Fri, Jan 20, 2006 - Page 9 News List

Russia turning to entrapment with its satellite states

The Kremlin is using Gazprom and other monopolies to take over key industries and institutions in the former Soviet republics

By Vladimer Papava and Frederick Starr

Russia's use of natural gas to exert economic and political pressure on Ukraine has caused grave concern in the West. But Russia's pressure on Georgia has been even heavier -- and has scarcely been noticed.

In Georgia, as in Ukraine, Russian President Vladimir Putin seeks to implement the doctrine of a "liberal empire" put forward in October 2003 by Anatoli Chubais, the chairman of United Energy System (RAO UES), Russia's energy monopoly. According to Chubais, Russia will never find a place in either NATO or the EU, so it must create an alternative to both, a new empire of its own.

It can do this by using its huge and rich public-private monopolies to take over the key industries and economic institutions of former Soviet republics, thereby laying the groundwork for political domination. The resulting empire will be liberal, according to Chubais's definition, because it can be built with money rather than tanks.

Russia's first step in fulfilling this plan in the South Caucasus was directed against Armenia, its strategic partner in the region. Seizing on a US$93 million debt that Armenia owed to Russia, the Putin administration demanded payment in either cash or equity in Armenia's major industries. Cash-strapped Armenia had no alternative but to hand over the shares, which it did in a 2002 treaty candidly titled "Possessions in Exchange for Debt" -- a reminder of the infamous "debt-for-equity" swaps of the Yeltsin years (another Chubais invention), which spawned Russia's oligarchs.

Russia's second step in rebuilding its empire in the Caucasus is to unite itself and Armenia in a single economic zone. Because Georgia stands directly in the geographical path to realizing this goal, Russia had to deal with it first. In the 1990s, it used crude political pressure to bring Georgia into line, but it shifted to economic leverage in 2003. When US-based AES Silk Road failed to transform Georgia's energy system, Chubais's RAO UES bought AES's holdings and other assets that amounted to 75 percent of the country's electricity network.

Then came Georgia's "Rose Revolution." Many state-owned firms were privatized for 10 times the sums yielded in asset sales under the previous government of Edvard Shevardnadze. But an utter lack of transparency allowed Russian companies, and their subsidiaries registered in third countries, to snap up most of the new offerings. Typical was the Russian holding company Promyslennye Investory (Industrial Investors), which managed to get a major gold mine and then half of a plant producing gold alloys.

Russia's main foreign policy instrument in Georgia is Gazprom, the state-controlled gas monopoly. Gazprom's aim is to control not only the gas industry in Georgia, but also the only pipeline that feeds Russian gas to both Georgia and Armenia. Had the US not intervened last year with US$49.5 million to rehabilitate the pipeline, it would have ended up in Gazprom's hands.

Even then, pressure from Moscow may result in joint Russian-Georgian control of the pipeline, if not its outright sale to Gazprom. The Georgian government, without clear support from the West, may yet agree to such a deal, something that Moldova, which saw its gas cut off on Jan. 1, has just done.

Gazprom is not the only state entity carrying out Russian policy in the South Caucasus. In 2004, Russia's state-owned Vneshtorgbank acquired a controlling stake in Armenia's Armsberbank. The following year, Vneshtorgbank purchased a controlling stake in the privatized United Georgian Bank, Georgia's third largest. In effect, Vneshtorgbank renationalized United Georgian Bank, but the new owner was the Russian state.

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