Volume 7 Number 3

Summer 1998

Constitution Watch
     A country-by-country update on constitutional politics in Eastern Europe and the ex-USSR

Russia
     With the dismissal of the semi-independent prime minister, Viktor Chernomyrdin, President Boris Yeltsin lost his political buffer and has now become directly responsible for the policy failures of his government. During the summer, meltdown of the Russian economy presented Prime Minister Sergei Kiriyenko’s new cabinet, and, therefore, Yeltsin himself, with a grave and complex challenge. As the central bank allowed interest rates to soar, in a desperate attempt to defend the value of the ruble, government officials struggled with IMF officials, on the one hand, and the Duma (the lower house of the Federal Assembly), on the other. An IMF bailout was designed to calm foreign investors, and Yeltsin utilized his decree powers to circumvent parliamentary opposition, but by mid-August, stock and bond markets were again near collapse.

     The crisis began in mid-May, as Russian stock and bond markets began sliding in response to the continuing economic crisis in Asia. By May 18, the Russian stock market was down over 40 percent from the start of the year, and rumors of a devaluation of the ruble were scaring international investors away from Russia’s government-securities market. Since Russian citizens and investors continue to invest in foreign currency rather than government securities, the Russian government has relied on foreign investors to purchase about a third of its ruble-denominated government securities. When devaluation fears began to scare these investors away, the central bank was forced to push up interest rates to keep this debt rolled over. The central bank’s reserves, already depleted by the run on the ruble in the fall of 1997, decreased to below $10 billion (not counting gold reserves). Devaluation of the ruble—which would also devalue the ruble-denominated debt—appeared to be the only way the government could avoid default. The private banks holding government debt naturally warned that “fascism” would arise were the ruble to be devalued. But a decision to devalue seems to have been made just as EECR goes to press.

     On May 18, in a dramatic attempt to break the downward spiral of investor expectations, the central bank pushed interest rates for interbank lending to 50 percent, up from 30 percent. The move only deepened the panic, and stock and bond markets plummeted. The following week, on May 28, the central bank again hiked interest rates—this time to a staggering 150 percent. Yields on government securities topped 80 percent for notes of extremely short duration. Yeltsin declared unequivocally that the ruble would not be devalued, but despite these moves, the dwindling level of foreign reserves kept the possibility quite real. Devaluation posed a grave threat to the commercial banking system, which had accumulated large amounts of foreign debt during the 1996–97 rally of the Russian stock market. At the end of May, Moody’s downgraded Russia’s sovereign-debt rating as well as the credit ratings for nine of Russia’s largest banks.

     The roots of the crisis lie in concern over the ruble’s strength, rather than fear of an imminent Russian default on its debt. On June 18, Russia was able to float successfully $2.5 billion in Eurobonds, just one day after the Finance Ministry was forced to cancel two auctions for domestic treasury bills. If the government could succeed in transferring its large load of short-term ruble debt to longer-term foreign debt, it believed it would drastically lower interest payments on its debt. At the same time, though, such a debt restructuring would shift the costs of any ruble devaluation from foreign investors to the government itself. By early August, however, fears of a default had taken hold, and interest rates on the external debt had also begun to soar.

     An additional catalyst feeding the crisis was the global decline in oil prices. Russian oil exporters were hit hard by the slump, and their financial woes made it even less likely that the government would be able to collect tax debts owed by the oil industry. Equally troubling, the oil glut reduced the value of the government’s holdings in privatized oil companies. In May, the government failed to attract even a single bidder for the sale of Rosneft, the last oil company still entirely in the state’s hands. The Rosneft debacle represented a major loss of anticipated income for the government, and was one of the clearest early signs of the collapse of investor confidence in Russian markets.

     By early June, the Kiriyenko government made it clear that it was pinning its hopes on a sizable stabilization fund from the IMF and foreign governments to shore up the value of the ruble and permit large-scale restructuring of foreign debt. On June 17, Anatoly Chubais returned to the government as its chief negotiator with the IMF. Chubais had been dismissed as deputy prime minister in March, and currently heads Russia’s national power monopoly, United Energy Systems (UES). Chubais immediately announced that Russia would seek $10–15 billion in financing from the IMF, even though the fund was delaying its disbursement of a $670 million loan installment, citing concerns about Russia’s poor tax collection rates and high budget deficit. On July 10, with an avalanche of short-term debt coming due and reserves dwindling, Yeltsin forced the hand of IMF negotiators in Moscow by telephoning a slew of Western leaders, including Bill Clinton, Tony Blair, Jacques Chirac, and Helmut Kohl, and appealing directly for a massive bailout. Yeltsin also telephoned Michel Camdessus, the IMF’s managing director, and assured him that he would implement a wide-ranging package of anticrisis measures. On July 13, the IMF announced that it would extend $11.2 billion in new loans to Russia in 1998 and 1999, as part of a $22.6 billion package that also includes credits from other Western governments and a large syndicated loan.

     Armed with these supplemental reserves, the government promptly announced that it would swap domestic treasury bills maturing within the next year for long-term dollar-denominated Eurobonds. Deputy Finance Minister Mikhail Kasyanov announced that the swap, which included over $4 billion in short-term government securities, would buy Russia “four or five months of breathing space.”

     The full terms of the IMF loans were not immediately disclosed, leading some newspapers to complain that Russia had made too many concessions to Western demands. A central requirement of the bailout, however, was certainly the enactment of a package of economic reforms that had long been stalled in the Duma. On June 23, Kiriyenko announced the details of a comprehensive plan to cut the state budget and raise additional revenues, aimed at bringing Russia’s budget deficit below 3 percent of GDP. The plan, which was quickly presented to the Duma in the form of 20 draft laws, included a new comprehensive tax code, provisions for new sales and land taxes, widespread layoffs of government employees, confiscation of debtors’ property to pay back taxes, and an extensive devolution of social-welfare spending to the regional level.

     The Duma scheduled a special session on July 15–17 to consider the government’s proposals. The Federation Council (the upper house of the Federal Assembly) had already passed a resolution, on July 10, to support the program “in principle” (since the Duma had not yet acted on the draft laws, the upper house could not consider them directly), though the Council also included a call for greater efforts to “revive industrial production.” This Keynsian theme became a centerpiece of the opposition to the austerity measures, as regional governors urged the federal government simply to print more money to stimulate the economy. Yeltsin quickly resorted to his familiar blend of threats and enticements, as he had in March and April when attempting to secure Kiriyenko’s confirmation in the Duma. On the eve of the special session, he told parliamentary leaders that their prompt passage of the program was essential, since he could only implement part of the package by decree. At the same time, Yeltsin added the curious warning (and/or reassurance) that “there will be no extraordinary elections, no coups, no dissolution of the Duma, and no changes in the Constitution.” The vague specter of “coups” thus hung over the Duma chamber as it convened on July 15.

     The session handed Yeltsin a mixed result. Certain laws, like a new budget code, were approved. Others, including a sales tax to be levied by regional authorities, were approved only after several attempts. Still other measures, including a sharp increase in the land tax, were rejected. On July 19, Yeltsin made good on his long-standing threat to impose certain measures by decree if the Duma failed to back them. He issued a decree unilaterally raising the tax on land, and Kiriyenko announced that the government was also unilaterally raising import duties and limiting the range of goods exempted from the standard rates for value-added tax (VAT). Several deputies complained that the tax decrees exceeded executive authority and were unconstitutional. Communist deputy Viktor Ilyukhin claimed the decrees provided additional grounds for impeachment of the president and would be considered, along with other charges, when a special commission on impeachment convened at the end of July.

     In late July, the Duma agreed to meet for another special session in August to consider a further package of tax and budget measures. Chief among these is a proposal to give the government the power to hike unilaterally tax rates by up to 10 percent, provided the Duma does not repeal the measure within 10 days. Duma Speaker Gennady Seleznev of the Communist Party of the Russian Federation (CPRF) called the proposal “unacceptable,” and a leading newspaper, Nezavisimaya gazeta, called it an “attempted constitutional coup.” Stock and bond markets, faced with these new uncertainties about the fate of economic reforms in the Duma, plummeted, in late July, back to the lows they had hit before the IMF bailout was announced. By mid-August, as Duma leaders threatened to postpone the special session, uncertainties over the fate of the reform package drove short-term interest rates over 200 percent and drove the stock exchange to three-year lows amid extremely thin trading.

     Beyond these new austerity measures imposed through decree and legislation, on May 29, Boris Fedorov, a former finance minister, was appointed head of the State Tax Service. Fedorov promptly announced that he would target 1000 prominent Russians for special audits to enforce tax compliance. He also launched a broad purge of the tax service, coming on the heels of the high-profile arrests of top officials at the State Statistical Agency on charges of corruption. Fedorov even announced that he favored public “show trials” for tax evaders.

     Beyond the bluster of its new tax chief, the government’s tangible steps to boost tax collections produced sharp confrontations with key actors in the oil and gas sectors. Beginning in late June, the government began restricting pipeline access to oil companies with large tax bills. Mikail Khodarkovski, head of the large Yukos oil firm, charged that the new policy was implemented merely to comply with IMF demands. The government then announced plans to seize the assets of four large firms with significant tax liabilities.

     The most dramatic move to crack down on tax debtors came when Fedorov canceled an earlier agreement permitting the natural-gas monopoly Gazprom to make reduced tax payments to the government on a prearranged schedule. On July 2, Kiriyenko announced that the government would begin seizing property belonging to Gazprom, after the company paid just 20 percent of its tax liability for June. Kiriyenko also announced that he planned to revoke the government’s December 1997 agreement allowing Gazprom executives to control the government’s 35 percent voting block of state-owned shares. The following day, Yeltsin himself told Gazprom chief executive Rem Vyakhirev that Gazprom’s tax debt needed to be paid to break the “circle of nonpayments” afflicting the economy. As opposition leaders in the Duma rushed to defend Gazprom, the government announced that it would give the gas giant until August 1 before taking action against it. As July progressed, Gazprom began shutting off supplies to nonpaying customers in several regions. Gazprom’s total tax arrears are estimated to be around $2 billion.

     The interruption of fuel supplies to certain areas was just one of the ways in which the financial crisis was creating hardships for some of the poorest segments of society. Throughout the spring and early summer, unpaid coal miners in Kemerovo Oblast blocked all traffic on the Trans-Siberian railway to demand full payment of their wages. On May 24, the miners lifted the blockade after the government agreed to a special aid package, but the protests resumed in early July after miners complained that the government was still ignoring its promises. Kemerovo governor, Aman Tuleev, warned of a “social explosion” if wages were not paid, though Deputy Prime Minister Boris Nemtsov claimed that the blockade was an “insulting” response to the government’s efforts to support the coal industry. Wage arrears were also the driving factor behind any number of other labor protests around the country. In June, for instance, miners from Komi marched through Moscow to demand wages, and, in July, workers from defense industries also staged a rally to protest wage arrears. Teachers and students also held rallies around the country protesting nonpayment of wages and stipends in the education sector.

     Against this backdrop of rising labor tensions, the financial “oligarchs” in control of Russia’s largest banks and holding companies used the financial crisis to institutionalize their access to power at the highest levels. In June, ten leading bankers and industrialists threw their weight behind the government’s austerity program and were rewarded with the promise of a new “advisory council” of business leaders to advise the government on economic policy. Deputy Prime Minister Oleg Sysuev felt compelled to assure observers that the council would not “replace” the cabinet as a policy organ. Another instance of Yeltsin’s capacity to co-opt his critics appeared in the figure of Yuri Masliukov. A member of the CPRF Central Committee and former head of Gosplan under Mikhail Gorbachev, Masliukov defied party discipline and on July 23 agreed to join the cabinet as Industry and Trade Minister.

     Beyond the anticrisis package, little progress was made in other important legislation. The president continued to oppose a parliamentary version of a new Land Code that would place restrictions on the right to buy and sell land. On July 16, a new draft code by Yeltsin, with some limitations on the right to buy and sell farmland, was rejected by the Duma three times, ultimately by a single vote. The Duma also passed an amendment to the important production-sharing law that would place limits on the amount of natural resources within Russia that may be covered by production-sharing agreements (such agreements permit foreign firms to invest in resource-extraction industries in return for a share of the extracted resource in the future). The revised law would also require production-sharing agreements to receive the approval of regional legislatures in addition to federal agencies—a requirement that could prove onerous given the strength of Communist factions in many of these bodies. On another front, the Duma also passed a law outlining a medical-review procedure for determining the president’s fitness to serve, but that measure was rejected by the Federation Council, on July 9. Controversial laws on trophy art and the parliamentary-electoral law (see the article by Joseph Middleton in this issue) continued to await action by the Constitutional Court.

     In politics between the center and the regions, on May 20, Yeltsin signed five new power-sharing treaties with various governments (the Amur, Voronezh, Ivanovo, and Kostroma oblasts, and the Marii-El Republic). As a result, more than half of the 89 federal “subjects” now have relations with the Kremlin partially governed by bilateral treaties. On June 16, the city of Moscow also signed its own bilateral treaty with the federal government, resolving a long-standing dispute over federal compensation to the city for serving as the national capital. Despite these signs of greater accord, there were also continuing areas of tension over a proper division of responsibilities between federal and regional governments. In May, Belarus signed an economic-cooperation treaty with an association of 12 Russian regions, annoying Foreign Ministry officials who have been trying to restrict foreign-policy making at the subnational level. Also in May, the Constitutional Court ordered the Komi Republic to stop its practice of permitting officials to serve in the legislative and executive branches simultaneously.

     In Kalmykia, the murder on June 10 of a prominent newspaper editor, Larisa Yudina, triggered a national wave of outrage. Yudina was the editor-in-chief of Sovetskaya Kalmykiya and a prominent critic of Kalmykian president Kirsan Ilyumzhinov. The suspects arrested for her murder were linked to the president’s entourage. Facing mounting criticism from local and national observers, Ilyumzhinov announced he was considering a run for the Russian presidency in the elections scheduled for 2000.

back