapters of Part II of the tax code introducing a 13 per cent flat personal income tax’ (RET, Monthly Update , 10 July 2000, p. 4). It is clear that the reform of individual income tax and social security contributions is primarily intended to bring more transactions into the open, with the further intensions of simplifying tax collection and encouraging employers and employees to be tax compliant. (p. 7) The unified social tax passed its second reading in the State Duma on 9 June 2000. ‘The tax is to replace payments to the pension fund, social insurance fund and medical insurance fund … The system in which money was raised by separate social funds was inefficient and non-transparent and created incentives for fraud’ (p. 9). The legislation on value-added tax was passed by the State Duma, at the second reading, on 23 June 2000. There is a 20 per cent VAT rate, with a 10 per cent rate for basic food and children’s clothing (as before) and a zero rate for exported goods (with the exception of oil and gas exported to the CIS). The indexation of excises was passed by the State Duma, at the second reading, on 5 July 2000. In particular there is a 5 per cent rate for alcohol (10 per cent for beer) and 50 per cent for tobacco (p. 9). The flat rate personal income tax of 13 per cent passed the third reading in the State Duma on 19 July 2000. It was approved by the Council of the Federation on 26 July 2000 and signed by the president on 7 August 2000. The unified social tax to replace payments to the pension fund, the social insurance fund and the medical insurance fund (with standard rates for employers and the 1 per cent contribution to the pension fund by the employee being cancelled) was

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passed by the State Duma at its third reading on 19 July. It was approved by the Council of the Federation on 26 July 2000 and signed by the president on 7 August 2000 (RET, Monthly Update, 11 August 2000, pp. 3–6). The top income tax rate will be cut from 35 per cent to a flat rate of 13 per cent (IHT, 2 July 2000, p. 15, and 27 July 2000, p. 6; FT, 27 July 2000, p. 8). [There is] a flat rate personal income tax of 13 per cent, including 1 per cent in social security levies … The move is designed to increase substantially the number of taxpayers by reducing, through such a low rate, the temptation for tax evasion. It will be offset by additional revenues from increased duties on alcohol, tobacco and other products. (FT, 8 August 2000, p. 7) A flat rate income tax of 13 per cent is to be introduced from next year [2001], which is designed to entice the country’s richer residents into the tax net … One percentage point of the total is to be paid into the national social fund to create a centralized and more transparent welfare system. A second package of laws is due to be completed in the autumn … Both measures are designed to increase the country’s low rate of tax collection and to reduce the huge administrative uncertainty and leeway given to individual tax inspectors. This has encouraged tax evasion and created an uncertain climate for many local businesses. (FT, 9 August 2000, p. 16) The Federation Council confirmed new tax laws yesterday [26 July] … Back on 19 July the laws were adopted by the State Duma … [Finance minister] Alexei Kudrin spelled out the basic principles of the 2001 budget for the senators … [A] key provision is an improvement in interbudget relations and the creation of equal conditions for the regions. Today 66 per cent of the tax potential is formed in twelve regions of the country … The 2001 budget calls for distributing revenue between the centre and the regions at a ratio of 57.5 : 42.5 in favour of the centre. Supposedly, the inclusion of support from the compensation fund makes the ratio 52.5 : 47.5 and if all types of aid are counted the ration changes to 47.5 : 52.5 in favour of the regions. A trilateral reconciliation commission on the budget will begin work today [27 July]. (CDSP, 2000, vol. 52, no. 30, p. 6) According to Kudrin, the governors keep saying that 70 per cent of their revenue will go to the centre and the Federation members will get only 30 per cent. In fact, if the transfer fund and all compensatory payments are taken into account, the regions will be getting 56.6 per cent and the centre 43.4 per cent. ‘This is the first time that the Federation’s members’ spending will be higher than federal budget spending,’ Kudrin said. (CDSP, 2000, vol. 52, no. 32, p. 10)

478 Russia Yesterday [12 September 2000] the governors of the eighteen donor regions [those that put more money into the federal budget than they take out of it] asked the State Duma to send the budget to a conference committee instead of passing it on first reading. (CDSP, 2000, vol. 52, no. 37, p. 7) ‘[In June 2001] Russia’s lower house of parliament approved a law slashing profit taxes from 35 per cent to 24 per cent’ (Business Central Europe, July–August 2001, p. 14). ‘The profit tax will be cut from the current 35 per cent to 24 per cent. At the same time profit tax exemptions will be abolished’ (RET, 2001, vol. 10, no. 1, p. 2). ‘Next year [2002] corporate profit tax will fall from 35 per cent to 24 per cent’ (FT, 25 July 2001, p. 11). ‘In July 2001 the Duma passed and the Federation Council approved a block of amendments to the tax code concerning profit tax and the tax on use of natural resources’ (RET, Monthly Update, 30 July 2001, pp. 4–5). The new corporate profit tax with its reduced 24 per cent rate and abolition of exemptions should become one of the cornerstones of the new favourable business environment … Transparent and uniform treatment of taxpayers, thanks to the abolition of exemptions, is a key part of the new corporate tax system … Tax code amendments introducing a new federal tax on mineral extraction to replace several taxes that were partly set in the regions serve to simplify the tax system and reduce scope for arbitrary taxation. (p. 2) New chapters of the tax code have been put into effect since January 2001. The general policy line is that federal government is taking over responsibilities for part of expenditures, previously paid by regional authorities. Tax revenues are redistributed between federal and regional budgets in order to compensate the difference to the federal budget. The government intends to allocate transfers strictly for well-defined purposes and to prevent excessive fiscal expansion of regional authorities. The aim is also to make control over expenditures and revenue collection more efficient … VAT goes entirely to the federal budget (it was previously divided between federal and regional budgets) … Personal tax goes almost entirely to regional budgets (previously the federal budget’s share was larger) … The republics of Bashkortostan and Tatarstan have enjoyed … exclusive bilateral agreements … [but] are subject to standard federal budget regulation as from 2001. (RET, 2001, vol. 10, no. 2, pp. 68–9) As from 1 January 2002 the corporate profit tax fell from 35 per cent to 24 per cent (RET, 2002, vol. 11, no. 1, p. 77). ‘Another important novelty is the elimination of most tax exemptions. This particularly concerns the regional part of profit tax’ (RET, Monthly Update, 21 January 2002, p. 4).

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Amendments to the Tax Code aimed at easing the tax burden on small enterprises … simplifying taxation of small businesses and extending the definition of small businesses … were adopted [on third reading] by [State Duma] deputies on 2 July 2002 … A simplified tax system for small enterprises and unified tax on imputed income [was approved] … Small enterprises will be able to choose between a 15 per cent tax on profit and 6 per cent tax on revenue starting from 1 January 2003. They will be exempted from all other taxes apart from payments to the State Pension Fund and some other payments, such as licences and customs duties … Enterprises employing fewer than 100 people and with an annual turnover of less than 15 million roubles will pay tax at a rate of 6 per cent if turnover is taken as the tax base or 15 per cent if profit is taken as the tax base. Unified tax on imputed income also relates mostly to small businesses. The new legislation reduces the list of small business activities subject to tax on imputed income. (RET, Monthly Update, 15 July 2002, pp. 2, 8 and 12)

Foreign debt and aid before the August 1998 financial crisis Foreign debt When it disintegrated the Soviet Union was a net international creditor, being owed more than it owed. But the problem is that most of the debt owed to the Soviet Union (and inherited by Russia) by poor and current/former communist countries will never be repaid. ‘Russia is actually a net international creditor and is owed $150 billion by debtors to the Soviet Union. But the largest debtors (such as Cuba, Vietnam and Mongolia, which account for 38 per cent of total debt) are insolvent’ (RET, 1994, vol. 3, no. 2, pp. 70–1) On 17 September 1997 Russia became a member (the nineteenth) of the Paris Club of creditor nations. (The London Club comprises creditor banks.) In reality Russia has, on occasion, defaulted on its sovereign debt. Although the term has never formally been used by Western creditors, commentators have been less constrained. For example, ‘Russia went into default in January 1992’ (Jeffrey Sachs, FT, 31 March 1994, p. 21). Formal default on Russia’s foreign debt has been avoided by a series of payment delays and rescheduling agreements. Estimates of the size of Russia’s debt Estimates of the size of Russia’s debt are as follows: 1

On 1 January 1992 the total external debt of the Soviet Union was $107.7 billion (RET, Monthly Update, June 1999, p. 1). Russia’s foreign debt consists of two parts: (a) the debts of the former Soviet Union, which were inherited by Russia in exchange for sole Russian entitlement to all assets

480 Russia

2

3

4 5

6

7

abroad formerly owned by the republics of the USSR (around $80 billion by the end of 1993, of which about $40 billion was owed to Paris Club governments, nearly $26 billion to the London Club banks and the rest to ‘non-organized’ creditors, mainly Western exporters to the former Soviet Union); and (b) the purely ‘Russian’ debts, accumulated over 1992–3 and totalling approximately $18 billion (RET, 1994, vol. 3, no. 2, pp. 70–1). In 1993 only $3.6 billion was actually paid out of the $31 billion due in debt servicing. In 1994 total debt service due was $32.5 billion, but only $3.7 billion had been paid by the end of September (RET, 1995, vol. 3, no. 4, pp. 79–80; and vol. 4, no. 1, p. 84). At the beginning of 1995 Russia’s external debt (including debt of the former Soviet Union) was $122 billion (38.7 per cent of 1994 GDP). This figure includes $28 billion in debts to former Comecon countries and $94 billion due to other countries. Of the $122 billion, $11 billion had been built up by the Russian government since 1992 (RET, 1995, vol. 4, no. 4, p. 87). Russia’s total external debt amounts to about $150 billion, close to 90 per cent of GDP (RET, Monthly Update, 10 September 1999, p. 7). The foreign debt is about $150 billion. ‘Following the 1998 crisis the total value has leapt to more than 100 per cent of GDP’ (FT, Survey, 10 May 2000, p. ii). At the end of 1998 the total external debt was $150.8 billion – not including indebtedness to foreign holders of government short-term bonds, known as GKOs, and federal bonds, known as OFZs. The total debt was broken down into Soviet-era debt, amounting to $91.4 billion, and Russian debt, amounting to $59.4 billion (CDSP, 1999, vol. 51, no. 11, p. 9.) As of 1 January 2000 Russia’s external debt was $158.8 billion. This was divided into the following: a

b c d

Commercial creditors $56.8 billion: Eurobonds (Russia), $16.0 billion; Eurobonds (former London Club Soviet debt), $31.8 billion; MinFin bonds tranche 4–7, $7.4 billion; MinFin bonds tranche 3, $1.3 billion. Multilateral loans $21.8 billion: IMF, $14.9 billion; World Bank, $6.9 billion. Bilateral loans $64.1 billion: Paris Club (post Soviet), $9.2 billion; Paris Club (Soviet), $40.2 billion; Comecon, $14.7 billion. Other $16.1 billion (RET, 13 April 2000, p. 3).

Russia’s foreign debt is £153 billion (The Economist, 26 April 2003, p. 102). Foreign aid Although Russia’s record of fulfilling the conditions laid down for aid has generally been poor, the IMF has continued to provide further aid (though tranches have frequently been delayed). The IMF has been the subject of considerable controversy, including the accusation that Western countries (especially the USA)

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have leaned on it to continue supporting Russia for broader political reasons (not least Russia’s large number of nuclear weapons). Prime minister Mikhail Kasyanov: ‘After the Second World War the USA provided an estimated $88 billion of aid – in current dollars – under the Marshall Plan to promote postwar European economic recovery’ (FT, 20 July 2000, p. 23). (See the earlier section on the IMF, p. 470.)

A chronology of major aid agreements, including debt rescheduling 2 April 1993: the Paris Club of creditor countries formally reschedules over ten years $15 billion due to be paid by Russia in 1993 (most of it would not have been paid had the agreement not been made). 3 August 1993: the London Club of Western bank creditors agrees to accept $0.5 billion of the $3.5 billion in interest owed in 1993, with the repayment of the remaining $3 billion postponed for five years. Towards the end of December 1993 a new roll-over replaced the old one, expiring on 31 March 1994. 4 June 1994: Western creditor governments agree to reschedule $7 billion of the debt due in 1994. 5 October 1994: preliminary agreement is reached with the London Club of creditors to reschedule Russia’s commercial bank debt (there is a five-year grace period and the following ten years will be allowed to pay off the debt). Russia agrees to pay $500 million in interest before the end of the year. 16 November 1995: Russia reaches an agreement with commercial bank creditors to reschedule $32.5 billion – $25.5 billion of principal and $7 billion of interest. The principal will be restructured over twenty-five years, with the right to defer payments for seven years. An interest payment of $1.5 billion will be made by the end of 1996. The balance of the interest will be repaid over a twenty-year period, with the right to defer payments for seven years (CDSP, 1995, vol. XLVII, no. 46, pp. 5–6). 29 April 1996: the Paris Club rescheduled Russia’s $40.4 billion of sovereign debt inherited from the Soviet Union and owed to eighteen creditor countries. The repayment period was to be twenty-five years. 6 October and 2 December 1997: the London Club agreement was signed on 6 October and completed on 2 December 1997. The $33 billion of Soviet-era debt to commercial banks was rescheduled. The deal rescheduled the $24 billion of principal repayments over twenty-five years from the end of 1995, with a seven-year grace period (i.e. payments would start at the beginning of 2003). Repayment of $8 billion of overdue interest was rescheduled over twenty years, starting after 2002. Russia made a down-payment of $3 billion on 2 December 1997 when the deal had been completed (RET, 1997, no. 4, pp. 79, 106). (Further details of the role of the IMF are to be found in the sections dealing with macroeconomic stabilization and the financial crisis of August 1998, pp. 464 and 481.)

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Russia and the Asian financial crisis The Asian financial crisis started in July 1997 with a speculative attack on the currency of Thailand. Although at first it was Russia that suffered from the effects of the Asian financial crisis, after the dramatic events of 17 August 1998 it was Russia that became a major cause of uncertainty in emerging markets. (On 13 January 1999 Brazil devalued its currency.) The Asian crisis hit Russia in October 1997 (RET, Monthly Update, 5 June 1998, p. 1). Russia has suffered from a financial crisis since late October 1997 (Anders Åslund, The World Today, July 1998, vol. 54, no. 7. pp. 185). ‘The authorities in Russia successfully defended the exchange rate in late October/November 1997, and again in January 1998, by raising interest rates sharply’ (John Odling-Smee, Director of the IMF’s European II Department, Finance and Development, 1998, vol. 35, no. 3, p. 16). A combination of factors drove interest rates to dramatic heights in May 1998. Near the end of May they had risen to 150 per cent. (‘The flight of non-residents from government GKOs and the rouble could not be stopped despite a hike of the central bank interest rate to 150 per cent in June 1998’: Desai 2000: 50. On 14 August 1998 the yield on GKOs reached 144.9 per cent: Kharas et al. 2001: 38.) Factors behind the rise in interest rates included the following: 1 2 3

4 5 6

7

The government’s determination to defend the rouble on foreign exchange markets. Discouraging the withdrawal of funds from the bond market and the stock market. Continuing fiscal problems, especially with raising tax revenue. (On 30 March 1999 Yeltsin said that: ‘In July [1998] the government drafted its anti-crisis programme … The State Duma rejected that programme … The Duma sent a bad signal to investors, a signal telling them that Russia’s authorities were unwilling to take responsibility for decisions that were difficult but that had to be made’: CDSP, 1999, vol. 51, no. 13, p. 14.) Political wrangling between the president and the State Duma over the appointment of a new prime minister. Labour unrest over pay arrears, especially the blocking of railway lines by coal miners. There were no bids on 26 May for a 75 per cent stake in Rosneft (the oil company), the starting price of which was set at $2.1 billion. Reasons included sharp falls in world oil prices and financial uncertainty in Russia. The fall in world oil and other commodity prices. Commodities account for about 70 per cent of Russia’s merchandise trade. Their prices started to decline in October 1997 due to lower demand from Asia … On 16 June [1998] Brent oil fell to $10.6 a barrel, its all-time low in real terms. By the first half of August [1998] the Economist all-items commodity index was at its lowest level in real terms in over twenty-five years … In the first half of 1998 Russia’s …

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current account position turned negative (minus 3 per cent of GDP) for the first time since the start of the reforms. (Malleret et al. 1999: 111) ‘The decline in oil prices from $23 per barrel in mid-1997 to $11 per barrel a year later [was] accompanied by falling prices of non-ferrous metals’ (Desai 2000: 50). Although oil prices have rebounded a bit in recent months the industry is still reeling from their collapse in 1998. Prices fell almost continuously through the year, averaging about $13 a barrel. That is a third below their average in 1997 and the lowest in real terms for twenty-five years. (The Economist, 3 July 1999, p. 128) 8 Continuing effects of the Asian financial crisis, especially political and economic turmoil in Indonesia. 9 Speculation. 10 IMF delays in releasing the latest tranche of its loan. On 17 August 1998 the Russian government defaulted on its domestic debt and was subsequently forced to allow the rouble to float. The Russian government was forced to devalue the rouble on 17 August 1998; it also announced a unilateral rescheduling of most of its short-term debt into long-term securities and the imposition of a ninety-day moratorium on payments by Russian banks and enterprises on much of their foreign debt. (United Nations 1999, p. 57) ‘Russia’s devaluation and default triggered a full-scale crisis in emerging markets. And spillovers have been felt in world stock markets as well as in the premium for emerging market risk’ (FT, editorial, 1 October 1998, p. 23). The Russian financial crisis took a heavy toll on stock markets around the world Thursday [27 August 1998], pushing indexes in developed countries down by as much as 5 per cent, while emerging markets in Europe and the Americas saw prices fall 5 per cent to 7 per cent. (IHT, 28 August 1998, p. 1) These effects were felt despite the extraordinarily small contribution that Russia now makes to the world economy (as the figures below illustrate). ‘Russia’s economy … is about the size of Switzerland’s’ (The Economist, 31 October 1998, p. 108). (‘Russia’s economy [is] smaller than that of the Netherlands’: The Economist, 18 December 1999, p. 13.)

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Russia It is easy to forget that Russia is a small economy, whose trade links with the West are tiny. Western Europe’s exports to Russia, for example, account for well under 0.5 per cent of GDP. However, it is already clear that the impact of this crisis will be greatly disproportionate to Russia’s size. (FT, 29 August 1998, p. 10)

‘The country now accounts for less than 1 per cent of global GDP; its entire federal budget is dwarfed by the size of US military spending’ (FT, 23 December 1998, p. 2). ‘According to the IMF, Russia’s GDP in 1999 was just 2 per cent of that of the USA’ (FT, 3 June 2000, p. 14). ‘GDP next year [1999] is expected to be about that of Belgium’ (Independent, 26 December 1998, p. 13). ‘Russia’s … economy now accounts for little more than 1 per cent of world economic activity, compared with a US share of more than one-fifth’ (IHT, 22 January 1999, p. 6). ‘When trading ended [on 28 August] at the Tokyo stock exchange, Japanese stocks this week alone had dropped in value by $241 billion – a sum that exceeds the size of the entire Russian economy at present exchange rates’ (IHT, 29 August 1998, p. 1). The following chronology shows the dramatic developments of 17 August 1998 and the events immediately preceding them: 12 August 1998: the republic of Yakutia–Sakha becomes the first Russian region to go bankrupt as a result of the financial crisis. The Yakutsk government announces that it will be unable to pay off republic loan bonds (CDSP, 1998, vol. 50, no. 32, p. 10). 13 August 1998: ‘Black Thursday.’ The RTS index falls by 6.51 per cent to 101.17. Russian markets plunged … as investors feared the government might soon be forced into devaluation or a domestic debt restructuring … Yields on short-term Treasury bills also soared to more than 210 per cent at one point. They closed at 170 per cent, their highest level since before the 1996 presidential elections. (FT, 14 August 1998, p. 1) ‘Russia’s stock and bond markets plunged … Demand for Russian debt vanished altogether, with yields on some short-term bonds exceeding an astounding 300 per cent’ (Michael Wines, IHT, 14 August 1998, pp. 1, 17). ‘The Thursday crisis was rooted in months of speculating by some banks in high-yield government bonds and currency “forwards” – contracts to buy or sell currencies at specified future dates’ (Michael Wines, IHT, 15 August 1998, p. 13). It was generally considered that a factor in the events of ‘Black Thursday’ was the following comment by George Soros: ‘The best solution would be to introduce a currency board after a modest devaluation of 15 to 25 per cent’ (George Soros, FT, 13 August 1998, p. 18). 14 August 1998: Yeltsin: ‘I’ll say it firmly and clearly. There will be no devaluation of the rouble in Russia.’

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17 August 1998: a dramatic turnabout takes place. The following measures are announced: Floating rouble ‘As of 17 August 1998 the Bank of Russia is switching to a policy of a floating rouble exchange rate within new exchange rate corridor limits, which have been set at a level of 6 to 9.5 roubles to the dollar’ (official statement by the government and the central bank: CDSP, 1998, vol. 50, no. 33, p. 5). The trading band for the rouble against the US dollar is widened (until the end of 1998) from 5.27/7.13 to 6.0/9.5. Although this amounted to a devaluation, prime minister Kiriyenko insisted otherwise: ‘This does not mean the rouble is being devalued. It is simply a new approach to financial policy’ (The Times, 18 August 1998, p. 10). (The rouble had traded at 6.36 to the US dollar on 13 August, ‘Black Thursday’.) ‘An effective float of the exchange rate’ (RET, Monthly Update, 18 August 1998, p. 1). (The rouble was floated on 2 September after $2.8 billion in reserves had been lost between 17 August and 2 September 1998: Kharas et al. 2001: 49.) On 19 August the central bank announced that since 20 July 1998 it had spent some $3.8 billion to support the rouble (RET, 1998, vol. 7, no. 3, p. 42). On 19 August the chairman of the central bank, Sergei Dubinin, admitted that some $3.8 billion of the $4.8 billion advanced by the IMF had been used since 20 July to shore up the rouble (Independent, 20 August 1998, p. 13). The remainder was used to redeem short-term government debt (FT, 20 August 1998, p. 1). New securities ‘Government securities (short-term bonds and federal loan bonds) due to mature by 31 December 1999, inclusive, will be converted into new securities … As of 17 August 1998 there is a ninety-day moratorium on the repayment of loans received from non-residents of the Russian Federation, on insurance payments on loans collateralized by securities, and on payments on foreign currency futures’ (official statement by the government and the central bank: CDSP, 1998, vol. 50, no. 33, pp. 5–6). Details were revealed about the foreign debts affected on 18 August. It does not cover sovereign debt. Nor does it apply to interest on foreign credits and loans from the EBRD. Two areas will be affected: syndicated loans extended by Western banks to Russian banks and corporations; and forward foreign exchange contracts taken out by foreign investors with Russian banks to protect their investments (and thus rouble exposures) in the domestic Treasury bill (GKO) market (FT, 19 August 1998, p. 2). The measures appear chiefly to affect repayment of principal of foreign syndicated loans, margin calls on repurchase transactions and settlements on foreign currency forward contracts (FT, 24 August 1998, p. 3). (GKOs are short-maturity – less than one year – rouble-denominated Treasury bills, while OFZs are longer-dated coupon-bearing bonds: EBRD 1998b: 13. OFZs are medium-term fixed-rate government bonds: FT, 10 September 1998, p. 31.) (Margin calls are demands for additional funds to

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maintain an appropriate level of deposits which traders in futures contracts make to ensure their ability to meet their obligations.) (‘Buying stock on margin [means] in effect borrowing to speculate’: IHT, 6 April 2000, p. 10.) The authorities announced a forced restructuring of the GKO/OFZ market and a ninety-day moratorium on principal payments by Russian commercial enterprises on their foreign currency debt (RET, 1998, vol. 7, no. 3, p. 16). There will be a ninety-day moratorium on repayment of debt to non-residents, which is a form of capital control. The moratorium does not include payments on the external debt of the Russian Federation (indeed, there are no sovereign debt payments due in the period). Instead, it covers all commercial activities, including forward contracts, margin calls and standard debt service. There will be a lengthening of the maturity of all GKO and OFZ instruments (short- and long-term rouble-denominated government bonds) maturing before the end of 1999. Trading on the GKO/OFZ markets is to be suspended. The government and the central bank have expressed their support for the formation of a pool of large banks to maintain the stability of interbank settlements and payments (RET, Monthly Update, 18 August 1998, p. 1). There will be an imposition of controls on capital account transactions. ‘Russian banks held half of the Treasury bills affected by this week’s restructuring, while the central bank and foreign investors each held about a quarter’ (FT, 27 August 1998, p. 2). Of the $40 billion in short-term government paper, foreign investors, converting dollars to roubles, had bought about $10 billion (IHT, 27 August 1998, p. 10). The Asian financial crisis has caused the greatest havoc in those economies with fundamental weaknesses. These weaknesses range from the incestuous links between government and companies and between banks and companies in some Asian countries (‘crony capitalism’) to the many affecting Russia itself. Russia’s inability to raise sufficient tax revenue to finance the central (federal) government’s essential activities is crucial to gaining an understanding of the crisis. ‘If the state does not learn to collect taxes it will cease to exist,’ said Sergei Kiriyenko on 23 June 1998 (prime minister from 23 March to 23 August 1998). Although Russia succeeded admirably in bringing inflation (hyperinflation in 1992) down to single figures by gradually reducing reliance on the printing press to finance persistently high (though generally declining) budget deficits, the heavy dependence on short-term borrowing proved to be unsustainable. Investors became increasingly unwilling to roll over their loans. Excellent analyses of the financial crisis and of Russia’s fundamental weaknesses are to be found in the following: Although this latest crisis was confined to the financial markets, it does reflect a number of persistent and fundamental problems in the Russian economy and these seem to have been the main cause of the turmoil despite an apparent contagion effect from the Asian crisis. At the core of these problems is Russia’s chronic fiscal imbalance and the manner in which it is being financed. Russia has been running large budget deficits for a number of years. Consequently,

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the Russian authorities have been forced to attract increasing amounts of foreign funds to finance the deficit: by selling Treasury bills to foreigners and by borrowing from the international financial markets. This has resulted in an increase in the exposure of Russia to volatile short-term foreign capital. (United Nations Economic Commission for Europe 1998b: 24–5) Key institutional foundations … [include] an effective judicial and law enforcement system, the creation of a healthy commercial banking system, and a coherent policy for changing the structure of incentives so as to encourage entrepreneurship and fixed investment rather than rent-seeking and asset-stripping. (United Nations Economic Commission for Europe 1998c: 10) Among the most damaging of the mistaken conclusions that were drawn early on in the transition process, both by Western advisers and by policy makers in Moscow, was that the Russian state remained too strong. The need to scale back inefficient spending, and to create room for private sector consumption is a necessary task for which a strong public administration is required; but this is a quite different task from restructuring the state so that it is strong enough and capable to perform the functions required to support a market economy. (p. 9) Russian public administration is infamous for its lack of transparency and corruption. (p. 34) The current crisis in Russia arose largely from a failure of the state – its inability to collect taxes, to enforce laws, to manage its employees and to pay them … [There has been a] failure of prudential regulation to contain banks’ exposure to foreign exchange risk. (EBRD 1998b: iv, vii) The government’s stabilization programme in 1995 managed to bring down inflation, but it did not address the underlying causes of macroeconomic imbalance. The government was not prepared to accept the consequences of enforcing hard budget constraints both in terms of the social and economic dislocation and the opposition of entrenched interest groups. Instead, it replaced monetary financing of the [budget] deficit with non-inflationary borrowing on a newly created Treasury bill market and on the international capital markets. It also used the exchange rate as an anchor to fight inflation. (p. 12) From 1995 the federal government financed much of its deficit by issuing short-term (less than one year) rouble-denominated Treasury bills (GKOs) and longer-dated coupon-bearing bonds (OFZs). Foreigners rushed into the high-

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yielding Russian debt market and, by the end of 1997, held an estimated 33 per cent of the total stock of GKOs and OFZs (p. 13). Foreign investors in the GKO market were at first obliged, and many later chose, to hedge themselves against the risk of devaluation by buying dollar forward contracts with Russian banks. The hedge contracts increased the exposure of the Russian banking system to declines in the rouble (p. 14). ‘Russia’s economy, having still achieved only modest progress in key structural reforms and with looming fiscal problems, looked particularly vulnerable’ (p. 14). Falling commodity prices hit Russia’s main sources of export earnings, sending the current account into deficit. ‘At the root of Russia’s macroeconomic problems have been persistently high federal budget deficits’ (p. 14). The fundamental causes of the budget deficit were political: an inability to rein in government spending, weak tax discipline among politically influential firms and an excessive devolution of revenue to regional governments … Underlying Russia’s fiscal problems has been a deeper set of difficulties afflicting the entire large corporate sector that has inhibited growth, encouraged capital flight, limited tax collection and reduced domestic savings. Politicians have been unwilling to draw sharp distinctions between public and private property or to impose hard budget constraints on large enterprises, both out of fear of the unemployment implications and to preserve rent-seeking opportunities for powerful vested interests. (pp. 14–15) In the absence of a credible bankruptcy threat, enterprises have increasingly resorted to financing themselves by accumulating arrears towards tax authorities, banks, suppliers and workers, as well as through non-monetary forms of payments, such as barter, monetary surrogates, offsets and payments in kind (p. 186). Since the introduction of the currency corridor in 1995 the strong rouble has served as a nominal anchor for the economy, helping bring down inflationary expectations and giving foreign investors the confidence to lend to the Russian government, banks and companies. Commitment to the rouble corridor limited the central bank’s ability to print money and forced the government to finance its deficits in non-inflationary ways – by borrowing on the domestic and international bond markets. (RET, Monthly Update, 5 June 1998, p. 1) In May the rouble fell by its usual average of 0.5 per cent against the dollar. However … the CBR used about $1.5 billion of reserves to defend its stability. This reduced reserves to $14.6 billion at the beginning of June. (p. 11) ‘Foreigners’ share of the government rouble debt market increased to roughly 30 per cent in the summer of 1997 … Higher interest rates have turned out to be sufficient to stem the outflow of foreigners’ (p. 4).

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In the … first ten months of 1997 Russian banks took the opportunity to borrow heavily in the syndicated loan and Eurobond markets … The banks used these foreign funds to invest in Russian assets … After the Asian crisis hit Russia in October 1997 the flow of foreign money came to a halt. (pp. 5–6) It is impossible to escape the conclusion that Russia’s problems are largely home-made … including an excessively large federal budget deficit, unsustainable build-up of rouble-denominated debt, poor tax collection, non-productive government expenditures, a weak and inefficient banking system, poor corporate governance and continued accumulation of payment arrears. (RET, 1998, no. 2, pp. 3–4) ‘The balance of payments on current account moved from a $2.9 billion surplus in 1997 to a deficit of $1.5 billion in the first quarter of 1998’ (RET, 1998, no. 2, p. 2). Russia has suffered from a financial crisis since late October 1997. ‘At first everybody blamed the Asian economic collapse, but by late January [1998] it became clear that this was a truly Russian crisis.’ The budget deficit is too large (9 per cent of GDP in 1996 and 8.2 per cent in 1997). But the government undertook substantial cuts in February and May 1998, reducing the 1998 budget deficit target to 5 per cent of GDP. Russia’s international reserves are low at some $14 billion. Russia’s debt burden is not large in itself. As a share of GDP it is about 45 per cent. The external debt is about $130 billion (27 per cent of GDP) and the interest rates on that are reasonable. The problem is about $60 billion of short-term debt held in the form of Treasury bills. Although this is only 13 per cent of GDP, interest rates are very high (perhaps an average of 35 per cent in 1998), meaning that this part of the debt burden alone will cost 4.5 per cent of GDP (amounting to almost half federal revenues). The modest amount of domestic Treasury bills held by foreigners (some $20 billion) is the immediate threat to stability. (Anders Åslund, The World Today, July 1998, vol. 54, no. 7. pp. 185–7) Russia’s most immediate problem is that it has too large a short-term government debt in comparison with international reserves. The critical issue is that about $25 billion of Treasury bills are held by Russian commercial banks and foreign investors, while the international reserves hover at around $15 billion. (Anders Åslund, Transition, 1998, vol. 9, no. 3, pp. 10–11) ‘At about 30 per cent of GDP and some 150 per cent of exports the country’s $141 billion foreign debt remained well under control: the Maastricht criteria for Emu countries fix the maximum debt-to-GDP ratio at 60 per cent’ (Malleret et al. 1999: 109).

490

Russia Three aspects of Russia’s debt policy made its debt position particularly vulnerable in 1998. First, the internal debt, which amounted to 15 per cent of GDP, was very short term. GKOs constituted around 70 per cent of the market in early 1998. Second, the growth of the Treasury bill market is a measure of Russia’s dependence on foreign capital for financing its budget deficit. Official figures put the non-residents’ share of the domestic debt market at some 32 per cent in the first half of 1998, but several indirect schemes available to foreign investors brought their share closer to 50 per cent. (p. 115) The budget deficit … was long financed by borrowing, which became increasingly burdensome. Whereas in 1993 debt servicing took up 26 roubles of each 100 roubles borrowed, in 1997 it consumed 85 roubles, while in 1998 all new borrowings went to repay old debts. The cost of borrowing started to grow in October 1997. In 1998 the fiscal situation became unsustainable. Debt servicing was beginning to crowd out other expenditures: in 1998 almost one in every three roubles (31 per cent) of public spending was going to debt servicing, compared with one in four in 1997. (p. 114) Before the crisis erupted the Russian banking system was saddled with forward contract liabilities while its involvement in industrial projects was ludicrously small. By mid-1998 the Russian banks had become extremely vulnerable to rouble devaluation … Russian banks had also feasted to surfeit on the international markets … The banks used these funds, which increased their hard currency liabilities, to build up domestic bond holdings. (p. 116)

‘Interest earnings … had had to be covered by growing GKO issues, as the Russian Treasury bill market degenerated into a pyramid scheme’ (Hanson 1999: 1153). Russian sovereign debt levels were not particularly high by international standards (51 per cent of GDP in mid-1998), but the domestic GKO debt, especially, was rising very fast. Investors began to doubt the government’s ability to reduce the deficit in future, and, therefore, to continue to roll over GKO debt at interest rates with which its revenue could cope. (p. 1155) Note that there is increasing stress on the ‘primary’ budget deficit or surplus, i.e. excluding interest payments. Interest payments made up a quarter of total federal spending in 1997. Debt service reached a third of federal spending in the first quarter of 1998 (RET, Monthly Update, 2 July 1998, p. 4). Such dramatic events have, not surprisingly, produced widely differing opinions about, for example, the virtues of fixed (or, more accurately, adjustable peg)

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and floating exchange rate systems. Some of those broadly agreeing with government policy prior to 17 August 1998 were as follows: 1

‘Since the introduction of the currency corridor in 1995 the strong rouble has served as a nominal anchor for the economy, helping bring down inflationary expectations and giving foreign investors the confidence to lend to the Russian government, banks and companies. Commitment to the rouble corridor limited the central bank’s ability to print money and forced the government to finance its deficits in non-inflationary ways – by borrowing on the domestic and international bond markets’ (RET, Monthly Update, 5 June 1998, p. 1). A forced devaluation of the rouble … would have very negative effects on the banking system, threaten a return of inflation, severely undermine confidence in the authorities and their policies and, in the end, lead to further social and political friction in a society that has already seen much grief. (RET, 1998, no. 2, pp. 3–4) The maintenance of a stable rouble exchange rate, in combination with other monetary measures, has been a central element in the fight against inflation. A forced devaluation of the rouble would trigger an immediate renewal of inflation, both because of higher import prices and because the chances are high that the central bank would resort to monetary expansion to finance maturing debt. (p. 14)

2

3

‘A devaluation in Russia would be catastrophic … The greatest achievement of the reformers has been to bring low inflation and financial stability. If they cannot even do that they will lose all credibility … A devaluation would lead to an immediate increase in inflation and, even worse, to bank failures. And bank failures would lead to bankruptcies of enterprise. Unemployment would rise on a massive scale … Without the Asian débâcle, there would be no crisis now in Russia. The G7 nations need to put together a stabilization fund of at least $10 billion which would be available for the Russian government’ (Richard Layard, Independent, 29 May 1998, p. 23). ‘Devaluation is not necessary because the rouble is not overvalued. Last year Russia had a huge trade surplus of $20 billion and it has had similar trade surpluses for years … Russia’s most immediate problem is that it has too large a short-term government debt in comparison with international reserves. The critical issue is that about $25 billion of Treasury bills are held by Russian commercial banks and foreign investors, while the international reserves hover at around $15 billion … Devaluation would undermine what little remaining confidence there was in the rouble and the exchange rate would drop by 80 to 90 per cent’ (Anders Åslund, Transition, 1998, vol. 9, no. 3, pp. 10–11).

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Russia It is by no means obvious that the value [of the rouble] is too high … If the rouble were devalued it could end up in free fall … because the key issue is not valuation but confidence … [In 1997 oil and oil products accounted for only 22 per cent of exports] … A devaluation would eliminate all remaining confidence in the rouble among foreigners as well as Russians … Russia’s international reserves are low at some $14 billion and an international loan – on top of the ordinary IMF financing – is needed to calm markets … Russia should get a $10 billion international inter-governmental financing package. (Anders Åslund, The World Today, July 1998, vol. 54, no. 7. pp. 185–7)

4

(‘Government debt prior to the crisis amounted to less than 60 per cent of GDP, of which roughly half was domestic debt. Even factoring in other commitments, overall indebtedness remains moderate’: EBRD 1998b: 18.) ‘The exchange rate anchor has delivered some stability to the Russian economy and is the only credible monetary target. And the rouble is not overvalued’ (editorial, FT, 28 May 1998, p. 19). Without substantial additional support [a stabilization fund of perhaps as much as $20 billion] the currency is almost certain to collapse … The present pro-reform government is likely to go down with it … Devaluation is not a sensible short-term option: it would probably trigger a banking collapse and flight from the rouble. (editorial, FT, 6 July 1998, p. 21) Devaluation would almost certainly be uncontrollable; inflation would soar; and the government would fall … The new government consists of the most single-minded and determined group of reformers to hold office since 1992 … What is needed is an aid package capable of giving the needed breathing space. (editorial, FT, 13 July 1998, p. 19)

5

‘The argument for helping Russia now is that it would give its new government a chance of steadying market nerves, and thereby provide a long enough breathing space – a year or so – for reforms to bite and to start benefiting people. If no help is forthcoming, there is every chance that the ensuing economic chaos, in the wake of a rouble crash, will not only bring down the current government but may even bring down Russia’s rough-andready democracy … Russia is politically at its most fragile since October 1993 … The inflation-driven mayhem following a rouble collapse could shift power into the hands of a new, more xenophobic, anti-reform parliament. Mr Yeltsin could fall. An anti-democratic strongman could emerge, whether or not by election. In short, Russia’s future as a market-based, albeit roughhewn, democracy hangs in the balance … Mr Kiriyenko’s government … is the best equipped to tackle the gargantuan tasks ahead of it since communism collapsed six-and-a-half years ago’ (The Economist, 11 July 1998, p. 16).

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Some of those broadly disagreeing with government policy prior to 17 August 1998 were as follows: Jeffrey Sachs An economic adviser to the Russian government from December 1991 to January 1994. In an article in The Economist (12 September 1998) he comments on the financial crisis in general. Almost all observers now concede that premature liberalization of capital markets (often pushed by the IMF itself) was one cause of the current crisis … Developing countries should impose their own supervisory controls on short-term international borrowing by domestic financial institutions. (p. 24) The IMF worked mightily, and wrongheadedly, to make the world safe for short-term money managers … exchange rate stability above all else … The IMF encouraged central banks from Moscow to Brasilia to raise interest rates to stratospheric levels to protect their currencies. (p. 24) Sachs believes that exchange rates should generally float. It is neither worthwhile nor feasible to twist monetary policy to soothe panicky investors, especially at the cost of internal depression. The only real exception to floating rates comes at the start of stabilization from extreme inflations, when exchange rate targeting is more efficient than monetary targeting. (p. 24) The IMF has become the Typhoid Mary of emerging markets, spreading recessions in country after country. It lends its client governments money to repay foreign investors, with the condition that the government jack up interest rates, cut the flow of credits to the banking system and close weak banks. The measures kill the economies and further undermine investors’ confidence. It would be more sensible to keep interest rates moderate and let the economies continue to grow. True, currencies would lose their value and speculators would lose their bets. But borrowers and lenders would be more cautious in the future. (Jeffrey Sachs, IHT, 5 June 1998, p. 8) To move away from the pegged exchange rate and to introduce a much more flexible exchange rate system … is the path successfully taken by Israel after its 1985 stabilization and by Poland after 1990. Indeed, the basic stabilization strategy of an early pegged rate followed by a modest depreciation and subsequent flexibility had become part of the accepted professional lore of anti-inflation programmes … Some governments, however, fall in love

494 Russia with the exchange rate peg since an overvalued currency generally means cheap consumer goods and high real wages in urban areas. Thus Mexico delayed a needed exchange rate exchange … Brazil delayed needed exchange rate changes … Any careful observer in 1998 could recognize the Mexico débâcle clearly. When Russia fell into the same currency trap in mid-year – for the same reason: an exchange-based stabilization programme held too long with IMF encouragement – Brazil was the subject of intense speculative attack once again … Why has it [the IMF] been a party to such damaging and unsuccessful policies? There are, I think, four reasons. First, the IMF and the US Treasury have listened far too much to Wall Street importunings since the mid-1990s. US investors wanted to get their money out of Russia and Brazil without devaluation losses. Second, the IMF believes it can outsmart the market … Third, as an anti-inflation zealot the IMF coolly accepts deep recessions if it thinks that the output collapse will save a few percentage points on the price level. Last, the IMF remains impervious to criticism. (Jeffrey Sachs, FT, 22 January 1999, p. 14) Every one of the major crises in recent years – Brazil (1999), Indonesia (1997), Korea (1997), Mexico (1994), Russia (1998), Thailand (1997) – went through similar stages. Each of the countries that succumbed to crisis started with a national currency pegged to the dollar. Each attracted large capital inflows, including short-term loans from international banks. In each country the currency became overvalued, leading investors to withdraw their money in anticipation of a devaluation. Each country defended the currency until it had depleted its foreign exchange reserves. And in each this was followed by a panic by foreign investors, in which the remaining shortterm debts were abruptly recalled. The IMF then stepped in with a ‘rescue plan’, but failed to stop the panic, and the downturn proceeded with ferocity. There are three lessons for the economic architect. First, emerging market currencies should be allowed to float, since countries with pegged currencies too often run out of foreign reserves. Second, these countries should abstain from taking short-term loans from international banks. Short-term inflows easily become short-term outflows. And third, these countries should not turn to the IMF for help. The IMF advice has often added to the economic destruction. (Jeffrey Sachs, Independent, 1 February 1999, p. 11) Evan Scott (Transition, 1998, vol. 9, no. 3, p. 11): ‘Trying to maintain an artificially high exchange rate will only deplete the country’s remaining foreign reserves, use up its lines of credit to international financial institutions, and force it to stifle recovery with an exorbitant interest rate.’ Peter Oppenheimer (FT, 12 June 1998, p. 18): the rouble’s nominal peg to the dollar is not the bedrock of stabilization policy.

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The bedrock has been the central bank restraint on growth of the monetary aggregates and government consolidation of the public finances. These policies were established in 1995 … in the presence of a freely floating exchange rate. In the summer of that year the ‘exchange rate corridor’ was introduced as a pragmatic means of limiting exchange rate movements … [There is need] to secure a modest downward adjustment of the exchange rate path, which more than any other single measure will enhance tax revenues. Effects of the financial crisis There has been a sharp reversal of Russia’s former heavy dependence on imports of consumer goods owing to the sharp depreciation of the rouble. (The share of imported goods in retail sales peaked at 53 per cent in 1995: RET, Monthly Update, 30 January 1998, p. 4.) Today … a remarkable 48 per cent of all consumer goods here are foreign made, according to the state statistics committee … Russian agriculture has so withered that the country imported 73 per cent of its sugar, 37 per cent of its fish and 35 per cent of its meat last year [1997], said Nikolai Kharitonov, leader of the Agrarian Party. (Greg Myre, IHT, 2 October 1998, p. 15) Yevgeni Primakov (6 October 1998): ‘The rouble’s autumn collapse has resulted in a sharp decline in food imports, which in recent years have accounted for half our food supplies’ (CDSP, 1998, vol. 50, no. 40, p. 5). Yuri Maslyukov (17 November 1998): ‘In a country that depends on imports for 60 per cent of its food supplies, after the events of 17 August those imports had fallen by 86 per cent’ (CDSP, 1998, vol. 50, no. 46, p. 9). The proportion of imports in retail sales has fallen from 49 per cent to 30 per cent (FT, 9 July 1999, p. 15). Hyperinflation did not result. There was no massive increase in the money supply. IMF loans were sought (as is discussed in the section below). In July 1998 prices grew only 0.2 per cent month-on-month. The monthly inflation rate was 15.3 per cent in August (year-on-year), 38.4 per cent in September, 4.5 per cent in October and 5.7 per cent in November (RET, Monthly Update, 4 September 1998, p. 1; Monthly Update, 11 September 1998, p. 10; 1998, vol. 7, no. 3, p. 10; Monthly Update, 8 December 1998, p. 7). In September 1998 GDP was 11.4 per cent lower than in December 1997 and 9.9 per cent lower than in September 1997, while the respective figures for industrial output fell by 16.5 per cent and 14.5 per cent. Agricultural output was 15 per cent lower than in September 1997 (RET, Monthly Update, 11 September 1998, p. 9). The IMF predicts that GDP in Russia will fall by 7 per cent in 1999 before stabilizing in 2000. The IMF report said:

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Russia In the absence of coherent stabilization and reform policies, however, there would remain a risk of high inflation and continued economic contraction; access to international financial markets would be unlikely to resume; and much of the progress tentatively achieved in some areas during 1991–98 would be lost. (FT, 21 April 1999, p. 6)

‘For 1999 the usually judicious IMF had forecast that Russian GDP would slump by 9 per cent’ (Anders Åslund, IHT, 19 January 2000, p. 8). But the economy made a surprisingly rapid recovery. Gloomy forecasts predicting hyperinflation and a deep recession have not yet been realized. In spite of the collapse of Russia’s banking system and the breakdown of its financial markets, the country appears to have started on the path of real growth by taking advantage of the rouble devaluation that has made Russian goods more competitive … Initially after the August crisis output continued to fall, mainly as a result of the breakdown of the payments system, which led to disruption in deliveries. When the payment system was mostly restored in October [1998] production returned to levels observed immediately before the crisis and even surpassed them. (RET, Monthly Update, 14 May 1999, p. 1) At that time [August 1998] forecasts were made predicting hyperinflation and a rapid reduction in production … This gloomy scenario [however] did not materialize. Instead the economy has been on a path of recovery with impressive growth rates in industrial production. Inflation has come down … [Central bank chairman] Gerashchenko’s actions have been very different from that of 1992–4 … Emissions have been kept at a reasonable level … Two events in particular have provided the foundation for the industrial recovery and healthy export environment. These are the devaluation of the rouble in August 1998 and the agreement made by OPEC in March 1999 to limit world oil supply, bringing surging world market oil prices … The real exchange rate has depreciated 43 per cent since July 1998 … A devaluation of this magnitude … gives domestic producers and exporters a competitive edge. For Russia this has materialized in the form of strong growth in industrial production, driven mainly by import substitution and an improved situation for exporters, many of which have their costs in roubles and revenues in dollars … The devaluation has had a positive impact on Russia’s current account and trade account, mainly due to the effect on imports … One consequence of the crisis was the disappearance of securities markets … Deprived of the main source of funding the government was finally faced with no other alternative than to come up with a much tighter budget for 1999 … Not only has the government managed to collect its targeted revenues, but, more importantly, the bulk is now paid in cash … Monetary policy has remained relatively tight. (RET, Monthly Update, 10 September 1999, pp. 3–6)

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GDP rose 3.2 per cent [in 1999] … thanks largely to a surge in industrial output [which rose by 8.1 per cent]. While a boost in world oil prices contributed usefully, the main gains came from import substitution prompted by the 80 per cent decline in the rouble’s international value. Exports stayed roughly constant, but imports dropped by more than a third. (FT, Survey, 10 May 2000, p. ii) Even when economic growth is recognized it is dismissed as merely an effect of the large devaluation of the rouble in August 1998 and higher oil prices. But the EBRD reckons that Russia has done almost as much systemic reform as Latvia and Lithuania, and sooner or later the results are likely to emerge. The 1998 financial crash seems to have been a catalyst for more profound change. By imposing tough budget constraints the crash convinced many Russian businessmen that they could no longer live off the state but had to make real money in the market. Meanwhile the much-publicized barter economy is dwindling. From August 1998 to August 1999 barter dropped by one-third. Non-payments of most kinds have fallen by at least one-half … [Federal] revenue rose from 9 per cent of GDP in 1998 to 13 per cent in 1999, largely at the expense of the regional governments. (Anders Åslund, IHT, 19 January 2000, p. 8) (‘Federal budget revenues in 1999 were only about 14 per cent of GDP, and those of all levels of government were only 36 per cent’: Andrei Nesterenko, Finance and Development, 2000, vol. 37, no. 3, p. 21.) ‘Wage arrears have ceased to be a macroeconomic problem and are only a cause of tension in a few industries in a few regions. This conclusion is supported by data on strike activity, which has remained negligible since 2000’ (RET, Monthly Update, 15 July 2002, p. 7). ‘Barter and arrears are declining rapidly as the economy switches to cash (Business Central Europe 2000: 41). Until the 1998 crash Russians could make easy money lending to the government or speculating against the rouble, so they stripped cash out of companies to do it. By destroying the government debt market and devaluing the rouble the crash has forced companies to look for investment opportunities. (Business Central Europe, May 2000, pp. 35–6) Two big shifts are now taking place in the economy. One is the rise of national conglomerates, which are driving a restructuring process throughout the economy. The other is the dismantling of the ‘virtual economy’: the system of barter and non-payments which held back economic growth for much of the 1990s. (Business Central Europe, April 2001, p. 54)

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Russia The dismantling of the ‘virtual economy’ has required concerted action by the government and energy suppliers, which have demanded payment in cash … The role of the government points to the main reason for the decline of the ‘virtual economy’. Before the crash, huge amounts of foreign lending covered the hole in the budget caused by the lack of tax revenues. But the 1998 financial crisis turned off the tap, forcing the government to collect taxes. (pp. 58–9) Before then … the devaluation of the rouble in 1998 … it was easy to make money by diverting cash offshore, ripping off minority shareholders and the tax authorities. But the new profit opportunities in Russian industry have made it worthwhile to invest. (p. 61)

There are many concerns about Russia’s long-term prospects. ‘What the country’s current economic performance really suggests is that the window of opportunity opened by last year’s crash is being wasted … Investment is flat’ (The Economist, 23 October 1999, p. 144). Thanks to high oil and gas prices the value of Russian exports is soaring … Oil and gas accounted for almost all that increase. Since the devaluation of the rouble in August 1998 imports have slumped … The rouble is rising against the dollar. Coupled with [rising] inflation this erodes the competitiveness that Russian has enjoyed since devaluation. So the economy remains acutely vulnerable. Its fragility is a result of the lack of structural reform since the financial crisis. With some exceptions most Russian companies are still run inefficiently by crooked managers, using worn-out equipment to produce cheap, low-quality goods. Apart from raw materials, guns and vodka Russia has few things worth exporting … Investment, though up a bit on the pitiful levels of last year [1999], is still paltry when set against Russia’s modernization needs. (The Economist, 8 July 2000, p. 125) (In 1999 investment in fixed assets rose by 1 per cent: CDSP, 2000, vol. 52, no. 11, p. 17.) Stanley Fischer, acting managing director of the IMF (6 April 2000): The good macroeconomic performance since early 1999 cannot be sustained without a broad-based acceleration of structural reforms … The sustained growth that is needed will require an acceleration in economic reforms to spur investment and strengthen exports as well as comprehensive tax and expenditure reforms. (FT, 7 April 2000, p. 10; IHT, 7 April 2000, p. 15)

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The recovery in Russia has been underpinned by strong growth in industrial output, increased international competitiveness and the steep rise in commodity prices, especially the price of oil. Some of these developments are unlikely to persist. For sustainable growth to be achieved, Russia will have to make significant progress in improving the investment climate, in enterprise restructuring and in eliminating barter, non-payments and arrears. With the new government in place there is a window of opportunity to move forward on these fronts. (EBRD 2000a: 3) The higher profits due to lower competition from imports and lower real wages have helped to reduce the stock of arrears and the share of barter substantially, from 52 per cent of all transactions in 1998 to 34 per cent in 1999. (p. 5) The positive effects of the past year were almost guaranteed by the devaluation. They have also been substantially helped by the oil price rise. But there is no persuasive evidence that the devaluation has led to, or even been used for, reforming the Russian economy and improving its prospects in the longer term. (Clifford Gaddy, Post-Soviet Affairs, 2000, vol. 16, no. 1, p. 17) What real 1999 increment in production, in monetization and in fiscal balance has occurred is the result of massive devaluation coupled with a very fortuitous rise in energy and resource prices, and is unsustainable without massive investment and structural change. (Richard Ericson, Post-Soviet Affairs, 2000, vol. 16, no. 1, p. 18) ‘Russia is in the midst of an economic recovery … [But] the virtual economy remains the best way to understand current economic developments’ (Gaddy and Ickes 2001: 1). The recovery occurred because of the windfall brought about by the exchange rate shock and the rise in world market prices for oil and other resources that Russia exports, not because of any essential change in the behaviour of enterprises in Russia. (p. 15) There has been a significant decline in barter as a share of industrial sales in Russia since the August 1998 crisis. There has also been an increase in tax payments paid in cash … [But] barter is not the essence of the virtual economy. The essence of the virtual economy is the transfer of value from value-producing sectors – primarily, but not exclusively, energy and raw materials – to value-destroying sectors. Before the August meltdown barter was a means of transferring this value. (p. 15)

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‘Real depreciation shifts behaviour toward greater use of money. This is behavioural change, but it does not represent restructuring’ (p. 16) Barter is not the main problem in the Russian economy; it is a symptom of the problem. The essence of the virtual economy is enterprise behaviour that exploits what we call relational capital to protect and maintain valuedestroying activity – soft goods production. Barter is important because it facilitates that behaviour. (p. 17) ‘[A] lack of restructuring seems to have taken place during this window of opportunity’ (p. 18). ‘The underlying structure of the virtual economy remains intact – value producers are still subsidizing value destroyers’ (p. 19). ‘The windfall in tax revenue … was used to pay arrears rather than close plants that need to be shut down’ (p. 20). ‘The real value of the rouble at the end of 1998 was only about 36 per cent of its immediate pre-crisis level’ (p. 15) The real depreciation of the rouble ended in January 1999. Since then the rouble has appreciated gradually in real terms, as a result of inflation, which averaged more than 19 per cent during 2000 while the rouble held fairly steady. (p. 18) President Vladimir Putin (8 July 2000): Russia’s economic weaknesses continues to be another serious problem. The widening gap between the advanced countries and Russia is pushing us into the ranks of third-world countries. The figures showing current economic growth should not put our minds at ease … The current growth has very little to do with the revamping of the economic mechanism. It is largely the result of favourable foreign economic conditions. (CDSP, 2000, vol. 52, no. 28, p. 5) President Putin (16 May 2003): Our economic foundation, although it has become noticeably stronger, is still shaky and very weak. The political system is not developed enough. The state apparatus is inefficient and most sectors of the economy are uncompetitive. (IHT, 17 May 2003, pp. 1, 4; FT, 17 May 2003, p. 6) Prime minister Mikhail Kasyanov: While Russia’s economic performance has improved significantly since the financial crisis of August 1998 much of the improvement is the result of one-off events. The challenge for Russia today is to implement extensive

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structural reforms that will ensure long-term economic growth and macroeconomic stability. (FT, 20 July 2000, p. 23) Andrei Illarionov: Since October and November last year [2000] the real economy has been in stagnation. The main reason for this is the state of the balance of payments. A huge inflow of foreign exchange [from energy and commodity exports] is pushing up the real exchange rate, making the rest of the economy less competitive … The main constraint on economic growth this year [2001], and in the foreseeable future, is the real exchange rate. Repaying [Paris Club] debt would slow the rise of the real exchange rate … When oil prices went up and stayed there the readiness for serious reform started to evaporate rather fast. (FT, Survey, 9 April 2001, p. ii) ‘There is a strong consensus that in order to attain sustainable economic growth further progress must be made in the area of structural reforms’ (RET, 2000, vol. 9, no. 1, p. 4). The new-found profitability of a number of industrial firms may be related not only to the weaker rouble and strong export prices, but also to severely repressed domestic prices for energy and transportation. This latter factor continues to raise questions about the quality and sustainability of current industrial growth. (OECD, Economic Outlook, June 2000, p. 146) Russia has thus far done little to meet the key challenge of economic diversification. Such diversification is necessary to enhance Russia’s medium- and long-term growth prospects and to reduce its vulnerability to oil price movements … The rouble appreciated by 6 per cent in real terms against the US dollar in 2002. This real appreciation continued in early 2003 as the central bank announced its future policy of targeting the inflation rate rather than the real exchange rate. Against the Euro the rouble has depreciated in real terms since early 2002. (EBRD 2003a: 3) Further effects of the financial crisis S TO C K M A R K E T S

Although there had been some ups and downs in the stock market, the trend was at first sharply downwards. The Russian Trading System (RTS) is an index of leading shares.

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‘The capital inflows led to a massive speculative asset bubble, with the stock market rising 142 per cent in 1996 and a further 184 per cent in the first eight months of 1997’ (EBRD 1998b: 12). In 1996 and 1997 Russia was the darling of international investors. In 1996 its stock market, as measured by the RTS index, grew by 100 per cent. This was followed by an even more spectacular performance in 1997, when stock portfolios tripled in nine months. (Malleret et al. 1999: 107) ‘Between March and August [1998] the Moscow stock exchange, which was the world’s best-performing market in 1997, lost more than 80 per cent of its value’ (Transition, 1998, vol. 9, no. 4, p. 7). ‘The RTS ends the day [2 June 1998] 12 per cent higher at 192.75. The 1997 peak was 571.6, reached on 6 October’ (IHT, 3 June 1998, p. 1). On ‘Black Thursday’ (13 August 1998) the RTS index fell by 6.51 per cent to 101.17. On 17 September 1998 the RTS index fell by 7.16 points to 51.70. The RTS stock index … slid 85 per cent last year [1998], when it was the world’s worst … The Russian Trading Index rose 7.4 per cent Monday [22 February] to 74.53 points, its highest level since 26 August [1998], after rising 5.6 per cent Friday [19 February]. The index has gained about 28 per cent this year. (IHT, 23 February 1999, p. 13) Russia’s stock market is rallying amid assumptions that holders of the frozen GKOs will be able to swap them for shares. In February the Moscow Times $ Index rose more than 40 per cent. Foreigners hold about $10 billion of GKOs/OFZs at face value, and the restructuring deal could mean that between $100 and $200 million will be spent on Russian shares. (RET, Monthly Update, 11 March 1999, p. 12) The Economist (various issues: stockmarkets in dollar terms): 3 March 1999, 73.3; 10 March, 76.5; 17 March, 90.0; 24 March (Nato attacks Serbia), 76.8; 30 March, 81.2. If Russia’s stock market was labelled the worst performing stock market of 1998, the first three months of 1999 told a different story. The Moscow Times dollar index, which fell 87 per cent during the course of 1998, rose 58.9 per cent in the first three months of 1999, making Russia one of the world’s best performing markets so far this year. A recent boost was given by expectations of part of the defaulted GKOs being swapped for equity (under the restructuring deal foreign holders of GKO Treasury bills will receive 10 per cent in cash which can then be invested in certain shares, decided by the ministry of finance, on the stock market) and by progress in the government’s

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negotiations with the IMF. Equally the recent increase in the world market price of oil has aroused interest in the shares of oil companies. (RET, Monthly Update, 13 April 1999, pp. 15–16) ‘The equity market, which slumped by more than 90 per cent last year [1998], is up 145 per cent in 1999, making it the best performing stock market in the world’ (FT, 9 July 1999, p. 15). The Economist (various issues: stockmarkets in dollar terms): 7 April 1999, 73.0; 22 September 1999, 80.1; 29 March 2000, 232.4; 28 June 2000, 170.2; 30 August 2000, 240.0; 18 October 2000, 184.0; 1 November 2000, 194.1; 8 November 2000, 184.5; 22 November 2000, 166.2; 3 January 2001, 131.0; 7 March 2001, 180.5; 14 March 2001, 167.5; 21 March 2001, 174.9; 28 March 2001, 173.5; 4 April 2001, 161.3; 10 April 2001, 168.6; 18 April 2001, 171.6; 27 June 2001, 222.0; 15 August 2001, 194.0; 5 September 2001, 209.8; 3 October 2001, 174.2; 12 December 2001, 241.9; 18 December 2001, 237.7. ‘The stock market grew 60 per cent in 2001, the fastest growing in the world’ (The Times, 7 January 2002, p. 14). ‘Russia’s total stock market capitalization [President Putin said on 3 April 2001] is $50 billion, which is five times smaller than the average major corporation in neighbouring Finland’ (IHT, 4 April 2001, p. 4). For the past three years the Russian [equity] markets have been outperforming those in the West. And with their extreme volatility subsiding with the end of the ‘Wild East’ days of the 1990s, they have become a relatively safe place to do business. Igor Kostikov, chairman of the Federal Commission for the Securities Market, says a Corporate Governance Code, in force for almost a year now, appears to be reinforcing the country’s growing market stability … [despite the fact that] compliance with the code is voluntary. (IHT, 17 March 2003, p. 9) The Economist (various issues: stockmarkets in dollar terms): 20 March 2002, 340.8; 3 April 2002, 339.8; 24 April 2002, 385.0; 22 May 2002, 414.1; 31 May 2002, 381.3; 12 June 2002, 396.2; 26 June, 335.9; 10 July 2002, 391.2; 24 July 2002, 325.0; 21 August 2002, 350.4; 28 August 2002, 347.5; 18 September 2002, 329.8; 23 October 2002, 357.5; 6 November 2002, 347.9; 18 December 2002, 346.5; 1 January 2003, 359.1; 15 January 2003, 360.9; 22 January 2003, 342.9; 5 February 2003, 346.8; 12 February 2003, 369.4; 5 March 2003, 392.8; 19 March 2003, 363.2; 23 April 2003, 429.4; 30 April 2003, 422.4; 28 May 2003, 471.2; 4 June 2003, 459.4; 25 June 2003, 502.1; 2 July 2003, 518.1; 9 July 2003, 493.8; 23 July 2003, 443.9; 30 July 2003, 452.6; 1 October 2003, 573.9.

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T H E RO U B L E E XC H A N G E R AT E A N D F O R E I G N E XC H A N G E R E S E RV E S

At first the rouble plummeted in value against the US dollar. 17 August 1998: As of 17 August 1998 the Bank of Russia is switching to a policy of a floating rouble exchange rate within new exchange rate corridor limits, which have been set at a level of 6 to 9.5 roubles to the dollar. (official statement by the government and the central bank: CDSP, 1998, vol. 50, no. 33, p. 5) The trading band for the rouble against the US dollar is widened (until the end of 1998) from 5.27/7.13 to 6.0/9.5 (The Times, 18 August 1998, p. 10). (The rouble had traded at 6.36 to the US dollar on 13 August, ‘Black Thursday’.) 1 September 1998: the exchange rate is 9.33 roubles to the dollar (IHT, 6 October 1998, p. 15). 8 September 1998: ‘Yesterday [8 September] the official rouble exchange rate dropped from 18.90 to 20.82 to the dollar, although the street value has fallen further’ (FT, 9 September 1998, p. 24). ‘The exchange rate slipped to twenty-three to the dollar’ (IHT, 9 September 1998, p. 1). 22 September 1998: the official rate for the rouble is set at 16.22 to the US dollar (FT, 22 September 1998, p. 2). 4 December 1998: ‘The rouble tumbled Friday [4 December], trading near record low levels last seen immediately after Russia’s economic crisis broke out in August. The rouble fell Friday to 20.61 to the dollar, compared with 18.56 to the dollar Thursday’ (IHT, 5 December 1998, p. 13). 28 December 1998: ‘The rouble slumps by 7 per cent to a record low of 20.99 to the dollar’ (IHT, 29 December 1998, p. 11). 2000: In 2000 Kazakhstan and Russia were committed to preventing the currency from appreciating in an attempt to preserve the competitiveness of domestic production. Interventions by the central banks, aimed at absorbing large, export-related foreign currency inflows, led to an expansion of the domestic money supply. (United Nations, World Economic and Social Survey 2001, p. 89) January 2001: ‘The government introduced a new and simplified system of import tariffs’ (p. 90). 10 August 2001: the share of export earnings that must be repatriated is reduced from 75 per cent to 50 per cent (RET, 2002, vol. 11, no. 1, p. 87). December 2001: ‘Given the strong current account inflows, the monetary authorities have resisted nominal appreciation of the rouble through active intervention on the foreign exchange market’ (OECD, Economic Outlook, December 2001, p. 129).

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‘Andrei Illarionov said … the rouble’s real value surged by 18 per cent last year [2001]’ (IHT, 30 January 2002, p. 15). ‘Last year [2001] … real appreciation of the rouble … amounted to about 7 per cent against the dollar’ (RET, Monthly Update, 20 May 2002, p. 2). 1 April 2002: The supreme court cancels an instruction of the central bank ordering exporters to sell 50 per cent of their export earnings at so-called ‘unified trading sessions’ on the Moscow Interbank Currency Exchange. According to the court decision, exporters are free to choose where to sell the part of export revenues which is subject to obligatory repatriation. (RET, 2002, vol. 11, no. 3, p. 102) THE REGIONS

The regions began to adopt policies which weakened central (federal) control and which in some cases were unconstitutional. Some examples, in chronological order, are as follows: 6 September 1998: ‘evidence that some of the eighty-nine republics, regions and territories are using the chaos to seize more power has been mounting since the crisis began last month’. Examples include regions no longer transferring any funds to Moscow, price freezes and ‘import’ taxes on goods from other regions (Independent, 7 September 1998, p. 10). 8 September 1998: regional leaders take measures deemed illegal by the federal authorities. The enclave of Kaliningrad on the Baltic Sea declares a ‘state of emergency’. Other measures include the following: price controls; refusal to send payments to Moscow; bans on shipping foodstuffs out of particular regions. It turned out that banning the export of goods is inconsistent with Article 71 of the constitution and with provisions of the civil code and of Russian antimonopoly legislation … But a considerable number of governors have not toed the government’s line. (CDSP, 1998, vol. 50, no. 41, p. 17) Many regions imposed price controls on basic goods, although in most cases these lasted only two or three months (EBRD 1999a: 20). The IMF and Russia’s fiscal and monetary policy August 2000: On 26 August [2000] the draft budget was submitted to the Duma … For the first time a balanced budget is being proposed … Interest payments (which exactly equal the primary surplus since the deficit is zero) are

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Russia envisaged at … 3.1 per cent of GDP. The first reading of the draft in the Duma is scheduled for 22 September. (RET, Monthly Update, 15 September 2000, p. 12) This is the first balanced budget in all the years of reform. Not counting debt service, revenues will exceed expenditures by 3.1 per cent of GDP. The extra revenue will go towards paying off our foreign debt, [finance minister] Kudrin said. Russia is supposed to pay back $14.5 billion next year [2001], but that is if the Paris Club does not agree to restructure Soviet debts. Right now the government is optimistic, so the budget reflects about $6 billion in debt service and $4.5 billion in payments on the principal. In other words, the government is planning to pay only about $10.5 billion altogether. (Kommersant, 10 August 2000, p. 2: CDSP, 2000, vol. 52, no. 32, p. 10)

6 October 2000: ‘The lower house of parliament approved the country’s first ever balanced budget … The Duma approved the budget in the first reading’ (FT, 7 October 2000, p. 8). 21 November 2000: ‘The IMF mission finishes talks with the Russian authorities without having reached agreement on a new financial arrangement’ (RET, 2000, vol. 9, no. 4, p. 67). 14 December 2000: The State Duma passes the 2001 budget in the fourth and final reading. For the first time in post-Soviet history the budget is scheduled to be balanced. It is based on an estimated annual inflation rate of 12 per cent and a GDP growth rate of 4 per cent. The average exchange rate in 2001 is forecast at 30 roubles to the dollar. (RET, 2000, vol. 9, no. 4, p. 68) ‘[In 2000] for the first time in post-Soviet history the federal budget ran a surplus, due to high revenues related to increased exports and rapid economic growth. Budget revenue exceeded targets by almost 40 per cent’ (p. 5). In 2000 the federal budget surplus was 2.5 per cent of GDP (the primary budget surplus being 5 per cent of GDP) (p. 53). Previously there were federal budget deficits: 1996, -7.9 per cent of GDP; 1997, -6.7 per cent of GDP; 1998, -4.9 per cent of GDP; 1999, -1.7 per cent of GDP (RET, Monthly Update, 20 March 2001, p. 2). ‘For the first time in the transition period Russia recorded federal and consolidated budgetary surpluses in 2000, currently estimated at 2.5 and 3 per cent of GDP, respectively’ (OECD, Economic Outlook, 2001, vol. 1, no. 69, p. 142). 2001: ‘The draft federal budget for 2002 should be handed to the Duma before August [2001]’ (RET, 2001, vol. 10, no. 1, p. 6). The draft envisages a surplus (after debt service) of 1.26 per cent of GDP (p. 60). ‘Russia adopted its first balanced budget law for the federal government in 2001’ (OECD, Economic Outlook, 2001, vol. 1, no. 69, p. 142). 19 October 2001: the State Duma adopts the draft budget law for 2002 at the

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second reading, involving a federal budget surplus of 1.6 per cent of GDP ‘and a reserve fund to accumulate resources for foreign debt repayments in 2003’ (RET, 2002, vol. 11, no. 1, p. 89). 14 December 2001: the draft federal budget for 2002 was approved by the State Duma at the fourth reading. This is the first Russian budget law, which implies a fiscal surplus (1.6 per cent of GDP) and carry-over to the year 2002 of a financial reserve amounting to 1 per cent of GDP … There will be a carry-over surplus from 2001 amounting to 25 billion roubles, which can be used for financing external debt amortization in 2002 … The planned federal budget surplus is approximately equal to the expected budget surplus in 2001. (pp. 77–8) ‘About one-third [of the budget surplus] will be spent during the year for debt amortization and the rest (1 per cent of GDP) will be accumulated in a financial reserve’ (RET, Monthly Update, 21 January 2002, p. 4). ‘[In 2001] most of the budget surplus was used for external debt repayments. The financial reserve formed from the rest of the surplus is to be used for covering future debt repayments’ (p. 2). The federal budget balance as a percentage of GDP was as follows: 1997, -6.7 per cent; 1998, -4.9 per cent; 1999, -1.7 per cent; 2000, 2.5 per cent; 2001, 2.9 per cent (RET, Monthly Update, 15 April 2002. p. 2). Debt reschedulings Russia’s forced restructuring of domestic debt has been essentially confiscatory. But Russia has also at times effectively (though not formally) defaulted on its sovereign debt, disguised by payment delays and formal reschedulings. Defaults (in effect) have not only applied to Soviet-era debt. Rolled over IMF loans have on occasion avoided formal defaults (which the IMF is not permitted to condone) on loans the institution has made since 1992. 16 December 1998: ‘The terms [are announced] of the deal investors who held bonds maturing before 31 December this year [are to get]’ (FT, 17 December 1998, p. 3). Foreign creditors have been offered 10 per cent of the discounted value of their holdings in cash, 20 per cent in three-year zero-coupon bonds which can be used to pay taxes or exchanged for equity in near-bankrupt Russian banks, 70 per cent in four- and five-year securities bearing a 30 per cent coupon which would fall to 10 per cent in the last year. The whole package is worth about 4 cents on the dollar. (FT, 18 December 1998, p. 4) 1 March 1999: Chase Manhattan becomes the second foreign bank to agree to restructure some of the frozen rouble bonds (IHT, 2 March 1999, p. 13).

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Russia Deutsche Bank, which was chairing the creditors’ nineteen-strong committee, announced that it would accept unilaterally the terms offered – worth at best six cents in the dollar (and probably much less) – on its own behalf, though not on its clients. The other banks, outraged, sacked Deutsche on 1 March, and then voted to continue without a chairman. (The Economist, 6 March 1999, p. 77)

15 March 1999: ‘The ministry’s current derisory restructuring offer would leave debt-holders with about five cents in the dollar’ (The Economist, 20 March 1999, p. 109). 21 April 1999: Ignoring the protests of several international banks, Russia has held foreign investors to a plan that restructures … defaulted government debt at a fraction of its face value … Under the government’s restructuring plan foreigners would get a package of new Russian securities and between 3 cents and 8 cents on the dollar. (IHT, 22 April 1999, p. 13) ‘The government defaulted in August [1998] on … GKOs, domestic rouble debt, once worth $40 billion … Bondholders are now contemplating a restructuring deal worth – at best – one solitary cent in the dollar’ (The Economist, 24 April 1999, p. 99). ‘Holders of GKOs … took the bone they were tossed – a confiscatory restructuring scheme giving them a couple of cents in the dollar’ (The Economist, 5 June 1999, p. 106). 4 January 2001: Russia announced Thursday [4 January 2001] that it did not plan to make a full first-quarter payment to the Paris Club of creditor nations, on debt inherited from the Soviet period. Russia owes $48 billion and was scheduled to pay $3.4 billion this year [2001] – $1.5 billion in the first quarter. Germany accounts for about 40 per cent of that debt. (IHT, 9 January 2001, p. 12) (‘Germany [is] Russia’s principal creditor with debt holdings of $21.1 billion’: IHT, 3 March 2001, p. 18.) An undertaking [was made] by Russia yesterday [9 January] to pay at least part of its foreign debt obligations to sovereign creditors in coming weeks … Russia owes Paris Club lenders some $48 billion. Russia sparked concern by indication on 4 January that it could suspend payments on some or all of its Paris Club obligations for the first quarter of this year. (FT, 10 January 2001, p. 8)

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19 January 2001: ‘The Russian government yesterday [19 January] retreated from its hard line on foreign debt, saying it would try to find more money in the state budget this year for repayment’ (FT, 20 January 2001, p. 7). Russia has rescheduled its Paris Club debts before, most recently in 1998, but that agreement expired at the end of last year [2000]. Under the timetable now in effect Russia owes $1.5 billion in the first quarter of 2001 and $3.4 billion for the year. (IHT, 20 January 2001, p. 13) 16 February 2001: At a meeting of the State Duma’s budget committee yesterday [16 February] the deputies and government tried to find money to pay the Paris Club. They finally came to an agreement at the very last moment … The first 41 billion roubles in supplementary revenue … i.e. revenue in excess of budget projections … expected to come from higher-than-projected oil prices and inflation … will go straight toward paying down the debt instead of being used for day-to-day budget spending. Everything that comes into the budget over and above that amount will be divided evenly: 50 per cent for the debt, 50 per cent to provide additional funding for budget items. (CDSP, 2001, vol. 53, no. 7, pp. 8–9) March 2001: [A] key event in March was the decision of the Russian authorities late in the month not to sign a financial agreement with the IMF … Russia does not need foreign financing during the current year … The major disagreements … concerned the IMF’s requirement for more transparency regarding the BBR’s activities as well as orderly settlement of the ministry of finance’s debts to the CBR. Without an IMF agreement there is now less hope of getting these issues in order. (RET, Monthly Update, 18 April 2001, p. 2) In March the Russian Federation turned down a one-year stand-by arrangement proposed by the IMF. While the deal would not have provided Moscow with fresh infusions of cash, it might have helped the government reschedule about $40 billion in debt with the Paris Club of creditor nations … The IMF’s offer involved no money, unless the Russian economy took a sharp turn for the worse, but the accord would have required the Russian government to charge market rates on central bank loans to the government and release more information about the operations of the Russian central bank and the state-run savings bank, Sberbank. IMF and World Bank economists have noted that Russia has done little to reform its banking sector since the country’s 1998 financial blowout … The IMF last lent

510

Russia money to Russia in the summer of 1999, when it disbursed $640 million as part of a $4.5 billion package. That aid programme was put on hold. (Transition, 2001, vol. 12, no. 1, pp. 37–8)

‘Stand-by arrangements are IMF credits that finance temporary balance of payments deficits of member countries and must be repaid within three-and-aquarter to five years’ (p. 5). 4 July 2001: ‘The central bank has unfrozen roubles allocated as compensation to foreign creditors of government bonds which defaulted in the August 1998 crisis, representing a new liberalization of markets alongside a relaxation of currency controls’ (FT, 5 July 2001, p. 10). 19 October 2001: ‘Russia has paid off nearly $1 million in debt ahead of schedule to the IMF’ (IHT, 20 October 2001, p. 16). [In 2001] most of the budget surplus was used for external debt repayments. The financial reserve formed from the rest of the surplus is to be used for covering future debt repayments … Russia gained much international goodwill in the autumn [of 2001] when it started repaying its debts to the IMF ahead of schedule. Also the timely redemption of Russia’s first Eurobond, which matured in November [2001], was appreciated internationally. (RET, Monthly Update, 21 January 2002, p. 2)

Economic performance GDP growth rates were negative from 1990 to 1996 inclusive. (See Table 6.3.) There were a number of false dawns before 1997, the year when (modest) positive growth returned. The Asian financial crisis (which began in July 1997) in general and the Russian financial crisis of August 1998 in particular sent the economy into reverse in 1998. ‘Russia … has fallen from fourth place in terms of GDP in 1913 to fifteenth place in 1999; in terms of GDP per capita we currently rank 101st’ (Pyotr Aven, Kommersant, 29 February 2000, p. 8: CDSP, 2000, vol. 52, no. 12, p. 13). In 1999 (in contrast to early forecasts) GDP growth turned decidedly positive owing to such factors as the large depreciation (nominal and real) of the rouble against the US dollar and rapidly rising world oil prices. In 2001 GDP was an estimated 64 per cent of the 1989 level (EBRD 2002b: 58). The hyperinflation of 1992 was conquered but the annual inflation rate is still not in single figures. The balance of payments on current account has typically been in surplus.

7

Ukraine

POLITICS

The political and demographic background The state of Kievan Rus reached its territorial zenith in the tenth century and adopted Christianity during the rule of Volodymyr the Great. In 1240 Kiev was sacked by Genghis Khan. Ukraine was absorbed by the kingdom of Poland in the fifteenth century. In 1654 Boghdan Khmelnytsky, a Ukrainian Cossack chieftain, led a revolt against Polish overlords and unified Ukraine with Russia (FT, 8 May 1999, p. 2). In 1991 the population was 52,060,000. At the start of 2000 it was 49,710,000 (CDSP, 2000, vol. 52, no. 32, p. 16). Ukrainians constitute 72.7 per cent of the population and Russians 22.1 per cent (Independent, 26 March 1994, p. 8). There are 300,000 Poles, 180,000 Hungarians and 25,000 Slovaks (The Economist, Survey, 13 March 1993, p. 18). ‘Around 20 per cent of Ukrainians are ethnic Russians, yet more than 60 per cent of the population … speak Russian’ (Guardian, 7 November 2000, p. 19). Jewish leaders claim that there are 500,000–600,000 Jews in Ukraine, the fifth largest Jewish population in the world. There is a revival of Jewish culture and Jewish leaders praise official attitudes since independence, e.g. handing back the properties of Jewish institutions seized by the Soviet Union and the condemnation of antisemitism (IHT, 31 March 1995, p. 2).

Crimea and the Black Sea Fleet The Tatars are descendants of Genghis Khan’s ‘Golden Horde’ of Mongols in the thirteenth century. They ruled the ‘Crimean Khanate’, under Ottoman protection, until 1783, when the strategically situated peninsula was annexed by Russia under Catherine the Great. In May 1944 Stalin deported the Tatars to the Central Asian republics for allegedly collaborating with Nazi Germany; there was great loss of life on the way. Khrushchev presented Crimea to the Ukrainian Soviet Socialist Republic in 1954 on the 300th anniversary of the unification of Russia and Ukraine. The Tatars started to return to the Crimea

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in large numbers in the Gorbachev era. James Rupert adds that in the last six years about half the estimated 500,000 Tatars have moved back. Tatar historians estimate that 100,000 of the 230,000 died in the first months of their exile, while Soviet historians put the figure at about 50,000 (James Rupert, IHT, 11 January 1996, p. 2). Tatars account for 12 per cent of the Crimean population (FT, Survey, 5 May 1998, p. iii). Russians make up about two-thirds of the peninsula’s 2.7 million people, whereas the Tatars number less than a tenth … Tatars … want their language [close to Turkish], which is barely taught in schools, preserved and the property that was confiscated after their deportation [on 18 May 1944 to Central Asia] given back. So far, none has been. Lastly, with two-thirds of their people unemployed, they want jobs. (The Economist, 6 May 2000, p. 57) A chronology of events 8 February 1995: Ukraine and Russia initial a friendship treaty. There is agreement in principle to divide the Black Sea Fleet. Russia will lease the main fleet base at Sevastopol. 17 March 1995: the Ukrainian parliament abolishes both the (1992) constitution and the presidency of the Crimean autonomous republic. Parliament also instructs the prosecutor-general to consider whether criminal charges should be brought against Crimean president Yuri Meshkov ‘in view of gross violations of Ukraine’s constitution and laws … for exceeding his authority and powers’. The Crimean parliament is given until 15 May 1995 to draw up a more acceptable constitution. 18 March 1995: the Crimean authorities call on Russia to help. (The Russian government thinks that the Crimean issue is an internal Ukrainian affair. The general view is that after the assault on Chechnya, which began on 11 December 1994, Russia could hardly encourage separatism in the Ukraine.) 22 March 1995: the Crimean parliament dismisses the Crimean prime minister, Anthony Franchuk. 31 March 1995: Ukraine president Leonid Kuchma decrees that his consent is necessary for the appointment of the prime minister and the rest of the cabinet in Crimea until a new constitution is adopted. He reinstates Franchuk (whose son is married to Kuchma’s daughter). 15 April 1995: Yeltsin says that he will not sign a friendship treaty with Ukraine until the dispute over Crimea has been solved, until the ‘interests and human rights’ of ethnic Russians have been heeded. 31 May 1995: the Crimean parliament votes to cancel the referendum. 9 June 1995: Yeltsin and Kuchma sign an agreement on sharing the Black Sea Fleet. Although the fleet is to be equally shared, Ukraine will eventually end up with only 18.3 per cent of the fleet after ‘selling’ most of its vessels to Russia (including the possibility of partial debt cancellation or rescheduling). The port of

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Sevastopol will be shared and Russia will pay rent in the form of energy supplies or debt forgiveness. The details of the agreement will be sorted out in future negotiations. 6 July 1995: the Crimean parliament elects a new chairman. Yevgeni Supriunyuk promises that ‘All the actions of the Crimean parliament will be in accordance with Ukrainian law.’ 29 August 1995: President Kuchma lifts direct presidential rule, allowing the Crimean parliament to name a new government (IHT, 30 August 1995, p. 6). The Crimean prime minister and members of the government will henceforth be appointed and dismissed by the Crimean Supreme Soviet (in the case of the prime minister the Ukrainian president’s consent will be required). The decree converts district Soviet executive committees into state administrations subordinate to the Crimean government and to the Ukrainian cabinet of ministers and president (CDSP, 1995, vol. XLVII, no. 35, p. 24). 21 September 1995: the Crimean parliament adopts a new constitution. Crimea is considered an ‘autonomous part of Ukraine’ and there is no president of Crimea (CDSP, 1995, vol. XLVII, no. 38, p. 19). (A new draft constitution was passed on 1 November 1995 by an overwhelming majority of the Crimean parliament. Local heads of security and the interior ministry are to be appointed directly by Kiev, although the appointees have to be approved by the Crimean parliament: EEN, 1995, vol. 9, no. 24, p. 7.) 7 February 1996: the Crimean parliament is angered by Kuchma’s appointment of a new presidential representative with expanded powers. These powers include monitoring compliance with Ukrainian legislation and presidential decrees by all bodies of local government and all institutions and establishments. The permanent representative is equal in status to the head of the central body of state power; he is to co-ordinate the activity of law-enforcement agencies and state executive-branch agencies with regard to Crimea, and his consent will be required for personnel appointments in those bodies. (CDSP, 1996, vol. XLVIII, no. 6, p. 21) 28 June 1996: the Ukrainian parliament approves the new constitution. Crimea is referred to as the ‘Autonomous Republic of Crimea’, which has its own parliament and adopts its own constitution, to be confirmed by a simple majority of the Ukrainian parliament. The provision prohibiting foreign military bases in Ukraine is retained (CDSP, 1996, vol. XLVIII, no. 26, p. 25). 28 May 1997: Ukraine and Russia agree on a division of the Black Sea Fleet (18.3 per cent going to the former and 81.7 per cent going to the latter). Russia is to lease part of Sevastopol for twenty years, with the possibility of an automatic five-year extension if neither side objects. (The agreement was ratified by the Ukrainian parliament on 24 March 1999.) 22 October 1998: the Crimean Supreme Council adopts a new constitution, which establishes Ukrainian as the autonomous entity’s state language. Russian is described as a ‘language of everyday communication’. Previously Russian was

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the ‘official language and language of record’, while Crimean Tatar, Russian and Ukrainian were state languages on the peninsula. In addition, the 1996 constitution guaranteed citizens’ rights to use their native or any language in everyday communication (CDSP, 1998, vol. 50, no. 43, pp. 19–20). 17 May 1999: President Kuchma signs a decree creating a Council of Representatives of the Crimean Tatar People under the Ukrainian president. On 24 May the chairman of the Crimean Council of Ministers went out on to the square [in Simferopol, the Crimean capital] in front of the Crimean government building, where volunteers mobilized by the Majlis [Tatar assembly] had been camped out for a week … He read out a decree he had just signed promising to form a Council of Representatives of the Crimean Tatar People under the Crimean government as an advisory body. Other concessions included television airtime and low-interest loans for building private homes. (CDSP, 1999 vol. 51, no. 24, pp. 16–17)

Chernobyl The working reactors of the Chernobyl plant generate 5 per cent of electric energy (Moscow News, 21–27 April 1995, p. 1). Current generation is dominated by thermal plants (66 per cent), nuclear accounting for 27 per cent (FT, 17 November 1993, p. 20). Nuclear power accounts for a third of electricity and the share has been rising (The Economist, 2 July 1994, p. 14). Up to 40 per cent of energy is obtained from five nuclear power stations (Transition, January–February 1995, p. 20). ‘Ukraine still gets 8 per cent of its electricity from Chernobyl and half its electric power supply comes from nuclear power stations’ (Independent, 6 July 2000, p. 14). An EU report attributes forty-two definite deaths to the Chernobyl accident; the Ukrainian government’s estimate is 8,000 (FT, 15 November 1993, p. 21.) A report by an association of victims of the disaster estimated that about 7,000 had died or committed suicide (CDSP, 1995, vol. XLVII, no. 17, p. 23). Russia uses the official figure of thirty-one deaths so far, the Ukrainian Greens estimate 32,000 and the Ukrainian government uses a figure of 8,000 (IHT, 26 April 1996, p. 10). According to varying estimates, between 3,000 and 10,000 have died in the republics of the former Soviet Union. The Ukrainian Ministry of Public Health calculates that 125,000 have died there (CDSP, 1996, vol. XLVIII, no. 17, p. 12). The reactor that exploded [number four] fourteen years ago [on 26 April 1986] released 100 times more radiation than the atomic bombs dropped on Hiroshima and Nagasaki in World War II … The accident killed thirty-one of their [Chernobyl workers’] fellow workers … More than 4,000 Ukrainians who took part in the cleanup effort have died and 70,000 were disabled by radiation, according to the government … Reactor number two was shut down in 1991 after a fire and reactor number one was closed in

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1996 at the end of its planned lifespan … The Chernobyl plant … at the end provided only about 5 per cent of Ukraine’s electricity. (IHT, 16 December 2000, pp. 1, 4) Reactor number four exploded during a predawn series of engineering tests on 26 April 1986. Thirty-one workers died in the immediate aftermath of the accident. Nobody knows how many died of radiation-related illnesses in the years since … Ukrainian doctors say thousands have died as a result. On Tuesday [22 April 2003] Alexander Rumyantsev, the Russian atomic energy minister, ridiculed such estimates, saying that the toll amounted to no more than a couple of hundred. (IHT, 24 April 2003, p. 4) ‘Thirty firemen and station personnel were killed in the immediate aftermath of the explosion’ (FT, 16 December 2000, p. 5). ‘[According to Russia, there were] forty-five deaths from acute radiation sickness … by 2002’ (CDSP, 2003, vol. 55, no. 19, p. 24). Further developments are as follows: 13 April 1995: Kuchma announces that Chernobyl will be closed down before the year 2000 (more specifically the two out of four reactors still operating; one was closed in 1991 after a fire). A gas-fired power station will compensate. (He implied that the West would pay the lion’s share of the $4.0 billion estimated by Ukraine to be needed to close and replace it.) 16 May 1995: the government announces that one of the remaining reactors will be closed in 1997 and the other in 1999. 20 December 1995: the G7 countries and Ukraine sign an agreement to close Chernobyl by the year 2000. The pact does not set a specific date for closure of the nuclear complex. Further negotiations will be necessary, with funding required from the West (IHT, 21 December 1995, p. 1). 9–12 April 1996: an international conference takes place, commemorating the tenth anniversary of the Chernobyl accident. Ukraine confirmed that it would close the plant by the year 2000 provided the West came up with a large enough amount of aid. 30 November 1996: Chernobyl’s third reactor (number one) is shut down. (It is unclear for how long.) 20 November 1997: at a conference in New York an extra $37 million is pledged to rebuild the concrete sarcophagus at Chernobyl. Twelve countries, the G7 countries and the EU have pledged close to half of the estimated $760 million cost of the reconstruction plan. Ukraine is contributing £150 million (IHT, 22 November 1997, p. 2). 29 March 2000: the government decides that the last generating unit (number three) should be closed, but no specific time frame is indicated. The plant generates 5 per cent of total electricity. A closure date will be set only after all the money from the G7 countries and the European Commission is received (CDSP, 2000, vol. 52, no. 13, p. 17).

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5 June 2000: during a visit by US President Clinton, President Kuchma announces that the last and only operating unit (out of the original four) at the Chernobyl plant will be closed on 15 December 2000. President Clinton announces that the USA will provide aid worth $78 million to help contain radiation at the plant and a further $2 million to help improve safety measures at other nuclear power plants. 5 July 2000: After years of delay the mammoth task of rebuilding a leaky concrete shell encasing a ruined Chernobyl nuclear reactor can now proceed after more than forty nations pledged … to cover nearly all of the estimated $768 million in construction costs … The new concrete tomb to prevent any further release of radiation should be completed by 2005 … At the conference [in Berlin] … $320 million was raised, which follows earlier pledges of $393 million at an inaugural meeting in New York three years ago … The remaining funds, about $50 million, would be forthcoming at a third meeting … Money now pledged was sufficient to begin work on a new sarcophagus to encompass the destroyed reactor that exploded and caught fire in the 1986 disaster … Experts say a new concrete tomb is urgently needed to prevent further emissions of radioactivity … Ukraine has been reluctant to close the entire Chernobyl power plant – which supplied up to 10 per cent of the nation’s electricity – until it could be assured of new power sources … Nuclear power still accounts for half of its [Ukraine’s] electricity. (IHT, 6 July 2000, pp. 1, 3) 7 December 2000: The EBRD yesterday [7 December] approved a controversial $215 million loan to Ukraine to complete two nuclear power stations … subject to a series of strict conditions – including proof that Chernobyl is permanently closed as planned on 15 December, that a safety check is undertaken by international nuclear regulators, and agreement is reached on the resumption of a $2.6 billion threeyear IMF loan package to Ukraine which was suspended in September 1999. (FT, 8 December 2000, p. 15) 15 December 2000: the fourth and final reactor (number three) is closed down on schedule.

Political developments from mid-1995 to the 1998 general election 18 May 1995: parliament passes Kuchma’s ‘law on power’ by one vote, giving decisive political advantage to the president (EEN, 1995, vol. 9, no. 11, p. 1). The president now has full control over ministerial appointments (The Economist, 27 May 1995, p. 6).

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1 June 1995: parliament vetoes Kuchma’s decree of 31 May to hold a plebiscite to push forward economic and constitutional changes. (The question asked citizens was whether they ‘trust president or parliament’.) (Kuchma’s decree came after parliament had again failed to ratify constitutional amendments passed on 18 May giving the president broad powers to form a cabinet without parliamentary approval and to control local government: FT, 2 June 1995, p. 3.) 5 June 1995: Kuchma issues a decree invalidating parliament’s veto. 7 June 1995: the president and parliament agree to sign a ‘constitutional accord’. Parliament votes to cede the president (temporary) extra powers (e.g. the right to appoint ministers without having to refer them to parliament, greater powers to issue decrees and the right to appoint local administrators), while Kuchma agrees to a one-year deadline for a new constitution, to yield the power to dissolve parliament and to cancel the plebiscite. The June 1995 Constitutional Agreement between the president and the parliament … temporarily resolved a serious deadlock by regulating the division of power between the legislative and the executive branches, while setting out a procedure for the adoption of a new constitution … Still, Ukraine is the only country in the former Soviet Union that has not adopted a new constitution since independence and Kuchma’s June [1996] deadline will prove tough to meet. (Mroz and Pavliuk 1996: 56) 8 June 1995: Kuchma appoints Yevgeni Marchuk as prime minister. 5 January 1996: Ukraine confirms that 90 per cent of nuclear warheads have been returned to Russia. 27 May 1996: President Kuchma dismisses Prime Minister Marchuk. The press office statement: ‘Premier Yevgeni Marchuk did not effectively carry out his duties in running the government. Rather than fulfilling his day-to-day duties, he has most recently been using all his energy to promote his own political image.’ The prime minister is blamed for the lack of progress in economic reform and for lax budget discipline. He has brought the country to a state of ‘economic crisis’. (Marchuk had, in a speech to parliament, called for a softening of the policy of economic reforms, the tough monetary policy having caused a slump in production and a build-up of unpaid wages: CDSP, 1996, vol. XLVIII, no. 21, p. 23.) Marchuk is replaced by deputy prime minister Pavlo Lazarenko. (Lazarenko was approved by parliament on 11 July 1996.) 1 June 1996: Ukraine announces that the last nuclear weapon has been sent to Russia. 25 June 1996: Ukraine says it will seek associate Nato membership if the alliance is expanded (IHT, 26 June 1996, p. 5). 28 June 1996: parliament approves the new constitution. The new constitution is to be overseen by a constitutional court still to be set up. The president chooses the prime minister and regional heads. But parliament vets the choice of prime minister and other positions such as the heads of the central bank, the privatization

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agency and the national broadcasting organization. Only for three more years (until the end of Kuchma’s term) may the president issue decrees and then only on economic matters unaffected by current legislation. The president is unable to call a state of emergency without parliament’s consent or to dissolve parliament. A right to private property is enshrined in the constitution. Ukrainian remains the state language, but the government will pay for schools which teach in other languages. Crimea retains its autonomy. Although Crimea’s elected leaders may write their own constitution, Ukraine’s parliament has the final say. Military bases for foreigners are forbidden, although Ukraine is permitted to ‘lease’ them (The Economist, 6 July 1996, pp. 42, 44). The president appoints the government and the prime minister in consultation with parliament and the judicial branch is recognized as independent. The provision prohibiting foreign military bases in Ukraine is retained (CDSP, 1996, vol. XLVIII, no. 26, p. 25). ‘Mr Kuchma’s error is that he has allowed one clan and one region to get too rich … his old friends from Dnepropetrovsk … have done spectacularly well. They dominate business and politics (The Economist, 14 December 1996, p. 48). 25 February 1997: the finance minister (for ‘serious inadequacies’) and the statistics minister (for bad management) are dismissed. The economy minister and the minister for machine-building and the military complex are moved to other posts (FT, 26 February 1997, p. 2). 26 February 1997: reformist economy and finance ministers are appointed (FT, 27 February 1997, p. 2). They are Yuri Yekhanurov and Igor Mitiukov respectively. 2 April 1997: Viktor Pinzenyk offers his resignation to Kuchma (accepted on 7 April) because of the slow pace of economic reform. His resignation letter referred to the absence of political forces in support of reform (UET, Monthly Update, March 1997, p. 5). 9 April 1997: pro-reform Sergei Tigipko is appointed deputy prime minister. 29 May 1997: Ukraine and Nato initial a security charter. This includes Ukraine’s ability to consult Nato on perceived security threats, a permanent Ukrainian mission at Nato headquarters and the holding of regular political talks. Yeltsin and Kuchma sign a treaty on friendship, co-operation and partnership, including the mutual recognition of existing borders. Russia and Ukraine will base their relations on the non-use of force or the threat of force, ‘including economic means of pressure’ (UET, Quarterly Update, June 1997, p. 5; CDSP, 1997, vol. XLIX, no. 22, p. 2). (Yeltsin had not before visited Ukraine as president of Russia. He postponed the visit six times.) (The Ukrainian parliament ratified the treaty on 14 January 1998.) (In May 1997 Ukraine signed a declaration of reconciliation with Poland: Business Central Europe 1997: 53.) 2 June 1997: the presidents of Ukraine and Romania sign a Treaty of Friendship, Co-operation and Partnership, including mutual recognition of (‘immutable’) existing land frontiers. Sea frontiers will be left to negotiations to be completed by 1999.

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28 June 1997: Kuchma says that parliament is blocking economic reform (EEN, 1997, vol. 11, no. 13, p. 6). 2 July 1997: Kuchma signs a decree accepting Lazarenko’s resignation on health grounds (‘his inability to perform his duties due to the need for prolonged medical treatment’). (‘Kuchma made it pretty plain thereafter that he had sacked him because of slow reform and the damage that his reputation for sleaze was doing to the country’: Business Central Europe, September 1997, p. 26.) 9 July 1997: a Charter on a Distinctive Partnership between Nato and Ukraine is signed: ‘Nato and Ukraine will develop a crisis consultative mechanism to consult together whenever Ukraine perceives a direct threat to its territorial integrity, political independence or security.’ 16 July 1997: parliament approves Valeri Pustovoitenko as prime minister. ‘Pustovoitenko … looks less greedy … But he seems hardly any keener on reform … Less than a third of Ukraine’s MPs are reform-minded; many of the rest are open to the highest bidder’ (The Economist, 26 July 1997, p. 43). Pustovoitenko’s economic plan is not convincing in the least … Little has been achieved and the bickering between the government and parliament continues to block any reform measures … He is a Kuchma loyalist rather than a convinced reformer and was approved by Mr Kuchma to beef up popular support for the parliamentary elections in March [1998]. (Business Central Europe 1997: 52) 18 August 1997: the president approves a document called ‘urgent measures for accelerating economic reforms and overcoming the crisis’ (UET, Monthly Update, August 1997, pp. 5–7). 21 August 1997: the justice minister, a reformist who spearheaded an anticorruption campaign, resigns (FT, 22 August 1997, p. 2). 22 August 1997: the president approves Sergei Tigipko as vice-premier for the economy and Igor Mitiukov as minister of finance. 25 August 1997: the start of joint naval exercises off the Crimean coast, involving ships from Ukraine, the USA, Turkey, Romania, Bulgaria and Georgia, brings protests from Russia (which declined an invitation to take part). (In November 1997 Ukraine and Russia did undertake joint exercises.) 24 September 1997: parliament approves a new election law, which stipulates that half of the 450 deputies will be elected according to party list votes (provided a party reaches a threshold of 4 per cent) and half will be elected directly. Previously all deputies were elected directly (FT, 25 September 1997, p. 2). 22 October 1997: Kuchma signs a new election law providing for a 50 : 50 split between proportional representation and majority constituency elections (EEN, 1997, vol. 11, no. 21, p. 8). 1 March 1998: the first state visit of the president of Ukraine to Russia results in the signing of an intergovernmental agreement and an economic co-operation programme for 1998–2007 (UET, Quarterly Issue, March 1998, p. 3).

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6 March 1998: Ukraine and the USA agree on a nuclear co-operation pact. Ukraine says that it will cancel an order from Russia to supply turbines for Iran’s nuclear power project. In return, for example, the USA will sell nuclear fuel to, and bid for, contracts to complete nuclear reactors in Ukraine (IHT, 7 March 1998, pp. 1, 10).

The general election of 29 March 1998 There are 450 seats in the Supreme Council (Verkhovna Rada). Half of the seats were decided by proportional representation (party list), with a 4 per cent threshold. The remaining 225 seats were decided by direct elections in single constituencies. Thirty parties contested the election. The turnout was 70.78 per cent. (See Table 7.1.) Table 7.1 Ukraine: the general election of 29 March 1998 Party

Seats in the Supreme Council Number

%

122 34 16 1 173

27.11 7.56 3.56 0.22 38.44

1 2 1 4

0.22 0.44 0.22 0.89

19 29 23 17 8 3 1 2 2 1 105

4.22 6.44 5.11 3.78 1.78 0.67 0.22 0.44 0.44 0.22 23.32

Rukh National Front Menshe Sliv Total Right

46 5 1 52

10.22 1.11 0.22 11.56

Independents Total

116 450

25.78 100.00

Communist Party Socialist/Village Progressive Socialists Working Ukraine Total Left Social Liberal Union Party of Regional Revival Soyuz Total Russophile Greens Popular Democrats Hromada Social Democrats (United) Agrarians Reforms and Order Razom Forward Ukraine Christian Democratic Party NEP Total Centre

Source: Wilson and Birch (1999: 1040)

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The main parties: Communist Party The leader of the party, Petro Simonenko, says that he wants to abolish the presidency and to let the largest party in parliament form the government. He calls for ‘rapprochement’ with Russia and Belarus (Guardian, 1 April 1998, p. 11). The self-proclaimed ‘Leninist Communist Party of Ukraine’ is one of the most left-wing communist successor parties in the former Soviet bloc … The Communists called for ‘the Russian language … to be given the status of a state language alongside the Ukrainian language’ and unambiguously supported ‘the voluntary creation of an equal Union of fraternal peoples’ on the territory of the former USSR. (Wilson and Birch 1999: 1043) Rukh (People’s Movement of Ukraine) ‘The nationalist party that has its power base in western Ukraine’ (FT, 31 March 1998, p. 3). Rukh [People’s Movement of Ukraine] avoided the grand rhetoric of liberal reform, well aware of its unpopularity, calling instead for lower taxes, ‘the development of small and medium business’, an anti-mafia campaign and a ‘programme for the struggle with poverty’ … ‘a return to Europe’ and insisted on ‘the national idea as a guarantee of strengthening statehood, the rebirth and unification of the Ukrainian nation’. (Wilson and Birch 1999: 1043) Socialist/Village Bloc (Socialist and Peasant Party) Allied to the Communist Party (FT, 31 March 1998, p. 3; The Economist, 28 March 1998, p. 46). The party is led by parliamentary chairman Alexander Moroz. The Socialist/Village Bloc was more moderate in tone, confining itself to a call for ‘securing effective state control over the banking system and over strategic profitable markets’ and ‘effective regulation of prices’ … A call for ‘good-neighbourly fraternal economic and political relations, above all with the Slavonic world, Russia and Belarus, other states’. (Wilson and Birch 1999: 1043) National (People’s) Democratic Party Led by prime minister Valeri Pustovoitenko. ‘The National Democratic Party stood for a continuation of reforms … The NDP’s media campaign stressed the virtues of experience … On the national issue the party trod the middle ground’ (p 1044).

522 Ukraine Hromada (Community)

The party is

led by Pavlo Lazarenko, a notoriously rich gas baron who was sacked as prime minister last June. Once one of Mr Kuchma’s cronies, from the days when the president ran a missile factory in Dnipropetrovsk, Mr Lazarenko is now his sworn enemy. (The Economist, 28 March 1998, p. 46) ‘An opposition party led by Pavlo Lazarenko, the former prime minister who is a sworn opponent of the president … Hromada … is made up primarily of commercial interests from the Dnipropetrovsk region in eastern Ukraine’ (FT, 31 March 1998, p. 3). ‘The Hromada party faction [is] headed by former premier Pavlo Lazarenko, who controls much of the country’s natural gas trade and supply and who leads the powerful Dnipropetrovsk “mafia” ’ (EEN, 1998, vol. 12, no. 7, p. 6). Green Party ‘Pro-government … party, which succeeded because of an immense advertising budget and the perception that it is politically neutral’ (FT, 31 March 1998, p. 3). ‘A leading member … makes little attempt to hide the fact that the Green Party … is simply a front for big business’ (FT, 17 April 1998, p. 2). ‘The number of bankers in its ranks and its expensive advertising campaign suggest it is largely a commercial creature’ (Guardian, 1 April 1998, p. 11). United Social Democratic Party ‘A centrist vehicle for Leonid Kravchuk, the former president, and Yevgeni Marchuk, the former prime minister’ (FT, 31 March 1998, p. 3). Agrarian Party ‘A left-leaning rural party that for the time being is pro-government’ (p. 3). Pro-government (IHT, 31 March 1998, p. 5). ‘International observers were satisfied with the fairness of the election process, though many noted pervasive open voting (voters filling out ballots in public), especially in rural districts’ (FT, 31 March 1998, p. 3). OSCE said that pre-election campaigns were ‘marred by incidents of violence, arrests and actions against candidates and abuse of public office that represent serious shortcomings in the conduct of the campaign, and raise questions about the neutrality of the state apparatus in the election’. The OSCE report concentrated on violations in local elections, but also pointed out many attempts by the Ukrainian government to manipulate the national media (FT, 1 April 1998, p. 2). During the political campaign before the March election there were ominous signs that Ukraine’s short democratic tradition may be in jeopardy. The government closed newspapers and arrested an opposition newspaper publisher on flimsy grounds. OSCE sharply criticized the government’s handling of the elections, saying that these incidents ‘cast doubt on the neutrality of the state apparatus in the elections’. (FT, Survey, 5 May 1998, p. iv)

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The Communist Party and its allies increased their representation but not as much as generally expected. In contrast, Hromada did better than generally expected. Although 116 of the 225 constituency deputies were originally elected as independents, by the summer only thirty-seven of them had failed to join one of the eight factions. Many deputies elected from parties that failed to meet the 4 per cent threshold had also joined factions … The leftists gained hardly any ground … The real contest was between … Hromada and the National Democratic Party. (Wilson and Birch 1999: 1058) Comments The Communists did indeed emerge as the largest single force, with … 122 out of 450 seats in parliament … However, the real story of the elections was one of underlying stability and limited change. The elections confirmed overall voting patterns that were initially apparent in the transition elections of 1990–4. Ukraine still has no real national party system, only a set of local systems, but the sum total of these systems now seems to produce overall results that are fairly predictable … The left as a whole won roughly the same proportion of votes and seats as in 1994 (40 per cent) … The 1998 elections confirmed that the left parties command plurality, but not majority support. The nationalist … mainstream underperformed slightly on its traditional 20 to 25 per cent with under 15 per cent of the seats (Rukh, members of other rightists parties elected in single-member seats, plus independents). The far right won 2 to 3 per cent of the vote, which … was roughly the same as in 1994 … Significant change came only in the political centre, which took the same proportion of seats as in 1994, but where proper political parties have now emerged for the first time. (p. 1039) The new parliament has much the same balance of forces as in 1994. The new speaker, Tkachenko, like his predecessor Moroz, was chosen from the same moderate leftist camp, but … no stable overall majority exists … When first elected the Rada reflected the Ukrainian electorate – a leftist plurality outweighing a rightist minority on either extreme and a substantial middle ground. (p. 1060) In the past three months alone, several candidates have been arrested, two newspapers have been shut down, one newspaper has been firebombed and opposition political parties have been banned from state-run television …

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Ukraine The Communist Party is likely to grab the biggest share of the vote, a reflection in part of Ukraine’s 15 million retirees who long for the days of the cradle-to-grave security and of the country’s 11 million ethnic Russians, who support closer ties to Moscow. (Christine Spolar, IHT, 30 March 1998, pp. 1, 6) Kuchma … has won democratic credentials and delayed reform since election in 1994 by trying to work with parliament rather than without it, as other post-Soviet leaders, in Russia and Central Asia, have done … The election was a disaster for Ukrainian nationalists. The nationalist standard bearer, Rukh, scraped into second place with less than 9 per cent of the vote and was beaten by Communists in some of its old Kiev strongholds. (James Meek, Guardian, 1 April 1998, p. 11) The Ukrainian election results make depressing reading. Years of weak government and a state of permanent conflict between a fractious parliament and a well-intentioned but ineffective president have left millions of voters dissatisfied with the post-communist reality. Nostalgia for the impoverished but guaranteed minimum standards of living offered by the former Soviet regime has grown. Little wonder under these circumstances that the communists, still the only nationally organized party, should have emerged as the largest single party, albeit with little more than a quarter of the seats … The best thing about the Ukrainian elections has been the emergence of a new bloc of 114 independent members in the 450 seat parliament. Many are either business people or campaigners on a reformist platform. (FT, editorial, 2 April 1998, p. 31) A new political class of 150 Ukrainian businessmen and bankers … won seats … The Ukrainian government is counting on businessmen to form a bulwark of opposition to the left wing, which increased its representation to 40 per cent of the seats against 25 per cent in the outgoing parliament … Many people say that the Communist Party’s success last month was mainly due to citizens’ anger at the excesses of capitalists who have made vast fortunes from the country’s disarray. Ukraine’s cash-starved economy is at present run by monopolistic trading companies which import energy, such as gas and oil products, and barter them for finished export goods from farms and factories, often on heavy terms. Last year [1997] the amount of barter in the economy was equal to two-thirds of the country’s GDP. At the same time an estimated $20 billion to $30 billion has been spirited out of the country to bank accounts in Cyprus and Switzerland since Ukraine gained its independence in 1991. ‘We have elected a parliament, half of whom are simply seeking immunity from prosecution,’ complained a front page article in Zerkala Nedelya, a respected Kiev newspaper, referring to a law

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which grants MPs special legal status. The tide of businessmen coming into parliament has had a mediating effect on the left, which, having fallen short of a majority, will need to form a coalition with centre parties in order to be an effective force in parliament. (Charles Clover, FT, 17 April 1998, p. 2) To combat the regionalists’ influence Kiev was forced to make something of a Faustian bargain. Central government, like its counterpart in Russia, decided to promote the development of political parties … The first and most visible manifestation of this unofficial policy was that in 1993, after being banned for two years, the Communist Party was allowed to reform and rapidly became the largest political party in the country. Last summer [1997] the passage of a new election law strengthened the political parties considerably by allocating half of the seats in parliament for election by party list rather than in individual districts … But weakening the regional bosses means strengthening the left, which inflicts political paralysis … Ukraine is one of the only countries in the CIS where parliament remains a strong force in politics. In virtually all the rest, including Russia, it has been either abolished or seriously weakened as an institution … Others point out that Ukraine’s main problem is not parliament. The real culprit in Ukraine’s paralysis is the government … Little by little, however, the government has been making progress to trim its bloated ranks and rationalize decision-making. (Charles Clover, FT, Survey, 5 May 1998, p. iv) The Communist Party led the balloting in a majority of localities and won the largest bloc of seats in the parliament. Its stated policy goals include the reversal of some key elements of Ukraine’s privatization programme, as well as partial renationalization of industry and the banking system … However, the ability of the Communist Party to turn back the clock is severely limited. Ukraine’s need for access to international investment capital and development assistance is likely to prove stronger than the siren song of a bankrupt ideology … Ukrainian democracy faces its next test in eighteen months, in the October 1999 presidential election. Officials from both the legislative and the executive branches may be tempted to defer difficult decisions so that they can say and do things that they believe will earn favour with the voters … While there is cause for concern about what lies ahead, there are reasons for optimism as well …Even the latest elections contained encouraging signs that Ukrainians are dealing with their ethnic and cultural differences through peaceful, democratic means. The results indicate that members of the Russian- and Polish-speaking minorities tended to cast their ballots for candidates on the basis of their stands on issues, not on the basis of ethnicity … For the United States, that means maintaining an array of programmes that have made Ukraine the fourth largest recipient of American assistance – and the number one recipient in the former Soviet Union. (Strobe Talbott, IHT, 14 April 1998, p. 8)

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Ukraine The left-wing parties won 38 per cent of the seats in parliament, the rightwing opposition (Rukh) garnered about 10 per cent and independent deputies 25 per cent. While the centre parties may support the president and his parliament, they now hold an even smaller minority than before. In the past the government relied on representatives of different groupings and it is not always clear how the independent deputies will vote on specific issues … Under the new configuration the government can hardly be expected to make significant economic strides also because the Ukrainian president wields less power than the Russian president, for instance, and presidential elections are scheduled for late 1999. (Deutsche Bank Research, Ukraine, 26 May 1998, p. 2)

Political developments after the March 1998 general election 6 May 1998: the USA and Ukraine sign an agreement that allows Ukraine to import technology for the nuclear industry (FT, 7 May 1998, p. 6). 7 July 1998: Alexander Tkachenko (Peasant Party of Ukraine) is elected parliamentary speaker. The new parliament was so hopelessly divided that it required twenty votes to elect a speaker. In the interim parliamentary business stalled and Mr Kuchma ruled by decree. He took the opportunity to push through some of the mildly reformist legislation he favours. But the parliament returned rejuvenated. The tiff over electing a speaker had the accidental result of forming an effective anti-Kuchma bloc, comprising the Communists, various independents and the nominally pro-business Hromada party, led by the discredited former premier Pavlo Lazarenko … At the end of the year things came to a head: parliament overturned a presidential veto on a bill it had passed to limit Mr Kuchma’s powers over tax policy. They also rejected an agreement the government has signed with the World Bank and prevented Mr Kuchma from cutting any spending already written into the budget. (Business Central Europe 1998: 47) 17 February 1999: parliament votes in favour of arresting former prime minister Pavlo Lazarenko on the grounds of corruption. An arrest warrant was issued on 19 February by the prosecutor-general. Also on 19 February Lazarenko was detained (apparently on the grounds of passport irregularities) while trying to enter the USA. (Lazarenko was released on bail from a prison in Switzerland on 18 December 1998. He is seeking asylum in the USA.) 31 October 1999: the first round of the presidential election takes place. There are thirteen candidates. The turnout was around 70 per cent. Leonid Kuchma came first in the first round with 36.36 per cent of the vote.

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Leonid Kuchma … has employed the rhetoric of market-based economic reform, but presided over rampant corruption. Alexander Volkov, one of his closest advisers, is under investigation by prosecutors in Belgium as part of an enquiry into the suspected laundering of money there for a Russian criminal syndicate. Ukraine’s economy is based on a system of patronage known as the shakhmatka (Ukrainian slang for chessboard). (Charles Clover, FT, 29 October 1999, p. 19) Leonid Kuchma is running on a five-year record of decline … Far more dismaying is the extent to which the campaign seems to have been rigged to favour Mr Kuchma … The tactics include blizzards of phony leaflets promoting stands that opposition candidates say they have not taken, the emergence of a radical populist candidate who has split the two leading opposition candidates, and retribution against private media that have given favourable coverage to the president’s rivals. Mr Kuchma’s rivals have been all but ignored by the state-run television and the major independent channels, largely controlled by pro-Kuchma tycoons. (Michael Wines, IHT, 29 October 1999, p. 2) ‘There is no prospect of a fair election nationwide … However … as disenchanted as the electorate might be, Kuchma is regarded by over half the electorate as a better bet than his half dozen main adversaries’ (EEN 1999, vol. 12, no. 20, p. 1). Petro Simonenko came second with 22.32 per cent of the vote. ‘Petro Simonenko, the head of the Communist Party … wants to see Ukraine join Russia and Belarus in an “equal union of brother states” ’ (FT, 29 October 1999, p. 19). ‘Mr Simonenko favours including Ukraine in a recreation of the Soviet Union and reacquiring a nuclear arsenal’ (FT, 3 November 1999, p. 10). Petro Simonenko … yesterday [5 November] took steps to distance himself from hardline communist doctrine and attract moderate voters [in the second round of voting on 14 November]. He promised to implement an ‘independent’ foreign policy, and pledged his loyalty to Ukraine’s continued independence. In the past he has favoured inclusion of Ukraine in a union of ‘Slavic Brotherhood’ with Russia and Belarus, but he emphasized yesterday that he was in favour of maintaining Ukraine’s sovereignty. ‘We are true patriots and of our motherland, a civilized European nation,’ he said … He asked voters to ‘vote with mind and heart for Ukraine’. (FT, 6 November 1999, p. 6) Mr Simonenko has often said he would like to see Ukraine join an ‘equal union of independent states’ with Russia and Belarus, a ‘Union of Slavic Brotherhood’. In a recent interview with the FT he insisted that Ukraine would maintain its sovereignty in such a union. Since the first election round

528 Ukraine he has sought to appeal to a moderate audience, saying he will pursue an ‘independent’ foreign policy, and insists he is a Ukrainian patriot. (FT, 10 November 1999, p. 14) Ukraine’s Communists are moderating their own economic programme and pledging to leave existing businesses more or less alone. As Russia’s tin-cup economy staggered and Belarus’s freedoms shrank this year, the Communists mostly shelved the notion that Ukraine should reunite with its neighbours. (Michael Wines, IHT, 29 October 1999, p. 2) ‘[He has been] campaigning on such promises as abolishing Ukraine’s presidency, restoring socialism and scrapping his country’s “partnership for peace” with Nato’ (The Times, 2 November 1999, p. 18). Mr Simonenko tried at the last minute [before the second round of voting] to convince voters that they had nothing to fear … Mr Simonenko had pledged to maintain rights to private property, support private business and restore churches despite the Communists’ atheist policies. But the Communist programme also called for a state-planned economy with heavy subsidies for major industries, price controls, halting privatization of state assets, a ban on land sales and a likely government monopoly on foreign trade. (IHT, 15 November 1999, p. 6) Alexander Moroz came third with 11.88 per cent of the vote. Alexander Moroz of the Socialist Party is a political moderate who enjoys a high reputation among intellectuals in Kiev. But Mr Kuchma has employed ruthless tactics to sideline his rivals. He has done so by using the machinery of government. The government has closed off media access to his opponents and spent huge amounts on paying wages and pensions in advance of the elections. It has also played heavily on an indirect association between Mr Moroz and a terrorist attack. Earlier this month two grenades were thrown at Ms [Natalia] Vitrenko, who was slightly injured … State television broadcast the news that Ms Vitrenko’s assailant was the brother of a Moroz campaign worker. (Charles Clover, FT, 29 October 1999, p. 19) On 2 October someone tossed a hand grenade during a rally of Vitrenko supporters, wounding the candidate and thirty-three others, some seriously. Hours later the government said it had arrested two Russian assassins – and traced the grenades to the Moroz campaign manager. (Michael Wines, IHT, 29 October 1999, p. 2) Natalia Vitrenko came fourth with 11.24 per cent of the vote.

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‘She is strongly opposed by Moroz’s Socialist Party of Ukraine, from which she hived off a sizeable faction in order to form her Progressive Socialist Party’ (EEN, 1999, vol. 12, no. 20, p. 2). ‘Natalia Vitrenko … is fervently pro-Russian and has campaigned for nuclear rearmament’ (FT, 29 October 1999, p. 19). Natalia Vitrenko is running the most radical campaign of any serious candidate … She would eject the IMF from Ukraine and send the government’s economic reformers to work in the uranium mines … It is taken for granted by … most experts, but never proven, that Mr Kuchma’s supporters jumpstarted the Vitrenko campaign with cash donations. Regardless, her candidacy has crippled the two leftists most likely to rival Mr Kuchma. (Michael Wines, IHT, 29 October 1999, p. 2) ‘Outside observers criticized the conduct of the campaign: the main media slavishly backed the government, public officials campaigned vigorously, dirty tricks abounded’ (The Economist, 6 November 1999, p. 54). 14 November 1999: in the second round of voting Kuchma wins comfortably with 56.31 per cent of the vote. Simonenko gets 37.76 per cent of the vote. The turnout was 74 per cent. The appointment [on 10 November] of Yevgeni Marchuk, who was unanimously supported by all of western Ukraine and by many nationalist organizations, to the post of secretary of the Ukrainian national security and defence council gave Kuchma roughly another 10 per cent of the vote … The day after the first round of voting … Leonid Kuchma fired several regional officials representing provinces where Alexander Moroz won majorities. Those regional leaders whose ‘subjects’ had voted en masse for Petro Simonenko were summoned to the president’s office for a ‘serious talk’. (CDSP, 1999, vol. 51, no. 46, p. 18) (Marchuk had 8 per cent of the vote in the first round.) ‘OSCE, which monitored the polls, has said there was “comprehensive interference” in the campaign from the state apparatus – including pressure on the media’ (FT, 16 November 1999, p. 13). 16 December 1999: Viktor Yushchenko, the governor of the central bank, is appointed prime minister. (He was approved by parliament on 22 December.) 19 January 2000: ‘Pro-Kuchma parliamentary majority parties walk out of parliament in protest at speaker Alexander Tkachenko’s refusal to resign [as parliamentary speaker]’ (EEN, 2000, vol. 12, no. 22, p. 6). 21 January 2000: ‘The parliamentary majority (243 MPs) assemble in Ukrainian House near the parliament building and vote to dismiss parliamentary chairman Tkachenko’ (p. 6). The centre-right deputies vote to remove Tkachenko as speaker and to set up a commission to investigate his financial and economic activities. Tkachenko is supported by communists, socialists and agrarians (CDSP, 2000, vol. 52, no. 4, p. 18).

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1 February 2000: People’s Democratic Party leader Ivan Plyushch is elected parliamentary speaker by the centre-right majority (259 of the 446 deputies). He held the same post from 1991 to 1994. Sessions of the majority and minority wings of the Supreme Council are now being held separately and in different buildings, the latter continuing to assemble in the official council hall. ‘The majority has already seized control of all the parliamentary committees. The centre-right majority in the Supreme Council takes an openly pro-Kuchma line’ (CDSP, 2000, vol. 52, no. 5, p. 20). 8 February 2000: ‘Yesterday [8 February], for the first time since the parliamentary crisis in Ukraine began, the Supreme Soviet attempted to hold a plenary session with both the rightist majority and the leftist minority. However, the leftists virtually torpedoed the session’ (CDSP, 2000, vol. 52, no. 6, p. 16). 20 February 2000: the number of seats held by parliamentary factions is as follows: Communist Party, 111; Regional Revival, thirty-eight; Motherland, thirty-six; Social Democratic Party (United), thirty-eight; People’s Democratic Party, twenty-six; Ukrainian People’s Movement, twenty-four; Labour Party of Ukraine, twenty-seven; Left–Centre faction (Socialist Party), twenty-two; People’s Movement of Ukraine, seventeen; Green Party, seventeen; Independents, fourteen; Reforms–Congress, fourteen; Hromada, twelve; Peasant Party, eleven (EEN, 2000, vol. 12, no. 22, p. 12). 11 March 2000: an estimated eighty-one coal miners die in an explosion in the Barakova mine in the Lugansk region of eastern Ukraine. (This is the highest death toll since 1980 when sixty-six miners and two rescuers died at the Gorskaya mine. In 1998, 360 miners were killed and 297 in 1999: Guardian, 13 March 2000, p. 13; Independent, 13 March 2000, p. 12. ‘Ukraine has the world’s highest coal industry death rate’: Independent, 13 March 2000, p. 12.) 22 March 2000: President Kuchma signs a law ending the death penalty. 16 April 2000: a referendum is held. It was called by President Kuchma (and backed by a petition with 3 million signatures) essentially to increase the powers of the president over parliament. The original six questions were: Does the public have confidence in the Supreme Soviet and should the constitution be amended to give the president the power to dissolve parliament? Should the president have the power to dissolve parliament if it fails to form a parliamentary majority within one month or to pass a government-proposed budget within three months? Should the immunity of deputies be abolished? Should the number of deputies be reduced from 450 to 300? Should the Supreme Soviet be replaced with a bicameral parliament? Should it be possible to adopt a constitution by referendum? (CDSP, 2000, vol. 52, no. 4, pp. 17–18). The upper house will be made up of governors, who in Ukraine are appointed by the president, not elected (p. 18). On 6 April the constitutional court declared the first and last questions unconstitutional and they were removed from the ballots (UETC, Quarterly Issue, March 2000, p. 3). Voters are asked to approve constitutional amendments which will allow for a dissolution of parliament if it fails to form a majority government within a

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month, approve a state budget within three months, or if there is a no confidence vote in a national referendum. The number of deputies will be cut from 450 to 300 and the present single chamber will be supplemented by another, designed to represent regional interests (Business Central Europe, February 2000, p. 40). The referendum asks if Ukrainians want to transform parliament into a bicameral assembly, with one part consisting or regional representatives. ‘Since oblast governors are appointed by the president, the move would allow Mr Kuchma to pack one chamber of parliament with his subordinates.’ Each question has to be passed in parliament as a constitutional amendment (Business Central Europe, May 2000, p. 45). Preliminary results showed massive backing on all questions and a voter turnout of 81 per cent. ‘But several polling station officials in the regions have complained that local politicians forced them to fiddle turnout figures where they were not high enough … Suspicions of vote-rigging have marred the results’ (p. 45). The upper house will consist of senators appointed by the president and the president will be able to dissolve the parliament if it is unable to form a majority and adopt a budget. Also there will be no such thing as deputies’ immunity … All the opposition parties have said there were massive irregularities … The Council of Europe did not recognize the referendum as legitimate and did not send observers … According to the central electoral commission, of the 78 per cent of citizens who took part in the plebiscite almost 90 per cent said yes to all four questions. (CDSP, 2000, vol. 52, no. 16, p. 20) 30 June 2000: former prime minister Pavlo Lazarenko is given a suspended eighteen-month prison sentence in Switzerland after pleading guilty in his absence to charges of money-laundering (to the tune of $9 million). The money relates to sums received from a state farm and commissions paid in return for export permits while he was regional governor of Dniepropetrovsk in 1994. Nearly $6.6 million frozen in Swiss bank accounts is to be returned to Ukraine. The deal paves the way for Switzerland to drop its extradition request to the USA. Lazarenko has been detained in the USA since February 1999 on further money-laundering charges. He has pleaded not guilty to charges of laundering $114 million between 1994 and 1999 (FT, 1 July 2000, p. 7; Guardian, 1 July 2000, p. 15; CDSP, 2000, vol. 52, no. 27, p. 17). ‘Ukraine, for its part, holds Lazarenko responsible for misappropriations totalling $800 million’ (CDSP, 2000, vol. 52, no. 27, p. 17). August 2000: the Supreme Council enacts a new language law. Although the new law makes special provision for the use of Russian in Crimea, for other regions Ukrainian will be the sole official language. Under the new law not only will all official correspondence have to be conducted in Ukrainian – even commercial correspondence will have to be carried out in the Ukrainian language. Ukrainian will be the only language that employees

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Ukraine of government organizations, communications and transportation enterprises, health care institutions and social welfare offices will be permitted to use in dealing with the public. When applying for jobs and undergoing certification, officials of government agencies and local self-governing authorities, as well as employees of state enterprises and organizations (which include housing management offices, polyclinics, the courts and the police), will be required to demonstrate oral proficiency in the state language and an ability to conduct official business in it to a special language commission. The law imposes restrictions on the use of Russian in the news media. From now on even commercial radio and television will be required to broadcast in Ukrainian at least 70 per cent of the time. The use of Russian is prohibited in commercials ‘and in other forms of audiovisual promotional materials’. (CDSP, 2000, vol. 52, no. 35, p. 17)

16 September 2000: the investigative reporter Georgy Gongadze disappears. He has been critical of the Kuchma regime (Independent, 14 December 2000, p. 11). A decapitated and mutilated corpse was found on 2 November. There is speculation that it is Gongadze (CDSP, 2000, vol. 52, no. 46, p. 18). ‘The leader of the Socialist Party, Alexander Moroz, released an audio cassette last month [28 November] that he said proved Mr Kuchma and several senior officials played key roles in the disappearance of the journalist, Georgy Gongadze’ (IHT, 22 December 2000, p. 4). The tape recordings are allegedly of Mr Kuchma demanding that Ukraine’s intelligence services find a way to silence the troublesome journalist. ‘I am telling you, drive him out!’ the president [allegedly] said on the tapes. ‘Throw him out! Give him to the Chechens [unintelligible words] then a ransom.’ (IHT, 26 June 2001, p. 2) On Tuesday [28 November] Alexander Moroz, leader of the Socialist Party of Ukraine, declared that the disappearance of Georgy Gongadze, a wellknown journalist in Ukraine, had been arranged on the orders of none other than the country’s president. Moroz said his statement was based on audiotapes of conversations Kuchma had held, and that the tapes had been given to him by an anonymous officer of the Ukrainian security service … Kuchma did say that Gongadze had to be ‘taken care of ’ but exactly what the head of state meant by that remains unclear. (Noviye Izvestia, 30 November 2000, p. 2: CDSP, 2000, vol. 52, no. 48, p. 18) ‘The president categorically denies having anything to do with the Gongadze affair’ (CDSP, 2000, vol. 52, no. 48, p. 18). ‘Ukrainian prosecutor general Mikhail Potebenko yesterday [10 January 2001] … indicated that the body of an unidentified man found in early November [2000] … had been identified with 99.6 per cent certainty as that of Georgy Gongadze. DNA testing was conducted’ (CDSP, 2001, vol. 53, no. 2, p. 17).

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(‘In late November [2000] … a member of Mr Kuchma’s presidential security service … [Major] Mykola Melnichenko … fled the country and then made public what were said to be secret recordings of Mr Kuchma’s private conversations in which he ordered his top aides to orchestrate the abduction of Mr Gongadze … The release of the recordings triggered demonstrations in December [2000] … The intimacy of the recordings … have transported Mr Kuchma’s private and profane demands for Mr Gongadze’s elimination into a national debate on Ukraine’s self-image … A fuller record of Mr Kuchma’s private conversations emerged in January [2001] and for the first time linked him to officials suspected of siphoning off tens of millions of dollars from natural gas shipments under the control of Naftogaz Ukrayiny, the state-owned energy monopoly’: IHT, 16 February 2001, p. 4.) 7 December 2000: Russia and Ukraine finally signed a memorandum on co-operation in the natural gas sector yesterday [7 December] … Inter-governmental agreements on implementing the memorandum are to be signed by 15 December. They will deal with the repayment of Ukraine’s debt, additional sales of Russian gas to Ukraine and the transit of natural gas to Europe (the transit agreement is supposed to establish a strict system of sanctions for the unauthorized siphoning off of Russian gas). The memorandum signed yesterday states that Ukraine’s natural gas balance next year [2001] will consist of 30 billion cubic metres of Turkmen gas, 18 billion cubic metres of Ukrainian gas and 30 billion cubic metres of Russian natural gas that will serve as payment for the transit of [Russian] gas through Ukrainian territory. Ukraine’s total consumption of natural gas will be 78 billion cubic metres … Ukraine … will be supplied with energy resources for an entire year … Russia agreed to restructure Ukraine’s natural gas debts, which the Ukrainian prime minister has put at approximately $1.5 billion, including penalties. The plan is for Ukraine to repay the debts over a period of eight to eleven years. (CDSP, 2000, vol. 52, no. 49, p. 19) President Kuchma wrapped up a visit to Russia yesterday [22 December] … As a result of talks between [the Russian] deputy prime minister … and a [Ukrainian government] delegation two agreements on natural gas were signed in Moscow. The accords virtually guarantee that Ukraine will receive the amounts of fuel it needs. (CDSP, 2000, vol. 52, no. 52, p. 20) 18 January 2001: Russia and Ukraine agreed yesterday [18 January] to create a joint military unit … The unit will be a joint search and rescue patrol and is to include personnel, ships and aviation from both Ukraine’s navy and Russia’s Black Sea fleet, which is based in Ukraine’s Crimean peninsula. (FT, 19 January 2001, p. 7)

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19 January 2001: ‘Leonid Kuchma … yesterday [19 January] dismissed Yulia Timoshenko, the controversial deputy prime minister for energy issues … The sacking followed Ms Timoshenko’s indictment by Ukraine’s prosecutor-general on allegations of smuggling and fraud stemming from 1996–7’ (FT, 20 January 2001, p. 7). (The prosecutor general’s office … reports directly to the president’: Business Central Europe, March 2001, p. 42.) 6 February 2001: Thousands of protesters … estimated at from 3,500 to 5,000 … streamed into Kiev on Tuesday [6 February] … demanding an end to corruption and the resignation of President Leonid Kuchma … Counter-demonstrators ransacked a tent city on Independence Square that has become a base for the anti-Kuchma movement … Protesters in the capital who have set up the tent city … have vowed to stay there until Mr Kuchma resigns … Demonstrations blocked the centre of the capital in December [2000] … The crisis in Ukraine is being fuelled by the ongoing release of recordings of Mr Kuchma’s private conversations … The triggering event of the crisis was the disappearance last September [2000] of Georgy Gongadze, a journalist whose internet news site, Ukrainskaya Pravda, [was] a frequent critic of the corruption that has plagued the country during Mr Kuchma’s two terms as president. (IHT, 7 February 2001, p. 4) ‘Yesterday’s demonstration drew between 2,000 (police officials’ estimate) and 10,000 (the organizers’ estimate) people’ (CDSP, 2001, vol. 53, no. 6, p. 2). 7 February 2001: Yesterday [7 February] … the general prosecutor’s office ended months of stonewalling to confirm that audio tapes indicating presidential complicity in the murder of an opposition journalist were genuine … The deputy general prosecutor … said yesterday that Mr Kuchma, the interior minister, the secret service chief of staff and the president’s chief of staff had all been questioned about the tapes and had confirmed that their voices could indeed be heard on them. He also said that while the voices were genuine, the tapes had been doctored, and the president still denied that the incriminating evidence on the Gongadze case was authentic … Leading opposition figures in Ukraine’s notoriously fractious political scene announced they were uniting on an anti-Kuchma platform. (Guardian, 8 February 2001, p. 18) 8 February 2001: President Leonid Kuchma was questioned yesterday [8 February] by prosecutors … Prosecutors interviewed Mr Kuchma and senior aides … including the chief of the presidential administration and the interior

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minister. But they also said that the recording … was a fabrication put together from fragments of other conversations. (Independent, 9 February 2001, p. 13) ‘Mr Kuchma said he believed the tapes were a montage of several different conversations, probably recorded in his office’ (FT, 10 February 2001, p. 6). 9 February 2001: The opposition … yesterday [9 February] acquired a powerful co-ordinating body, the National Salvation Forum movement. The movement’s stated goal is to remove Leonid Kuchma from power and transform Ukraine from a presidential republic into a parliamentary/presidential republic. The movement’s council consists of fifteen opposition leaders, including Socialist Party leader Alexander Moroz, Cherkassy mayor Vladimir Oleinik, Fatherland Party leaders Yulia Timoshenko and Alexander Turchinov, People’s Movement [Rukh] member Taras Chornivil and Conservative Republican Party leader Stepan Khmara. (CDSP, 2001, vol. 53, no. 6, p. 3) (‘On 21 December [2000] Fatherland signed a declaration of the creation of the National Ukrainian Council, a political association of national democratic forces. In addition to [Yulia] Timoshenko’s supporters, ten other parties and twenty-one public movements signed the declaration. They intend to set up a rightists’ electoral bloc that will take part in the parliamentary and presidential election: CDSP, 2001, vol. 53, no. 4, p. 19.) 11 February 2001: some 5,000 demonstrate in Kiev against Kuchma (Independent, 12 February 2001, p. 12). As many as 5,000 … demonstrators marched through the capital … on Sunday [11 February], the second such outpouring in a week … Groups from socialists on the left to pro-business parties on the right have united in opposition to Mr Kuchma … Additional recordings released last month [January] have prompted a new set of allegations that Mr Kuchma was aware of specific instances of large-scale corruption in the country’s notoriously corrupt energy sector. (IHT, 13 February 2001, p. 4) 12 February 2001: President Putin of Russian visits Ukraine. ‘Mr Putin and Mr Kuchma announced an agreement to rejoin their nations’ electricity grids’ (p. 4). An undertaking [was made] to rebuild joint energy and high-tech schemes … Agreements [were made] to reconnect the Russian and Ukrainian power grids, create a … Russian–Ukrainian aerospace consortium and even build a … bridge connecting Russia to the Crimean peninsula … Ukraine will ship

536 Ukraine east large quantities of coal to ease Siberia’s heating crisis in return for cutprice Russian electricity. (The Times, 13 February 2001, p. 16) ‘Ukraine’s debt for electricity [from Russia] currently stands at $60 million’ (CDSP, 2001, vol. 16, no. 7, p. 15). 13 February 2001: Yulia Timoshenko, a former deputy prime minister, was arrested on charges of ‘smuggling and falsifying documents’ … Mrs Timoshenko is accused of importing nearly 3 million cubic metres (100 billion cubic feet) of Russian gas in 1996 using forged documents and hiding hundreds of millions of dollars in profits. (IHT, 14 February 2001, p. 5) ‘Mrs Timoshenko … asserted in a recent interview that the case against her was motivated by the anti-corruption drive she led in the cabinet … Mrs Timoshenko’s Fatherland faction … has joined the “Ukraine without Kuchma” coalition’ (IHT, 17 February 2001, p. 4). Yulia Timoshenko … was arrested yesterday [13 February] on corruption charges stemming from her past as one of Ukraine’s largest natural gas traders. The arrest follows a criminal investigation started on 5 January and her removal from the government by President Leonid Kuchma on 19 January. Earlier this month Ukraine’s tax administration said Ms Timoshenko had illegally transferred more than $1 billion out of Ukraine between 1996 and 1997 … Ms Timoshenko is an implacable opponent of Mr Kuchma. (FT, 14 February 2001, p. 8) On 13 February Mr Kuchma corralled the reformist prime minister, Viktor Yushchenko, and the speaker of parliament into signing a strongly worded joint statement which denounced the protests’ organizers as egoists bent on power at all costs. They were accused of using ‘nationalist socialist’ tactics to provoke the authorities into repression and of putting the ‘very existence of Ukraine, its territorial integrity and social peace at stake’. (The Economist, 17 February 2001, p. 51) President Leonid Kuchma … issued a strongly worded statement with his prime minister, Viktor Yushchenko, and the parliament speaker, Ivan Plyushch. According to the statement, the ‘Ukraine without Kuchma’ movement formed this winter was trying to ‘set off mob rule … by using flagrant provocation and to compel the authorities to use force.’ (IHT, 16 February 2001, p. 4).

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The statement included the following: An atmosphere of hysteria and psychosis [is being whipped up] in hopes of undermining legitimate government institutions and seizing power by any means … Attempts to incite disturbances in the streets and to use openly provocative methods for the purpose of deepening divisions in our society and spurring the authorities to use force pose a real threat to the national security of our state … Recall how fascism got its start … These attempts must be countered actively and resolutely by all legally permitted means. (CDSP, 2001, vol. 53, no. 7, p. 6) 26 February 2001: ‘Ukrainian prosecutors said yesterday [26 February] that a headless corpse … is that of journalist Georgy Gongadze’ (IHT, 27 February 2001, p. 5). ‘The Ukrainian prosecutor-general’s office has ruled that the headless corpse found a few months ago in a forest outside Kiev is that of journalist Georgy Gongadze. Earlier, investigators had determined with 99.6 per cent certainty that the body was his’ (CDSP, 2001, vol. 53, no. 9, p. 1). 1 March 2001: ‘Police tear down tent city … a makeshift camp in Kiev … The [anti-Kuchma] demonstrators had camped out … since December [2000]’ (Independent, 2 March 2001, p. 17). (‘In the past few days alone the police have broken up tent cities or prohibited people from setting them up in the central areas of Kharkov, Rovno, Kirovograd, Dnepropetrovsk and Kiev … In Kiev a tent city was prohibited due to construction work’: Vremya, 30 January 2001, p. 5: CDSP, 2001, vol. 53, no. 5, p. 118.) 3 March 2001: On Saturday [3 March] Mr Kuchma’s tax chief, Mylola Azarov, announced he would lead a new pro-Kuchma political party in next year’s parliamentary elections, raising protest from opposition leaders that Mr Azarov would use his position to press businessmen for campaign support … Prime minister Viktor Yushchenko … has joined Mr Kuchma in denouncing the opposition, but many opposition leaders continue to support Mr Yushchenko and call on him to join their cause. A group calling itself the Ukrainian Right has announced that it will hold a parallel protest on 9 March in support of Mr Yushchenko in the same park where the Ukraine Without Kuchma alliance is planning its next demonstration. The antiKuchma group’s last three protests have drawn 6,000 to 8,000 people. (FT, 7 March 2001, p. 10) 9 March 2001: riot police clash with some of the many people demonstrating in Kiev. Estimates of the total number of anti-Kuchma demonstrators vary from 5,000 to 18,000. The incidents mark the largest one-day turnout and the first serious violence during protests against Mr Kuchma … The opposition campaign of recent

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‘Previous rallies drew 5,000 to 8,000 people and were almost without violence’ (FT, 10 March 2001, p. 7). 14 March 2001: around a thousand people protest in Kiev (The Times, 15 March 2001, p. 19). 21 March 2001: ‘DNA tests in Germany have shown that a mutilated body found in Ukraine in November [2000] is not that of the missing journalist, Georgy Gongadze’ (IHT, 22 March 2001, p. 6). ‘The explanation for the different results of the DNA tests may be that the German laboratory did not, in fact, receive tissue from the badly mutilated body’ (Independent, 23 March 2001, p. 14). 27 March 2001: ‘A Kiev district court ordered the release Tuesday [27 March] of … Yulia Timoshenko’ (IHT, 28 March 2001, p. 6). (Yulia Timoshenko was rearrested on 30 March and released again on 2 April: CDSP, 2001, vol. 53, no. 14, p. 19.) [The] unity … [of] the opposition … has vaporized … Mrs Timoshenko was freed three weeks ago and promptly declared that she would keep fighting until she came to power. Her announcement shattered an accord among anti-Kuchma leaders to shelve their own political ambitions until the president had been removed … Mrs Timoshenko and other opposition leaders then publicly disagreed over whether to try to enter into talks with Mr Kuchma or organize a popular referendum against him … Its [the opposition’s] leaders agree on the need to replace the president, but after that their goals diverge. The liberal-to-centre coalition includes socialists, free-market democrats, nationalists, students and even some members of the young communists movement. In the 450-member parliament opposition leaders say they can count on only about eighty-five votes, compared with approximately 120 to 130 pro-Kuchma deputies and 112 communists … An international press organization that analysed the recording said it could not conclusively state it was Mr Kuchma’s voice … Recent demonstrations have drawn only a few thousand demonstrators, fewer than in December [2000]. And the head of at least one of the liberal-minded opposition parties opted out so as not to rub shoulders with socialists. (Sharon LaFraniere, IHT, 24 April 2001, p. 5) April 2001: The Ukrainian parliament has adopted a law on a special prosecutor and special investigators on second reading by a majority of 299 votes. Until last week the country had no such officials, but now their status has been fully resolved. Under the new law the special prosecutor is a first deputy prosecutor general of Ukraine, is responsible for ensuring that legal norms are

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duly observed during investigations into crimes committed by the head of state and other senior officials, and serves as state prosecutor in trials of criminal cases investigated by the special investigators. The special investigators are appointed by the special prosecutor with parliament’s consent, while the special prosecutor himself is appointed for a five-year term by the prosecutor-general solely on the recommendation of parliament. The deputies also passed a new law on the Ukrainian presidency in which they established, among other things, that the head of state is obliged to sign all laws adopted by a constitutional majority (more than 300 votes). Observers were unanimous in describing the two laws as a victory for the anti-Kuchma forces and the final breakdown of the pro-Kuchma parliamentary majority. The newly adopted laws are also important in light of the fact that Leonid Kuchma actively exercises his power to veto laws he finds objectionable, and his veto can be overridden only by a constitutional majority. The politically divided parliament hardly ever manages to muster that many votes for an override, but it does often pass laws by 300 votes. Kuchma has already vetoed a law on special parliamentary investigative commissions, a move that essentially blocked the start of impeachment proceedings against him. (Vremya, 11 April 2001, p. 2: CDSP, 2001, vol. 53, no. 15, p. 18) 13 April 2001: The United States has granted asylum to a former bodyguard of … Leonid Kuchma and also to the wife [Myroslava Gongadze] of a murdered journalist, Georgy Gongadze … The bodyguard, Mykola Melnichenko, has been in hiding since he released audiotapes last year [2000] on which a voice similar to Mr Kuchma’s is heard asking officials to ‘deal with’ Mr Gongadze, a frequent critic of the president whose headless corpse was found in November [2000] … The former bodyguard, who says he secretly recorded hundreds of hours of conversations in Mr Kuchma’s office, is being sued for libel and forgery by the prosecutor general … The IMF, unsettled by the crisis and frustrated by Ukraine’s lack of change, has frozen its lending programme. (IHT, 16 April 2001, p. 7) 26 April 2001: A parliamentary alliance of Communists, oligarch-led parties and supporters of President Leonid Kuchma voted overwhelmingly to dismiss the reformist prime minister, Viktor Yushchenko, and his government. The vote [was] 263 to sixty-nine … The dumping of Mr Yushchenko … [was] orchestrated in large part by Mr Kuchma and his parliamentary allies over the last year … The key to his ouster was the decision by Ukraine’s Communist deputies, who hold about a quarter of the 450 seats, to join the coalition of oligarch-led parties and Mr Kuchma’s core supporters to shape

540 Ukraine a new majority … Mr Yushchenko … has been seen to champion clean government and economic reform, since he tried to confront Ukraine’s endemic and rampant corruption problems. (IHT, 27 April 2001, p. 1) ‘The big business “oligarchs” … voted against the prime minister out of fear of his tough market-led reforms … President Kuchma … is widely accused of orchestrating Mr Yushchenko’s removal to get rid of a potential rival’ (The Times, 27 April 2001, p. 20). ‘A no confidence vote [was] spearheaded by the Communist Party and a pro-presidential bloc of big business parties’ (FT, 27 April 2001, p. 10). The sacking of Ukraine’s head of government came through a strange-bedfellows alliance of the country’s powerful Communist Party and parties representing the rich ‘oligarchs’. They teamed up to remove the liberal and pro-Western Mr Yushchenko, who had moved energetically to fight corruption, break up monopolies and stabilize the … currency … The forty-three-nation Council of Europe … yesterday [26 April] gave Ukraine until June to mend its ways [as regards human rights] or face possible sanctions. (Independent, 27 April 2001, p. 13) Viktor Yushchenko was forced out of office yesterday by communist MPs backed by the president’s crony millionaires … Although the communists have long been opposed to Mr Kuchma’s government, the no confidence vote would have failed without the backing of the centrist parties, which are beholden to the millionaire clan leaders who dominate Ukraine’s notoriously corrupt public life and the tacit assent of Mr Kuchma … The industrial oligarchs who run Ukraine … feared that Mr Yushchenko’s economic reforms would imperil their control of national assets … Yulia Timoshenko … immediately invited Mr Yushchenko to lead her campaign against the president. (Guardian, 27 April 2001, p. 15) The ‘oligarch’ parties turned against him because Mr Yushchenko … took a stand against corruption and diminished the money-making opportunities for the wealthy businessmen who used their positions in the Ukrainian parliament to their advantage … Western diplomats said Mr Kuchma had connived in the dismissal of his prime minister … Mr Kuchma is closely connected with Ukraine’s business tycoons, who have grown immensely wealthy because of his patronage. (Telegraph, 27 April 2001, p. 16) Viktor Yushchenko: ‘Democracy in Ukraine has suffered a serious defeat. The political elite has shown itself unable to accept a legal economy and public politics. I am not leaving politics. I am going away in order to return.’

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Estimates of a pro-Yushchenko demonstration ranged from 10,000 to 15,000. Mr Yushchenko has been voted out of office by a parliamentary cabal of hardline Communists and powerful tycoons, or oligarchs. The latter, closely allied to the president, had started to feel their business and economic interests were threatened by Mr Yushchenko’s reforms … Mr Kuchma’s … rule has seen the rise of the oligarchs. Closely allied to Mr Kuchma, they used their political connections and massive corruption to amass vast fortunes as well as power. They now dominate the political scene, through their ownership of parties and media groups, as well as their personal contacts with the president … The oligarch parties initially supported reforms, voting them through parliament. But opposition grew as reform started to undermine some oligarchs’ business interests. This was particularly true of reforms to the electricity sector, which removed lucrative sources of corruption. When Mr Yushchenko also tried to reform the equally corrupt coal sector he made more powerful enemies … Yulia Timoshenko … despite having a shady reputation herself (earned through some very dodgy gas deals in the 1990s) … nevertheless went a long way to cleaning up the [energy] sector. She boosted cash payments for electricity … [although] 40 per cent of electricity bills still go unpaid … and cracked down on widespread theft of revenues … More generally, the Yushchenko government managed to reduce the economy’s reliance on barter. It abolished tax concessions called offsets, which allowed firms to pay their taxes in kind. In practice the whole system was based on back-handers, which allowed firms to pass off shoddy goods at inflated prices. Abolishing offsets has also boosted tax revenues … That in turn made it possible to pay off large pension and wage arrears … Land privatization has started to break up the hopeless collective farms … Ukraine’s economy is growing fast. (Business Central Europe, June 2001, pp. 18–21) The tapes claim to reveal … the grim realities of everyday life. In politics what was known to have been a dirty re-election campaign in 1999 is now laid bare in all its glory. President Kuchma is recorded instructing his entourage in great detail on the precise methodology for accumulating his vote … The tapes have … made it clear that in Ukrainian politics the competition for access to state power and resources is more important than the competition of ideas. In this respect Ukraine is just like Russia, but subtly different. Both countries have weak democracies and a shaky rule of law. In both politics is often ‘virtual’, little more than the pursuit of venal interest professionally packaged. In both countries nearly all the powerful are potentially compromised. In Russia, however, the oligarchs are more substantially independent of the state – even under Putin. Control of Russia’s vast energy and raw material empires is an important source of power; in Ukraine distribution is a source of huge profits, but its channels are controlled by the state. In Ukraine power itself is the main resource … Among the fallen Pavlo Lazarenko, now facing trial or extradition in America, stands accused of netting upwards of $850 million during his year

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Ukraine of office (1996–7); former deputy premier Yulia Timoshenko of hiding $181 million abroad in 1996–9 – it is not clear who is credited with the $79 million she allegedly passed to Lazarenko … Corruption in Ukraine has strength in depth. Not many honest replacements are in sight. There are question marks against nearly all the rising stars … Only sixty-two deputies joined the National Salvation Forum set up in January [2001], which in any case competes on the streets with at least two other opposition movements – Ukraine Without Kuchma and For Truth. (Andrew Wilson, The World Today, 2001, vol. 57, no. 6, pp. 14 –16)

‘On 26 April the Council of Europe voted in favour of banning Ukraine from membership at the end of June unless by then there was better freedom of the media and better human rights’ (EEN, 2001, vol. 13, no. 5, p. 8). 27 April 2001: Mr Kuchma yesterday [27 April] asked Mr Yushchenko to head a threemonth caretaker cabinet … Mr Yushchenko agreed to stay on … As she [Yulia Timoshenko] announced her plans for a national referendum to get rid of Mr Kuchma, she said Mr Yushchenko was the man to lead Ukraine. (Independent, 13 April 2001, p. 13) Viktor Yushchenko indicated Friday [27 April] that he would like to form a broad coalition of political parties and public organizations to promote ‘the establishment of democratic principles’ in Ukraine, a market economy based on European standards and an ‘honest domestic and foreign policy’. He did not mention President Leonid Kuchma, who orchestrated his ouster …. Mr Yushchenko would not seek to head any single opposition party … A day after a coalition of Communists and oligarch-led parties in parliament turned Mr Yushchenko and his government out of office, Western governments issued statements of concern … [For example] the EU issued a statement saying its members were seriously concerned that ‘the dismissal of the Yushchenko government may hamper the process of economic and political reforms’ in Ukraine. It praised ‘Yushchenko’s selfless work’ in achieving ‘considerable success’ in stabilizing the country’s economy and nurturing a fragile recovery … Yulia Timoshenko, now leader of the opposition Fatherland Party, said she would work to organize a national referendum on whether Mr Kuchma should resign. (IHT, 28 April 2001, p. 2) 8 May 2001: A team of US experts has concluded that a headless body found near Kiev is that of … Georgy Gongadze … a prosecutor said Tuesday [8 May] … The findings confirmed the conclusion by Russian experts … But the experts could not determine the cause of death … The first deputy state

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prosecutor … said the death occurred two or three months before the body was found in November [2000]. (IHT, 9 May 2001, p. 7) 14 May 2001: an agreement is reached with Turkmenistan on the supply of natural gas for the period 2002–6, with 50 per cent being paid in money and the rest in the form of joint investment projects (UET, Monthly Update, May 2001, p. 2). 22 May 2001: ‘Leonid Kuchma yesterday [22 May] said he would nominate Anatoli Kinakh as the country’s next prime minister … Mr Kinakh is a former first deputy prime minister who currently heads a lobbying group, the Ukrainian Union of Industrialists’ (FT, 23 May 2001, p. 10). 29 May 2001: parliament confirms Anatoli Kinakh as prime minister. Anatoli Kinakh is a former deputy prime minister and a member of the National Democratic Party … ‘We must not forget to develop a strategy that will allow us to both strengthen and make irreversible market and democratic reforms,’ he said after Tuesday’s vote … [But] Mr Kinakh also suggested that Ukrainian industry needs greater protection from foreign competition’. (IHT, 30 May 2001, p. 5) Mr Kinakh spoke in favour of an increased government role in the economy … ‘The time of market romanticism is already past. We need to strengthen the efforts involving and protection of entrepreneurship’ … Mr Kinakh has also publicly questioned the wisdom of following the policy suggestions of the IMF. (FT, 30 May 2001, p. 8) Anatoli Kinakh, a forty-six-year-old business lobbyist … is chairman of the pro-business Ukrainian Union of Industrialists and Entrepreneurs … Mr Kinakh promises he will continue where Mr Yushchenko left off and that his priority will be easing the tax burden on businesses … [But] in speeches to parliament … he has criticized the previous government’s energy reforms and said that he will seek greater government control over the economy … Mr Kuchma has emerged from his ordeal stronger than ever. Not only has he managed to appoint a loyal new premier, but he has also gathered all the executive power in the country into his own hands … The same day that parliament confirmed Mr Kinakh as premier, Mr Kuchma issued a decree establishing the position of state secretary in the government. The decree assigns one such position to the government and one to each of the ministries. The decree suggests that ministers will now become ‘pure political figures’, while state secretaries will de facto manage the ministries. State secretaries will have control over each ministry’s budget and the authority to appoint regional officials. They will be appointed and dismissed by the president and will report to him directly. (Business Central Europe, July–August 2001, pp. 40–1)

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Ukraine President Leonid Kuchma has set about buttressing the executive branch with loyal people … Kuchma signed a decree on further administrative reforms in which he instituted the posts of state secretary of the government and state secretaries of the ministries. All state secretaries and their deputies will be appointed by the president for five-year terms and will control virtually all the work of their ministries, from staffing to the allocation of funds and the appointment of directors of the ministries’ regional offices. The decree says that the state secretaries ‘shall oversee the particular operations of their ministries’ and ‘shall be responsible for organizational, legal, expert-analytical, informational and technical support for the ministries’ work’. The post of deputy ministries is henceforth abolished. State secretaries can be fired only by the president … Presidential chief of staff Vladimir Litvin commented … ‘Virtually all levers of influence are concentrated in the hands of the ministry state secretaries’. (CDSP, 2001, vol. 53, no. 2, pp. 10–11)

The presidential decree on further development of administrative reform created the following positions: the state secretary of the cabinet of ministers and state secretaries of the ministries (to be appointed for a term equal to that of the president, i.e. five years). Due to the introduction of positions of state secretaries of the ministries, their first deputies and deputies, positions of first deputies and deputies to the ministers shall be abolished. Ministers within the scope of their competence, shall define the policy priorities and strategic objectives of ministerial work and means for reaching these objectives. (UET, Monthly Update, May 2001, p. 3) ‘Street demonstrations and calls for his [Kuchma’s] removal have waned’ (IHT, 25 June 2001, p. 4). 13 June 2001: Yuri Kostenko, leader of the Ukrainian People’s Movement, and Gennadi Udovenko, leader of the People’s Movement of Ukraine, have signed a declaration on unification of the two Rukh parties [rukh means ‘movement’ in Ukrainian] … The declaration announces the ‘commencement’ [of the unification] … The two Rukhs have declared Viktor Yushchenko – who was present when the aforementioned declaration was signed – to be the ‘sole acknowledged leader of the nation’ and said that he alone can head a broad coalition of democratic forces. (CDSP, 2001, vol. 53, no. 24, p. 14) 23–27 June 2001: Pope John Paul II visits Ukraine.

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There are 6 million Catholics … Some 5 million are Greek Catholics, who follow Orthodox ritual but profess allegiance to the Pope. The other 1 million are Roman Catholics … Ukraine’s complicated religious matrix includes three Orthodox churches. Two are independent Ukrainian churches, while the third, the largest, is loyal to the Russian Orthodox Church. It is this last that has fiercely opposed the Pope’s visit. (Telegraph, 23 June 2001, p. 20) Since the Soviet Union’s collapse … the Orthodox majority have accused Catholics of using their newly gained freedoms to extend their influence, regain churches and seize property and other assets taken by the former communist rulers … The Russian Orthodox patriarch, Alexei II, whose patriarchate is the dominant force among Ukraine’s Orthodox believers, has opposed the Pope’s visit. (IHT, 23 June 2001, p. 2) ‘The Greek Catholics took back the churches that Stalin had confiscated in favour of the state-sanctioned Orthodox Church’ (IHT, 26 June 2001, p. 2). ‘The communist government formally abolished the Greek Catholic Church in 1946’ (IHT, 28 June 2001, p. 6). Both Russia’s Orthodox Church and its Ukrainian affiliate accuse the Pope of seeking converts in Ukraine and say the visit will worsen relations between the Orthodox and Catholic branches of Christianity, which split in 1054 … Many of … Ukraine’s 6 million Catholics … live near the Western city of Lvov. (FT, 23 June 2001, p. 6) Western Ukraine has the world’s biggest community – 5 million – of Uniate or Greek Catholics [Eastern-rite Catholics], who observe Orthodox rites and liturgy but are faithful to Rome … The Uniates were established in the sixteenth century in the borderlands between Orthodoxy and Catholicism when the Catholic Poles, and then the Hapsburgs, ruled the region and pressed the locals into accepting papal hegemony. They succumbed but kept their Byzantine rituals. (Guardian, 23 June 2001, p. 16) ‘Eastern Christianity had been founded in Kievan Rus in 988’ (The Times, 25 June 2001, p. 4). ‘The Greek Catholic Church … follows Orthodox rituals and priests are allowed to marry, but also recognizes the Pope as supreme leader’ (Independent, 2 July 2001, p. 11). 24 June 2001: Pope John Paul II on Sunday [24 June] celebrated his first Mass in Ukraine …The Pope was greeted by the country’s leading Catholics, Jews and Moslems and by the heads of two breakaway Orthodox churches that have

546 Ukraine emerged since Ukrainian independence … Rivals … compete for allegiance from Ukraine’s 30 million Orthodox faithful. (IHT, 25 June 2001, p. 4) ‘The breakaway Kiev Patriarchate of the Orthodox Church, created in 1993, has welcomed the Pope. Filaret, the Patriarch of the Ukrainian Church, was excommunicated by the Russian Church in 1993’ (FT, 25 June 2001, p. 8). 7 July 2001: A crusading television journalist whom the government had tried to ban died as a result of a brutal attack by a gang of armed men … Igor Alexandrov died … in the eastern town of Slavyanksk … [He] ran the TOR television company … [and] specialized in exposing cases of local corruption and organized crime. In 1998 a local court sentenced him to two years in prison and banned him from working for five years for allegedly violating laws on election coverage. He was acquitted last year [2000] after a long legal battle in which he took his case to the European Court of Human Rights in Strasbourg. (The Times, 9 July 2001, p. 11) ‘Igor Alexandrov was known for his outspoken programmes on corruption in the province’ (CDSP, 2001, vol. 53, no. 28, p. 18). ‘Mr Alexandrov [was] the eleventh reporter to be killed in the country in the last five years … [He] was attacked … on Tuesday [3 July] … [and] pronounced dead … on Saturday [7 July]’ (Independent, 9 July 2001, p. 10). 10 July 2001: Yulia Timoshenko has been elected leader of Ukraine’s new electoral bloc, the National Salvation Forum … The bloc’s founding declaration… was signed by the newly established Assembly Party, the … Social Democratic Party and the … small Ukrainian Republican Party, Conservative Republican Party, Christian Democratic Party and Patriotic Party. The bloc does not include the two Rukh parties or their ex-prime minister Viktor Yushchenko … Nor did … Alexander Moroz join the bloc, although he said that his Socialist Party would not compete with the Forum. (CDSP, 2001, vol. 53, no. 28, p. 18) 10 August 2001: Civilian and military prosecutors in Russia have announced the opening of new criminal cases against … Yulia Timoshenko … The military prosecutor’s office said it was looking into bribery charges involving Mrs Timoshenko, while the civilian prosecutor’s office said she and her husband had failed to properly declare $100,000 on customs forms when leaving Russia in 1995. (IHT, 11 August 2001, p. 2)

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Russian prosecutors offered Ukraine evidence dating from 1995 purporting to show that Mrs Timoshenko had tried to smuggle $100,000 in cash through a Moscow airport and that she was allegedly involved in a conspiracy to defraud the Russian defence ministry of $450 million. (The Times, 10 August 2001, p. 12) 23 August 2001:‘President Putin takes part … [in celebrations for] the tenth anniversary of [Ukraine’s] independence … but he arrives late, skipping the main public event … The only other European leaders attending are the presidents of Poland and Macedonia’ (CDSP, 2001, vol. 53, no. 34, p. 5). 11 September 2001. There are terrorist attacks on the USA. ‘Ukraine yesterday [24 September] cleared the way for US military cargo planes … to fly through Ukrainian airspace’ (FT, 25 September 2001, p. 5). 4 October 2001: Ukraine and Russia have agreed to restructure $1.4 billion of Ukraine’s debts for Russian natural gas supplied in the late 1990s … Ukraine agreed to issue Eurobonds to be paid off over twelve years after a three-year grace period, bearing interest of Libor plus 1 per cent … The deal must be ratified by the countries’ parliaments. The restructuring deal was part of a broader agreement signed on Thursday … also covers the terms of Russia’s use of Ukraine’s pipelines, which carry more than 90 per cent of Russia’s gas exports to Europe … Russia’s national gas company Gazprom opened a new pipeline route last year [2000] that runs through Belarus and Poland to Germany. Gazprom has sought financial and political support for a second line bypassing Ukraine via Belarus, Poland and Slovakia … In an effort to assure Gazprom that its transit gas was not being stolen, Ukraine has blocked exports of Ukrainian-produced gas since last December [2000], virtually shutting down private investment in gas production … Ukraine imports … gas … from Russia and Turkmenistan, of which about half is supplied by Gazprom as payment for its use of Ukraine’s transit pipelines. Since 1999 Ukraine has imported the remainder through the private company Itera and payments have rarely been more than a few months late. (FT, 5 October 2001, p. 12) A Russian airliner carrying seventy-six people [a death toll of seventy-eight was given later] … from Tel Aviv to Novosibirsk in central Siberia exploded Thursday [4 October] and plunged into the Black Sea off the Russian coast. President Vladimir Putin … said … ‘A terrorist act has not been ruled out’ … But … there were also reports that the crash could have been a tragic accident, the work of anti-aircraft missiles fired by Ukrainian military forces in a Black Sea training exercise … off the Crimean Peninsula … The Ukrainian defence ministry adamantly denied any role in the crash … Mr Putin ordered an investigative committee to determine the cause of the

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Ukraine disaster … Russian officials said they were not excluding a mechanical cause. (IHT, 5 October 2001, pp. 1, 3)

‘All seventy-eight crew and passengers, mostly Russian-born Israelis, died’ (IHT, 17 October 2001, p. 6). [The following day] Anatoli Kinakh, the Ukrainian prime minister said … that he believed the ‘theory’ the aircraft was hit by a missile ‘has a right to exist’ … US officials … have been reported as saying that satellite images show a missile fired in a Ukrainian military exercise about to hit the aircraft … [In] an accident last year [2000] a missile went off course during exercises and hit an apartment near Kiev, killing four people. The [Ukrainian] defence minister then also vigorously denied that any test rocket might have gone astray until Russia said its radar had observed the shot. (FT, 6 October 2001, p. 10) ‘Mr Kinakh was quoted as saying that the government had drawn no conclusions about the crash’ (IHT, 6 October 2001, p. 1). Ukraine’s military on Monday [8 October] clung to its denial that a rogue missile blew up a Russian airline … President Leonid Kuchma … said: ‘Technically it is impossible, but theoretically everything is possible. Following a catastrophe all theories should be discussed, but only by experts’ … The controversy comes eighteen months after Ukraine’s defence ministry spent days denying that a rogue missile had blown up an apartment block in the town of Brovary, killing four. It admitted responsibility only when rescue workers found a piece of the missile in the ruins. (IHT, 9 October 2001, p. 7) Leonid Kuchma (10 October): ‘We are not the first and will not be the last. We should not make a tragedy out of matters if it was a mistake. Bigger mistakes have been made’ (IHT, 11 October 2001, p. 8). The head of [Russia’s] investigatory commission … [said on 12 October that] ‘The Tu-154 crashed because it was hit by the warhead of an antiaircraft missile’ … The head of the Ukrainian security council … [said] ‘The reason for the crash could be an S-200 missile during the Ukrainian defence exercises … There is a lot of information to support such a version’ … He added that the investigators would offer their final conclusions after further inquiry. (IHT, 13 October 2001, p. 5) President Kuchma (13 October): ‘Obviously, final results of the commission’s inquiry will be known after experts complete their in-depth investigation

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and make appropriate assessments public. But even today it can be said that a big tragedy took place … a tragic coincidence.’ ‘Earlier Saturday [13 October] Ukraine’s military took responsibility [for the accident]’ (IHT, 15 October 2001, p. 6). The Ukrainian defence minister, Alexander Kuzmuk, resigned on 24 October. 19 October 2001: On its fifth attempt Ukraine’s parliament has passed a new law on elections of people’s deputies … The president had refused to sign the first four versions of the law … Half of Ukraine’s parliament will be made up of representatives of political parties, while the other half will consist of deputies from single-seat districts. The law establishes a ninety-day campaign period and a monetary deposit (as opposed to signature gathering) for candidate registration. Parties registered less than a year before an election are barred from fielding candidates. (CDSP, 2001, vol. 53, no. 42, p. 17) 30 October 2001: ‘Ukraine destroyed its last nuclear silo Tuesday [30 October], fulfilling a pledge to give up the nuclear arsenal it inherited … The silo [was] the last of forty-six to be dismantled’ (IHT, 31 October 2001, p. 6). November 2001: The Financial Action Task Force, a group formed by the G7 to fight moneylaundering, chastised Ukraine in September by including it in a list of ‘non-co-operative’ countries … Anatoli Kinakh, prime minister, said last week … that he had agreed to step up bilateral efforts [with the USA] to control money-laundering. (FT, 5 November 2001, p. 10) 29 November 2001: President Leonid Kuchma has named a successor. He is Vladimir Litvin, currently the president’s chief of staff … Former prime minister Viktor Yuschenko had previously been considered the ‘heir’ … The president endorsed Litvin’s plan to head the right-centre election bloc For a United Ukraine. (CDSP, 2001, vol. 53, no. 48, p. 16) 7 February 2002: Ukraine’s Supreme Council voted yesterday [7 February] to include the matter of impeaching President Leonid Kuchma on the agenda … In the past Leonid Kuchma’s opponents tried to initiate impeachment proceedings on many occasions. The head of state was accused of theft, then of corruption and then of the murder of journalist Georgy Gongadze. None of the

550 Ukraine deputies’ attacks was successful. This time a group of deputies is basing their initiative on the argument that the president was involved in misappropriating state property, together with former prime minister Pavel Lazarenko … Before approving the proposal the deputies passed another resolution that stripped Pavel Lazarenko, who is under investigation in the USA, of his powers as a deputy … A guilty verdict against the former prime minister has gone into effect in Switzerland. (CDSP, 2002, vol. 54, no. 6, p. 16) 8 February 2002: An expert analysis performed in the United States has found that the audiotapes made in the office of President Leonid Kuchma by Mykola Melnichenko, a former major in the state security service, are authentic … Parliament … began impeachment proceedings against the president this week … Major Melnichenko himself is currently in the United States, where he has been granted political asylum. He wants to run for a seat in the Ukrainian parliament on the Socialist Party’s list. (CDSP, 2002, vol. 54, no. 6) 28 March 2002: Only days before Ukraine’s parliamentary elections, President Leonid Kuchma is facing a new scandal featuring recordings purportedly made in his office [in 1999 and 2000], the death in a car crash [on 7 March] of a top arms-export official and allegations that Mr Kuchma approved a $100 million shipment of arms to Iraq [even though Iraq is under UN sanctions] … Mr Kuchma has refuted the allegations. (FT, 28 March 2002, p. 8) 29 March 2002: ‘On Friday [29 March] a Social Democratic Party candidate was shot dead’ (Guardian, 1 April 2002, p. 12). ‘[The person murdered] was running for the Supreme Council as a candidate agreed by the Social Democrats and the pro-government For a United Ukraine bloc’ (CDSP, 2002, vol. 54, no. 13, p. 15). 31 March 2002: a general election is held. The 450 parliamentary seats were divided as follows: 225 by party list (proportional representation) and 225 by single-member constituencies. There was a 4 per cent threshold. Only six out of thirty-three competing parties and coalitions cleared the hurdle. The turnout was 69.6 per cent. OECD observers were present. OSCE praised the Ukrainian authorities Monday [1 April] for organizing televised debates that offered ‘greater access to television and other media coverage’ than in the 1998 legislative vote … It said that civil society had

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‘engaged in the electoral process’ for the first time since the former Soviet republic gained its independence from Moscow in 1991. (IHT, 2 April 2002, p. 6) The corrupt powers-that-be, for all their bullying, manipulation and voterigging, won the most seats – but failed to achieve a crushing majority … A reform-minded opposition coalition won the popular vote on the national list … but pro-presidential candidates did well, sometimes suspiciously so, in the single-mandate constituencies. (The Economist, 6 April 2002, p. 41) The result for the party list votes was as follows (UET, Monthly Update, February 2002, p. 3) (percentage share of the vote and number of seats gained, respectively): Our Ukraine bloc: 23.57 per cent, seventy. Led by Viktor Yushchenko. Communist Party: 19.98 per cent, fifty-nine. Its share of the vote went down. For a United Ukraine: 11.77 per cent, thirty-five. A four-party bloc headed by Vladimir Litvin (chief of President Kuchma’s administration). Yulia Timoshenko’s bloc: 7.26 per cent, twenty-two. The bloc did better than expected. Socialist Party: 6.87, twenty. The Socialists did better than expected. Social Democratic Party: 6.27 per cent, nineteen. Pro-Kuchma (FT, 1 April 2002, p. 6). For a United Ukraine … through victories in single-seat districts … managed to end up with … 102 deputies … Viktor Yushchenko’s Our Ukraine bloc … [ended up with] 112 seats … Alexander Moroz’s Socialist Party … [ended up with] twenty-four seats and Yulia Timoshenko’s bloc [with] twenty-one seats … Viktor Medvedchuk’s Social Democratic Party of Ukraine (united) … [ended up with] twenty-three … seats. The Communist Party made its poorest showing in the entire history of independent Ukraine … [with] sixty-six seats. (CDSP, 2002, vol. 54, no. 14, p. 4) The 450 seats were apportioned as follows: Kuchma bloc, 182; Yushchenko bloc, 117; Communist Party, sixty-six; Socialist Party, twenty-four; Yulia Timoshenko bloc, twenty-two; unaffiliated, thirty-nine (The Economist, 6 April 2002, p. 41). The faction of the pro-government bloc For a United Ukraine will number 180 deputies now that 145 deputies elected under the majority system [i.e. from single-seat districts instead of party lists] have agreed to join it. Faction leader Vladimir Litvin stated categorically on Tuesday [9 April] that no parliamentary majority can be formed without the participation of For a United Ukraine … Few people thought that the faction would grow to 180

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Ukraine people only a week after the elections … Litvin’s announcement that 145 deputies … had agreed to join his faction caused a sensation. (CDSP, 2002, vol. 54, no. 15, p. 17)

‘In the single-member districts … powerful business barons and regional leaders largely loyal to Kuchma hold sway’ (IHT, 2 April 2002, p. 6). The result was ‘inconclusive’ (The Times, 3 April 2002, p. 23). Opposition groups failed to wrest control of parliament from supporters of Mr Kuchma, after a messy vote marked by scattered violence and widespread reports of double-voting … The conservative centrists close to Mr Kuchma will keep control of the parliamentary leadership, and almost certainly of the government as well. But the Kuchma camp’s failure to win a majority has put it on the defensive. (FT, 5 April 2002, p. 8) [On 28 May] Vladimir Litvin … won 226 votes, exactly the number of seats needed to be elected speaker [of parliament]. Opposition parties have a narrow majority of seats … but they were unable to unite behind a common slate of candidates and apparently suffered defections in yesterday’s secret ballot. (FT, 29 May 2002, p. 12) The proceedings of the newly elected parliament are being boycotted by an opposition ‘Four’ consisting of Viktor Yushchenko’s Our Ukraine faction, the Communist Party of Ukraine, the Yulia Timoshenko Bloc and the Socialist Party faction, which account for nearly half the deputies. The opposition attributes its actions to what it considers the unfair outcome of the elections for the Supreme Council leadership … Yulia Timoshenko has described that outcome as resulting from ‘our squabbles, our quarrelling and our duplicity’ … The Yushchenko and Timoshenko blocs, the Communist Party of Ukraine and the faction of ex-speaker A. Moroz (the Socialist Party of Ukraine) are demanding that the portfolios for chairmen and vicechairmen of the parliamentary committees be distributed in such a way that they all get twenty-three committee chairmanships. (CDSP, 2002, vol. 54, no. 24, pp. 16–17) 2 July 2002: Agreements reached yesterday [2 July] between the Russian Federation and Ukraine guarantee that Kiev will get not only hundreds of millions of dollars in natural gas transit fees, but also a steady supply of Russian natural gas and both for the next ten years. As for Russia, it will be able to move nearly 130 billion cubic metres without obstruction and at low cost. This will generate annual revenues of more than $11 billion. What is

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more … [the Russian] gas industry will be able to use Ukraine’s gas storage facilities … throughout that period … [Ukraine] will experience no more shortages of fuel and raw materials for many industries; more importantly, it no longer need fear a by-pass gas pipeline that would have gone through Belarus. (CDSP, 2002, vol. 54, no. 27, p. 20) 27 July 2002: at an air show in Lviv eighty-five people are killed when a fighter plane crashes. It is the world’s worst air show disaster. Among those dismissed by President Kuchma are the armed forces chief of staff and the air force chief. The defence minister submitted his resignation. (The month of July added considerably to Ukraine’s poor safety record in coal mining. On 7 July thirty-five coal miners died, on 21 July six and on 31 July twenty.) (‘From the beginning of the year [2002] to the accident [on 31 July] … 166 coal miners have lost their lives in Ukraine. Since 1991 accidents and mishaps have claimed the lives of 3,724 miners’: Kommersant, 2 August 2002, p. 7.) August 2002: President Leonid Kuchma announced recently that … Ukraine plans to seek Nato membership … Ukraine has also put together a taskforce to work on joining the EU, setting a goal of becoming an associate member by 2007 and a full member by 2011 … For a time last year [2001] Kuchma drew closer to Russia as scandal repelled the West … By November [2002] … [Nato and Ukraine] hope to announce that Ukraine has entered ‘intensified dialogue’ with Nato, the first step toward applying for membership … Kuchma has allowed US military planes to fly through Ukrainian airspace more than 2,500 times as part of the war on terrorism … [Mykola Melnichenko, the former bodyguard who defected] … produced a transcript of a tape suggesting Kuchma authorized sale of a sophisticated $100 million radar system to Iraq. Kuchma disputed the allegation. (IHT, 6 August 2002, p. 8) The new alignment between Russia and the West, as well as easing Ukraine’s foreign policy decisions, could calm a long-running internal debate about Ukraine’s identity. Traditionally, western Ukraine has looked west for inspiration, while eastern Ukraine has looked to Russia. Now these differences could subside … Business groups that previously amassed capital abroad, like their Russian counterparts, are beginning to invest. Some sectors have become more transparent. But much of the economy remains under the control of Mr Kuchma’s cronies, who will almost certainly continue to delay changes that might threaten their interests. For example, Viktor Pinchuk, the president’s son-in-law, controls an empire ranging from steel to banking and the media, all linked by undisclosed shareholdings. He is among 150 politically connected business people in the 450-seat parliament. (FT, 21 August 2002, p. 12)

554 Ukraine 3 September 2002: A Ukrainian parliamentary commission accused President Leonid Kuchma yesterday [3 September] of involvement in the murder of journalist Georgy Gongadze and the beating of former parliamentary deputy Alexander Yelyashkevich and called for law enforcement authorities to bring criminal charges. The accusations … echo accusations by opposition politicians since the crimes were committed in 2000, but have never been voiced by an official body. (FT, 4 September 2002, p. 8) 16 September 2002: About 15,000 demonstrators marched Monday [16 September] in [Kiev] … and tens of thousands of others gathered in public squares around the country, demanding that President Leonid Kuchma resign or call new elections … Protesters [came] from several opposition groups [including the Socialist Party] … The demonstration was timed to mark the second anniversary of [Georgy] Gongadze’s disappearance … The protest organizers were buoyed by a last-minute pledge of support from … Viktor Yushchenko … [It was] one of the largest demonstrations since Ukraine’s independence from the Soviet Union … Citing their constitutional right to peaceful assembly, protest leaders proceeded with the demonstration in defiance of a court order last week ordering the protest to be moved to an airfield outside Kiev. (IHT, 17 September 2002, p. 3) ‘A rally of 20,000 protesters [was held]’ (IHT, 20 September 2002, p. 3). About 20,000 demonstrators rallied in Kiev yesterday [16 September], calling for President Leonid Kuchma to step down. The protest came as the strongest opposition group struck a tentative agreement with Mr Kuchma’s supporters that could lead to a coalition government. Viktor Yushchenko … thanked a diverse crowd of leftists, liberals and nationalists … Mr Yushchenko also pointed to an agreement between Our Ukraine and four pro-Kuchma groups to form a parliamentary majority. (FT, 17 September 2002, p. 8) ‘[On 16 September] more than 100,000 people took part in a demonstration organized in Kiev by the political opposition. Throughout the country more than a million Ukrainians participated in the opposition’s ‘Rise Up Ukraine!’ campaign’ (Izvestia, 17 September 2002, p. 1: CDSP, 2002, vol. 54, no. 38). 17 September 2002: Several thousand police officers armed with shields and rubber truncheons broke up a tent camp and evicted protesters in front of the president’s office

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before dawn Tuesday [17 September] … Protesters representing a variety of opposition groups set up 167 tents … Monday evening. They vowed to occupy the area until Kuchma stepped down … The police … cited a court decision last week that ordered that the protests be held at an airfield outside Kiev … The police said … court representatives arrived at the scene early in the morning and ordered the tents removed under an earlier decision banning the protests from the city centre. (IHT, 18 September 2002, p. 2) 24 September 2002: ‘Five thousand Ukrainians took to the streets Tuesday [24 September], demanding Kuchma resign, in the second such protest this month, as opposition leaders occupied his administrative buildings and started a hunger strike’ (IHT, 25 September 2002, p. 8). 25 September 2002: ‘President Leonid Kuchma bowed to opposition pressure Wednesday [25 September] meeting leaders who spent the night on hunger strike, but he bluntly rejected their demands for him to quit’ (IHT, 26 September 2002, p. 6). ‘The fifty MPs took over the presidential administration building on Tuesday [24 September] during a demonstration by more than 5,000 people. Mr Kuchma agreed that the parliament would look into allegations that Ukraine had sold military technology to Iraq’ (Guardian, 26 September 2002, p. 14). [The] fifty political leaders … [demanded] that he [Kuchma] resign or call elections. He refused to do either. The MPs left the building later … Washington has given Kiev $2 billion in aid since he [Kuchma] came to power in 1994; it is the fourth largest recipient of US aid. (The Times, 26 September 2002, p. 18) 15 October 2002: In the first legal challenge to President Leonid Kuchma … a judge said Tuesday [15 October] that he had ordered prosecutors to open a criminal probe into opposition charges of corruption and abuse of power … A judge at the court of appeal in Kiev said it was time to probe allegations linking Kuchma to the killing of a reporter and to arms sales to Iraq in violation of UN sanctions. (IHT, 16 October 2002, p. 3) ‘The prosecutor-general answers directly to the president … When the opposition organized new protests last weekend, they were half the size of the previous ones’ (The Economist, 19 October 2002, p. 45). (‘Mr Kuchma’s] narrow majority [in parliament] collapsed last week when five deputies defected over a prominent businessman’s arrest on what they said were trumped up charges’: FT, 21 October 2002, p. 8.)

556 Ukraine 21 October 2002: Another prominent Ukrainian journalist has died. Mikhail Kolomiyets … disappeared on 21 October … On 17 November … [his body was found] in Belarus … [Ukrainian] investigators regard ‘suicide by hanging’ as the leading theory. Colleagues and relatives of the late journalists categorically disagree with the investigators … People in Kiev are drawing parallels between the two cases [Mikhail Kolomiyets and Georgi Gongadze]. (CDSP, 2002, vol. 54, no. 47, p. 21) 11 November 2002: President Leonid Kuchma scored a victory yesterday [11 November] … when his candidate [Vasily Malyarenko] was elected [by the sixty-fivemember assembly of the court] chief justice of the supreme court, one of the few institutions that has challenged his decisions … Mr Kuchma promised … to increase the court’s budget and their salaries. The supreme court has played a key role … often overruling prosecutors and lower-level courts which have less independence. (FT, 12 November 2002, p. 9) 16 November 2002: ‘Leonid Kuchma dismissed his government [led by Anatoli Kinakh] … and nominated … Viktor Yanukovich … [Kuchma] has been unable to garner a majority coalition in parliament since legislative elections last spring’ (IHT, 18 November 2002, p. 2). ‘Kuchma credited the outgoing government with having ‘supported economic growth trends’, but he complained that it had been powerless to solve social problems. The Supreme Council is expected to confirm the president’s decision on 21 November’ (Vremya Novostei, 18 November 2002, p. 5). 22 November 2002: President Kuchma attends the forty-six-member EuroAtlantic Partnership Council meeting in Prague despite Nato saying he was unwelcome. The alphabetical seating arrangements were switched to French rather than English so that the British and American leaders were not sitting respectively next to and one along from President Kuchma. 7 December 2002: Following what critics describe as a campaign of threats and bribes, a slim majority of legislators last week pledged to work with the executive branch … Muscling legislators [including those who are businessmen] is just the most visible of a variety of tough tactics that critics say have intensified as Kuchma’s government sinks deeper into scandal and loses popular support. Other methods include retaliating against insufficiently loyal businessmen and independent judges, and cowing the media. (Sharon LaFraniere, IHT, Thursday 19 December 2002, p. 2)

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The ceremonial signing between the government and the pro-Kuchma parliamentary majority was held … on 7 December … Socialist Party leader Alexander Moroz described the event as the ‘theatrical conclusion of a non-aggression pact by the oligarchs’ … On the eve of the ceremony the pro-Kuchma majority had taken away its [the opposition’s] chairmanships of key parliamentary committees … Throughout the eight years Leonid Kuchma has been in power the Supreme Council has been a real headache for him. Now, however, the president’s backers have found a remedy, one they call ‘consolidation’. ‘No Ukrainian government has ever gone to work against the backdrop of such political consolidation. Now it is the duty of the government to strengthen this consolidation and work together for the good of Ukraine,’ Leonid Kuchma declared. ‘It must be borne in mind that the situation in the country has changed fundamentally. We have formed a triangle made up of the president, the parliamentary majority and a coalition government.’ Observers in Kiev note yet another consolidation – that of ministerial portfolios in the hands of people from the Donetsk region, home of the new prime minister himself. (Kommersant, 9 December 2002, p. 9: CDSP, 2002, vol. 54, no. 49, p. 16) 25 December 2002: The parliamentary crisis has been resolved: the factions of the pro-Kuchma majority have restored to the opposition the parliamentary committees that were recently taken away from it and the opposition parliamentarians have agreed to confirm … Sergei Tigipko as head of the National Bank … The Supreme Council had been paralysed since 17 December … The members of the majority were ultimately forced to compromise with the opposition and that led to a split within the majority. (CDSP, 2002, vol. 54, no. 52, p. 17) 27 December 2002: Ukraine’s supreme court on Friday [27 December] repealed a lower court judge’s decision to open criminal investigations of President Leonid Kuchma … The court said that a Kiev appellate court judge had abused his power and violated the law when he opened two separate criminal probes against the president. (IHT, 28 December 2002, p. 3) 28 January 2003: Presidents Vladimir Putin and Leonid Kuchma signed a treaty delineating the border between the two [countries] … moving to end years of sometimes sharp disputes over the issue … [President Putin said] that the status of the Sea of Azov remained uncertain, but voiced confidence that it could

558 Ukraine be resolved in the future. Ukraine wants to divide the inland sea, which lies between Ukraine and Russia, while Russia wants both countries to have access to resources – mostly fish – throughout the sea. (IHT, 29 January 2003, p. 9) An unexpected development was the presidents’ signing of a treaty on the state border between Ukraine and Russia … All that remains is the question of the Sea of Azov. Ukraine wants the border to split both the seabed and the surface of the water, while the Russians want to split only the seabed … The presidents were able to reach agreement on the operations of the Ukrainian–Russian natural gas consortium. (CDSP, 2003, vol. 55, no. 4, p. 16) ‘Mr Putin is on a three-day visit to Kiev … [He is] seeking the election of … Leonid Kuchma as head of the CIS’ (FT, 29 January 2003, p. 10). ‘Ukraine’s traditionally fragmented opposition will pick a single candidate to run in presidential elections next year [2004], a leading opposition figure [Viktor Yushchenko] said Tuesday [18 January]’ (IHT, 29 January 2003, p. 9). 14 February 2003: The Financial Action Task Force, a watchdog set up by the G7 industrialized nations and the OECD … said that it would stop applying restrictions on business with Ukraine … after Ukraine pledged to enact measures to crack down on money laundering … Ukraine [however] will remain on a money laundering blacklist until it implements the new legislation, which was approved by the country’s parliament this month [February]. (IHT, 15 February 2003, p. 13) 9 March 2003: ‘Tens of thousands of protesters took to the streets across Ukraine to demand the resignation of President Leonid Kuchma … Protests were witnessed in 103 towns, the largest in Kiev, with organizers claiming that up to 100,000 people took part. Police estimates put the figure at 30,000’ (Guardian, 10 March 2003, p. 17). ‘Protesters … marked the two-year anniversary of the country’s most violent demonstrations against Kuchma’ (IHT, 10 March 2003, p. 8). 20 March 2003: for the war in Iraq, see the summary of political developments in Russia. Although the United States accused Ukraine of selling an advanced radar system to Iraq in 2000, Kuchma was generally supportive of the United States during the war. 8 April 2003: Ukraine’s presidential administration yesterday [8 April] announced a crackdown on opposition media, signalling that journalists who criticize Leonid Kuchma could be jailed for ‘hindering the fulfilment of the duties of

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the president’. The statement confirms reports by a journalist rights group that prosecutors had started interrogating journalists under a statute that defines ‘interference in the activities of a state official’ as a crime punishable by up to three years in prison. (FT, 9 April 2003, p. 12) 15 April 2003: President Leonid Kuchma ceded ground to the opposition Tuesday by confirming that he would step down next year [2004], but insisted on first splitting parliament into two chambers, which his opponents see as a move to weaken the legislature … Kuchma called on … parliament to adopt his proposed political reforms – billed as transferring power from the executive to parliament – before his second and final term ends in 2004. (IHT, 16 April 2003, p. 6) 16 April 2003: A new parliamentary crisis erupted … Opposition deputies accused prime minister Viktor Yanukovich and the factions that support President Kuchma of failing to keep their word and refused to participate in the Supreme Council’s proceedings … At a meeting with opposition representatives the day before, Viktor Yanukovich had promised that a bill changing Ukraine’s electoral system from one based half on proportional representation and half on single-seat representation to one based entirely on proportional representation would be supported by some of the deputies from the proKuchma factions … [But] the draft law on changing the electoral system got only 217 votes (it needed 225 to pass). (CDSP, 2003, vol. 55, no. 15, p. 23) 7 June 2003: President Leonid Kuchma has signed a law, passed by the Supreme Council, on ratification of the European Charter for Regional or Minority Languages. Henceforth, the Russian language will officially be considered a regional language in Ukraine or a language spoken by ethnic minorities, and it cannot be granted the status of a second state language. The language question has been considered one of the most controversial issues in Ukraine for the past twelve years … In ratifying the charter a country commits itself to protect the rights of ethnic minorities as regards the unrestricted use of their native language, including such use at the state level (for example, in official documents and correspondence) … Russian speakers account for more than 40 per cent of the population by some estimates, and 60 per cent by others. (CDSP, 2003, vol. 55, no. 23, pp. 15–16)

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9 July 2003: Approximately 4,000 demonstrators … angry about food prices gathered outside the parliament building to press their allegations that officials are as much to blame for the increases as weather that wiped out much of the grain crop. Retail prices of flour in recent days have almost doubled … and prices for other staples have risen dramatically … An exceptionally harsh winter and dry summer have ruined much of Ukraine’s grain yield, but the demonstrators said official malfeasance has contributed to the price increases. (IHT, 10 July 2003, p. 4)

THE ECONOMY

The economic background As much as 40 per cent of Ukraine’s industrial capacity in the Soviet era was devoted to making armaments (FT, 26 August 1993, p. 14). Roughly 40 per cent of total Soviet military production was located in Ukraine (Deutsche Bank, Focus: Eastern Europe, 1993, no. 87, p. 4).

The economic system in the early years of transition Havrylyshyn et al. (1994) put the early reluctance to engage in serious economic reform down to factors such as the ability of powerful interest groups to block changes which threatened the ‘rents’ they received from the partially reformed system (e.g. from control over export licences, subsidized energy imports and state credits to enterprises) (p. 371). The semi-reformed economy is full of rent-seekers with strong motives to resist change, while the ill-defined nature of political groupings and allegiances makes it difficult to arrange the kind of social compromise necessary to achieve much-needed reform … Price distortions and their associated rents attract powerful lobbies which fight to preserve or even increase the distortions and prevent further reform. (pp. 373–4) ‘Ukraine’s economy is characterized by corruption and the dominance of a few well-connected tycoons, called oligarchs … They make their money from simple scams protected by their political connections’ (Business Central Europe, April 2001, p. 59). The advent of a new government in October 1992 brought about a degree of liberalization (some relaxation of controls over prices and exports and the introduction of a foreign exchange auction), but in the summer of 1993 Ukraine’s new

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government began to reintroduce administrative controls. By mid-1994 the degree of administrative control over the economy was virtually the same as it had been immediately following independence (Transition, 1994, vol. 5, no. 7, p. 2). State orders in 1992 accounted for about 75 per cent of turnover in industrial inputs. Sectoral ministries played a major role intermediating between enterprises, both to ensure that the basic inputs needed to meet the state order were made available and to allocate goods delivered under state orders to enterprises that required them for further processing (Sundakov et al. 1994: 420). ‘At present the Ukrainian economy is more liberalized than the Russian economy’ (Åslund 1995: 142). The government was too weak to maintain the centralized system of allocation; by 1994 it had effectively broken down. Therefore, enterprises increasingly became dependent on actual demand, and much of the necessary downscaling of obsolete and uneconomic production took place. Many enterprises closed down because of insufficient demand, while others adjusted. (p. 129) The domestic trade distortion index measures the share of state orders in total output. The index fell from 55.1 in the first quarter of 1992 to 31 in the second quarter of 1995, i.e. by the latter date 69 per cent of total output was produced outside the state order framework (Daniel Kaufmann, cited by Tedstrom 1995: 63–4). Administrative controls, especially on foreign exchange, exports and domestic prices, were reimposed in the second half of 1993. ‘Since then, however, we see a slow but steady liberalization that picked up considerable steam in the last quarter of 1994’ (p. 64).

Financial policy The value of the Ukrainian coupon (karbovanets or zaichik, meaning ‘little hare’ or ‘bunny’, from the design) has plummeted even against the Russian rouble. As of 18 February 1995 the use of foreign currency as legal tender is to be forbidden (Moscow News, 20–26 January 1995, p. 9). As of 18 February 1995 all financial transactions are to be concluded in karbovanets (Business Central Europe, February 1995, p. 50). The stabilization effort in 1992 relied more on administrative methods, e.g. the imposition of limits on both wage increases and profit margins on goods (ceilings on some food prices) at the end of January. The economic programme adopted in February 1993 aimed to reduce the budget deficit in 1993 to 6 per cent of GDP and monthly inflation to 3 to 4 per cent by the end of the year. Strict wage restraint is also a feature (United Nations Economic Commission for Europe 1993: 231). The government criticized a very large increase in credit by the central bank in March 1993, which was used to wipe out the debts of enterprises (including those owed to Ukrainian by Russian enterprises).

562 Ukraine The EEN (11 May 1993, vol. 7, no. 10, p. 4) reported a ‘lack of direction’ in the government, one of the main aims of which was to reduce inflation to 5 per cent a month by the end of 1993. The budget was passed on 9 April 1993, but the reformist deputy prime minister Viktor Pinzenyk resigned his economic reform portfolio four days later (although he remained deputy premier). An order was issued to close the currency exchange ‘temporarily’ in an attempt to regulate the exchange rate. Kravchuk then presented a three-stage programme envisaging the introduction in 1994 of currency and price liberalization (The Times, 13 November 1993, p. 12). In early December 1993 a joint statement is issued by the government and the central bank: ‘Issuing loans in Ukraine is banned until the end of the year because of the country’s very difficult financial situation’ (FT, 7 December 1993, p. 2). (The governor of the national bank, Victor Yushchenko, has said that ‘parliament has the right to order me to emit credits, and it is controlled by lobbies’: The Economist, Survey, 7 May 1994, p. 7.) A new stabilization plan (the eighth in two years) has already been discredited by the granting in January of substantial extra subsidies to agriculture. The forecasts for 1994 of 5 to 8 per cent monthly inflation and a balanced budget look hopelessly unrealistic (The Economist, 22 January 1994, p. 35). Near the end of February 1994 the brief three-month clamp-down on the money supply was abandoned when credits totalling 10 per cent of GNP were issued (FT, 3 March 1994, p. 3). A tight credit squeeze was introduced in December 1993, but the policy was reversed at the end of February 1994. The government agreed an emission equal to half the 1993 GNP in the first quarter of 1994 (FT, 13 April 1994, p. 25). In January 1994 the governor of the central bank, Viktor Yushchenko, launched a very severe monetary squeeze (although there was a wave of new credits in July, mainly for agriculture) (FT, 8 August 1994, p. 2). The counterinflationary effects of the tight monetary policy have been undermined by the large budget deficit (FT, 14 October 1994, p. 16). The monthly inflation rate was brought down from 90 per cent in December 1993 to 5.2 per cent in May 1994 (FT, 23 June 1994, p. 3). On 29 September 1994 a preliminary agreement was signed with the IMF. In exchange for $360 million (part of the ‘systemic transformation facility’) Ukraine would undertake a stabilization and liberalization programme (e.g. a budget deficit of 10 per cent of GDP, price and foreign trade liberalization, and speedier privatization). The karbovanets has been stabilized, trading at 150,000 to the US dollar since February 1995 (FT, 6 June 1995, p. 3). Since January 1995 the street and official exchange rates have converged and stabilized. On 1 August the exchange rate was 152,300 to the dollar. In late July Kuchma announced that the karbovanets would be replaced by the grivna in October 1995 (FT, 2 August 1995, p. 2). As of 1 August 1995 there was a ban on the use of foreign currency for cash payments in the retail and service sectors. Deposits from businesses must be converted into karbovanets within a day (IHT, 2 August 1995, p. 2).

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The grivna (hryvna) was introduced on 2 September 1996. (Hryvna is an Old Church Slavonic word for money.) One grivna (divided into 100 kopiyas) equalled 100,000 karbovanets and people had until 16 September 1996 to spend or exchange the karbovanets. The opening rate of exchange against the dollar was 176,100. The economic circumstances were deemed appropriate (e.g. the monthly inflation rate was 0.1 per cent in both June and July 1996), but a onemonth price freeze accompanied the introduction of the new currency (FT, 3 September 1996, p. 2). The government’s promise of a price freeze in state shops until 1 October 1996 was cancelled on 9 September. The price freeze would last only until 16 September 1996 (EEN, 1996, vol. 10, no. 18, p. 3). The introduction of the new currency was deemed to be proceeding successfully and so the cabinet announced that the price freeze would be lifted on 16 September, two weeks ahead of schedule. ‘However, it has been learned that prices were actually set free on 11 September’ (CDSP, 1996, vol. XLVIII, no. 38, p. 20). It was announced on 14 October 1996 that the grivna was to float. The central bank had stopped defending a rate of 1.76 grivna to the US dollar ‘last week’ (FT, 14 October 1996, p. 3). There has been little enforcement of the May 1992 law on bankruptcy. Administrative setting of wages continues. In September 1995 the government reinstated the 80 per cent wage indexation ceiling, according to which wage increases are limited to 80 per cent of consumer price index inflation (EBRD 1996b: 181; and 1997b: 208). ‘So far not a single enterprise has been formally declared bankrupt’ (The Economist, 22 July 1995, p. 20). ‘On the way to radical economic reform’ was presented on 11 October 1994 and approved by parliament on 19 October. Kuchma’s programme comprised: 1

2

A macroeconomic stabilization package, with the budget deficit being reduced to 10 per cent of GDP by the end of 1994 and 5 per cent in 1995. Price liberalization (e.g. a sevenfold increase in bread prices) would mean a saving on subsidies, although there would be extra expenditure on the indexing of pensions and wages and improvements in social welfare. (Local authorities can subsidize certain staple commodities such as bread out of their own budgets: Moscow News, 11–17 November 1994, p. 4.) By the end of 1994 the volume of state-regulated retail prices was to be reduced from 80 per cent to 65 per cent of all prices. Most prices would be freed from 1995, excluding those set by monopoly producers (IHT, 28 October 1994, p. 13). The aim was to increase domestic energy prices to world levels by mid-1995 (FT, 28 October 1994, p. 19). Trade liberalization and the unification of exchange rates (see p. 580).

On 3 March 1995 Ukraine signed a stand-by agreement with the IMF. In return for a $1.5 billion stand-by loan and a $373 million systemic transformation facility Ukraine agreed to keep its budget deficit to 6.4 per cent of GDP, to reduce the monthly inflation rate to 1 per cent by the end of the year and to

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undertake reforms such as further price liberalization and the limitation of export quotas to grain. Parliament approved the budget on 6 April 1995. The budget deficit in 1995 was to be 7.3 per cent of GDP, including external debt servicing. More than half the deficit was to be financed by printing money (FT, 7 April 1995, p. 3). (According to IMF methods of calculations, the budget deficit would amount to 3.5 per cent of GDP: FT, 13 March 1995, p. 3. Including an allowance for expected aid, the budget deficit would come to 3.2 per cent of GDP: The Economist, 18 March 1995, p. 43.) On 9 April 1995 the IMF approved a total of $1.96 billion, including a $1.57 billion stand-by loan and a $392 million systemic transformation facility. In January 1995 a new enterprise profits tax was introduced, which changed from gross to net income (EBRD 1995a: 67). Åslund believes that Kuchma has ‘transformed Ukraine’s international agenda by putting economic reform first. Saying that he did so for the sake of Ukraine’s sovereignty, he succeeded in bringing eastern and western Ukraine together’ (Åslund 1995: 141). Thanks to IMF and World Bank agreements Ukraine is effectively bound to its present course of reforms, rendering success likely … Yet pressure for credits may still defeat the reformers. The most obvious threat comes from agriculture, but that danger is widely anticipated … Like Yeltsin in the spring of 1992 he [Kuchma] may be convinced that industrial lobbies are justified in making certain demands. (p. 142) ‘On the whole, Ukraine has made considerable progress in stabilizing the economy. The days of hyperinflation are, in all likelihood, behind it, and there appears to be a growing appreciation of the importance of financial responsibility’ (Tedstrom 1995: 54–5). In late 1994 the government began issuing state debt as a way of financing the budget deficit. Although the amount of debt sold has not been as high as government officials had hoped, it appears that the national bank is enjoying increasing success in its efforts to avoid bank credits as a method of deficit financing (p. 67). (In 1995 the budget deficit was 7.9 per cent of GDP. This deficit was financed as follows: central bank, 72.7 per cent; external 19.8 per cent; bonds, 7.4 per cent. Bond sales began to be used in June 1995. The intention was to finance a third of the budget deficit, 5.5 per cent of GDP, by means of bond sales: UET, Quarterly Update, August 1996, pp. 46–7.) In April 1995 a one-year standby loan of $1.5 billion (in five tranches) was agreed by the IMF, but by late autumn Ukraine had run into problems meeting some of the conditions. In January 1996 the IMF suspended the programme, with $700 million not disbursed. Parliament passed an acceptable budget deficit of 6.2 per cent of GDP on 22 March 1996. But on 8 April 1996, after cancelling the loan programme (which expired on 6 April), the IMF sent an emergency mission to Ukraine to negotiate a new standby loan of $900 million for 1996.

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This was agreed on 18 April. (Deutsche Bank, Focus: Eastern Europe, 1996, no. 151, p. 2; FT, 23 March 1996, p. 2; FT, 9 April 1996, p. 2; Transition, January–February 1996, vol. 7, no. 1, p. 22; IHT, 19 April 1996, p. 15.) Each monthly tranche of the $867 million IMF loan was conditional, principally on maintaining a yearly inflation rate, measured from December to December, below 42 per cent (UET, Quarterly Update, August 1996, p. 4). The monthly inflation rate was reduced from 9.4 per cent in January 1996 to 0.1 per cent in July 1996. Although the rate increased to 5.7 in August 1996 this was mainly caused by higher administered charges for communal and housing services (pp. 80, 82). On 13 November 1996 the prime minister reported that a mutual understanding on tax policy and the budget deficit for 1997 had been reached with the IMF. The budget should take into account the arrears in the payment of wages and social benefits and the planned budget deficit should not exceed 6 per cent of GDP (or 4 per cent according to the IMF methodology) (UET, Quarterly Update, October 1996, p. 5). (See the section on aid, p. 589.) In the first half of 1996 inflation speeded up again. But this time it was largely the result of the intentional upward correction in the levels of prices in service and utility sectors aimed at bringing them closer to cost recovery … Ukrainian policy makers have chosen to introduce economic transformation measures gradually and believe that growth of industrial output should remain a major aim of economic policy. That approach was reiterated in major policy declarations made by the country’s president in June 1995. Accordingly, the government of Ukraine has developed a twenty-to-twenty-five year Programme of Structural Reconstruction of the Ukrainian Economy. So far, however, Ukraine seems to be repeating the Russian Federation’s 1992–94 pattern of inconsistency in the implementation of economic reform, in particular in the policies designed to achieve financial stabilization – and with similar results, including persistent inflation, a serious budget deficit, balance of payments problems and painfully slow restructuring of enterprises. (United Nations 1996: 30, 32) Despite large increases in utility prices monthly inflation was still around 1.5 per cent in October 1996. ‘Macroeconomic and structural performance criteria for end-June [1996], as agreed with the IMF, have generally been met’ (OECD, Economic Outlook, December 1996, p. 125). According to the central bank, Treasury bills financed 35 per cent of the budget deficit in 1996 (EBRD 1997a: 34). The board of the IMF approves a stand-by credit of $542 million, the first tranche ($48 million) being payable immediately (UET, Monthly Update, August 1997, p. 5). (Ukraine has unexpectedly failed to secure an IMF facility worth up to $2.6 billion. The IMF said it would refuse the loan as long as Ukraine did not reduce its 51 per cent payroll tax, deregulate its economy and fight corruption: Business Central Europe 1997: 53.)

566 Ukraine One tranche of the $542 million stand-by loan has already been held up by a higher than expected budget deficit in August 1997 (FT, 13 October 1997, p. 2). On 27 November 1997 the IMF unfroze a tranche of about $100 million (FT, 28 November 1997, p. 2). On 26 November 1997 the IMF announced that Ukraine would receive two tranches of the stand-by credit, amounting to roughly $103 million (UET, Monthly Update, November 1997, p. 3). In November 1997 the IMF released two payments totalling $103 million, which had been delayed because IMF limits for the budget deficit had been exceeded. On 29 December 1997 the IMF released a $50 million tranche of a $542 stand-by loan. This brought the total released since the loan was approved in August 1997 to about $200 million (FT, 30 December 1997, p. 2). On 28 January 1998 the IMF approved the release of the fifth tranche of the stand-by loan, worth about $49 million (UET, Monthly Update, January 1998, p. 3). On 14 March 1998 the IMF withdrew for the second month in a row a tranche ($49 million) of the $585 million loan (FT, 17 March 1998, p. 4). On 14 March 1998 the IMF postponed its decision on the disbursement of the next tranche under the stand-by programme. On 7 April 1998 the IMF suspended the financing of Ukraine under the stand-by programme, the main reason being the significant deviation of the budget deficit from the level stipulated in the memorandum of co-operation (UET, Monthly Update, April 1998, p. 3). On 31 July 1998 IMF officials said that that they would recommend to the IMF board a three-year extended fund facility loan of about $2.2 billion. (This was granted on 4 September 1998.) Ukraine could receive a first payment of between $200 million and $250 million by the end of August 1998. The conditions included a budget deficit of 3.3 per cent in 1998 (and around 2 per cent in the following years) and an inflation target of 10 per cent in 1998 (and an average of 8 per cent during 1999–2001). On 24 July parliament formally gave the president power to approve the 1998 budget by decree (IHT, 1 August 1998, p. 11; FT, 1 August 1998, p. 2; and 3 August 1998, p. 2). ‘Viktor Yushchenko [is] the much admired governor of the National Bank of Ukraine’ (FT, Survey, 5 May 1998, p. ii). Though inflation has been tamed and the currency stabilized, these achievements have come at the cost of increasing wage and pension arrears, which now total roughly 5 per cent of GDP. Inter-enterprise arrears, a substitute for the lack of credit in the economy, are now higher than Ukraine’s GDP, while barter transactions [in 1997 totalled] … two-thirds of the country’s GDP. (p. ii) In 1998 barter transactions accounted for over 40 per cent of industrial sales (EBRD 1999b: 279). ‘[As regards] shady barter deals in the energy sector, some 70 per cent of payments are now made in cash, compared with under 10 per cent in 1999’ (Business Central Europe 2000: 48).

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The cutting off of external finance has had dramatic effects … A new reformist government has boosted cash collection in the energy sector from 8 per cent of payments to 60 per cent during the last year, pulling the plug on thousands of firms that refused to pay. Tax collection has surged by 30 per cent during the same period … Meanwhile the government has simply banned non-monetary transactions. (Business Central Europe, April 2001, p. 59) The financing of the budget deficit (see Table 7.2) changed substantially between 1995 and 1998: central bank financing fell from 72.7 per cent to 0.8 per cent, while external financing increased from 19.8 per cent to 68 per cent and bonds increased from 7.4 per cent to 31.2 per cent (UET, Quarterly Issue, March 1999, p. 46). The respective figures for 1995, 1996, 1997, 1998 and 1999 for financing the budget deficit are as follows: central bank, 72.7 per cent, 40.2 per cent, 1.3 per cent, 0.8 per cent and 0.1 per cent; external, 19.8 per cent, 22.8 per cent, 26.7 per cent, 68.0 per cent and 13.7 per cent; bonds, 7.4 per cent, 37.0 per cent, 72.0 per cent, 31.2 per cent and 86.2 per cent (UET, Quarterly Issue, June 2000, p. 56). In September 2001 the IMF agreed to resume lending … A new tax liability law has largely ended the ‘kartoteka’ practice … [whereby] the authorities could freeze the bank accounts of enterprises for alleged non-payment of tax, which constrained the use of bank accounts. (EBRD 2001b: 206) ‘The government recently gave up on efforts to win $550 million in planned credits from the IMF … Ukraine’s government [is] faced with a spiralling budget deficit’ (FT, 8 August 2002, p. 6).

Prices After the price liberalization in 1991 and 1992 price regulation intensified at the beginning of 1993. Prices are set administratively for housing and transport, goods of ‘social significance’ and goods produced in monopolistic sectors. In addition profit margins are subject to regulatory limits (EBRD 1994: 41). In October 1994 most energy and agricultural prices, communal tariffs and rents were increased in real terms. Further liberalization steps followed in December 1994 and in February 1995. Energy prices have been moving significantly towards cost recovery levels for domestic production and world price levels for imports. Public utility prices increased from 2 to 3 per cent of cost in September 1994 to 40 per cent by February 1995 and were expected to rise to 60 per cent of cost by July 1995 (EBRD 1995a: 66). Price controls remain only for bread, public utilities, public transport, fuel for households and rents. Producer price controls remain only for utilities (gas, electricity, central heating, water supply and sewage), public transport and rents (EBRD 1995b: 62). In October 1995 the average prices of

-12.0 -3.6 376.7

Rate of growth of industrial output ( %)

Rate of growth of agricultural output ( %)

Inflation rate (consumer, %)

-1.152 0.257

Balance of payments (current account, $ billion)

Foreign direct investment (net, $ billion)

0.516

-1.185

1.3

-3.2

80.0

-9.5

-5.1

-10.0

1996

0.581

-1.335

2.3

-5.4

15.9

-1.9

-1.8

-3.0

1997

0.747

-1.296

3.7

-2.8

10.5

-9.8

-1.0

-1.9

1998

0.489

0.834

4.3

-2.4

22.7

-6.9

4.3

-0.2

1999

0.594

1.481

4.2

-1.3

28.2

7.6

12.5

5.9

2000

0.769

1.402

3.7

-1.6

12.0

9.9

14.2

9.1

2001

0.698

3.173

3.8

0.8

0.8

8.6

7.0

4.6

2002 (estimate)

1

General government balance: includes the state, municipalities and extra-budgetary funds (EBRD)

Note

Source: Various issues of European Bank for Reconstruction and Development, Transition Report; Ukrainian Economic Trends; United Nations Economic Commission for Europe, Economic Survey of Europe

0.3

Unemployment rate (end of year, %)

Budget surplus or deficit ( % GDP)

-6.1

-12.2

Rate of growth of GDP ( %)

1

1995

Economic indicator

Table 7.2 Ukraine: selected economic indicators 1995 –2002

Ukraine

569

electricity and coal for households were raised to 70 to 75 per cent of cost recovery levels and the prices were again raised in January 1996 to maintain these cost recovery rates (EBRD 1996a: 11). In October 1994 the majority of direct price controls, most ceilings on profit margins as well as the advance notification/approval of price increases in goods of ‘social significance’ were eliminated (EBRD 1996b: 181). The only goods and services that remain subject to price controls are bread, utilities, public transport and rents (EBRD 1997b: 208). By early 1992 the ministry of the economy estimated that the percentages of retail and wholesale turnover accounted for by various categories of prices were as follows: free, 21 and 26; administered, 12 and 17; regulated (limits on profit margins principally), 67 and 57. But in many cases it is unlikely that profit margin regulation provided more than symbolic constraint. In July 1992 the majority of profit margin limits were abolished. But the relative price freedom came to an end in December 1992 when the category of regulated prices was substantially expanded and the effectiveness of regulation strengthened (Sundakov et al. 1994: 414–16). In December 1992 subsidies were abolished on almost all agricultural products, resulting in food price increases in state shops of 300 to 500 per cent (United Nations Economic Commission for Europe 1993: 231). On 10 September 1993 the prices of food, electric power and some other goods and services were increased 300 to 500 per cent (there were some cash awards and wage rises to compensate). On 28 October 1993 price increases and state purchasing in key industries were enforced (EEN, 1993, vol. 7, no. 22, p. 1). Wholesale and retail price controls were imposed; prices were to rise with energy cost increases only and profits were to be strictly limited. The state order system was reinstituted, requiring most enterprises to sell a portion of their production to the state at fixed prices (FT, 9 November 1993, p. 3). Wholesalers were allowed to raise their prices only in line with input costs and manufacturers of ‘strategic products’ (such as food and fuel) had to deliver an average of 40 per cent of their output to the central ministries (The Economist, 20 November 1993, p. 48). According to Kasper Bartholdy and Ivan Szegvari (Economics of Transition, 1993, vol. 1, no. 4, p. 511), ‘the Ukrainian authorities reactivated the old central planning mechanism, reintroducing pervasive price controls and a comprehensive state-order system as the basis for the distribution of production’. The June 1993 agreement between Kravchuk and Yeltsin foresaw world prices for energy supplies from Russia from the start of 1994. Domestic industry and agriculture are charged a fraction of world prices (ranging from between 25 per cent for electricity and gas to 33 per cent for coal) and households are charged only a fraction of what the industries pay (Daniel Kaufmann, Transition, September 1994, vol. 5, no. 7, p. 5). At the start of November 1994 the price of bread quadrupled and public transport fares increased tenfold (EEN, 1994, vol. 8, no. 23, p. 1). On 1 June 1995 utility prices for individual consumers were increased, e.g. doubled in the case of heating and by 40 per cent for water (Transition, 1995, vol. 6, nos 5–6, p. 19).

570

Ukraine

Even energy prices have reached world market levels. The subsidies that remain (for rents and natural gas for households and for collective transport) have been sharply reduced (Åslund 1995: 138). By the second quarter of 1995 only 14 per cent of retail prices and 31 per cent of wholesale prices were set by the state (Daniel Kaufmann, cited by Tedstrom 1995: 64). On 15 January 1996 household coal and gas prices were raised by 24 per cent and 34 per cent respectively, while rents and communal services were increased from 40 per cent to 60 per cent of cost recovery. A further increase was scheduled for April 1996 (Matthew Kaminski, FT, 16 January 1996, p. 2). Price increases for municipal services (water, rents, electricity and gas) were eventually put into effect on 1 August 1996. ‘The price hikes aim to gradually adjust prices for municipal services and public transport so that they tally with marginal costs’ (Deutsche Bank, Focus: Eastern Europe, 1996, no. 161, p. 3).

Privatization The number of privatized enterprises at year end was as follows: 1992, thirty; 1993, 3,585; 1994 11,552; 1995, 28,000. As of 1 October 1996 about 45,000 enterprises were privatized, of which 36,576 were small and almost 8,200 medium-sized and large. The programme of small privatization had been ‘substantially completed’ by the end of June 1996. By October 1996, 39.2 per cent of total housing (by surface area) was privatized, ‘the largest part of which [was] free of charge’. Since the beginning of 1995 the main method of large privatization has been the issuing of shares, as opposed to the leasing contract used earlier. ‘Reportedly, shares have been allocated in many cases through preferential sales and buy-outs by management and employees.’ ‘Over the last months’ share auctions have been based on property certificates and compensation certificates. Property certificates may be used only by citizens; they are personal and in principle not tradable. The deadline for the issuing of property certificates was extended from the end of September until 1 January 1997. (The majority of citizens who have invested their certificates through auctions have done so via investment funds. The setting of minimum prices has adversely affected sales.) Compensation certificates are being distributed to holders of savings deposits as compensation for the reduction in the real value of their savings through inflation. These certificates are tradable and can be used to buy shares in enterprises not sold in auctions based on property certificates. So far only 296 joint stock companies have been sold for cash on the ‘Ukrainian Fund Exchange’. ‘The limited success of certificate privatization is probably due to the fact that the most attractive enterprises, namely those of oil, chemical and metallurgy industries, have so far not been on offer’ (UET, Quarterly Update, October 1996, pp. 68–70). On 27 December 1996 parliament extended the deadline for issuing privatization vouchers until 1 July 1997. The vouchers and the compensation coupons can be used until the end of 1997 (UET, Quarterly Update, December 1996, p. 5). In 1991 there were around 18,000 medium-sized and large state enterprises and

Ukraine

571

45,000 small state enterprises. The privatization process was initiated in 1992. The ongoing privatization programme is largely based on the presidential decree of November 1994. The decree aimed at ensuring wide citizen participation, establishing the use of auctions as the basic means of privatization and the privatization of an additional 8,000 medium-sized and large enterprises by the end of 1997. The 1997 programme was approved by parliament in early June 1997. An additional 1,562 small, 1,440 medium-sized and 220 large enterprises were to be privatized by the end of 1997. Property certificates were issued to citizens in January 1995. Compensation certificates have been issued since February 1996 as compensation to holders of savings deposits, state insurance and government bonds whose purchasing power was eroded by high inflation. The main difference between the two certificates is that in the case of property certificates a minimum price is set, high minimum prices acting as a brake on privatization. Various groups have received preferential treatment, including mainly workers and management of enterprises and also main suppliers (notably in the agro-industrial sector). (Enterprises belonging to the agro-industrial complex account for about half the enterprises to be privatized, with 51 per cent of the shares being given to their suppliers.) Preferential treatment may have included selling shares to workers at a discount and providing a packet of shares to the management (up to 5 per cent) which was either free or at a discount. Until 1995 most of the enterprises were privatized by leased buy-outs with the minimal involvement of outsiders. By the end of 1995, 28,272 enterprises had been privatized, and by the end of 1996, 48,225 enterprises. By 15 March 1997 a total of 9,649 medium-sized and large enterprises had entered the corporatization stage. Of these a total of 6,321 had transferred more than 70 per cent of their shares to the private sector (UET, Quarterly Update, June 1997, pp. 82–8). A presidential decree issued on 6 May 1997 stated that the cabinet of ministers had the right to draw up the list of strategic enterprises where the state share would range from 26 per cent to 51 per cent. The decision on the size of the state shares would be valid for only two years. The management of the enterprise had the right to buy 5 per cent of shares for cash and 5 per cent for compensation certificates (p. 4). There is substantial agreement among economists that there has been little change in the behaviour of the typical enterprise in Ukraine. Many enterprises have continued producing similar products, albeit at a much lower capacity. Operations have been financed by increasing their stock of debt most notably to other enterprises and their workers … Given the reduction in government subsidies and the tightening of monetary policy over the period [1994–6], the results provide indications of a lack of restructuring and a lack of a firm budget constraint at the enterprise level. It seems likely that enterprises have largely retained their operations and financed them by substituting the (exogenous) tightening of government finance and credit by increasing the endogenous component of total arrears (arrears to other enterprises and their workers). (p. 80)

572 Ukraine Many enterprises which have been formally privatized have neither changed their economic behaviour nor undertaken any restructuring and, furthermore, their corporate governance remains highly inefficient. Examples are many enterprises which were privatized by insiders (management and workers’ collective) through leased buy-outs. (p. 85) On 4 February 1999 parliament extended mass privatization until 1 May 1999. Auctions for vouchers would continue to be held until that date (UET, Monthly Update, January 1999, p. 3). On 23 November 1999 the president signed a law according to which the state company Khlib Ukrainy was recognized to be of high national importance and so could not be privatized (UET, Monthly Update, October 1999, p. 3). Little progress has been made with large privatization. By early 1994 only about 4 per cent of the 60,000 small units to be privatized had been sold, but the informal economy is growing rapidly. There has been no property restitution for former owners (EBRD 1994a: 40). In December 1994 parliament lifted its suspension of mass privatization. Hitherto less than 5 per cent of small-scale units had been privatized and there had been virtually no mass privatization (EBRD 1995a: 16). The aim of the draft legislation was to privatize 8,000 medium-sized and large enterprises (and another 12,700 small enterprises) in 1995. Up to 5 per cent of shares would go to management, with the rest to be sold in auctions (about 70 per cent of general vouchers issued to the population at large and 30 per cent to savings account holders). The first auctions were scheduled for the first quarter of 1995 in five pilot regions. A December 1994 decree provided incentives to accelerate small privatization (p. 66). Over 200 investment trusts and funds are operational (p. 67). In December 1994 parliament lifted its moratorium on mass privatization, but replaced it with a list of 6,147 enterprises in the transport, communications and energy sectors that were to be excluded from privatization. The list was extended in March 1995 by ninety enterprises in the oil refining, defence and food processing industries. Although parliament rejected the 1995 privatization programme in April 1995, its decision was overruled by a June presidential decree. By June 1995 five auctions for over 600 enterprises had been concluded. But out of 387 large and medium-sized enterprises put up for sale in the first three monthly auctions only 102 were successfully sold (EBRD 1995b: 61). About 40 per cent of the population have collected their vouchers and regional auction centres have been established (April 1996 report). Some 1,800 medium-sized and large enterprises were offered for sale in voucher auctions in 1995 and 600 of these have been fully privatized (EBRD 1996a: 9). By mid-1996 it is estimated that some 3,500 enterprises had been sold to private shareholders under the mass privatization programme. But the majority of sales have taken the form of preferential sales, share transfers and buy-outs by management and employees. In early 1996 draft legislation was prepared by parliament which stipulated the transfer of 51 per cent of shares in some 3,600 agro-industrial enterprises to the managers of

Ukraine

573

collective farms and the reversal of previous privatizations in some cases. The president has vetoed this legislation on a number of occasions and privatization has continued. The decision has been taken to end the voucher scheme in 1996, although the deadline for issuing vouchers was recently extended from the end of June to the beginning of October 1996. Compensation certificates (which are tradable) are being distributed to holders of savings deposits to compensate them for the inflation-induced erosion of their savings. These can be used to buy shares in enterprises not sold in the main auctions. In August 1996 the government approved a list of over 200 enterprises to be sold via international tender. By the end of 1994 only around 8,000 of some 45,000 small enterprises (less than 200 employees) had been transferred into private hands, while about half of all enterprises were held in collective ownership. The main method of privatization has been management and employee buy-outs. By the end of June 1996 a cumulative total of around 31,000 small enterprises had been privatized (the majority being sold to workers and management). But increasing use of auctions has been made since September 1995. It was expected that the remainder of small enterprises would be sold by the end of 1996. There has been no restitution to former owners of nationalized property. Enterprise budget constraints have remained soft because of budgetary subsidies, continued cheap directed credits (especially to depressed industrial regions) and tolerance of non-payment for utilities (EBRD 1996b: 180–1). The current phase of the small privatization programme was completed at the end of 1996. Parliament has agreed to reduce the number of enterprises excluded from mass privatization from over 6,000 to less than 5,200 (EBRD 1997a: 34). By mid-1997, 86 per cent of citizens had received their vouchers and over 45 per cent had invested them in exchange for shares in joint stock companies. The vouchers are often exchanged for shares in investment funds. The deadline for investing vouchers was the end of 1997. By April 1997 over 9,600 of the existing 18,000 medium-sized and large enterprises had been privatized, of which it is estimated that some 6,300 had been completely privatized (with more than 70 per cent of shares sold to private owners). But the pace of large privatization slowed in the first half of 1997 (EBRD 1997b: 208). Small privatization is largely complete. The 1998 privatization programme has been approved by the president. This includes the completion of the mass privatization programme by the end of 1998 and gives greater emphasis to the sale of larger enterprises for cash. At the beginning of 1998, 7,000 of the original 9,500 enterprises included in the mass programme had been privatized (defined as a state share in capital of less than 30 per cent). At the same time the government announced its intention to privatize a number of large enterprises in the energy, transport and financial sectors, as well as to break up and eventually privatize the main state enterprises in the telecommunications and the grain marketing/distribution sectors. The decision to focus on sales to strategic investors reflects both the need for fresh capital and the need to raise revenue for the budget (EBRD 1998a: 43). Legislation adopted in 1998 envisaged the virtual completion of the mass privatization programme by the end of the year. By July 1998 over 7,800 of the original 9,500 medium-sized and

574

Ukraine

large enterprises included in the programme had been privatized (defined as more than 70 per cent of shares sold). By mid-1998 only forty of the 200 largest enterprises had been privatized (via open tender for cash or via investment tender to strategic investors). The dominant role of insiders in newly privatized firms coupled with persistent weaknesses in financial discipline and in the enforcement of bankruptcy law have contributed to the slow pace of industrial restructuring. There are several indicators of soft budget constraints on enterprises … inter-enterprise arrears … wage arrears … Barter trade constituted some 42 per cent of industrial sales … The complexity of procedures and the lack of trained staff have limited the implementation of the 1992 [bankruptcy] law. (EBRD 1998b: 196) By July 1998 cash tenders for large share packages had been completed for ten distribution companies (p. 197). The 1998 privatization programme ended with mixed results. Voucher privatization neared completion (although parliament has recently voted to extend it). Further progress was made in large-scale privatization, although with only fifty-three of the intended 200 large enterprises privatized it fell short of the initial targets. (EBRD 1999a: 25) At the beginning of 1999 it was estimated that over 9,500 medium-sized and large enterprises (of which about half are agro-industrial enterprises) had been privatized, such that private ownership exceeded the 70 per cent target set by the government … However, recent government announcements that the national agency for the management of state corporate rights will actively manage the state’s residual stakes (likely in cases where these exceed a 25 per cent threshold) raise concerns over the commitment to full investiture. At the beginning of the year the president approved the 1999 privatization programme, designed to promote cash privatization … and to attract strategic investors. Over 450 medium-sized and large enterprises are to be privatized during the year. However, parliament objected to some specific proposals and also rejected the government proposal for the privatization of the telecoms utility, Ukrtelecom. (pp. 45–6) Small privatization is virtually complete. Over a quarter of the 200 larger enterprises originally identified for case-by-case privatization through open tender have been privatized, although relatively few strategic investors have participated owing to a lack of transparency of procedures. Privatization of grain elevators originally owned by Khlib Ukrainy commenced in late 1997. By mid-1999 privatization plans for most of the 442 elevators originally included in the IMF programme were

Ukraine

575

under way and over 402 were more than 70 per cent privatized. But the state retains a minority share in the elevators and owns Khlib Ukrainy (also responsible for the supply of inputs and grain procurement) (EBRD 1999b: 278). ‘The government’s current privatization programme promotes cash sales for large enterprises and agro-industrial enterprises, in contrast to the previous emphasis on sales via tender and through local stock exchanges’ (EBRD 2000a: 84). Voucher-based mass privatization was concluded in 1999. However, initial attempts to sell shares of larger enterprises via open tenders were less successful owing to a lack of transparency. The winners of some tenders also failed to pay, so the state property fund has increasingly resorted to sales through stock exchanges. In 1999 over 1,930 enterprises were more than 70 per cent privatized (taking the total to 11,450 enterprises from 1995) … Fiscal pressure and the need to promote large-scale privatization led the government to propose a more radical approach to privatization for the period 2000–2, which was approved by the Rada in May 2000. The emphasis will be on sales of state shares in some of the largest enterprises in major sectors of the economy, including metallurgy, energy and chemicals. The sales will be to strategic investors and for cash … By mid-year a number of sales had occurred owing to the greater effectiveness of tenders as the state property fund has sold controlling blocks of shares … The Rada has approved a bill to begin the privatization of Ukrtelecom … A 25 per cent stake will be sold to a strategic investor … The state will retain 50 per cent plus one share … In July 2000 a law took effect to improve cash payments in the wholesale power market … Power distribution companies … [are] already about 40 per cent privatized … The formal (though not necessarily practical) ending of ‘kartoteka’ [took place] in 1999 (whereby the tax authorities could freeze the bank account of a company suspected of tax evasion … An IFC survey of small and medium-sized enterprises, conducted in the three months to February 2000 indicated that excessive government interference (especially inspections), a high tax burden and difficulties in gaining access to credit are among the main obstacles. However, the earlier introduction of a simplified tax system for small and mediumsized enterprises has reduced the costs of tax compliance. (EBRD 2000b: 222–3) Sales of government stakes in large industrial enterprises raised $385 million in 2000. The sale of the Mikolayev Alumina plant to a Russian company contributed about half of this amount … The government plans to sell just under 50 per cent of Ukrtelecom, including a 25 per cent stake to a strategic investor, towards the end of the year [2001]. (EBRD 2001a: 94) A new tax liability law has largely ended the ‘kartoteka’ practice … [whereby] the authorities could freeze the bank accounts of enterprises for

576

Ukraine alleged non-payment of tax, which constrained the use of bank accounts … Large-scale privatization has proceeded but receipts fall short … During the year the state property fund has sold stakes in larger companies through tenders, cash auctions and via the stock exchange. A number have been purchased by Russian companies, especially in oil refining … Majority stakes in six power distribution companies were sold to strategic investors in April 2001. (EBRD 2001b: 206) Large privatizations [have been] delayed [including that of Ukrtelecom until 2003] … Small-scale privatization has continued … In September 2001 the government announced a programme to develop small businesses … The small business sector has continued to develop … The share of barter in industrial sales has continued to fall, amounting to 8 per cent by the end of 2001 compared with 33 per cent two years earlier. (EBRD 2002b: 210–11)

Other sources dealing with privatization The first auctions in the small privatization programme took place in Lvov on 20 February 1993 with the help of the International Finance Corporation (FT, 22 February 1993, p. 16). Workers employed in shops, restaurants and small businesses were able to obtain a 30 per cent discount off the bid price and to make a 30 per cent down payment with a year to pay the remainder. Leasing was the main form. By October 1992 enterprises accounting for 21 per cent of retail sales had been leased to private management. Also operating under leasing arrangements were 1,431 medium-sized manufacturing enterprises, with ownership divided between lessees and the state (Havrylyshyn et al. 1994: 391). Less than 2 per cent of industry has been privatized (The Economist, 27 November 1993, p. 17). Less than 10 per cent of total assets have been officially privatized (Daniel Kaufmann, Transition, 1994, vol. 5, no. 7, p. 1). Less than 10 per cent of enterprises have been privatized (FT, 2 August 1994, p. 14). President Kuchma issued a decree aimed at privatizing more than 8,000 state enterprises in 1995. The decree sought to guarantee the right of Ukrainian citizens to use privatization certificates and create a market for shares. Shares were to be sold to insiders (employees and enterprise managers) and at auction. Managers would have the right to buy up to 5 per cent of the shares in a given enterprise (Transition, November–December 1994, vol. 5, no. 9, p. 17). Less than 10 per cent of the 8,000 targeted large and medium-size enterprises went into private hands in 1995. The government announced in March 1996 that it would speed up the privatization of 400 of these enterprises through international tender (Mroz and Pavliuk 1996: 55).

Ukraine

577

Tedstrom describes the privatization programme as voucher-based and worker-biased, but not guaranteeing (as in Russia) 51 per cent of shares to workers. The shares depend on the number of workers, their holdings of vouchers and the (indexed) valuation of the enterprise. This means that workers often cannot amass enough vouchers to buy a significant portion of the enterprise. Investment funds have emerged of late and are poised to be ‘the real buyers’. The 1994 privatization programme included a list of 29,000 small enterprises, but by the end of the year only 30 per cent had successfully gone through the process of privatization. In 1995 the privatization targets were 22,450 small enterprises and some 8,000 large enterprises, some 50 per cent of the latter being in the agro-industrial complex (enterprises which Tedstrom thought likely to go to state and collective farm executives). As of November 1995 only 9,745 small enterprises and 2,707 large enterprises had been privatized. Of the 2,707 large enterprises, moreover, less than 200 were privatized according to presidential decree 699 which required selling more than 70 per cent of all shares at certificate auctions. The remaining enterprises are a mixture of ownership forms that include leases and state enterprises that have sold only a small share of their equity. Thus figures that report nearly 3,000 privatized large enterprises are somewhat misleading. (Tedstrom 1995: 58–9) (The total number of small enterprises is estimated to be about 50,000 compared with about 20,000 large enterprises: p. 67.) To date less than one-third of medium-sized and large enterprises have been privatized, with about 70 per cent of their shares sold. Many of the privatized assets have been transferred to earlier managers, who are in full control of the enterprises (Daniel Kaufmann, Transition, April 1997, vol. 8, no. 2, p. 8). Parliament passed a new version of the privatization law on 11 December 1996. All citizens could purchase state property, but employees would enjoy preferential treatment in acquiring shares in enterprises where they work. Privation would not be allowed in the property of the armed forces, underground mineral deposits, water resources, radio and television transmitters and channels, pipelines, distilleries and weapons-producing enterprises. Citizens, foreigners and persons without citizenship, along with Ukrainian and foreign corporate bodies, could purchase shares in privatized enterprises. The property of the armed forces would be subject to corporatization, with the state retaining 51 per cent of the shares (Transition, 1996, vol. 7, nos 11–12, p. 28). There is … the offshore Ukraine, off-budget Ukraine, a ‘shadow’ economy … possibly the largest such economy in the world and one which is estimated by many experts at 60 per cent of total GDP … Through the shakhmatka [chessboard] system Ukraine’s cabinet of ministers divides stateowned factories, mines and collective farms between a few well-connected trading companies, which skim off the profits … mainly realized by

578 Ukraine bartering energy on very disadvantageous terms to the factories. In a country where the banking system is virtually non-existent these energy trading companies are the main source of working capital. Many traders are now replacing barter with pocket banks that lend cash to the enterprise at 80 per cent to 100 per cent interest rate, which is then used to buy inputs from the trader … [For example, the former] United Energy Systems [was] linked to Pavlo Lazarenko, the former prime minister, whose extradition from the USA to Switzerland is being sought [on money-laundering charges] … It is alleged that in 1996 and 1997 decrees by Lazarenko gave UES an exclusive monopoly on supplying natural gas to many of Ukraine’s prime industrial regions. The profits were transferred through Swiss banks, much winding up in Mr Lazarenko’s accounts … New traders have stepped in to fill UES’s shoes … Another method … of making money from Ukraine’s state enterprises … is the use of off-budget funds set up by Ukraine’s ministries and local administrations. Contributions to these offbudget funds are often counted as costs on the balance sheets of state enterprises … Meanwhile, for firms close to the government tax-paying is optional … Last year [1998] budget revenue lost due to tax privileges added up to more than total budget receipts for the year … As a result, the government is to levy 80 per cent tax rates on everyone else to make up the shortfall. More importantly, the government chooses who gets the tax breaks and who has to pay. (Charles Clover, FT, Survey, 10 November 1999, p. vi) Now energy is at the forefront of Ukrainian reform, as the country gets serious about privatizing its power companies. Six regional power distributors were sold in April [2001] to US and Slovak firms … Ukraine’s distributors are known as oblenergos …In all, fourteen of the twenty-seven distributors are now in private hands and another twelve are scheduled for sale later this year [2001]. The country’s five energy generators will go on the block next year [2002] … Prices are state-controlled and 30 per cent of electricity bills remain unpaid. The investors’ chances of making a profit, therefore, hinge on a package of government promises spelled out before the tenders. Under the package the government guarantees that state companies will pay their bills and it grants the oblenergos the right to disconnect debtors. And if any of the state firms still do not pay up then the distributors won’t have to pay the wholesalers for the electricity they used. The government is also allowing retail energy prices to rise by 11 per cent. (Business Central Europe, June 2001, pp. 30–1) The size of the private sector Rough estimates in mid-year of the private sector as a percentage of GDP are provided by the EBRD: 1990, 10 per cent; 1991, 10 per cent; 1992, 10 per cent; 1993, 15 per cent; 1994, 40 per cent; 1995, 45 per cent; 1996, 50 per cent; 1997,

Ukraine

579

55 per cent; 1998, 55 per cent; 1999, 55 per cent; 2000, 60 per cent; 2001, 65 per cent (EBRD 1999b: 24, 280; and 2002b: 20, 212). In mid-1994 the private sector accounted for roughly 30 per cent of GDP (EBRD 1994: 10). This figure takes into account the contribution of the large informal sector (p. 40). According to official estimates, the private sector has grown to at least 40 per cent of GDP of which three-quarters is likely to be in the informal sector (EBRD 1995a: 66). In mid-1995 the private sector accounted for roughly 35 per cent of GDP (EBRD 1995b: 11). In mid-1996 the private sector accounted for roughly 40 per cent of GDP, of which a large share is in the informal sector (EBRD 1996b: 11, 180). In mid-1997 the private sector accounted for roughly 50 per cent of GDP (EBRD 1997b: 14). In 1996, according to Ukrainian sources, the non-state sector accounted for almost 58 per cent of industrial output and the privatized sector accounted for some 40 per cent of industrial and 45 per cent of agricultural production (p. 208). Estimates of the informal economy vary, but range between 40 per cent and 50 per cent of recorded GDP (EBRD 1998b: 196). The informal economy amounts to perhaps half of GDP, according to some estimates (EBRD 1999b: 279). Estimates suggest that the unreported economy is about 30 per cent of GDP and growing (Tedstrom 1995: 50). The unofficial segment of the economy grew to more than 40 per cent of the overall GDP by 1994. By mid-1996 it was estimated to be about a half of overall GDP (Daniel Kaufmann, Transition, 1997, vol. 8, no. 2, p. 7). ‘When transition started in Ukraine the shadow economy was around 12 per cent of GDP. Today it is at least 50 per cent and maybe even more’ (Daniel Kaufmann, quoted in IHT, 30 August 1997, p. 9). The World Bank estimates that about half the economy works in the shadows (FT, Survey, 27 September 1996, p. xxxiv). The World Bank estimates that 40 per cent of the labour force works in the informal economy (Business Central Europe, October 1996, p. 24). The prime minister reckons that ‘the shadow economy produces 40 per cent of GDP’ (UET, Monthly Update, September 1996, p. 6). ‘The shadow economy [is] possibly the largest such economy in the world and one which is estimated by many experts at 60 per cent of total GDP’ (FT, Survey, 10 November 1999, p. vi). Analysts estimate that Ukraine may have the largest ‘grey’ economy in the world, worth 50 to 100 per cent of its GDP … Leonid Kuchma, the Ukrainian president, has ordered the government to declare an amnesty for an estimated $20 billion of ‘grey capital’ – money kept offshore by Ukrainian businessmen in order to evade taxes. The decree [was signed] on Friday [31 March 2000]. (FT, 3 April 2000, p. 8) A new law, authorized by President Leonid Kuchma but still to be adopted by parliament, will grant an amnesty to shadow capital, allowing Ukrainians

580

Ukraine to legalize any assets they have been hiding from the taxman. They simply have to declare the money to the tax authorities, transfer it from any foreign bank account to a Ukrainian one and pay a 10 per cent tax on it. Then it is legal and they can spend it freely … Analysts estimate that about a half of Ukraine’s economy is not reflected in the government’s books. (Business Central Europe, September 2000, p. 46)

Foreign trade Foreign trade was recentralized in late 1993, leaving most transactions subject to bilateral agreements and state orders. There have been few import tariff rates since the beginning of 1993 and there are no significant quotas. As far as exports are concerned, since March 1994 there have been explicit export quotas and licences for virtually all products. There are heavy restrictions on convertibility. There is a floating rate with intervention (EBRD 1994: 111). In October 1994 most export quotas and licensing requirements were abolished. Export licences remained for only four important commodities (grain, coal, cast iron and scrap metal). In December 1994 these were lifted on all but grain, which was to be liberalized by mid-1995. Unification of multiple exchange rates had almost been achieved by October 1994. The official exchange rate is now determined on the interbank currency exchange. Access to the interbank market has since been broadened. In late January 1995 additional US dollar auctions were introduced and banks were allowed to sell foreign exchange direct to their customers (with a margin no greater than 10 per cent of the auction price) (EBRD 1995: 66). At the end of 1995 and in early 1996 the export regime was further liberalized. Export quotas and licences now apply only to goods subject to voluntary export restraints under international agreements and to goods falling under the ‘special export regime’ (coal, precious metals and alcoholic spirits). The system of indicative export prices was removed in December 1995. In 1996 the authorities abolished the state order system for grain and eliminated quotas and licence requirements for grain exports. But export taxes on ferrous metals and some agricultural products have recently been introduced. Tariffs on some agricultural products were raised in early 1996. A unified exchange rate was introduced in October 1994. The official exchange rate is now determined on the interbank currency exchange. In August 1995 the use of foreign currency for domestic trade was prohibited. The government has signalled that it will ease the requirement that exporters convert 50 per cent of their foreign currency through the interbank currency exchange (EBRD 1996b: 181). Ukraine has a managed floating exchange rate regime (p. 280). On 25 April 1997 the deputy prime minister announced that an exchange rate corridor of 1.7 to 1.9 grivna to the US dollar would be in existence until the end of 1997. But the prime minister said that the corridor would be introduced after the adoption of the budget (UET, Monthly Update, March 1997, p. 5). On 12 May 1997 Ukraine accepted Article 8 of the IMF, thus guaranteeing

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unrestricted convertibility of the grivna for all current account transactions (UET, Quarterly Update, June 1997, p. 4). On 3 June 1997 the 50 per cent surrender requirement of the foreign currency export earnings of enterprises was cancelled (UET, Monthly Update, July 1997, p. 4). On 1 September 1997 the cabinet of ministers and the national bank adopted a joint resolution which officially introduced a currency corridor for the grivna and limited the fluctuation of its exchange rate against the US dollar within the range 1.7 to 1.9 until the end of 1997. A joint resolution of 3 November 1997 specified a currency corridor in the range 1.75 to 1.95 grivna to the US dollar for the first half of 1998 (UET, Monthly Update, October 1997, pp. 2–3). In January 1998 the currency corridor for the whole of 1998 was fixed at 1.8 to 2.25 to the US dollar (UET, Monthly Update, January 1998, p. 3). After 16 August 1993 exporters were obliged to exchange 50 per cent of hard currency earnings for karbovanets at a fixed rate of 5,970 to the US dollar, instead of 15 per cent at the floating rate determined in the hard currency auctions; Ukrainian citizens were allowed to buy or sell foreign currency in unrestricted quantities at the floating rate (IHT, 12 August 1993, p. 11; FT, 16 August 1993, p. 2). There were, however, exemptions from this general rule (Moscow News, 27 August 1993, p. 1). On 3 November 1993 the buying and selling of foreign currency were suspended and all auction centres and exchange points were to be closed down. Hard currency transactions were to be confined to government-authorized exports and imports at the fixed central bank exchange rate. In January 1994 new rules laid down that exporters had to surrender 40 per cent of their hard currency receipts to the central bank for 12,610 karbovanets to the US dollar; another 10 per cent had to be sold at 25,000, the same rate at which the traders could sell the remaining half (Business Central Europe, February 1994, pp. 48–9). A decree signed by President Kuchma on 23 August 1994 included the following: (1) a call for the reopening of the interbank currency exchange on 1 October 1994; (2) the central bank would gradually bring the official exchange rate into line with the market rate (possibly by the end of 1994); factors taken into account were to include the inflation rate, the money supply and the balance of payments (a unified, market-determined exchange rate would finally come about when the IMF provided a stabilization fund); (3) in the meantime enterprises would still have to surrender 50 per cent of their hard currency earnings, but 20 per cent would be sold at the market rate and only 30 per cent at the official rate. In an article in the FT (30 September 1994, p. 18), Kuchma said that ‘I want to peg the exchange rate of our currency from the beginning of 1995 and exchange our provisional coupon for our national currency [the grivna].’ The exchange rate was unified on 1 November 1994. A single hard currency rate has been restored. The interbank hard currency exchange operates once a week and only a 2.5 per cent deviation from the rate is allowed in hard currency transactions (Moscow News, 4–10 November 1994, p. 4).

582 Ukraine Export licences have been reduced to four items, namely grain, coal, precious, ferrous and non-ferrous scrap metal and pig iron (p. 4). The export restriction index measures the share of total exports governed by licences and quotas. The index was 51.3 in the second quarter of 1995 (compared with 79.8 in the second quarter of 1992), i.e. 48.7 per cent of exports were traded outside the administrative control regime (Daniel Kaufmann, cited by Tedstrom 1995: 64–5). ‘Ukraine’s performance in this regard shows that it is still quite protectionist and is having difficulty opening its markets’ (Tedstrom 1995: 63). Towards the end of 1997 higher quotas and tariffs were imposed on certain agricultural products (EBRD 1998a: 43). On 1 October 1996 Russia imposed a 20 per cent VAT on Ukrainian imports. Belarus, with which Russia has a customs union, has failed to impose the tax, giving rise to the possibility of circumventing the tariff (RET, Monthly Update, 22 October 1996, p. 13). Ukraine did not sign the 1992 agreement reached by CIS countries under which VAT was to be levied by the producing country rather than by the importer. Ukrainian goods, mainly vodka and raw spirits, gained a significant advantage. Russian producers complained about unfair competition (CDSP, 1996, vol. XLVIII, no. 35, pp. 18–19). In August 1996 Ukraine had imposed VAT on goods imported from CIS countries (CDSP, 1996, vol. XLVIII, no. 33, p. 20). As of 1 February 1998 VAT ceased to be imposed on goods from Russia. Russia reciprocated (UET, Monthly Update, January 1998, p. 3). High tariff and non-tariff barriers remain a significant obstacle to trade, despite the removal of the temporary import surcharge … At the beginning of 2000 the temporary 2 per cent was removed and some preferential import duties were lowered … Despite some recent reductions in tariff barriers, licensing requirements still hamper foreign trade … The resort to certification procedures and other non-tariff barriers to protect domestic industry has slowed progress. The maintenance of the export duty on sunflower seeds and a recent presidential decree on intervention in the grain market have also raised concerns that production will be adversely affected. (EBRD 2000b: 222) On 14 June 1994 President Kravchuk signed a partnership and co-operation agreement with the EU. On 1 June 1995 President Kuchma signed an interim trade agreement with the EU. The agreement on partnership and co-operation between Ukraine and the EU came into force on 1 March 1998 (UET, Monthly Update, April 1998, p. 2). Ukraine now pays around 70 per cent of the world market price for Russian oil (FT, 18 May 1993, p. 4; and 23 November 1993, p. 2). A figure of 80 per cent for oil and gas is reported (IHT, 9 November 1993, p. 8). Ukraine relied on Russia for 90 per cent of its oil and gas (FT, 23 November 1993, p. 2). Ukraine imports almost two-thirds of its energy needs, buying oil, natural gas and coal from Russia, Turkmenistan and Poland (Guardian, 30

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December 1994, p. 11). Ukraine imports 87 per cent of its oil and 83 per cent of its natural gas, mostly from Russia and Turkmenistan. A new oil terminal in Odessa has been approved, with the aim of diversifying energy sources. In 1994 Ukraine produced 4 million tonnes of oil and 17 billion cubic metres of natural gas (FT, 24 January 1995, p. 5). Gas accounts for 40 per cent of energy consumption (FT, 1 May 1995, p. 2). Ukraine is heavily dependent on imports of fuel, paid for by exports of raw materials such as metals and minerals. Although the existing official regulations concerning foreign economic activity in Ukraine could be seen as quite liberal … Under the system now prevailing in Ukraine, in which changes in tariffs are decided by the Cabinet of Ministers, the discretionary corrections in their rates are quite frequent. In such circumstances the result of lobbying by different sectors to obtain preferential treatment are tariffs which are highly dispersed and as a whole there is a tendency to increase the overall level of protection. (UET, Quarterly Update, October 1996, p. 58) On 18 November 1996 parliament deprived the Cabinet of Ministers of the right to cancel, change or postpone customs duties for individual importers, while on 2 December 1996 the Cabinet of Ministers abolished the special regulations concerning exports of non-ferrous and precious metals, ores, coal and oil products. All enterprises, independently of their legal status, were to be allowed to export these products (UET, Monthly Update, November 1996, pp. 4–5). ‘There has been a significant reduction in the CIS countries’ share of Ukrainian exports … At the same time the Ukrainian economy is still greatly dependent on Russian imports making up almost 50 per cent’ (UET, Quarterly Issue, June 2000, p. 70). ‘As regards the pattern of Russian exports to Ukraine, energy carriers make up 68.8 per cent (gas, oil, oil products etc.).’ In 1999 the respective regional distribution of imports and exports was as follows: CIS, 57.3 per cent and 32.8 per cent; EU, 18.5 per cent and 17.0 per cent; others, 24.2 per cent and 50.2 per cent (p. 71). On 29 January 1998 Ukraine and Turkmenistan signed an agreement under which Ukraine would buy 20 billion cubic metres of gas every year until 2005. In March 1997 Turkmenistan, which formerly supplied some 20 per cent of Ukraine’s gas supplies, shut off gas exports after Ukraine’s debts reached more than $700 million. By the end of 1997, $185 million had been paid off. The agreement included the restructuring of debts, which was to be reduced to $600 million. Ukraine relies on gas for roughly half its energy needs and 80 per cent of this is imported (FT, 30 January 1998, p. 6). Forty per cent of the gas would be paid for in hard currency and 60 per cent in the form of goods and services (CDSP, 1999, vol. 51, no. 1, p. 17). ‘The USA was expected to announce stiff trade sanctions … last night [20 December 2001] after … [the Ukrainian] parliament failed to pass a law to control unlicensed production of compact discs’ (FT, 21 December 2001, p. 15).

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‘Russia, Belarus, Ukraine and Kazakhstan … said they planned to create a free-trade zone … [and] promised to implement the measures this year [2003]’ (FT, 24 February 2003, p. 7).

Ukraine and the Asian/Russian financial crisis Ukraine has suffered the backlash of the Asian financial crisis, which started in July 1997, and the Russian financial crisis of August 1998. ‘Ukraine has been strongly affected by the recurrent emerging market turmoil of the last few months, being one of the most vulnerable countries in the region’ (Deutsche Bank Research, Ukraine, 26 May 1998, p. 1). ‘The Ukrainian government faces considerable liquidity problems, resulting from having issued short-term debt to finance excessively high budget deficits’ (p. 5). ‘Russia and Ukraine experienced the most serious liquidity and financial difficulties, as investor confidence was weakened by their dependence on short-term foreign borrowing, over-exposed banking sectors and delayed fiscal and structural reforms’ (Deutsche Bank Research, Global Emerging Markets, June 1998, pp. 56–7). Inadequate fiscal adjustment in Ukraine led to reliance on official shortterm borrowing, which heightened the country’s vulnerability to adverse external developments. As the Asian crisis developed exchange market pressures started to build toward the end of October 1997 and forced the authorities to defend the exchange rate by widening the exchange rate band and increasing both interest rates and reserve requirements. These measures, together with additional external borrowing undertaken in early 1998 to shore up reserves, were insufficient to stem speculative pressures, and the central bank consequently had to tighten monetary policy further in 1998 … In Russia and Ukraine weak follow-through in the implementation of structural and financial sector reforms, substantial dependence on short-term government borrowing, and (in Russia) a large fiscal deficit … largely explain the intensity of the impact of the Asian crisis on them. (John Odling-Smee, Director of the IMF’s European II Department, Finance and Development, 1998, vol. 35, no. 3, p. 16) The seeds of the present crisis were laid three years ago with the creation of a market for domestic debt. Theoretically, this would allow the government to finance its deficits in a non-inflationary way, that is without money. But … the government rapidly began accumulating an unsustainable pyramid of debt. In 1997 more than $1 billion in foreign investment poured into Ukraine’s short-term Treasury bill market, and by mid-year foreigners held more than half of all outstanding government debt. But in the autumn the Asian crisis caused a wave of redemption by foreigners, and the government was stuck with 6–8 billion grivna of maturing Treasury bills to pay off by itself in 1998. Since the beginning of 1998

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Ukraine’s reserves have been run down from $2.4 billion to $800 million at the beginning of September after financing redemptions by foreigners. A timely decision by the IMF to grant Ukraine a $2.2 billion three-year loan in August nearly saved the country from a default or a devaluation. But the collapse of the [Russian] rouble dealt the death blow to the grivna, which fell from 2.1 to the dollar in mid-August to more than 3.2 on 22 September [1998]. (Charles Clover, FT, Survey, 2 October 1998, p. xxvi) The first six months of 1998 provided the first indications of a turnabout in output. The available official statistics suggest that GDP registered an increase of 0.2 per cent, while industrial production increased by 0.7 per cent. Over the same period the consumer price index registered an increase of slightly over 3 per cent … The statistics … provide the first firm indications of growth since the onset of transition. However, the apparent stability is fragile. The registered growth is concentrated on traditional sectors, such as heavy industry … The absence of significant changes in privatization and deregulation has hampered both the efficient restructuring of existing firms and the establishment of new firms … More ominously, the growth in output has been accompanied by a significant deterioration in the country’s debt position. The traditional sectors, upon which the growth in output has been based, continue to benefit from explicit or implicit subsidies, which continue to burden the country’s fiscal position. Indeed, the country’s fiscal and debt position has deteriorated markedly and has reached crisis proportions. The overall fiscal position remains lax and contributes to a rapidly increasing stock of debt, a significant part of which is serviced at very high rates of interest: the yield of the latest Eurobond issue was close to 15 per cent, while yields on grivnadenominated Treasury bills remained very high at around 50 per cent (and currently trade at close to 70 per cent). (UET, Quarterly Issue, June 1998, p. 16) ‘Positive developments are more than counterbalanced by the evolving situation regarding the budget deficit and the country’s internal and external debt obligations’ (p.17). ‘Given the lax fiscal position (and particularly the government’s short-term indebtedness), the country is widely considered to be facing a risk of default, because it simply does not possess enough funds to meet its shortterm obligations’ (p. 5). From the onset of the Asian crisis onwards (November 1997) the refinancing credit provided by the central bank to commercial banks has been steadily decreasing. This reflects the continuous tightening of monetary conditions over the period. In contrast, credit to government has increased significantly, reflecting the loose fiscal position. (p. 57)

586 Ukraine ‘The tight monetary policy measures … taken since November 1997 have reversed the steady decline … of nominal interest rates’ (p. 67). On 7 July 1998 the refinancing rate was increased from 51 per cent to 82 per cent and the Lombard rate from 56 per cent to 82 per cent (p. 3). (The refinancing rate is the minimum rate at which commercial banks can borrow reserves from the central bank: p. 67). At the end of June 1998 the nominal exchange rate stood at 2.06 grivna to the US dollar, having depreciated during the first half of the year within the 1.85/2.25 corridor fixed for the whole of 1998 (pp. 17, 71). ‘The overall economic situation in the first half of 1999 remained unfavourable. According to official data, GDP decreased by 3 per cent in comparison with the respective period of 1998’ (UET, Monthly Update, July 1999, p. 4). A chronology of events 26 February 1999: After threatening to halve its aid because of Ukraine’s lack of progress toward economic reform, the United States said Friday [26 February] that it was releasing $195 million in assistance this year [1999], in part because the business climate has improved … Ukraine has done some things right. Its central bank handled the economic slide last fall [1998] far more deftly than Russia did, with the result that its banking system has survived largely intact and its creditors are mostly satisfied. The government is moving to reduce taxes, a big barrier to foreign investment. (Michael Wines, IHT, 2 March 1999, p. 2) The Ukrainian authorities, facing the same problems as the Russian government earlier in the summer [of 1998] in rolling over with difficulty government securities held by both residents and non-residents, chose instead to monetize the budget deficit by the sale of T-bills to the central bank. By August 1998 the National Bank of Ukraine was the holder of some 60 per cent of the T-bills in circulation … Ukraine was able to choose a different set of instruments to get through the summer of 1998 without a default or devaluation … ‘Voluntary’ restructuring of maturing debt was successfully accomplished, both for T-bills and for Eurobonds. (United Nations Economic Commission for Europe 1998c: 46–7) As part of the authorities’ package of anti-crisis measures in response to the Russian crisis the national bank of Ukraine introduced various restrictions in the foreign exchange market, including a ban on foreign exchange trading in the interbank market and the reintroduction of a 50 per cent export revenue surrender requirement. These measures contributed to the stability of the grivna at 3.43 to the US dollar from October 1998 until February 1999. (EBRD 1999a: 45)

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27 May 1999: the IMF releases two monthly tranches of the extended fund facility. In addition, the IMF accepts the request to augment the three-year extended fund programme by $366 million, of which about $50 million will be made available immediately. With the regular tranches the release adds up to about $180 million. The augmentation increases the extended fund facility to up to $2.571 billion (UET, Monthly Update, April 1999, pp. 3, 5). 7 September 1999: the executive board of the IMF approves the next credit tranche worth $184 million under the three-year extended fund facility programme (UET, Monthly Update, August 1999, p. 3). 1 October 1999: the IMF stops financing Ukraine until November 1999. Reasons include the introduction of an export duty on sunflower seeds and the existence of low tariffs on housing and communal services (UET, Quarterly Issue, September 1999, p. 2). 7 October 1999: ‘The Cabinet of Ministers presented the draft budget 2000 to parliament. It is the first budget in Ukraine that has been introduced with a surplus’ (p. 3). 18 November 1999: parliament adopts the draft of the state budget for 2000 at the first reading. It was agreed that the government should target a zero budget deficit (UET, Monthly Update, October 1999, p. 3). ‘When the grivna moved out of its then band (4.6 to the US dollar) in November, and with only limited reserves, the National Bank of Ukraine let it float, a policy that was confirmed in February 2000’ (EBRD 2000b: 222). 14 February 2000: an IMF mission arrives in Ukraine. 14 March 2000: The IMF said Kiev had misled it over breaches in the terms of its previous agreement. The IMF said late Tuesday [14 March] that Ukraine’s central bank had between 1996 and 1998 conducted transactions worth $935 million, which gave a false impression of the health of its reserves. As a result Ukraine received millions of dollars in funding which would otherwise have been withheld … The IMF now says that new funds to the country would be kept in its own accounts. (FT, 16 March 2000, p. 8) (The Financial Times was the first to report its concern over the alleged problem.) The IMF statement: It appears that a number of transactions in 1996–8 gave the impression that Ukraine’s reserves were larger than was actually the case. The view of the IMF staff is that Ukraine appears to have received disbursements from the IMF on three occasions in late 1997 and early 1998 that it would not have done if the true state of Ukraine’s reserves had been known at the time. ‘The IMF said that the Ukrainian central bank, in three separate transactions from 1996 to 1998, created the impression that it controlled more foreign

588 Ukraine currency than was actually the case’ (IHT, 16 March 2000, p. 13). ‘Viktor Yushchenko headed Ukraine’s central bank before becoming prime minister … Until recently Kiev was the third-largest recipient of foreign aid from the United States after Israel and Egypt’ (IHT, 17 March 2000, p. 5). [A] Crédit Suisse executive … said [on 23 March] his bank received $705 million from the Ukrainian central bank from 1996 to 1998, which Crédit Suisse then lent to banks in Ukraine. The central bank guaranteed any losses Crédit Suisse might incur on the loans and paid Crédit Suisse commissions for distributing the money … The IMF disclosed last week that … the central bank used nearly $1 billion to conduct transactions that allowed it to double count its foreign exchange reserves. (IHT, 25 March 2000, p. 12) An investigation by PriceWaterhouseCoopers, ordered by the IMF, found that Ukraine’s central bank arranged twenty-one transactions during a one-year period ending in January 1998 that exaggerated the size of its foreign reserves, the Fund said Thursday [4 May]. The transactions falsely inflated the reserves by as much as $713 million, prompting the Fund to release loans of $200 million that would otherwise have been withheld, the accounting firm determined. The firm did not find any evidence that central bank authorities personally profited from diverted funds. (IHT, 6 May 2000, p. 11) Last week the IMF released a study by PriceWaterhouseCoopers, the international accounting firm, of the central bank’s operations. The study said the central bank misled the IMF about its foreign currency reserves by as much as $700 million, but said they found ‘no evidence’ that central bank funds had been stolen, aside from one $15 million loan. (FT, 8 May 2000, p. 7) Though he faces no public allegation of personal wrongdoing, Mr Yushchenko’s first denials that any unorthodox methods had been used, followed by a claim that underlings had run the scheme without his knowledge and then by repeated delays in publishing a detailed audit of the bank’s dealings in the period concerned, have all damaged his standing … As prime minister his agenda is a sensible mixture of longoverdue privatization and other reforms. Ukraine’s parliament … has now backed his programme and pledged not to try to oust the government for a year. (The Economist, 6 May 2000, p. 58) ‘[On 9 March 2000] Ukraine said it would return $200 million it received from the IMF after supplying misleading information if the Fund makes such a

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step a condition for resuming loans under a stalled $2.6 billion programme’ (IHT, 10 May 2000, p. 15). Leonid Kuchma yesterday [29 August] confirmed that Ukraine has paid back almost $100 million to the IMF, after admitting that his country might not have received the funds if it had not overstated the reserves … ‘We have admitted that not everything in our house was in order,’ he said. (FT, 30 August 2000, p. 9) The IMF is today [19 December] expected to renew lending to Ukraine … The board is expected to approve a recommendation from IMF staff to release about $250 million of $1.65 billion that had yet to be disbursed when the IMF last year [1999] froze a $2.6 billion lending programme. The funds would help the government repay previous IMF loans. (FT, 19 December 2000, p. 10) [On 19 December 2000] the IMF board of directors passed a decision to resume lending to Ukraine under the EFF [extended fund facility] programme which was suspended in September 1999. The IMF decided to extend the EFF programme until September 2002 and grant Ukraine the next tranche of … approximately $246 million. Each quarter the IMF will grant about $190 million subject to compliance with the requirements of the EFF programme. Subsequent tranches will be granted based on findings of IMF missions which will monitor Ukraine’s compliance with EFF programme requirements. (UET, Quarterly Issue, December 2000, p. 3)

Foreign aid Jeffrey Sachs (FT, 17 February 1995, p. 17) described the EU’s response as ‘extremely feeble’. The EU had found about Ecu 85 million in loans for balance of payments purposes, but Ecu 65 million of this was to be used to repay debts to the EU that were falling due. The IMF was to put up another $1.5 billion. The overall sums were ‘miniscule’ and fell short even of the ‘inadequate’ pledges given at the G7 summit in the summer of 1994, when $4 billion was promised. ‘Without significant external assistance most financially strapped governments cannot win the time needed for basic reforms.’ The IMF should provide $3 billion, half to help the budget and half to help back a new Ukrainian currency. The World Bank should put up another $1.5 billion for urgent balance of payments support (as opposed to the $0.5 billion on offer), while European countries should together mobilize $1 billion in urgent additional support. In 1996 Ukraine became the third largest recipient of US aid, after Egypt and Israel (IHT, 15 July 1997, p. 5). ‘Ukraine … now receives more US aid than any former communist country … The country has received $2 billion in US aid since Mr Kuchma … won the presidency in 1994’ (IHT, 27 February 2001, pp. 1, 5)

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Foreign direct investment Foreign direct investment has been relatively small. (See Table 7.2.) A November 1994 decree introduced private land ownership, subject to constraints on use. But foreign land ownership is not permitted (EBRD 1995a: 66). Foreigners may lease land (EBRD 1996b: 182). Despite its size, agricultural potential and key location, Ukraine has failed to attract major investors. Kuchma claims that the economy … received only $750 million between 1992 and 1995 … The country’s confusing tax laws and its failure to allow private property have combined with its economic instability to scare away many investors. (Mroz and Pavliuk 1996: 55) Total direct foreign investment since independence amounts to about $1 billion (FT, Survey, 27 September 1996, p. xxxiv; Business Central Europe, October 1996, p. 24). Foreign direct investment in 1996 was an estimated $460 million, taking the stock to $1.4 billion. In the first half of 1997 the figure was $336 million. In March 1997 parliament passed a bill that would have removed some of the main tax exemptions for joint ventures with foreign partners. Companies registered before 1995 would have lost their five-year tax holiday from paying profit tax, while another proposal would have removed the exemption from paying import duties. The president vetoed the bill (EBRD 1997b: 209). In April 1998 the 15 per cent limit on foreign bank ownership was abolished (EBRD 1998b: 197). On 15 April 1998 the restriction on foreign capital in the banking system was abolished. The foreign share in the total capital of the banking system at present is 12 per cent (UET, Monthly Update, April 1998, p. 3). By the end of 1998 only $2.7 billion of foreign direct investment had been attracted (UET, Monthly Update, January 1999, p. 5). ‘The law on production sharing agreements, which took effect in October 1999, could lead to more investment in natural resources. [But] in February 2000 parliament suspended certain tax privileges to enterprises with foreign capital’ (EBRD 2000a: 84). Flows of foreign direct investment … remain low. The extent of regulation, the tax burden and the difficulties of enforcing contracts remain the main obstacles, according to most surveys. However, the passage in 1999 of the laws on production sharing and on concessions could provide investors with incentives to invest in natural resources and in infrastructure respectively. In addition, in February 2000 a law was adopted introducing the concept of national treatment between domestic and foreign-owned enterprises with respect to tax and currency regulations. (EBRD 2000b: 223)

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While Western businesses have shunned Ukraine, cash-rich Russian companies have recently been snapping up the country’s industrial giants. Major Russian holdings now include Ukraine’s largest chemical plant, two of its four major oil refineries, its only aluminium smelter and a massive alumina plant … Russian firms were nearly alone in buying up auctioned Ukrainian state properties last year [2000] … Large Western businesses have avoided Ukraine, citing widespread corruption, massive red tape and constantly changing tax laws. (Business Central Europe, April 2001, p. 60)

Agriculture A decree of November 1994 introduced private land ownership, including the right to sell, lease or bequeath land to Ukrainian citizens (subject to no changes in its usage). It also made it possible for farmers to separate themselves from collective farms by claiming their share of land and fixed assets. But the decree is not effective until passed by parliament. The development of the agricultural land market and private farming are also being constrained by a six-year moratorium on land sales. Although the share of state-owned land had fallen to 35 per cent by early 1995, three-quarters of all land is still managed by collective farms. By August 1995 around 12 per cent of agricultural land was cultivated by families on 0.5 ha household plots. Some 33,000 private farmers cultivated 2 per cent of agricultural land in 20 ha farms. In July 1995 the government declared that residents were to be allowed to buy or lease land plots for business activities which have not been designated for agricultural use. Land ownership will not be limited (EBRD 1995b: 61). State procurement has been significantly reduced and is taking place at market prices. It is being replaced by agricultural commodity exchanges which are starting to function (p. 62). The new constitution adopted by parliament in June 1996 guarantees private property rights, including land ownership. But there is a six-year moratorium on land sales. The number of registered private farmers increased from 32,000 at the beginning of 1995 to 34,800 in April 1996, but state and collective farms still account for some 85 per cent of the arable land area (EBRD 1996b: 181). In December 1997 the government announced the abolition of the state purchase of grain so that farmers could sell most of their crop through the commodity exchanges. But the positive impact could be lessened by the continuation of other programmes whereby the government accepts payment in kind for supplies of agricultural inputs (EBRD 1998a: 43). In practice the state remains a major influence in the market as it claims a large proportion of marketed grain as payments for inputs and past debts and to boost grain reserves (EBRD 1998b: 196). The legal organization of agriculture did not change very much until 1995. In 1992 a new type of agricultural enterprise had been created, collective farms being allowed to transform themselves into ‘collective agricultural units’ (whose status was similar). Although around 40 per cent of collective farms transformed themselves, nothing changed until the presidential decree of 8 August 1995 on

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‘sharing’. Each member or employee of a collective farm, a collective agricultural unit or state farm was entitled to a share of land, which could be physically separated out for those leaving the farm although not sold. But ownership transformation was very slow. The ‘sharing’ … did not change in any way the behaviour of the farms. Few country people used their newly granted individual property right on land and assets to transform into private farmers. Decision-making in most cases remained in the hands of the presidents of the collective farms and collective agricultural units or directors of state farms. (UET, Quarterly Update, August 1996, pp. 76–7) A law of July 1996 concerned the privatization of enterprises in the agroindustrial sector: 51 per cent of shares were to be either (1) transferred free of charge to collective agricultural units, co-operative unions or individual farmers providing a particular enterprise with raw materials, or (2) transferred at a low price to ‘the members of the personnel of the agricultural bodies’. State farms were to be transformed into collective agricultural units or joint stock companies. When a state farm is privatized a part of its assets is transferred to members free of charge while another part is sold cheaply to members for vouchers or cash (with a settlement period of five years). ‘This system leaves room for sale of shares at market prices to external potential shareholders.’ But the privatization of state farms has been slow and more than 300 are excluded from the privatization list. The state property fund issued an instruction in May 1996 aimed at accelerating privatization in the agro-industrial sector. But there are 3,000 ‘joint enterprises’ which qualify as ‘mixed enterprises’. ‘Unanimity of owners is necessary for any decision concerning a mixed enterprise … This explains why privatization is so difficult and slow in mixed enterprises’ (UET, Quarterly Update, August 1996, pp. 76–7). Land ownership is as follows: 60.2 per cent state; 36.6 per cent collective; 3.2 per cent private (UET, Quarterly Update, October 1996, p. 4). The land owned by 35,353 farmers is just 1.9 per cent of the total area of agricultural land. On average one farm household possesses 23 ha of land (residents are not allowed to buy or lease land plots for business activities which have not been designated for agricultural use) (p. 68). The share of the private sector in agricultural output increased from 32.8 per cent in 1991 to 59.9 per cent in 1999. In 1999 the private sector produced 98.7 per cent of potatoes, 88.4 per cent of fruits and berries, 83.3 per cent of vegetables, 71.1 per cent of meat. 64.9 per cent of milk, 63.1 per cent of eggs and 55.4 per cent of wool. The basic constituent of the private sector is subsidiary household plots. Private farms do not play an important role in the development of the agricultural sector … Private farms use … 2.8 per cent of all agricultural land … As of 1 January 2000 one private farm on average had 32 ha of agricultural land. (UET, Quarterly Issue, March 2000, p. 9)

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‘The government is still controlling the supply of a large quantity of strategic inputs’ (UET, Monthly Update, April 2000, pp. 4–5). The private farm does not yet play a significant role in the agricultural sector in Ukraine. Using about 5 per cent of arable land private farmers produce about 4 per cent of total agricultural production. The bases of the private sector are the household land plots, which produce about 56 per cent of total agricultural production. (UET, Quarterly Issue, June 2000, p. 15) Uncertainty of the legal status of land certificates hampers the process of transfers of rights on land share (average size of a land share is 4.3 ha). Due to existing restrictions land certificates cannot be actually purchased or sold. The main form of their utilization is leasing. Almost half of land used by farms is leased property. (UET, Quarterly Issue, December 2000, p. 17) Other sources dealing with agriculture and later developments President Kuchma issued a decree authorizing the private ownership of agricultural land for the first time. The decree allowed landowners to sell, lease or bequeath their land to Ukrainian citizens provided it continued to be used for agricultural purposes (Transition, November–December 1994, vol. 5, no. 9, p. 17). (See ‘Foreign direct investment’, p. 590.) A decree of late 1992 allowed property title to tenants of rural household plots and gave them the right to sell. Kuchma’s decree of November 1994 allowed each farm member to receive a certificate of ownership of a parcel of land or of a share in group property. Such certificates could be traded, bartered, inherited or mortgaged. Members of existing state and collective farms were to be invited to take voluntary decisions on their mode of ownership, but size limits were to be fixed on any one individual’s property. But parliament has challenged the legality of the right to transact land, thereby delaying implementation (Kaser 1995: 37). The 13 million private smallholders satisfy 25 per cent of food consumption (FT, 23 February 1993, p. 18). By the end of 1992 there were 14,400 private farms, with an average of 20 ha (CDSP, 1993, vol. XLV, no. 5, p. 22); they accounted for 0.7 per cent of total agricultural land (United Nations Economic Commission for Europe 1993: 206). As of 1 April 1993 there were 20,700 private farms, with an average size of 20 ha (CDSP, 1993, vol. XLV, no. 21, p. 20). In 1993 individuals held only 11 per cent of all agricultural land, yet they produced 43 per cent of all livestock and 37 per cent of crops (Daniel Kaufmann, Transition, 1994, vol. 5, no. 7, p. 5). About 14 per cent of arable land is held as private subsidiary plots, but it is not tradable. Private land produces about half of

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agricultural output, with the 86 per cent in collective and state hands producing the other half (Daniel Kaufmann, Transition, 1997, vol. 8, no. 2, p. 6). Roughly 60 per cent of the population have a piece of land on which they grow most of their own food (The Economist, Survey, 7 May 1994, p. 6). A quarter of the harvest is still bought by the state, often at below worldmarket prices. The distribution system is in the hands of government monopolies. Land privatization, promised by Mr Kuchma, has got nowhere because parliament has refused to approve it. (The Economist, 2 September 1995, p. 41) Reformers see the need to improve incentives for farmers who are currently forced to sell at low state-determined prices and to restructure the inefficient collectives still dominant in Ukraine. A government spokesman has outlined a plan to put 60 per cent of land in public hands (the state currently owns 93 per cent). Subsidies to agriculture eat up half the state’s budget (FT, 18 October 1994, p. 32). In January 1995 Kuchma signed an edict permitting farmers to sell their produce on commodity exchanges or to trading houses after the state quotas for certain goods (such as grain and sugar) had been met. The ministry of agriculture sets price floors on the commodity exchanges. State contracts were supposed to be phased out over the following two years (FT, 28 June 1995, p. 35). Of 4.5 million farmers only about 35,000 are private. By acreage collectives make up 70 per cent of the total, state farms around 15 per cent, private farms 2.5 per cent, and small subsidiaries and household plots 12 per cent. President Kuchma puts the contribution of the private sector as a whole to total agricultural output at 44 per cent. State orders for grain in 1995 cover some 25 per cent of the total harvest, compared with 50 per cent in 1994. The World Bank has urged Ukraine to remove ceilings on profit margins and mark-ups and generally to free prices. Parliament has so far failed to pass a law backed by President Kuchma that would allow land to be bought or sold (FT, 14 July 1995, p. 25). On 17 August 1995 the quotas and licences applying to grain exports were ‘temporarily’ reimposed owing to the disappointing grain harvest (they had been removed only at the beginning of that month) (FT, 18 August 1995, p. 21). State orders for grain (set to be withdrawn in 1996) amounted to 4.6 million tonnes in 1995, down from an expected 10 million tonnes (FT, 9 January 1996, p. 2). Even before 1990, farmers could leave the collective, but few did so. A single state farm broke up in western Ukraine. Only 2 per cent of farmland is not in the government’s hands. Now the government wants to speed up the process. In 1995 President Kuchma signed two decrees permitting private ownership of farmland. The governor of Donetsk region in eastern Ukraine gave the green light to reform in October 1995 (using Russia’s Nizhny Novgorod model) and the go-ahead has been given to three farms. Already 40 per cent of Ukrainian farmers get their seeds, fertilizers and other inputs from private suppliers on the free market. Once tied to state contracts that forced producers to sell at below market prices, they can now choose a newly opened commodities exchange or

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Western agro-business concern. But trade restrictions remain cumbersome. In 1995 roughly 40 per cent of all food output came from privately held land, including weekend garden plots (FT, 13 March 1996, p. 35). A commitment has been made to cut the state grain order from 5.8 million tonnes to 3 million tonnes and the government has committed itself to permit free export of grain when the crop is harvested in the autumn (FT, 24 May 1997, p. 2). A ministry of agriculture official has said that the state will no longer force farmers to sell part of their grain harvest at an artificially low price. Instead, they will be allowed to sell all their output at market prices through commodity exchanges. In 1997 total state orders were for 3 million tonnes out of a grain harvest of 35 million tonnes. In 1996 farmers were not permitted to export any of their grain until state orders had been fulfilled. Many farmers have not been paid for state purchases for several years. Farmers still receive more than 25 per cent less for their grain than their counterparts worldwide because of the inefficiency of the marketing sector, which is run by Khlib Ukrainy, the grain storage and processing monopoly (FT, 15 January 1998, p. 39). There is still a state monopoly in the storage, processing and distribution of farm produce. Some 100 out of the 550 enterprises in the state monopoly that controls the storage and distribution of grain (Khlib Ukrainy) are to be privatized in 1998. Up to a third of the shares in the enterprises to be privatized are to be sold for cash to investors (both domestic and foreign), while 15 to 20 per cent will go to employees of the enterprises. One hundred enterprises will remain with Khlib Ukrainy after the others have been sold off (FT, 30 December 1997, p. 15). As the law stands state farms can be divided among workers but land cannot be sold until six years after privatization. President Kuchma has tried to find a way round parliament’s objections to land sales by creating fifty-year leaseholds that are transferable. Food processing is almost entirely in the private sector now. The government intended to privatize during 1998 most grain elevators, which enjoy a monopoly over storage, distribution and supply of seeds. Although the old state and collective farms have been renamed ‘collective agricultural enterprises’ not much has changed. Workers now own certificates as proof of their share of the enterprise and can split away, receive the title to their share of land and become private farmers. But only 4 per cent of land is privately farmed (FT, Survey, 5 May 1998, p. v). According to the Ukrainian ambassador to the EU, it was only in March 1996 that the first privatization of a former collective farm took place (Guardian, 27 August 1996, p. 37). In mid-1995 only 3 per cent of farmland was in the hands of individual farms (Brada 1996: 69). In October 1995 the World Bank warned Ukraine that it would withdraw loans and export guarantees worth $720 million in 1995 unless it added 4,270 food and food handling and processing enterprises to the privatization list. Parliament removed the sector from the list and wanted the enterprises which supply it (mostly collective farms) to be given a free 51 per cent stake. The rest would be allocated to workers at the enterprises (FT, 27 October 1995, p. 2). Parliament has passed a law on privatization in the agriculture-related industries.

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The law stated that 51 per cent of shares in the enterprises processing agricultural produce were to be given free to farms. The remaining shares could be sold to farms or members of the staff working at the enterprises either for privatization certificates or for cash (Business Central Europe, December 1995–January 1996, p. 27). In early 1996 parliament approved a largely unchanged law, which proposed giving collective farm directors a free 51 per cent stake in the agro-industrial enterprises, mostly in food processing and handling. The law would effectively remove half the enterprises from the voucher privatization programme. The 4,270 agro-industrial enterprises, both private and state-owned, would be sold afresh. It is not exactly clear, but agroindustrial workers could mop up the remaining shares through a closed auction or the remaining stake could be sold through the voucher programme. President Kuchma vetoed the bill on 21 February 1996. (Parliamentary speaker Moroz called on local governments to ignore a November 1995 decree which cautiously mandated limited sales of land within collectives, which are slowly being broken up.) (FT, 8 February 1996, p. 33; and 22 February 1996, p. 2.) ‘The agricultural sector … consists mostly of bankrupt state-owned farms, 95 per cent of which lost money last year [1998]’ (Business Central Europe, December 1999–January 2000, p. 29). ‘Nearly 9,000 “strategic companies” and de facto the entire agricultural sector are exempt from privatization. The roughly 30,000 private farmers own no more than 2.2 per cent of arable land’ (Deutsche Bank, Focus: Eastern Europe, 27 August 1996, no. 161, p. 6). In 1996 private household plots occupied only about 12 per cent of agricultural land but produced over 47 per cent of agricultural output. The majority of farms have been officially transformed into joint stock companies called collective agricultural enterprises (as of 1 January 1997, 75 per cent of state farms and 99 per cent of collective farms). But ‘they have undergone little change in management, production choices or resource allocation’. Those who choose to exit the collective agricultural enterprises receive a plot of land. Few chose this option, perhaps due to the high degree of risk involved. A farmer might receive an unproductive lot or one far away from local infrastructure. Furthermore, because farmers have yet to receive legal title to the land, they face the risk that the land might one day be confiscated. The owner’s right to lease or sell the land is also unclear. Although President Kuchma submitted a decree repealing the six-year moratorium on the sale of agricultural land inherited by the state, in practice the moratorium still serves to obstruct land sales and impedes the transition to a functioning land market. (Britta Bjornlund, Transition, October 1997, vol. 8, no. 5, p. 20) The presidential decree of April 1997 legalized the lease and sale of both land parcels and land shares, to be paid in currency, in kind or in labour services.

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In recent years a small number of private farms have emerged, on 2 per cent of arable land (pp. 20–2). A presidential decree of 24 April 1997 provided for the leasing of land and the subsequent sale, inheritance or giving of leases (EEN, 1997, vol. 11, no. 9, p. 5). On 19 January 1999 a presidential decree allowed for sales of state and municipally owned land plots on which privatized facilities are located. Land plots could be sold only to Ukrainian legal entities and citizens of Ukraine who own the facilities on which the land plots are located. Parliament failed to overrule the presidential decree on 16 February (UET, Monthly Update, January 1999, pp. 2–3). The first decree presented to President Leonid Kuchma for signature following his re-election [on 14 November 1999] essentially introduced private land ownership. The certificates that farmers received after the land had been divided into shares acquired legal force and now constitute documents of ownership. Plots may now be leased to other parties on a contractual basis, passed on to their heirs or used for any type of agricultural activity at the owner’s discretion. For the first time foreigners are allowed to lease land for a period of fifty years. (CDSP, 1999, vol. 51, no. 52, p. 16) On 4 December 1999 Kuchma signed a decree allowing for the purchase and sale of land by private individuals or interests (EEN, 2000, vol. 12, no. 21, p. 7). Following a recent presidential decree on land reform, the first stage was completed in April 2000 with the transfer of ownership of collective farms to private entities or co-operatives. The next stage will be to develop land ownership, enabling farmers to use their land as collateral. (EBRD 2000a: 84) A presidential decree of December 1999 allows former members of collective farms to leave with their share of land and property. Although land cannot currently be sold, leasing to private operators has increased. By April 2000, 11,000 collective farms had been transformed into private ownership or co-operatives. In July the Rada approved the Land Code at first reading. If the Land Code is adopted it would allow farmers to trade land and use it as collateral, which should lead to an increase in finance for agriculture. However, higher agricultural output will also depend on reduced state interference in the sector. (EBRD 2000b: 223) Approval by the Rada (parliament) of the draft Land Code would complete the process of land reform begun last year [2000] with the abolition of collective farms. This measure would introduce a land registration system and help to develop a land market. However, the lack of a mortgage law

598

Ukraine would still limit the ability of farmers to receive credit against the value of land and other fixed assets. (EBRD 2001a: 94) [On 23 November 2000 the president] vetoed the law ‘on agreements on land shares’, which was adopted by parliament on 2 November 2000. According to this law, all agreements, other than inheritance (legal succession), giving to citizens the ownership rights on land shares, shall be considered invalid. The president believes that this law does not comply with the constitution. (UET, Monthly Update, November 2000, p. 3) The Law of Ukraine dated 18 January 2001 … deprived the owner of a land interest of his right to freely dispose of his land share. The law provided that, until procedures for realization of the rights of individuals and legal entities in these land plots (interests) have been spelled out by the Land Code of Ukraine, it shall be prohibited to enter into agreements for the sale and purchase, donation and pledge of land interests. Land shares may be alienated only by transfer into an inheritance and in the case of buyouts of land plots for state and community needs … A new Land Code is in the course of being considered by parliament. (UET, Quarterly Issue, June 2001, pp. 10–11)

‘The leasing of agricultural land has become an important means for increasing the amount of land used by private farms’ (p. 16). [On 29 January 2001] the president of Ukraine signed an order … [which] envisages the certification of rights to own property shares by issuing property certificates to former members of collective agricultural enterprises. The share ownership right may be leased, sold, purchased, granted as a gift, exchanged and inherited. In the case of leasing the rental fee must not be less than 1 per cent of the share value. (UET, Monthly Update, January 2001, p. 3) ‘The decree of the president dated 30 May 2001 … is supposed to ensure the acceleration of the completion of land reform’ (UET, Quarterly Issue, June 2001, p. 11). [If a farmer] owns 100 ha (250 acres) of land [this is] as much as a private farmer is allowed to … Land reform, which was meant to break up the old collective farms, has turned out to be a huge disappointment … A 1992 ‘land code’ ended the state monopoly on land and recognized three forms of ownership: state, collective and private. All the kolkhozi (collective farms), says the government, have been replaced by private ‘collective agricultural enterprises’. Since 1995, according to the ministry of agriculture,

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more than 6.5 million [there are 17 million peasant farmers: p. 49] Ukrainian peasants have become the owners of land-share certificates which, thanks to President Leonid Kuchma’s decrees, can be sold, swapped or used as collateral. The trouble is that the majority of these ‘private enterprises’ are in fact the very same collective farms … Farm output has shrunk every year since independence in 1991. According to the Farmers’ Association, 70 per cent of everything grown is wasted before it reaches the shops. Most of these enterprises are in effect bankrupt. Moreover, those who hold land-share certificates are not genuine landowners. They do not have real land titles, only the right to demand some land and capital upon leaving the enterprise. Although a peasant can indeed sell his land shares or use it as collateral, he cannot trade the actual piece of land … Though farmers have the right to pull out of an enterprise they cannot merge their land shares with others’ to create a bigger farm … Only about 5 per cent of the country’s peasant farmers have so far chosen to become private farmers … Individual farmers own just 2 per cent of Ukrainian land. A full 46 per cent of the land remains in the enterprises’ control. The rest belongs to the state … There is no open market in farm produce in Ukraine. The government remains the largest buyer and about the only supplier of seeds, fertilizer and so on. (The Economist, 11 September 1999, p. 44) Ukrainian farmers, already struggling with a chronic shortage of fuel during the harvesting season, are now having to cope with a new presidential decree that prevents them from buying and selling grain on the open market … a drastic change in rules governing the sale and export of grain … President Leonid Kuchma’s recent decree introduced a system under which farmers would sell grain to the state at the market price in the autumn and buy it back at the same price – plus storage costs – later in the season. They could then resell the grain. Khlib Ukrainy, a state monopoly, was appointed as sole agent responsible for all aspects of price setting, purchase and sales of grain on the domestic market. The president’s administration said the measure was needed to ensure that the farmers, rather than the wholesale traders, sold the grain in the spring and earned a higher profit – but the farmers are unhappy with the new arrangement … The head of the Ukrainian Farmers’ Association … [said] a state monopoly … will cheat the farmers … [and] that members were also unhappy about the requirement that farmers and traders register all grain they had stored … The decree refers to other potentially restrictive features, such as state intervention in the grain market to control prices, the setting up of a state register of businesses involved in grain storage and export, and entrenching the system of state procurement of grain by including it in the budget. (FT, 7 July 2000, p. 34)

600

Ukraine

On 29 June 2000 a presidential decree was signed: The decree anticipates that the government of Ukraine will encourage the in-cash sales of grain via the market infrastructure (exchanges, auctions and trading houses) and its purchases for the purpose of domestic processing. It is also expected that the government would be involved in the direct purchases of grain and its subsequent sales for the purpose of internal market stabilization. In addition to this the decree fosters the introduction of mortgage purchase of grain; crediting for this kind of operation will start in 2001 and is supposed to be covered by the state budget. (UET, Quarterly Issue, June 2000, p. 2) On 20 July the government passed a regulation to control the grain market, according to which ‘the ministry of agricultural policy of Ukraine must enhance control over the flow of wheat and other grains and enforce the accreditation requirements for the commodity exchanges’. The following day another regulation was adopted which ‘establishes prices for collateral grain purchases and nominates the state joint stock company “Khlib Ukrainy” to carry out the collateral purchases of grain on behalf of the state’ (UET, Monthly Update, July 2000, p. 2). By 1 September 2000 the former CAE [collective agricultural enterprises] had been restructured into 13,266 agricultural enterprises, of which 6,152 (or 46.4 per cent) were limited liability companies, 3,376 (or 25.4 per cent) were agricultural production co-operatives, 2,800 (or 21.1 per cent) were private and private-leasing enterprises and 938 (or 7.1 per cent) constituted private farms. [Around] 72 per cent of these enterprises are still run by former CAE managers, who have failed to improve management methods and to run enterprises appropriately as the agricultural production co-operative differs far too little from the CAE. There is barest necessity now to restructure these co-operatives into private farms. Numerous restrictions on the right of rural citizens to obtain private ownership of land, which are quite often imposed by local governments and managers of newly created farms, must be eliminated. Private households account for almost 65 per cent of gross agricultural output … [In the first] nine months of 2000 households produced more than two-thirds of meat, milk and eggs. Sales of their own agricultural products provide rural citizens with money. The lion’s share of salaries is paid by agricultural enterprises to their workers in kind (mainly in goods and occasionally in services). It is possible to get rid of widely spread barter transactions by means of introducing transparency into the agricultural market … [The 29 June 2000 presidential decree] paves the way for the sale of grain for cash through a transparent market infrastructure (commodity exchanges, auctions and trading houses). Additionally, mortgage-based grain purchases were introduced. This mechanism determines grain purchases from agricultural producers at mortgage prices

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during the harvest season while guaranteeing producers the right to sell their grain again at market prices if these exceed mortgage prices. (UET, Quarterly Issue, September 2000, p. 9) Land reform has halted agriculture’s headlong plunge into chaos. Ukraine was once the breadbasket of the Soviet Union, boasting one-third of the world’s total acreage of black soil, the most fertile stuff around. But failure to reform the sector has slashed output. Last year [2000] Ukraine harvested just 24.5 million tonnes of grain, half as much as in Soviet times. And the country has started importing grain, for the first time ever. Now, though, state farms are being privatized, with each collective farm worker receiving about five hectares of land. A fifth of agricultural land has already been privatized this way, with the rest due to go soon. As a result the sector has started to recover. Farmers’ losses tumbled by 90 per cent last year, while output rose by 6 per cent in the first three months of this year [2001]. Overall, this should be the best harvest since 1994. There are still some problems, though. In particular, farmers are not allowed to sell their land. That prevents land being consolidated, and it also scuppers agricultural investment because farmers have no collateral to offer against bank loans … But … the left-leaning parliament … has agreed to discuss land sales later this year. Such reform urgency marks a big shift from previous, failed, attempts at land reform. Farmers were actually given privatization certificates back in 1995, but few of them ever received any land because the certificates failed to specify a location. As a result, state farm managers and regional officials simply scuppered deals, to protect their own positions. The problem has now been dealt with. Already there are signs that farmers are thinking more commercially … The change has as much to do with ending state intervention last year, as with land privatization. For years Ukrainian farms were trapped in a vicious circle. The state paid for their fuel and fertilizers in the spring, but then took away their crops later in the year. So there was no incentive to increase production. (Business Central Europe, May 2001, p. 47) The share of peasant farms in agricultural land increased from 0.1 per cent in 1992 to 2.5 per cent in 1999 (Spoor and Visser 2001: 888). The share of private farms and household plots in agricultural production increased from 30 per cent in 1991, to 37 per cent in 1992 and to 60 per cent in 1999 (p. 890). Agricultural producers have responded to a number of incentives, including the initial privatization of 11,000 collectives (which were transformed into more than 15,000 private farms), the government’s decision to stop providing commodity backed loans and, from the beginning of this year [2001], the removal of the ban on the bankruptcy of agricultural enterprises. (EBRD 2001b: 207)

602

Ukraine A Land Code providing for private land ownership was passed on third reading by the Ukrainian parliament [on 25 October 2001] … Although the Code imposes a five-year moratorium on the purchase and sale of land, starting in 2005 any Ukrainian citizen will be able to buy 100 hectares of farmland, acquire permanent ownership of it and use the land as he sees fit. Moreover, Ukrainian legislators decided that farmers should have the right to acquire land free of charge, provided that ‘they are Ukrainian citizens and hold a degree in agriculture or have agricultural experience’. Foreign citizens and legal entities … may acquire ownership of non-agricultural land in order to put up buildings associated with business activities in Ukraine. The law seems to state very explicitly that ‘agricultural land may not be transferred to the ownership of foreign citizens or stateless persons’. (Nezavisimaya Gazeta, 27 October 2001, pp. 1, 5: CDSP, 2001, vol. 53, no. 43, p. 16) On 15 November [2001] the law was signed by President Kuchma … entered into force on 1 January 2002, and replaces the old Land Code from 1992 … It finally establishes a legal foundation for private land ownership … All land may not be transferred into private ownership … Exceptions … which may not be privatized … concern mainly forest and water lands unless otherwise stated in the Land Code, nature reserves or land for other environmental protection purposes of historical value unless otherwise stated by law or land belong to the military, nuclear power stations or space research establishments … Private and legal persons are prohibited to sell or otherwise transfer their land plots or land shares or transfer them to company capital until January 2005. Furthermore, private and legal persons’ purchase of ownership of agricultural land is limited to a maximum of 100 ha up until 1 January 2010 … Exceptions to this limitation may be granted in case of inheritance … Anyone purchasing agricultural land must have agricultural education or experience, or be involved with commodity agricultural production … The right to private ownership of land covers Ukrainian as well as foreign private and legal persons with two important exceptions: foreign private and legal persons are not allowed to own agricultural land or other land outside built-up areas. Land which is not agricultural land and which is situated outside built-up areas may be purchased if they own or plan to purchase property, e.g. a factory, belonging to the land. Land may also be leased to foreign private or legal persons. (UET, 2002, Monthly Update, January 2002, pp. 29–35) [Some] 2.722 million persons (40.9 per cent) – owners of the land certificates – received the official acts granting them the property right to the land plots (as of 1 May 2002). According to the presidential decree … of 3 December 1999, all the owners of land certificates should receive the official

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acts granting them the private property right to land by the end of 2002. The average size of the land plot is 4.1 hectares. (UET, Monthly Update, April 2002, p. 2) The new land code, which took effect at the beginning of 2002, allows for the sale of agricultural land from 2005 … One of the main benefits of the new land code will be to allow the use of land as collateral … By July [2002] 42 per cent of land owners had completed the formal registration of ownership of their plots. (EBRD 2002b: 210)

Economic performance ‘Ukrainianization’ is a term the country would sooner forget, the country earlier combining hyperinflation and rapidly falling output. Ukraine is unique among transitional economies in that GDP fell continuously throughout the 1990s. It took until 2000 to achieve a positive figure for GDP growth. Prior to the figures for 1995 onwards (see Table 7.2), GDP growth was -4.0 per cent in 1990, -8.7 per cent in 1991, -9.9 per cent in 1992, -14.2 per cent in 1993 and -22.9 per cent in 1994 (UET, Quarterly Issue, March 2000, p. 14). It has been estimated that in 2001 GDP was just 46 per cent of the 1989 level (EBRD 2002b: 58). ‘But there has been a strong recovery in industrial production, mainly in response to the devaluation of the exchange rate’ (EBRD 2000b: 7). Growth of GDP was achieved in the second quarter of 1998 but this positive trend was broken in the next quarter and the GDP decline continued for about a year … In the third quarter of 1999 the positive growth of GDP was 0.2 per cent … In the fourth quarter of 1999, compared with the same period of the previous year, real GDP increased by 3.2 per cent and in the first quarter of 2000 by 5.6 per cent. (UET, Monthly Update, April 2000, p. 29) ‘According to the official Derzhkomstat [State Committee for Statistics] index, for the first time since independence, Ukraine’s real GDP registered permanently positive monthly changes over six consecutive months’ (UET, Quarterly Issue, June 2000, p. 13). The main driving force of the Ukrainian economy … in 2000 is the dynamic of foreign trade boosted by the reactivation of the economies of FSU [former Soviet Union] countries (mainly the Russian one) … Exports to FSU countries represent 35.5 per cent of total export value … The Russian Federation [alone in 2000 accounted for] … 24 per cent of total export value. (UET, Quarterly Issue, March 2001, p. 5)

604 Ukraine There was hyperinflation in 1992 (1,210 per cent) and 1993 (4,743 per cent). Consumer price inflation fell sharply in 1994 (891 per cent) and the inflation rate reached single figures in 2002. According to the International Labour Organization, one in every three industrial workers is underemployed (FT, 9 January 1996, p. 2). According to the World Bank estimates for 1995, up to 70 per cent of all Ukrainian workers hold a second, unofficial job. The Ukrainian government put the number of registered unemployed at 1 per cent in May 1996, while the International Labour Organization talked in terms of unemployment in the 20 to 24 per cent range (Deutsche Bank, Focus: Eastern Europe, 27 August 1996, no. 161, p. 5). ‘About 27 per cent of the population remain below the national poverty line, according to official data’ (EBRD 2002b: 211).

Bibliography

Periodicals and reports ARET Armenia Economic Trends AZET Azerbaijan Economic Trends BET Belarus Economic Trends CDSP Current Digest of the Soviet Press (since 5 February 1992 Post-Soviet) EBRD European Bank for Reconstruction and Development EEN Eastern Europe (formerly Eastern Europe Newsletter) FEER Far Eastern Economic Review FT Financial Times GET Georgia Economic Trends IHT International Herald Tribune KET Kazakhstan Economic Trends MET Moldovan Economic Tends RET Russian Economic Trends UET Ukrainian Economic Trends UZET Uzbekistan Economic Trends Note the following changes of title: Soviet Economy to Post-Soviet Studies; Soviet Studies to Europe–Asia Studies.

Books and journals Afanasyev, Y. (1994) ‘Russian reform is dead’, Foreign Affairs, vol. 73, no. 2. Amelina, M. (1999) ‘The (not so) mysterious resilience of Russia’s agricultural collectives’, Transition, vol. 10, no. 6. Ash, T. (1993) ‘Agriculture in the former centrally-planned economies in transition’, Economics of Transition, vol. 1, no. 4. Ash, T. and Hare, P. (1994) ‘Privatization in the Russian Federation: changing enterprise behaviour in the transition period’, Cambridge Journal of Economics, vol. 18, no. 6. Åslund, A. (1989) Gorbachev’s Struggle for Economic Reform: The Soviet Reform Process, 1985–88, 1st edn, London: Pinter. —— (1991a) Gorbachev’s Struggle for Economic Reform: The Soviet Reform Process, 1985–88, 2nd edn, London: Pinter. —— (1991b) ‘Gorbachev, perestroyka, and economic crisis’, Problems of Communism, January–April.

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Index

Abramovich, R. 63, 66–9, 71, 418 Abu Walid 55 acquis communautaire 144, 151, 155–6 Adamkus, V. 17, 226–8, 233–4, 238–40 Adamsons, J.189 Ahtisaari, M. 59 Akhadov, I. 54 Akhmedkhanov, B. 52 Alekperov, V. 63, 67 Alexandrov, I. 546 Alexei II (Patriarch; Russia) 138–9, 545 al-Qaeda 50–1, 88–9 Amelina, A. 449–50 Annan, K. 95 Andriukaitis, V. 230, 232–3 Anti-Ballistic Missile Treaty (ABM Treaty) 84–5, 87 anti-crisis measures (Ukraine) 123, 519 anti-crisis programme (Belarus) 267, 302 arrears (including inter-enterprise debt) 102, 111–13, 375–8, 402, 467–8, 473, 499, 574 Article 8 (IMF) 122, 318, 394, 580 Åslund, A. 41, 104, 107, 109–10, 374, 377–9, 381, 387, 401, 406, 410–11, 423, 464, 469–70, 474–5, 489, 491–2, 496–7, 561, 564 August 1991 coup 39 Aushev, R. 61 Aven, P. 63, 67, 100, 413, 474, 510 Ayatskov, D. 436 Azarov, M. 537 Babitsky, A. 42 Balcerowicz, L. 374 Balian, H. 283 barter 102, 113, 303, 352, 375–7, 386, 406, 473, 488, 499–500, 566, 574 Bartholdy, K. 569

Bartholomew I (Patriarch of Constantinople) 138–9 Basayev, S. 50 Bashkortostan 77, 478 Bennett, A. 164 Berezovsky, B. 40–1, 46–7, 62–5, 68–70, 80, 380, 418, 423–4 Berger, M. 465 Berkis, I. 187 Berzins, A. 199, 201 big bang (EU expansion) 149 big bang/shock therapy 40, 111, 373–4, 385, 464–5 Birch, S. 521, 523 Birkavs, V. 195 Bjornlund, B. 596–7 black economy 104 Black Thursday 393, 484–5, 502 Black Tuesday 393 Blasi, J. 406 Bobelis, K. 231 Bogdankevich, S. 267 Bogusis, V. 230 Bohlen, C. 80 Bojars, J. 193 Boone, P. 104, 387, 404, 427 Borodin, P. 66 Bourke, M. 207, 244 Boyko, M. 401, 406 Brada, J. 595 Bradshaw, M. 457 Braghis, D. 32, 334, 336–9 Brazauskas, A. 223, 226, 230, 232–4, 248, 250 Brezhnev, A. 62 Brezhnev, L. 62 Broadman, H. 387–8, 405 Brown, D. 403 Budanov, Y. 57

Index 617 budget deficit: 470 (accrual basis); 108, 469 (IMF definition); 472, 490, 506 (primary deficit); 470–1 (rouble cash flow basis) Burawoy, M. 384 Burton, R. 461 Bush, G.W. 238, 85–8 Bykov, V. 402 Camdessus, M. 267, 471, 472 Cannon, L.S. 167, 175 capital flight 42, 356, 397–8 Celmins, J. 189 Cevers, Z. 189–90 CFE Treaty 334 Charter of Partnership 140 Chechnya 40–59, 62, 79–81, 84, 136, 326, 396, 440 Cherkesov, V. 74 Chernobyl 117, 241, 275, 277, 304, 514–16 Chernomyrdin, V. 103, 274, 410–11, 434 Chigir, M. 267, 273, 275, 278–9, 281 Chinese economic model 389 Chirac, J. 159–160 Chornovil, T. 535 Chown, J. 377 Chubais, A. 63, 66–8, 80, 291, 421–2, 429, 473 CIS (Commonwealth of Independent States) 9, 13, 32–3, 98–100, 174, 217, 255, 267, 327, 405, 329, 341, 344, 351, 364, 466, 558, 583 citizenship (see EU for further details): Estonia 6, 131–5; Latvia 12, 179–87; Lithuania 14–15, 222–3 Ciubuc, I. 29, 331–2 Clinton, B. 84, 117, 188, 516 Clover, C. 122, 578, 585, 525, 528 CMEA 370 Coase, R. 403 Cockburn, P. 284 Cohen, A. 98 Cold War 39 Collective Security Treaty (Organization) 89, 344 Common Agricultural Policy 153 Comprehensive Test Ban Treaty 85 convertibility (capital account) 9, 13, 19, 65, 111, 205–6, 243, 311 convertibility (current account) 9, 13, 19, 33, 65, 111, 122, 205–6, 243, 311, 353, 374, 394, 581

Cook, L. 399 corporate governance (control) 101, 404, 409 Council of Baltic States 192 Council of Europe 132, 182, 275, 287, 328, 348, 51, 54 Council of the Federation 75–8 crawling corridor 394 Crimea and the Black Sea Fleet 511–14, 533, 535 crony capitalism 486 CSCE 132 currency board 9, 18, 164–5, 206, 225, 242–3 Dalbins, J. 192 Daneiko, Y. 21, 296 Davis, J. 20, 36,177, 220, 259, 367, 371 de novo firms 405 Declaration of Eight 160 Deripaska, O. 66 Desai, R. 114, 403, 482–3 Diacov, D. 335 Dilmanis, S. 187 Dniestre region (Transdniestre) 27–34, 325–47, 353–47, 358–9, 372 Drachevsky, L. 74 Dubinin, S. 485 Earle, J. 403 Ellman, M. 450 Ericson, R. 499 Erlanger, S. 265 EU 5–8, 10–12, 15–17, 20, 79, 140–7, 149–59, 161–3, 197–200, 227, 232, 235–7, 241–2 EU (associate membership agreement; free-trade agreement; trade and cooperation agreement; partnership and co-operation agreement) 138, 188, 216, 224, 255, 268, 396 Eurasian Economic Community 339, 341 Euro-Atlantic Partnership Council 556 exchange rate corridor 481, 491 exchange rate mechanism 19 facilitated transit documents 237, 240 Fan, Q. 406 Filatochev, I. 403 Financial Action Task Force 558 financial crisis (Russian/Asian) 13, 18, 33, 40, 60, 105–7, 111–15, 119,178, 217,

618

Index

220, 227, 256, 261, 314–19, 354–5, 380, 391, 473, 482–510, 584–9 Financial-Industrial Groups (FIGs) 4407–9 check, 421–2 Fischer, S. 112, 405, 498 foreign direct investment (see contents pages) Franchuk, A. 512 free economic zones 259 free-trade zone 365 Freeland, C. 422–3 Friedman, M. 63, 67, 71, 413–14 Friendship and Co-operation Treaty (Moldova and Russia) 32, 344 Fyodorov, B. 387, 402, 404, 472–3 Fyodorov, N. 78 G7 135, 471, 589 G8 (political) 135 Gaddy, C. 101, 375, 404, 499 Gagauz region 28, 328, 330, 342 Gaidar, Y. 80, 82, 373, 385–6, 389, 427, 464, 468, 473 Gaidukevich, S. 282 Gailis, M. 188–9 Gainutdin, R. 93–4 Galeotti, M. 326 Genghis Khan 511 Gentvilas, E. 235 Gerashchenko, V. 459, 466, 496 GKOs 109, 114, 377, 468, 470, 480, 482, 485–8 490, 508 Goldberg, I. 403 Golovlyov, V. 70 Gonchar, V. 273–4, 278–9, 281, 287 Goncharik, V. 281–3 Gongadze, G. 118, 532–4, 537–9, 542, 549, 554, 556 Gorbachev, M. 39, 66, 188, 373, 379, 448, 512 Gorbunovs, A. 187, 189, 195 Graham, T. 81 Gref, G. 73, 389, 440 Grigoryeva, Y. 21, 296 Grinblats, M. 190, 193 Gryzlov, B. 82–3 Gusinsky, V. 62–70 GUUAM 344 Gwartney, J. 376, 475 Gwiazda, A. 131–5, 223 Hanar, V. 268 Handelman, S. 382

Hanke, S. 165, 206 Hanson, P. 490 Hansson, A. 164 Harding, A. 402 Havrylyshyn, O. 560, 576 Healey, N. 399 Hellman, J. 381 Heyken, E. 286 Hoffman, D. 113, 293, 473 honeymoon period 386 hyperinflation 32, 60, 106, 108, 119, 372, 387–8, 464–70, 486, 495–6, 510, 604 Ickes, B. 101, 375, 404, 467–9, 499 Ignalina nuclear power station 16, 151, 159, 227, 240–1 Ignatovich, V. 286 Iliescu, Ilie 333 Iliescu, Ion 345 Illarionov, A. 383, 405, 424, 465, 468, 501, 505 insiders/insider privatization 101, 399, 402, 404, 407, 421 investment funds (Russia) 404 Iraq 8, 13, 17, 21, 32, 78, 88–98, 117, 159–62, 350, 550, 558 Ivanov, I. 90 Ivanov, S. 51 Ivans, D. 202 Jack, A. 21, 52, 285 Jeffries, I. 430–2, 467 Jekabsons, E. 202 Johnson, J. 408 Jordan, B. 51, 65 Jurkans, J. 187, 190, 193, 200 Jursenas, C. 230, 232–3 Juzaitis, D. 461 Kadannikov, V. 68 Kadyrov, A. 52, 55 Kaliningrad 15, 235–8, 438, 505 Kallas, S. 136–7, 139, 141–2, 153–4 Kalvitis, A. 200 Kaminski, M. 177, 260, 570 kartoteka 575 Kaser, M. 321 Kasyanov, M. 61, 63–4, 71, 107, 113, 203, 398, 481, 500 Kaufmann, D. 381, 561, 569–70, 576–7, 579, 582, 593–4 Kauls, A. 190–1 Kazlauskiene, N. 259 Keay, J. 27, 325

Index 619 Kebich, V. 266–7 Khakamada, I. 80, 288 Kharas, H. 482, 485 Kharitonov, N. 495 Khasavyurt agreement 48 Khattab 48–9 Khmara, S. 535 Khmelnytsky, B. 511 Khodorkovsky, M. 63, 71, 418–19, 425 Khristenko, V. 203 Khrol, V. 286 Khrushchev, N. 511 Kinakh, A. 543, 548–9, 556 Kiriyenko, S. 58, 74, 80, 82, 107, 473, 485–6, 492 Kiselyov, Y. 66–7 Kitching, M. 451 Klebanov, I. 83 Kokov, V. 78 Kolomiyets, M. 556 Kosovo 59 Kostenko, Y. 544 Kostikov, I. 503 Kozlovsky, P. 281 Krasovsky, A. 278–9 Krasts, G. 191 Kravchuk, L. 522, 569, 562, 582 Kreitzberg, P. 148 Kristopans, V. 193–6 Krueger, G. 407 Kubilius, A. 228 Kubryakov, V. 348–9 Kuchma, L. 96–7, 117–19, 122, 125, 127, 289, 512–60, 564, 576, 579, 582, 589, 593–99, 602 Kudrin, A. 477, 506 Kursk (nuclear submarine) 44, 83–4 Kuzmuk, A. 549 Kwasniewski, A. 288 Laar, M. 136, 141–2, 148, 153, 161 LaFraniere, S. 538–9, 556. Land Code (Russia) 105, 430–48 Land Code (Ukraine) 126–7, 597–8, 602 Landsbergis, V. 224–6, 232 Latvian Legion (Legionnaires) 192, 194, 200–1 Layard, R. 110, 401, 406, 464, 491 Lazarenko, P. 122, 519, 522, 526, 531, 541–2, 550 Lebed, A. 43, 48, 57, 328 Lebedev, P. 71 Lembergs, A. 196, 204

Lesin, M. 63–4, 66 liberalization 374 Lileikis, A. 229–30 Linderfalk, B. 9, 170, 175, 210, 219, 247–8 Ling, S. 275 Litvin, V. 549, 551–2, 544 Lloyd, J. 434 London Club 479–81 Lucinschi, P. 28–31, 327, 330–5, 346 Lukashenko, A. 21, 96, 265–302, 319 lustration law 235 Luzhkov, Y. 78, 81–2, 399 McFaul, M. 401, 405 McKinnon, R. 388–9 McKinsey report 103, 374, 384–5, 407 mafia 100, 382 Makarovs, V. 198–9 Makashov, A. 113 Malakhov, V. 331 Malleret, T. 483, 489 Mamut, R. 67 management-employee buy-outs 120, 169, 572 Marchuk, Y. 517, 529 margin calls 485 Markov, S. 289 Maslyukov, Y. 495 Matei, V. 31, 331, 335 Matlock, J. 59 Matvienko, V. 74 Medvedchuk, V. 551 Meek, J. 524 Melnichenko, M. 533, 539, 550, 533 Meri, L. 7–8, 135–6, 139, 147–8 Meshkov, Y. 512 Milosovic, S. 59, 84 Mitiukov, I. 518–19 Mitra, P. 405 monetary overhang 386 monetizing a budget deficit 108, 468 Moroz, A. 521, 523, 528–9, 557, 578, 532, 535, 546, 551–2 Moscow (Treaty; Treaty on the Reduction of Strategic Offensive Potentials) 85–6, 92 Mroz, J. 517 Myre, G. 495 Naglis, J. 200 Nagorno-Karabakh, 40, 48–51, 56 Nantoi, O. 326 Nastase, A. 345

620

Index

National Missile Defence (NMD) 84–5, 87–8 Nato 5, 7–8, 12, 15, 17, 58–60, 84–8, 117, 140, 157–8, 162, 223, 229, 237, 265–6, 270, 289, 517–19, 553 Nato–Russia Permanent Joint Council 86 Nazdratenko, Y. 77 Nazi–Soviet Pact 140 near abroad 40 Nellis, J. 9, 167–8, 423–5 Nemtsov, B. 68, 71, 80–2, 288, 291 Nice Treaty 157 Nikonov, A. 449 Nizhny Novgorod 105, 399, 434–6, 451, 594 non-monetary exchange (transactions; payments) 111, 375–8, 488 Noviks, A. 190 Novoprudsky, Y. 99 Nvitsky, G. 285 nuclear weapons (Belarus) 265–6 nuclear weapons (Ukraine) 117, 517 Nugis, U. 137 Oddling-Smee, J. 482, 584 OECD 10, 42, 178, 280, 550, 558 OFZs 109, 468, 470, 480, 485–8 Oleinik, V. 535 oligarchs 40, 62–71, 378–81, 403, 411, 413, 419–25 oligarch parties (Ukraine) 540, 560 Oorzhak, S.-O. 78 Oppenheimer, P. 494 Orthodox Church (Belarus) 21, 287–8 Orthodox Church (Russia) 45 Orthodox Church (Ukraine) 545–6 Osama bin Laden 49, 88 OSCE 6, 29, 31, 54, 62, 118, 133–5, 184–6, 200, 269, 280, 282–9, 331, 334, 340–1, 350, 522, 529, 550 Ozolas, R. 225 Paksas, R. 17, 227–8, 231–5, 238–40 Pallot, J. 449 Paris Club 114–15, 479–81, 501, 508–9 Parnoja, M. 148 Partnership for Peace 17, 59 Parts, J. 160, 162 party of power 268–9 Pasko, G. 117 Patrushev, N. 47 Paulauskas, A. 226, 23–4, 238 Pauls, R. 193

Pavliuk, O. 517 Peebles, G. 165 Peitsch, B. 454, 457–8 Petrushkevich, D. 281 Pfaff, W. 39, 50, 411 Pinchuk, V. 553 Pinzenyk, V. 518, 562 Plyushch, I. 118, 530, 536 Pope John Paul II 136, 188, 223, 240, 544–5 Popov, A. 55 Potanin, V. 63, 67, 71, 414, 422–5 Potebenko, M. 532 Poznyak, Z. 268, 272, 278 Primakov, Y. 60–2, 66–7, 81, 434, 495 principle of differentiation 142 privatization (definition) 374, 398–9 privatization (see contents pages) production-sharing agreements 460–4 Prunskiene, K. 230 Pustovoitenko, V. 519–21 Putin, V. 21, 40–100, 104–5, 108, 112–13, 233, 294–300, 336, 344, 381, 383, 422, 426, 428, 438–9, 446–7, 476, 500, 535, 547, 557–8 pyramid schemes 404 Rakhimov, M. 61 Rapid Reaction Force 147 Ratkevicius, K. 224, 244 Reiltan, V. 161 rent seeking 100, 386 Repse, E. 10, 200–2, 205 restitution 14, 19–20, 166, 211, 250, 259, 261 Rich, V. 266 Rodionov, D. 427 Rodionov, I. 43 Rosca, I. 331, 338, 346–7, 349 Rossel, E. 43 rouble zone 465–6 Rubiks, A. 188, 190, 193, 202 Rupert, J. 512 Russia–Nato Council 86 Russian troops (Baltic States) 7, 135–6, 188, 193, 198, 223 Ruutel, A. 8, 137, 139, 148, 162 Ryterman, R. 467, 469 Sacareanu, S. 349 Sachs, J. 103, 110–11, 128, 374, 381, 410, 464, 479, 493–4, 589 Sakalas, A. 230

Index 621 Sakwa, R. 79 Samara (agriculture) 105, 436–8 Sangheli, A. 28, 327, 330–1 Saratov (agriculture) 436–7, 443 Sarkinas, R. 224, 244 Satarov, G. 105, 383–4 Savi, T. 148 Savisaar, E. 137–9, 141, 153, 160 Schaffer, M. 406 Schuler, K. 165 Scott, E. 494 Sea of Azov 558 Seglins, M. 201 Seile, A. 190 Seleznyov, G. 62 Selowsky, M. 405 Semyonov, V. 434 sequester 472 Serenas, V. 238 Serova, Y. 446 shadow economy (informal; grey) 121, 473, 577, 579 shakhmatka (chessboard system) 121, 577 Shaimiev, M. 61, 78, 81 shares-for-loans (loans-for-shares) privatization scheme 59, 104, 380, 403, 416, 419–25 Sharetsky, S. 277–9 Shaw, D. 449 Shelley, L. 382–3 Shleiffer, A. 401, 403, 406 shock therapy (see big bang/shock therapy) Shoigu, S. 80 Shukhno, V. 286 Shushkevich, S. 266, 275 Shvidler, E. 419 Siegerist, J. 187, 189, 190–1 Siiman, M. 140–1 Simonenko, P. 118, 521, 527–9 Siszov, A. 449 Skele, A. 190–1, 193, 196–9, 202, 212–13 Skokin, A. 389 Skuratov, Y. 58 Slezevicius, A. 224, 244 Sluchek, O. 281 Smirnov, I. 31, 329, 331–2, 336, 339–45, 350 Snegur, M. 28–9, 328–32, 335, 337 Sobchak, A. 60 soft budget constraints 103, 402–3 Solzhenitsyn, A. 402 Soros, G. 110, 423, 484 Soros Foundation 275 Spolar, C. 524

spontaneous privatization 410 Spoor, M. 26, 39, 128, 322, 371, 601 stabilization 374, 464 stabilization fund 392 Stalin, J. 39, 511 Stankevicius, M. 224, 244 Stanley, A. 421 Staravoitova, G. 58 Starikov, I. 447 Start 2 84, 87 state council 77 Stepashin, S. 42, 60 Stiglitz, J. 357, 403–4 strategic enterprises 121, 246, 575 Stroyev, Y. 78 Sturza, I. 332–4 Sundakov, A. 569 super governors 74 Supriunyuk, Y. 513 Sustauskas, V. 231 Szegvari, I. 569 Tadzhuddin, T. 93–4 Talbott, S. 525 Taleban 88–9 Tarand, A. 136–7, 141 Tarlev, V. 339–41, 345 Tartu Peace Treaty 136 Tatars 511, 514 Tatarstan 61, 74, 78, 443, 478 Tedstrom, J. 561, 564, 577, 579, 582 terrorist attacks (11 September 2001) 7, 12, 17, 21, 78, 88–9, 117, 285 Thornhill, J. 421 Tigipko, S. 518–19, 557 Timishenko, Y. 534–52 Titov, K. 80 Tkachenko, A. 118, 523, 526, 529 Tompson, W. 74–5, 375–6 Transdniestre (see Dniestre region) Transparency International 383 Treisman, D. 473, 475 Treuhandanstalt 9, 166–9 Tulviste, P. 148 Turchinov, A. 535 Udre, I. 202 Uibopuu, H.-J. 131, 222 Ukrainianization 119, 603 Ulmanis, G, 12, 181, 188, 191, 194–5 union (Belarus and Russia) 21, 24, 32, 66, 290–301, 308, 338, 341, 344 Urechean, S. 351

622

Index

Ustinov, V. 384 Vagnorius, G. 17, 224–9 Vahi, T. 137–40 Vaitekunas, R. 224, 244 Vaitovich, A. 286 Van Atta, D. 434 Vancea, I. 347–8 Van der Stoel, M. 6, 134 Vardomaski, A. 284 Vasiliauskas, A. 224 Vasiliev, D. 104 Veidemann, A. 138 Vekselberg, V. 71 veksels 377 Verheugen, G. 11, 144, 149 vertical of power 74 Victor, D. 460 Victor, N. 460 Vike-Freiberga, V. 12, 184, 195–6, 205 Vilnius group 160 Vinnikova, T. 276, 279 virtual economy 101, 374–8, 498–500 Visser, O. 26, 39, 128, 322, 371, 601 Vitrenko, N. 528–9 Volkov, A. 527 Volodymer the Great 511 Voloshin, A. 69 Volsky, A. 66–7 Voronezh (agriculture) 443–4 Voronin, V. 32, 330–1, 336–50 voucher (mass) stage of privatization (Russia) 101, 399–401, 410 Vyakhirev, R. 63 Wahhabi 55

Wegrin, S. 430–3, 448–50, 453 Wieck, H-G 283–4, 286 Williams, F. 457 Wilson, A. 521, 523, 542 Wines, M. 71, 74, 82, 278–9, 288, 327, 424, 484, 527–9, 586 Wolf, M. 424 WTO 9, 13, 34, 99, 175, 217, 343, 364–5, 390–1 Yakovlev, V. 61 Yakovleva, Y. 452 Yanukovich, V. 559 Yastrzhembsky, S. 44, 53 Yavlinsky, G. 57, 61, 81, 387, 421 Yekhanurov, Y. 518 Yeltsin, B. 135–6, 21, 40, 48, 57–61, 69, 74–9, 84, 104–6, 275–6, 290–3, 296, 330–1, 373, 383, 389, 399, 422–3, 430–7, 448, 450, 458, 464, 482, 484, 512, 564, 569 Yelyashkevich, A. 554 Yevtushenkov, V. 63 Yushchenko, V. 118, 529, 536–46, 549, 551–4, 562, 566 Yushenkov, S. 70 Zakayev, A. 50 Zakharenko, Y. 279, 281, 287 Zavadsky, D. 281, 286–7 Zaveryukha, A. 434 Zgardan, V. 350 Zhdanok, T. 202 Zhirinovsky, V. 57, 61, 79, 282 Zyuganov, G. 61, 79