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N89 - December 15 2008 Published every two weeks / International Edition

P. 1-3 Politics & Government

FINANCIAL CRISISc Alexey Kudrins Little pieces

of paper

c Yuri Volkov, Vladimir Putinsnew Mr Anti-Crisis

JUSTICEc Is United Russia against

Dmitry Medvedev?

DIPLOMACYc Russia-India: A strategic

partnership running out ofsteam

BEHIND THE SCENEc Kirill and Klement top

contenders to succeedAlexis II

P. 4-6 Business & Networks

NORILSK NICKELc Closing in on Vladimir

Potanin

FOCUSc Russneft: the End of the

Road?

ALERTc Big contract for Alstom

Transport

ENERGYc Caspian Pipeline

Consortium: BP negotiatesits way out

Alexey Kudrins Little pieces of paperc

P. 7-8

Over the last two weeks (and in any case since our most recent issue was published on November 27), theconcern expressed by the Russian leadership on the seriousness and breadth of the financial crisis has be-come more acute.

It is now clear that this crisis will have far-reaching consequences on both the political jousting betweenthe two heads of the executive as well as on Russias development choices in the coming years.

During the question and answer session with the Russian people on December 4 (or at least with someof its carefully selected representatives), Prime Minister Vladimir Putin first of all confirmed what we wrotein our most recent issue, to wit that the Russian presidential elections will not be brought forward. In fact,we did not believe in the early election scenario that was mooted in some Russian and western publications(which does not mean that it had never been on the cards) because of the increasingly serious situation ofthe Russian economy. On the macro-economic front the hypothesis of recession is openly evoked. The rateof growth of the Gross Domestic Product in the Third Quarter of 2008 was still 6.2% but taking everythinginto consideration it appears that the Fourth quarter of 2008 and the First Quarter of 2009 will show nega-tive growth indicating an extremely rapid fall in activity. Two weeks ago the controlled use of ReserveFunds to support business was being mooted as oil prices were hitting the floor week by week. Today, theresult that is being envisaged is that in the next few months this Reserve Fund could lose 40-50% of its va-lue. In his replies to the questions of his fellow citizens Vladimir Putin sought to reassure his audience byadopting the posture of a protector or a kindly uncle as he used to do when he was President. But thingsare not all rosy among the political and economic elite in the corridors of power. One section of VladimirPutins entourage seeks a clash with Dmitry Medvedev whose speech on the struggle against corruptionand reform of the legal system is causing some concern (see page 2 and Russia Intelligence n88 dated No-vember 272008). But for the time being there are no specific signs that the two men are becoming rivals. Itis more a case of a movement of tectonic plates caused by the different concepts of how to manage the cri-sis proposed by the groups around the two men.

For the time being there is a general feeling of every man for himself. According to a former economyminister who has his finger on the pulse of the present situation, the level of private debt to foreign banksis more than $500 million - more than the national debt at the end of 2001 when it had reached a record ofaround $135 billion. And $110 billion of this current debt contracted by private economic entities is due tobe renegotiated in 2009 . . . In these circumstances the pressure on the minister of finance, Alexey Kudrin,to loosen the purse strings is huge. Every day Kudrin receives little bits of paper signed by Sechin, Shu-valov and others pleading with him to save this one or that one. The only choice left to the minister isthe amount, the former minister said. Knowing the links of the oligarchs to political and governmental cir-cles it is not an exaggeration to simply conclude that the process of bolstering the economy through the Vnes-hekonombank and the financial backing it is able to grant to corporations is the subject of intense strugglesfor influence and of networks within the very heart of the governments apparatus.

Even if here and there they are becoming increasingly evident, the real questions will come later. Majorquestions hang over the economic model followed by Vladimir Putin over the last eight years. To bank onthe income from energy and mining, increase State control on these resources but leave the corporationsrevenues and outgoings virtually uncontrolled have proved to be a particularly dangerous way of operating.(Debts are contracted by industrial companies physically operating in Russia, while a part of the liquidityhas taken a complex route through networks of structures based offshore).

Indeed, the State will probably intervene regarding those assets that long have been targeted (see No-rilsk Nickel, page 4). But it is the entire energy and mining sectors that will have to be dramatically revie-wed over the next few months if crude and metal rates do not recover. Top executives of Russian oil compa-nies have warned the government that without massive fiscal aid from the State, oil production will probablyfall by 2-5% in 2009 and even anticipate a 20% drop by 2013. d

Regions & CISBASHKORTORSTANc Interview with Xavier le

Torrivellec (INALCO)

c Moscow region: GovernorGromov on the way out

FINANCIAL CRISIS

Next issue: January 15 2009

2Russia Intelligence N89 j December 15 2008 www.russia-intelligence.fr

RUSSIA INTELLIGENCE Poli t ics & Government

In his November 5 address to the Federal Assembly, DmitryMedvedev insisted heavily on the need to reinforce Russias le-gal system. The Russian president, who, let us not forget, trai-ned as a lawyer, indicated that humanizing the law, as well asthe manner in which it is enforced, was a matter of princi-ple. Medvedevs speech - analyzed extensively in our last is-sue, and in which the western press saw only the remarks hecame out with concerning the deployment of tactical missilesin Kaliningrad in response to the United States military pro-ject in Poland - was in fact a very un-Putinian profession offaith, which, of course, did not escape the attention of the primeminister and his advocates. As the economic crisis puts theMedvedev-Putin tandem to the test (Russia Intelligence, spe-cial edition, November 19 2008), we are observing what couldvery well be the first sign of open defiance on the part of theprime ministers advocates towards the president - and preci-sely in the area he is most specialized in: law.

On December 5, United Russia adopted, on first reading atthe State Duma, a bill that goes directly counter to the wishesexpressed by the head of state. The bill, brought in by Secu-rity Commission Chairman Vladimir Vasilev and his deputy Mi-khail Grishankov, both of whom come from the ranks of thesecurity services, is aimed at considerably reducing the areaof competence of juries. The bill would ban jury trials for casesof terrorism, hostage-taking, espionage, participation in armedgroups or for large- scale public disturbances. The initiatorsof the bill say that several recent incidents in the north Cau-casus prove that juries are subject to strong pressure and arenot capable of pronouncing judgment on such serious matters(Magomed Salikhov, accused of being behind the Buynakskattacks in September 1999 was acquitted and released in Ja-nuary 2006. Absent at his appeals trial, he was killed during a

JUSTICE

Is United Russia against Dmitry Medvedev?cspecial operation by security forces in Makhachkala last No-vember). Juries are blamed, in veiled terms, of being too laxwhereas the crime rate remains high. Of course, the under-lying problem for Vladimir Putins comrades is the fact thatthe prosecutor generals office lacks control over juries, aswas once again highlighted at the start of the trial of the al-leged killers of Anna Politkovskaya. Vasilev and Grishan-kov are therefore proposing that only professional judges,who have the double advantage of obeying orders and han-ding out acquittals parsimoniously, should have jurisdictionover heavy criminal cases.

Unsurprisingly, the bill was adopted in first reading but itgave rise to sharp debates at the Duma. The Communists,Vladimir Zhirinovskys Liberal Democrats and Sergey Miro-novs Fair Russia denounced it in strong terms, and some-times with a hint of irony, as undermining the voice of thepeople quite a rare sight in recent years. The presidentsrepresentative in the Duma, Alexandre Kosopkin, was no-ticeably silent during the debate.

According to information gathered in Moscow by RussiaIntelligence, Vasilev and Grishankovs initiative would appearto be a signal sent by Boris Gryzlov and Putins inner circleto Medvedevs entourage. The principal message is that Uni-ted Russia is the prime ministers party, and, for that matter,has a majority in parliament. Future debates on the bill shouldbe closely monitored. In the meantime, Dmitry Medvedevcontinues to place his men in the state apparatus. On De-cember 8 he appointed one of his former comrades from theLeningrad Law Faculty, Nikolay Vinnichenko, as super-pre-fect in the Ural-Volga federal district, a post that had beenvacant since the death of Pyotr Latyshev. d

At the beginning of December it was revealedthat a special anti-crisis group had beenestablished at the Duma. Outside the Moscowhive, the decision passed relatively unnoticedbut says much about the people whoVladimir Putin places his confidence in thishighly charged period. The aim of the group isto speed up the adoption procedures of thevarious series of measures announced by theKremlin and the White House the seat of theRussian government. This group, under thechairmanship of Yuri Volkov, will coordonatethe activities of the Dumas threecommissions: budget and taxes, bankingactivity and economic policy This old acquaintance of Vladimir Putin hailsfrom Leningrad and like the prime ministerand the president is a graduate of the JdanovState University law faculty. Between 1983 and1991 he worked at the KGB, leaving with thegrade of commander (contrary to informationcirculating in Moscow, although a Germanspeaker, Yuri Volkov however never worked

with Vladimir Putin in Dresden). In 1992-93he set up several Russian-German jointventures (Volchok and Go-Ga) registeredwith the Saint Petersburg City Halls foreigneconomic relations committee that at the timewas under the direction of Vladimir Putin.Then, in1995-96, he worked alongside ViktorIvanov at the City Hall responsible forrelations with special organizations such asthe secret services, police, army, legalauthorities before his appointment as theNumber Two of the Petrogradsky precinctwhere he came across Pavel Koshelev, oneof his former KGB comrades. In the mid-1980sthe latter was one of the most zealousadvisors of Viktor Cherkesov who at thetime, as a member of the KGBs directorate ofstruggle against ideological deviation wastracking down dissidents. In 2000, Yuri Volkovthen joined Viktor Cherkesov at the NorthWest Federal District prefecture.In 2001 Yuri Volkov was called to Moscowwhere he embarked upon a career as a

senator representing successively the Republicof Komi and then the Nenets AutonomousDistrict but was removed from office by theleaders of the two regions for absenteeism,which did not prevent him from continuing hisrise. At the end of 2002, the President of theFederation Council, Sergey Mironov,appointed him as his advisor. Then, in March2003, Yuri Volkov replaced the banker, SergeyVeremeenko as the head of the ExecutiveCommittee of United Russia, one of the pro-President partys main bodies (RussiaIntelligence No. 88 of 27 November 2008). Heoccupied this post for two years before hiselection in September 2005as one of thedeputy speakers of the State Duma, replacingGeorgy Boos, appointed as Governor ofKaliningrad.It can be seen that in this period of crisisVladimir Putin is thus relying more and moreon his circle of faithful followers who havepassed muster via the double filter of the KGBand the Saint Petersburg City Hall. d

Yuri Volkov, Vladimir Putins new Mr Anti-Crisis

3Russia Intelligence N89 j December 15 2008

RUSSIA INTELLIGENCE Poli t ics & Government

www.russia-intelligence.fr

Hardly back from his six-day tour in Latin America in lateNovember, Dmitry Medvedev was in India on December 4 and5 for an official visit. Surrounded by heightened security mea-sures in the wake of the Mumbai attacks, this visit resulted inthe signing of important contracts, notably in the domain ofcivil nuclear power. Yet the impression left behind is of a bi-lateral relationship that has reached its limits. Russia, whichis being subjected to growing competition from the UnitedStates and other western nations - including in its own spe-cialized areas such as the arms market is clearly on the de-fensive in India despite the traditional strategic partnershipstance. The most favorable outcome of the Russian presidentsvisit was the signing of an agreement between Rosatom andthe Indian government on construction of four additional reac-tors on the Kundankulam site, where Atomstroyexport hasbeen building two nuclear units of 1000 megawatts each since2002. Coming a few weeks after the United States Congressapproved the controversial 2005 Indian-American bilateralagreement, this was Russias reminder to Washington, as wellas to Paris, that they will have to reckon with it in Indias ci-vil nuclear power market. The deal is also important from acommercial point of view, as Rosatom will pocket nearly $6billion. At the same time, TVEL, the company specialized insupplying fuel, signed a $700 million contract. Russia and In-dia also finalized a contract worth over one billion dollarsconcerning the delivery of 80 Mi-17 helicopters (a prelimi-nary agreement had been reached in March 2007) and agreed

DIPLOMACY

Russia-India: A strategic partnership runningout of steam

c

to cooperate on space exploration - Moscow plans to send anIndian astronaut into space in 2013, followed in 2015 by a to-tally Indian-manned space mission. Dmitry Medvedev saysthese projects will increase the volume of bilateral trade from$7 billion to $10 billion by 2010 (to be compared with the $100billion in bilateral trade in 2007 between India and the UnitedStates).

But that is as far as the good news goes for Moscows traderelations with India. Military-technical cooperation, after ha-ving been the long-established backbone of bilateral relationssince the Soviet era, is going through a rough patch. The mostsymbolic example of this concerns the Admiral Gorshkov air-craft carrier. It was called the contract of the century in 2004,but it has, since then, turned into a nightmare for the Indiannavy. First, Moscow indicated that it could not deliver the shipuntil 2012, and not 2008 as planned. It then asked for over onebillion dollars in extra payment (Russia Intelligence n60, da-ted 30 August 2008). The matter has not been settled and dis-cussions are due to continue in early 2009 within the contextof the commission on bilateral military-technical cooperation,presided on the Russian side by Sergey Ivanov. Another pro-blem area is the Nerpa nuclear attack submarine. It is a knownfact that the Indian navy has long intended to rent it from Rus-sia, but its enthusiasm may very well have been dampened af-ter the tragic accident that took place on board in early No-vember, off the coast of Vladivostok. d

The process of selecting a successor toAlexis II, the patriarch of Moscow and AllRussia, is open. Alexiy II died on December5 and was buried at the Epiphany Cathedralon December 9 in the presence of manyRussian and foreign personalities (besidesDmitry Medvedev and Vladimir Putin,other personalities present included ViktorYanukovich, Serge Sarkisyan, theEcumenical Patriarch Bartholomew I ofConstantinople and Frances CardinalRoger Etchegaray). The selection process,which brings together bishops, monks andnon-religious representatives within a LocalCouncil (Pomestny Sobor), could last up tosix months. Two top contenders appear tohave emerged. One of them isMetropolitan Kirill of Smolensk andKaliningrad. A Leningrad native in chargeof the external relations department of theMoscow patriarchate, he has a head startsince he was elected Locum Tenens by theHoly Synod on December 10 for thetransitional period (although this does notguarantee election as head of thepatriarchate, as the experience in 1990

proved). Known for his imposing presenceand his eloquence, he was in the vanguardon a major issue in recent years bringingthe Orthodox Church outside of Russia backinto Moscows fold. Moscow observerspoint out, moreover, that Kirill of Smolenskand Kaliningrad played a decisive role thissummer during the commemoration of the1020th anniversary of the Baptism of Russiain Kiev, by convincing PatriarchBartholomew of Constantinople that heshould not recognize a Ukrainian Churchindependent of Moscow. However, twofactors may play against Metropolitan Kirill:his reputation as a religious liberal, or atany rate as an advocate of the OrthodoxChurch opening up to society and theworld, and according to some reportscirculating in Moscow because ofinformation, carefully preserved by hisadversaries, related to his alleged role inthe Moscow Patriarchates import of duty-free cigarettes during the 1990s.The other main contender is MetropolitanKlement of Kaluga and Borovsk, theright-hand man of Alexiy II and his closest

collaborator. He has been in charge, up tillnow, of the general affairs of thepatriarchate and is therefore totally familiarwith the churchs internal bureaucracy,which is obviously important. Mostspecialists in Moscow believe that he willattract the conservative elements in theRussian church. Two other names goingaround are Yuvenaly of Kolomenskoe andFilaret of Minsk and Slutsk. Both are 73years of age and either one may be pulledout of the hat in case there is no clearmajority for either of the two favorites.One consideration has been discreetlyoverlooked in Moscow but could play a keyrole: the position of the authorities. DuringDmitry Medvedevs inauguration on May 7last, Klement was in the first row, alongsideVladimir Putin, whereas Kirill was furtherback a small sign that attracted theattention of observers. At any rate, thechoice of Alexiy IIs successor will haveimportant political implications, whether onthe domestic or diplomatic level, especiallywhen it comes to relations withCatholics. d

Metropolitan Kirill and Metropolitan Klement top contenders tosucceed Alexis II

4Russia Intelligence N89 j December 15 2008 www.russia-intelligence.fr

RUSSIA INTELLIGENCE Business & Networks

It was more-or-less expected that the probably forced re-conciliation between Vladimir Potanin and Oleg Deripaskaregarding the fate of Norilsk Nickel was also going to involvethe States involvement in the matter. On November 25 Po-tanin and Deripaska publicly announced an end to hostili-ties for the control of Norilsk in which the former holds 30%of the equity and the latter around 25% (Russia Intelligencen 88 dated November 27). The agreement concluded bet-ween the two men provides for a 13-member board of direc-tors comprising four seats for Interros (Vladimir Potaninsholding company), four for Rusal executives, one seat formanagement (to be taken by Norilsks general director Vla-dimir Strzhalkovsky) one for the representative of the State,and three seats for independent administrators, two of whichmay be proposed by Interros. As one can see, the balance ofpower is quite subtle and discussions on the board of direc-tors promise to be all the more Florentine as Potanin andDeripaska, the two main players in the intrigue, have agreednot to take seats.

The precise identity of the mining groups administratorswill only be revealed at the specially convened Norilsk sha-reholders meeting on 26 December. It is evident that amongthem will be Potanins main executives at Norilsk and Inter-ros and Deripaskas top personnel at Rusal. But the main in-terest in this election resides in the names of the

independent administrators that come out of the hat. Aswe announced in our most recent issue, it is already accep-ted that Alexandre Voloshin will be one of the independentadministrators and that it appears likely that he will becomechairman of the Norilsk board. Voloshin, aged 55, was one ofthe brains of the Yeltsin period and from 1999 served the pre-sident as head of his administration, a position he kept un-

NORILSK NICKEL

Closing in on Vladimir Potanin cder Vladimir Putin until autumn 2003 when he resigned inprotest at the arrest of Mikhail Khordorkovsky. However,this did not bring about a total break between him and thePresident. Voloshins successor at the Kremlin was noneother than Dmitry Medvedev and the two men are apparentlyvery close. Having maintained a good relationship with theliberals in Yeltsins entourage he is very well acquaintedwith Potanin and Deripaska whom he often came across inthe corridors of the Kremlin. It is useful to note that his can-didacy as the independent chairman of Norilsk is presentedat the same time by both Rusal and Interros, even though itis public knowledge that that he is closer to Deripaska thanto Potanin. It is noteworthy that from 2002 to 2008, Volo-shin was chairman of the board of RAO UES

Two other surprises are expected in the future board. Thefirst is the presence of Mikhail Prokhorov, a former asso-ciate of Potanin and the man behind the declaration of waras it was he who sold his 25% shareholding in Norilsk to OlegDeripaska in exchange for cash and a portfolio of shares inRusal, for which he became one of the representatives onthe board. Potanin opposed his presence on the board butDeripaska had committed to it in writing, this clause beingpart and parcel of the deal with Prokhorov.

Last, but not least, the representative of the Vhnesheko-nombank will be Sergey Chemezov, the head of the newpublic industrial holding company, Rosteknologii, establi-shed on the basis of Rosoboronexport. It is in fact the Vhnes-hekonombank that over the last few weeks loaned Rusal $4.5billion to reimburse a consortium of foreign banks the loanthat was made to Deripaska to purchase Prokhorov. Not onlydoes Chemezov have no position at the bank, he is not a mem-ber of the board of directors either, nor of its monitoringbody whose chairman is none other than

Vladimir Putin. But his presence at Norilsk obviouslyowes nothing to chance. Chemezov has never hidden his in-tention to build a major world-class mining group aroundRusteknologii and recently reiterated these statements evenby evoking the Australian group BHP-Billiton as a model.For several months he has been involved with a certain num-ber of Norilsk assets and, at the same time, it would appearhe intends to take shares in other Russian mining groupssuch as Mechel. And it is known that he will be the partnerof Alisher Usmanov, the boss of Metalloinvest (who is alsoa Norilsk shareholder with a few percent of the equity andwill probably be represented on the board) in launching ope-rations at the Udokan copper deposit that Usmanov acqui-red the right to mine in an auction on 10 September (Rus-sia Intelligence n84 of 25 September).

In what state will Norilsk Nickel be following the strug-gles for power that will undoubtedly take place? As thingsstand at present this is a very difficult question to answer.One thing however seems clear: Vladimir Potanin is no lon-ger really the master of his own house and it is probable thatover the coming months the interests grouped against himwill seek to further marginalize him. d

3 Big contract for Alstom Transport

In its October 9 issue, Russia Intelligences readers wereinformed of the radiant industrial and commercial prospects instore for Alstoms transport division in Russia, after its maincompetitor, Canadas Bombardier, and Transmashholding(TMH) failed in their bid for a tie-up. The French company isthus seeing its large-scale projects beginning to materialize. Itwas confirmed, on December 8, that the Russian railways(RZhD) had chosen Alstom to supply it with 1210 double-deckerpassenger cars by 2015. Production will be carried out throughthe TMH-Alstom DV joint venture set up last October. A newproduction unit will be opened in the region of Tver, whereTMH already has a plant (TMZ). These double-decker cars afirst in Russia will allow an increase in passenger traffic despitecontinuing infrastructure constraints. They will be used on theMoscow-Saint Petersburg and Moscow-Sochi lines.According to a recent study, Russias passenger rolling stock fellby 30% between 1992 and 2006. Of the 24,000 units currentlyin circulation, 10,000 are expected to be put out of service overthe course of the next two years. d

A L E R T

5Russia Intelligence N89 j December 15 2008 www.russia-intelligence.fr

RUSSIA INTELLIGENCE Business & Networks

Russneft: the End of the Road?c

As we wrote in our previous editions, the present finan-cial crisis serves as a screen for a certain number of opera-tions concerning the more-or-less widespread redistributionof assets in Russia. Now, Russneft joins the cases of NorilskNickel (see article page 4) and NPO Saturn (Russia Intelli-gence No. 87 of 6 November 2008). On 3 December the stockexchange investigation committee confirmed that all the pro-tective measures concerning the oil companys shares takenin the summer of 2007 had been lifted. At the end of Novem-ber in a separate move, it was learnt that the trader Glen-core had passed an application to the German anti-trust au-thorities with a view to purchasing at least 25% of the groupscapital. Even if at this stage numerous questions remain obs-cure, movements are underway particularly with regard tothe role of Base Element headed by Oleg Deripaska.

For the record, the issue of Russneft - Russias seventh-ranking oil company with an annual production of around 14million tonnes began in the fall of 2006. Three close colla-borators of Mikhail Gutseriev who then headed the groupwere indicted (Russia Intelligence No. 44 of 1 December2006). The noose then tightened around the oligarch, a na-tive of Ingushetia, in a scenario that brings the Yukos affairto mind. On 30 July 2007 Mikhail Gutseriev resigned at chair-man of Russneft. A few days earlier Base Element, Oleg De-ripaskas holding company, contacted the anti-trust commit-tee informing it of his intention to acquire 100% of the oilcompanys equity. But as from 31 July complications set inwhen, at the request of the Minister of the Interior, a Mos-cow court sequestered the oil companys entire portfolio ofassets for back taxes of 20 billion rubbles (600 million euros).The Sechin-Bogdanchikov clan was suspected of being be-hind this hitch as Russneft seems to be a good target for Ros-neft. Meanwhile, Mikhail Gutseriev whose son lost his lifein a car crash under suspicious circumstances left Russia

(and still has a Russian police arrest warrant out against him).

The continuation of the Russneft saga becomes increasin-gly confused. On 19 September 2007, the general sharehol-ders meeting elected a new board headed by Alexandre Kor-sik, aged 51, formerly of Sibneft and Itera. Moscow sourcesbelieve that initially this was done for Oleg Deripaska who isreputed to have advanced the sum of three billion dollars toGutseriev, apparently though the Sberbank. The appointmentof Alexey Nikonov, formerly of Rusal, to the post of RussneftVice Chairman gives credit to the thesis of direct or indirectcontrol by Oleg Deripaska (Russia Intelligence No. 71 of 14February 2008). But in mid-November 2007, Base Elementmanaging director Gulzhan Moldazhanova stated that thediscussions with a view to purchasing Russneft were conti-nuing with the new owners, which leads one to believe thatOleg Deripaska was perhaps overtaken by others, since whenthe situation does not appear to have shifted.

The suspension of the protective measures added to thetaxation procedures against Russneft being lifted in Octoberopens the way to a change of direction of the group. But ma-jor questions remain unanswered. At present nobody knowswho really controls the group. Gulzhan Moldazhanova restric-ted her comments to saying that Russnefts shares were ina safe place. Meanwhile another Russian source close to thematter added that the famous three billion dollars that Deri-paska claimed to have spent in 2007 in fact were in the sameplace. In any case, it appears that Glencore will retain at least25% of Russneft. In seems that Deripaska intends to take therest of the capital but, in view of the present financial situa-tion, it is difficult to see how he would finance the deal, un-less in effect he paid for it in 2007 - or if Glencore, with whichRusal has a long history of cooperation, advances him thecash.

Electricity: E.On obtains guarantees from Vladimir PutincIn its most recent edition, Russia Intelligence discussed

the uncertainties surrounding the continuation of the reformof the electricity sector. In mid-November Gazprom announ-ced it was engaged in talks with the ministry of Energy regar-ding a reduction in its investment program. Meanwhile, theoil companies had written to Igor Sechin, the Deputy PrimeMinister in charge of energy, asking him to suspend the libe-ralization of the electricity sector because of the financialcrisis. The Russian government wanted to remain firm butthis did not completely reassure foreign investors like ENEL,E.On and Fortum who, we pointed out, would not fail to leapto the defense of their interests. This is precisely what hashappened. Received by Vladimir Putin on 28 November, thehead of E.On, Wulf Bernotat reminded him that in 2007 thegroup had invested 4.6 billion euros to acquire a majoritystake in OGK-4, one of the leading electricity generating com-panies. Emphasizing that the German side would respect allits commitments, he did not beat about the bush: One of themajor parameters that governed our decision to make thenecessary investments . . . was the liberalization of the elec-

tricity market. Obviously it is important that all the objec-tives fixed in terms of liberalization are met including whenconditions are complex. Clearly considering the statementsof Igor Sechin and the Minister of Energy, Sergey Shmatkoinadequate, Wulf Bernotat spoke to Vladimir Putin directlyto obtain guarantees. Mr. Prime Minister, it would be im-portant for us to obtain political support your support on this matter. Support was immediately assured by Vladi-mir Putin: We will achieve all our plans in this sphere.

Apparently fearing it could open Pandoras Box, the Rus-sian government therefore is sticking to this line. All theplanned power stations are expected to be built, the DeputyPrime Minister Igor Shuvalov said at the end of a discussionwith his colleague Igor Sechin on 4 December. Whilst remai-ning firm on his positions the latter however has not closedthe door on the issue of future special dispensations. In anycase, the Gazprom subsidiary Mezhregiongaz has already letit be known that there is a one billion dollars shortfall in mee-ting its commitments for 2009. d

RUSSIA INTELLIGENCE Business & Networks

6Russia Intelligence N89 j December 15 2008 www.russia-intelligence.fr

cc F O C U S

Belgrade approves NISsale to Gazprom Neft

BEHIND THE SCENE

It was with a feeling of a duty well done thatthe large Russian delegation, led by GeorgyPoltavchenko and Alexey Miller, leftBelgrade on December 6. The previous day,Gazproms chief obtained what he had beenseeking in vain since the spring politicalguarantees at the highest level onimplementing the oil component of thebilateral energy agreements signed with greatpomp at the Kremlin last January 25, in thepresence of Boris Tadic and Vladimir Putin(Russia Intelligence n70 dated 31 January2008). One may recall that the liberal wingof the government, centered around SerbianEconomy Minister Mladjan Dinkie,immediately contested Gazprom Neftspurchase of Serbias national hydrocarbonscompany, NIS. Moscows fears that Serbiamight change its mind intensified with thedeparture of its main backer in Belgrade,former Prime Minister Vojislav Kostunica,who lost the early legislative elections of May11 (Russia Intelligence n77 dated 13 may2008). The Serbian parliaments ratificationof the bilateral agreement only partlyreassured the Kremlin. Indeed, the Serbianside continued to campaign to revise theterms of the sale of NIS. In addition, it wasworried over the fact that the launch of theSouth Stream gas pipeline, initiallyscheduled for 2013, had been postponed till2015. The situation was such that nothingcould be taken for granted on the eve ofAlexey Millers visit to Belgrade on December5, even though there was some indicationthat the Serbian side would finally give in onNIS (it was revealed in early December thatthe 2009 budget for the region of Voivodine,where most of the NISs industrial sites arelocated, included the 360 million euros it issupposed to receive in accordance to theterms of the contract with Gazprom).According to statements made by AlexeyMiller following his meeting with Boris Tadic,all the documents resulting from the January25 agreements will be signed before the endof the year, probably during the Serbianpresidents visit to Moscow scheduled forDecember 17 and 18. The terms of the NISagreement s remain unchanged. Gazpromwill pay 400 million euros for NIS and anadditional 500 million in investmentsbetween 2009 and 2012. It should be notedthat this announcement coincided with thefirst session of the Russian-Serbian businessforum in Belgrade. Its Russian co-chairman,Andrey Borodin, is president of the Bank ofMoscow and has close ties to YuriLuzhkov. d

Unless there is a last minute surprise the question surrounding the extension of theCaspian Pipeline (CPC) that has been in suspense for several years logically shouldbe settled on 17 December next. While rivalry between Russia, the western states andChina for control of the hydrocarbon reserves of the Caspian Sea is at full swing, pro-gress on these matters would give a major boost to Moscow and seal closer relationswith Kazakhstan.

For the record, the 1,500km oil pipeline links the Tengiz field in western Kazakhs-tan to the Novorossiysk oil terminal on the Russian side of the Black Sea. The pipe-line, which came into service during the autumn of 2001, has an annual capacity of 32million tonnes and is the only one crossing Russia to export oil that is not under thecontrol of Transneft. The public operator controls only 31% of it (a 24% shareholdingthat it manages for the Russian State since April 2007 and the 7% belonging to the Sul-tanate of Oman purchased by Russia at the end of October - Russia Intelligence No.87 of 6 November 2008). The CPCs other shareholders are the Kazakh governmentwith 19%, Chevron - which operates the Tengiz deposit - with 15%, LUKarco (12.5%),Rosneft Shell Caspian Ventures Ltd and the Mobil Caspian Pipeline Company (eachholding 7.5%), Agip International and BG Overseas Holding Ltd (each with 2%) andOryx, 1.75%. For memory, over the last few years the CPC has been at the heart of thedispute between Moscow, Kazakhstan and most of the private shareholders Russia In-telligence No. 46-47 of 18 January 2007 and No.59 of 12 July 2007). Initially Russiablocked the plans to extend the CPC from 32 million tonnes to 67 million tonnes backedby Astana and the companies mining at Tengiz, linking any agreement to a series ofconditions, especially concerning transit rights. These conditions having been accep-ted by the other members of the CPC, Moscow finally lifted its veto And all the moreso that meanwhile, Kazakhstan has given Moscow guarantees to ensure that a part ofthe supplementary volumes go through the CPC may then be transported onwards toBulgaria by tankers to supply the future oil pipeline that Transneft is to build betweenBurgas and Alexandroupolis (Russia Intelligence No, 52 of 16 March 2007).

Everything seemed to have been settled until BP - which holds 6.6% indirectly throughits shareholdings in joint ventures with Lukarco (a 46% stake with the rest belongingto Lukoil) and Kazakhstan Pipeline Ventures (a 50% holding with the other 50% be-longing to the Kazakh national company KazMunaiGaz) - let it be known it did notagree with the financing arrangements for the plans to extend the Tengiz-Novorossiyskpipeline (evaluated at 2.5 billion dollars). The British side favored resorting to a loanwhile all the other shareholders preferred self-financing arrangements. BP, in fact, isthe only CPC member not extracting oil in a Kazakhstan deposit and not therefore ha-ving the possibility of financing this investment with future reserves.

Over the last few months the tone has risen as the situation becomes more urgent.The technical and financial feasibility studies soon expire and to start procedures againfrom scratch would require more than 18 months. Besides, the other CPC sharehol-ders suspect BP of playing for time and to have ulterior motives in this matter. The Bri-tish group in fact is the operator of the Baku-Ceyhan oil pipeline and would have eve-rything to gain if part of the Kazakh crude oil extracted at Tengiz went through thispipeline whose annual capacity could be increased to 80 or even 100 million tonnesfrom 50 million tonnes now. Infuriated, the other shareholders decided to get on withmatters and a memorandum with or without BP will be signed on 17 Decemberand work will begin in April 2009. Transneft and Chevron, which have the most to losefrom any delay, reserve the right to take legal action against BP in the United Kingdomin the case of persistent delays (at the beginning of the autumn, the head of Russiaspublic operator Nikolay Tokarev, evoked the possibility of constructing another pipe-line parallel to CPC-1). It is however not sure that the situation will come to this. BPhas commenced talks with Lukoil and KazMunaiGaz with a view to its withdrawal fromthe CPC. There are likely to be some difficulties with regard to the price. Russia In-telligence will be watching this question its upcoming issues. d

Caspian Pipeline Consortium: BPnegotiates its way out

7Russia Intelligence N89 j December 15 2008 www.russia-intelligence.fr

RUSSIA INTELLIGENCE Regions & C IS

INTERVIEW WITH XAVIER LE TORRIVELLEC

The balance of powers is not in Bashkir PresidentMurtaza Rakhimovs favor

c

Bashkortostan has been the subject of some talk on Rus-sias regional scene over recent months. Is PresidentMurtaza Rakhimovs succession open?

After ten years of virtual independence under Yeltsin andeight years of progressive expropriation under Putin, the re-gional state of Bashkiria, like many others, is reflecting uponthe conditions needed for its survival. Russian federalism is atype of political arrangement and at the moment the balanceof powers does not appear to be in the Bashkir presidents fa-vor, even though he was confirmed in his post in October 2006.The Bashkir Republic, which gets less media coverage but iseconomically more powerful than Tatarstan, is sought after bymany Moscow investors present there. There is a fierce strug-gle going on to succeed Murtaza Rakhimov (74 years-old) whomay leave his post before the legal end of his term in 2011. Gaz-proms participation in the Bashkir petrochemical complex(BTK, Bashkirskaja Toplivnaja Kompanja), obtained in 2003,has reinforced political pressure. Medvedevs mark is moreapparent in the sidelining, on October 20, 2008, of the power-ful interior minister Rafael Dibaev (who was blamed for the2004 events in Blagoveshchensk. He had held the post since1996) and the nomination on December 1 of a new minister,than in his potential support of Radiy Khabirov (head of thepresidential administration, dismissed by M. Rakhimov in July).Having efficiently fought corruption in Karelia, Igor Alyoshinmay soon initiate procedures against some high-ranking Bash-kir officials. Meanwhile, the resistance is being organizedaround Rail Sarbaev, who was appointed prime minister inApril 2008. He enjoys the administrative resources of thepresident and is expected to succeed him according to whatthe local press says. Sarbaev is also the straw man of Ural Ra-khimov, the presidents son and director of the BK consortium(Bashkirskij Kapital), who embodies Bashkir resistance againstthe Russian stranglehold and who did not hesitate in defyinghis father by backing the April 2005 Bashkir Revolution sothat BK may retain control of BTK.

Do you think it likely that a nationalist movement willemerge in Bashkortostan?

The Bashkir nationalist movement, on which the young Ra-khimov regime based itself in order to legitimize its demandsfor national sovereignty, represented a real trend of publicopinion relayed by several media intellectuals. As in other au-tonomous republics in Russia, the movement lost steam as itbecame more politicized. However, pressure from Moscowcould provoke violent reactions amongst the few local activistgroups that maintain the illusion of popular nationalism (aswitnessed by certain excesses committed by the Union of Bash-kir Youth, Sojuz Bashkirskoj Molodezhi). While Moscow consi-ders that its hold on its territory is in response to its formerdisintegration, Bashkirs elite feels it is an infringement ontheir national integrity. There is the risk that the nationalistdiscourse (of the Bashkirs and the Tatars of Bashkiria) will be-come more radical and may be used politically.

The Bashkirs are in the minority in their republic. Whatsort of relations do they have with the two other largecommunities, the Tatars and the Russians?

As of the last census, taken in 2002, the Bashkirs (29.75%)are more numerous than the Tatars (24.13%) in their epony-mous republic. As Tartar opponents like to remind us, theseresults are due to fraud, committed by the administrators ap-pointed by the Bashkir president (knowing that it is easy tomotivate a kolkhozian who rarely receives his salary in cash).The return to a certain demographic normality gives Bash-kirs reason to legitimize the existence of a national territory.But such excesses reinforce the criticism of their opponents,as well of some foreign observers, against the ethnocraticdictatorship of President Rakhimov. The overriding impres-sion is that relations between the ethnic groups are confron-tational. Fortunately the reality of the matter is much simpler.The relative rise in the number of Bashkirs indicates that eth-nic identification is clearly declining in favor of an identitychoice: I am Bashkir because I live in Bashkiria, because mywife is Bashkir, because I want to be. A faster pace of urba-nization and acculturation to Russian modernity has endedup breaking down traditional communities based on ethnicidentity. Although national languages (Tatar, Bashkir, Udmurt,Chuvash) are still spoken languages in villages nationwide,in urban areas they are limited to the private sphere. Teachingthe Bashkir language, which became obligatory on September1, 2006, has not managed to limit the preference of non-Rus-sian students in Bashkiria for the Russian language. Drop-ping all references to ethnic identity in Russian passports in1999 marked a decisive breakthrough in favor of Russian citi-zenship (Rossijskij).

Certain observers in Moscow are worried that someyoung Muslims in the Volga basin are becoming increasin-gly radical. Are we witnessing the birth in Bashkortostanof a movement based on political Islam?

Contrary to such claims that are aimed at inducing fear onthe cheap, there is a rise and a growing diversity of ideologi-cal solutions available to individuals. We are witnessing, on ageneral level, a way of life that is drawing closer to that of wes-tern nations. Within this cultural homogenization, politicalIslam could be one solution in some socially dismantled envi-ronments such as certain towns undergoing industrial decline.There is the risk that the economic crisis, by casting doubt onwhat the new middle class has gained in terms of social stabi-lity, may reinforce some tendencies to ideological or religiousradicalization. Such subjective choices are all the more im-portant for young urban residents as they appear in a contextwhere the pull of ethnic identity is waning. On August 20 last,the Bashkir security bodies arrested several members of a Bul-garian Jamaat saying they were terrorists linked to Al Qaeda.But knowing the Islamic scholars in charge of examining thedocuments collected leaves one with some doubts as to the ve-racity of the accusations. d

Xavier le Torrivellec is lecturer at the NationalInstitute for Oriental Languages and Civiliza-tions (INALCO, Paris)

Russia Intelligence N89 j December 15 2008 www.russia-intelligence.fr

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In its most recent issue, Russia Intelligence indicated that acertain number of veterans of the regional political scene werein the sights of the Kremlin and that the Russian governmentwas, in particular, considering a merger of the capital, Moscow,and its region, headed since 2000 by Boris Gromov, a retired ge-neral who commanded the Soviet troops in Afghanistan at themoment of their withdrawal in February 1989 and who in Decem-ber 1994 drew attention to himself by taking a position againstthe intervention of the Russian army In Chechnya. Although, atthe end of November, the governor took pains to deny rumors ofhis imminent resignation, his future has been looking increasin-gly bleak for several weeks. Three issues have created difficul-ties for Boris Gromov. The first concerns his former deputy incharge of finance, Alexey Kuznetsov. Responsible for the mana-gement of property belonging to the Moscow region, he had alle-gedly, over the last few years, approved grants of hundreds of hec-tares of land for building to the RIGroup, a company under thecontrol of Zhanna Bullok, Alexey Kuznetsovs wife. A criminalinvestigation for abuse of power was opened by the general pro-secutor who was surprised to discover that the former deputy go-vernor was the holder of a U.S. passport, which is contrary to Rus-sian law. And it was to the United States that Alexey Kuznetsovtook flight less than 24 hours after having handed in his resigna-tion at the end of July. Boris Gromov maintains that he was una-ware of this matter, but there is no doubt that it will be held against

Moscow region: Governor Gromov on the way outc

him. Another sensitive issue is the plan to build a section of theMoscow-Saint Petersburg highway at Khimki. Approved by Bo-ris Gromov in 2006, it involves cutting down dozens of hectaresof theoretically protected forest land on the outskirts of the ca-pital. As in most of the numerous cases throughout the countrythat are similar to this one, the matter could have remained there,except that it was brought to the notice of Dmitry Medvedev. Onthe eve of the presidential election, he was handed a petition si-gned by more than 10,000 Khimki residents. Three days later heordered the Ministries of Transport, Natural Resources and Re-gional Affairs to engage verification procedures. Boris Gromov isalso making headlines in an apparently more neutral domain soccer. Because of the financial crisis that is hitting the Moscowregion very badly (Standard & Poor reduced its rating as of theend of September), the governor announced big cuts in some bud-gets, including sports. No longer able to subsidize Saturn andKhimki, the regions two clubs, he simply announced their mer-ger. After having lost its forest, Khimki now faces the risk of lo-sing its soccer club - to the very great dissatisfaction of thousandsof supporters. Reliable sources believe that it is just a matter ofweeks before Boris Gromov leaves his post. Undoubtedly in or-der to smooth the way, he was decorated at the Kremlin on No-vember 7, his 65th birthday. The name cropping up most often toreplace him is that of Sergey Sobyanin the former Governor ofTyumen, and currently head of the governments administration. d

Things are no longer going well between Alexandre Lukashenkoand the Russian authorities. In previous editions (Russia Intelli-gence No.82 of 28 August 2008 and No.86 of 6 November 2008), weanalysed the mounting misunderstandings and grievances sincethe summer and tension now seems to be at a height. The latestincident is the suspension sine die of the session of the SupremeState Council (Vyshchy Gossovet), the highest authority in theUnion State of Russia and Belarus. All the more attention is gi-ven to this decision as this summit meeting, originally set for 3 No-vember, had already been put off until the beginning of Decem-ber.

The versions differ as to the reasons why the new meeting willnot take place between Moscow and Minsk. Belarus wanted thesummit to be an important bilateral event with the signature ofthe constitutional document of the Union State of Russia and Be-larus at its center. It would appear that the Kremlins excess ofcaution convinced Alexandre Lukashenko of the uselessness oftravelling to the Russian capital. This version is completely rejec-ted by Moscow where it is considered that the Belarus leadershipis seeking every possible pretext for not making progress in thismatter. It is well known that Minsks position on the question ofthe recognition of Abkhazia and South Ossetia was not at all well

Water in the gas between Moscow and Minskcreceived in the Kremlin and, all the more so that at the end of No-vember Russia unfroze the first instalment of its two billion dol-lar stabilization loan promised at the beginning of the autumn.More fundamentally, Alexandre Lukashenkos overtures to the west(the most recent being the return of Narodnaya Volya and NashaNiva, two opposition newspapers until now printed in Lithuaniato Belarus newsstands) are creating some trouble in the Kremlin.The main consequence of putting off the 1 December meeting isthe non-signature of the bilateral agreement on the unification ofthe anti-aircraft defense system.

As far as one can see, the situation between Minsk and Mos-cow is unlikely to be resolved in the coming weeks. A recent sta-tement by Rosselkhoznador, the health control body for agricultu-ral products in Russia, pinpointing Belaruss deficiencies are athinly veiled threat of trade sanctions. In a separate move, it hasbeen learnt that on 26 November Vladimir Putin signed a direc-tive concerning the launch of the project for the BTS-2 oil pipe-line between Unechi and Ust-Luga (Russia Intelligence No.80 of3 July 2008). The pipelines anticipated annual capacity is 50 mil-lion tonnes with the first section theoretically entering service atthe end of 2012 - something that would deprive Belarus of the flowsof Russian crude oil transiting through its territory. d