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S T R AT E G I C F O R E C A S T I N G , I N C .STRATFOR is the world’s leading private intelligence firm providing corporations, governments and individuals with intelligence and analysis to anticipate the political, economic, and security issues vital to their interests. Armed with powerful intelligence-gathering capabilities and working in close collaboration with STRATFOR’s experienced team of professionals, our clients are better able to protect their assets, diminish risk, and increase opportunities to compete in the global market.

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ii© 2005 Strategic Forecasting, Inc.

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A b o u t S t r at f o r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i i i

F or m e r S o v i e t Un i on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

E x e c u t i v e S u m m a r y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 J u n e : T h e M o n t h i n R e v i e w . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 K e y I s s u e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 T h e M o n t h A h e a d : F o r e c a s t s f o r J u l y . . . . . . . . . . . . . . . . . . . . . 1 1 T r e n d s , S t a t s a n d I n d i c a t o r s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 N o t e w o r t h y E v e n t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9

S t r at f o r S e r v i c e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 8

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STRATFOR is the world’s leading private intelligence firm providing corporations, governments and individuals with geopolitical intelligence and analysis to manage risk and anticipate the political, economic and security issues vital to their interests. Armed with powerful intelligence-gathering capabilities and working in close collaboration with STRATFOR’s expert team of analysts, clients are better able to protect their assets, diminish risk, compete in the global market and increase opportunities. STRATFOR has an unparalleled record for accuracy and clarity in its forecasts and has been called “the Shadow CIA” by Barron’s.

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une saw Russia proactively reaching out to potential allies as Russian President Vladimir Putin began steeling his country against the United States’ ongoing geopolitical push into the former Soviet Union (FSU). Unrest became a major issue in Central Asia, particularly in the Fergana Valley countries, while outside players continued to jockey for position in the race for influence in the Caucasus. July will see Russia and China forge a more substantial

partnership as Putin and Chinese President Hu Jintao meet in Moscow; the upcoming Shanghai Cooperation Organization summit will give the two Asian giants the chance to increase their cooperation, with help from the organization’s four Central Asian members. These meetings will yield far more benefits for Russia than will the G-8 Summit in early July. Instability within Russia and in the Fergana Valley will continue to rise in July, as will the militarization of the Caspian region.

T h i s M o n t h ’ s H i g h l i g h t s : I n E v e r y I s s u e : • Russia: Energy and the Economy • Trends, Stats and Indicators • Unrest in Central Asia • Noteworthy Events • Competition in the Caucasus

J


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n general, our expectations for the former Soviet Union (FSU) in June came to pass. Internal competition increased in Russia, while Moscow showed an increasing readiness to challenge the United States indirectly — largely by moving closer to allies to the south and east. The Russian offensive against militants in the North Caucasus continued, while instability and geopolitical competition rose in both the South Caucasus and Central Asia

as some FSU governments, such as Uzbekistan, showed willingness to stand up to the U.S. geopolitical push into the FSU. The overall trend, then, was toward increasing instability throughout the region and intensifying competition for influence with Russia, China, the United States and Iran as the leading players.

Economic issues became more of a focus in June, with important developments in the Russian energy sector — and with several of the region’s economies, including Russia’s, showing signs of increasing stress. Economic concerns will force Russian President Vladimir Putin to make difficult choices regarding reforms and the foreign investment that he acknowledges the country needs to reverse its accelerating economic decline. This will contribute to internal competition within Russia’s power circles in July.

As Putin tries to decide how to address internal issues, he will be busy extending his efforts to resist U.S. influence — starting immediately with July’s most important event, a two-day summit with Chinese President Hu Jintao in Moscow. During the summit, the two countries will continue steadily developing closer relations as both seek to restrain the United States as much as possible without a direct confrontation.

The Sino-Russian summit will be followed by a summit of the leaders of the six members of the Shanghai Cooperation Organization (SCO) — Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. The United States is pushing aggressively to bring all SCO members further un-der its influence, and this will give the members a firm reason to cooperate concretely through the SCO — resisting Washington in a way the organization has not been able to achieve since its inception.

Another key development will be more U.S. concern about the new regimes it has helped to put in place — in Georgia and Ukraine in particular — as their increasingly obvious autocratic tendencies lead to rising domestic instability. The United States, however, will not stop its geopolitical offensive in July as it concentrates more on Azerbaijan’s November elections. This month it will, nonetheless, find itself competing for influence against other players in Central Asia and the South Caucasus, where instability will continue to rise.

The Caspian Sea region will also see increased competition in July, as well as the early indications of a developing arms race among the littoral states. Another key July event, the G-8 summit, will offer few tangible results for Russia and no improvement in relations with Washington.

IE x e c u t i v e S u m m a r y


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J u n e : T h e M o n t h i n R e v i e w

R u s s i a : A N e w G a z p r o mThe Yukos affair essentially came to a close at the end of May with the sentencing of Mikhail Khodorkovsky, and the two Russian firms that benefited most directly from the case — Gazprom and Rosneft — moved on to new business. The Kremlin used shares of state-owned Rosneft — which won Yukos crown jewel subsidiary Yuganskneftegaz in the Yukos affair — to finalize the terms of its $7.15 billion purchase of a 10.74 percent stake of natural gas giant Gazprom.

Gazprom CEO Alexei Miller said that, with the government establishing majority control over the company, rules restricting the sale of Gazprom shares to foreign investors would be lifted. This will bring much-needed foreign investment into the firm while guaranteeing that it remains under the Russian government’s control. Miller said he would use the firm’s newfound cash flows to purchase more oil and gas assets — with an emphasis on the former — both inside and outside Russia.

At the end of May, Russian President Vladimir Putin said that all of Gazprom’s former Soviet Union (FSU) customers, except Belarus, should be required to pay market prices for natural gas. Putin argued that since those countries are striving to integrate their economies with Europe, or have already done so, they should pay the same prices for gas as Europe. Essentially, the Kremlin looked around and realized that former Soviet republics such as the Baltics, Ukraine, Moldova and Georgia, who have received discounted prices since gaining independence, were no longer reciprocating the favor politically as they have all tilted decisively toward the West and away from Russia.

The company announced at the end of June that it would raise prices to market levels, likely starting in 2006. This will have a tangible effect on all these countries’ economies, though the Baltic states are better-equipped than the others to absorb the blow, given their more stable economies and the development assistance they receive from the European Union.

Looser restrictions will bring foreign investment into Gazprom while keeping it under government control.

Gazprom will raise prices in the FSU to market levels.


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T h e S o u t h C a u c a s u s : P i p e l i n e T h r e a t s The Baku-Tbilisi-Ceyhan (BTC) pipeline was finally inaugurated in late May in Baku with great fanfare. It did not take long, however, for the honeymoon to come to an end.

In mid-June, the Kurdistan Workers’ Party, which ended a cease-fire and renewed its fight for independence against Turkey in mid-2004, announced its intentions to attack the pipeline. The pipeline’s route was planned to avoid Turkey’s volatile southeast as much as possible, but with 667 miles of pipeline running through the country, defending it against a concerted sabotage effort would be very difficult.

Attacks on the BTC would not only be a blow to the Turkish government, but would call into question the viability of the east-west energy corridor the United States is trying to create to link Central Asian and Caspian energy resources to markets in the West. The BTC is a test case for the corridor. If it proves insecure or unreliable, Central Asian and Caspian countries could turn to Russia or Iran as alternative means of getting their resources to the West — which is exactly what the United States hopes to avoid.

Elsewhere in the South Caucasus, geopolitical competition continued to rise. Armenia moved closer to Moscow in June — the clearest example being movements of arms and military equipment to Moscow’s base in Armenia from the bases in Georgia which Russia agreed to close. Meanwhile, the United States and Iran continued to compete for influence over Azerbaijan, with the United States trying to establish a permanent base there, and Iran doing its best to convince Baku to deny Washington.

T h e F e r g a n a Va l l e y : R i s i n g I n s t a b i l i t yThe Fergana Valley states — Kyrgyzstan, Uzbekistan and Tajikistan — all suffered growing instability in June. In the Kyrgyz capital of Bishkek, several hundred demonstrators stormed the presidential administration building in mid-June — the second time in three months that such a small number has overtaken the seat of executive power. Security forces responded quickly,

The BTC is a test case for a larger U.S.-backed energy corridor from Central Asia to Western markets.

If the BTC fails, Central Asian producers could turn to Russia or Iran.


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regaining control of the building within two hours, but the protesters fled only to return in larger numbers — estimates ranged from 1,500 to 5,000 — and demanded acting President Kurmanbek Bakiyev’s resignation. The demonstrators were eventually dispersed with water cannons.

Bakiyev said that close associates of ousted President Askar Akayev had paid all of the protesters for their participation, and that the demonstration was an effort to topple the new government to pave the way for Akayev’s return. Akayev denied any involvement. What is most notable is that the security forces responded quickly and effectively, indicating that, for now, the government has the cohesion and will to defend its position — two critical intangibles lacking when Akayev was toppled under similar conditions. This outcome, however, does not guarantee against future turbulence; various sources in Kyrgyzstan report that a power struggle among different clans, largely unseen but sometimes open, is in full swing.

For now, the Krygyz government has the cohesion and will to defend itself against internal threats.


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Similar developments are at nascent stages in Tajikistan, where opposition to President Emomali Rakhmonov is intensifying both outside and inside the government. Rakhmonov’s increasing concentration of power and wealth in the hands of his own family and relatives appears to be fomenting discontent within elite circles. Drug trafficking shows a growing influence on the government, and competition over turf and revenues could lead to violence.

The opposition also appears to be growing more radical in response to Rakhmonov’s consolidation of power in late February’s parliamentary elections — widely considered to have been fraudulent. The elections saw Rakhmonov’s party win more than a two-thirds majority of seats. Since then, he has systematically pursued and jailed opposition leaders, likely in preparation for presidential elections scheduled for 2006. A bomb went off in front of the country’s Emergencies Ministry in June causing several casualties — the second such bombing at the ministry since shortly before the elections, and likely the work of opposition groups.

June saw Uzbekistan take dramatic steps away from the West, as the fallout from the uprising in Andijan continued to affect relations. Europe and the United States have strongly pressed demands for an independent international investigation, which the Uzbeks have refused to allow. The U.S. State Department in particular has offered strong criticism of Uzbek President Islam Karimov’s regime and the lack of democracy in the country.

Uzbekistan responded by sponsoring a pro-government, anti-U.S. rally, having state-run media initiate an all-out offensive criticizing the West for interfering in domestic affairs, and denying visa renewals to many Western expatriates in the country — Americans in particular. Most significantly, the Uzbek government tightened restrictions imposed three months ago — in particular banning nighttime flights — at the Khanabad-Karshi air base, which is critical to supporting U.S. military and reconstruction efforts in Afghanistan. This forced the Pentagon to shift some operations to the Manas base in Kyrgyzstan and to move some of its planes to its base at Bagram in Afghanistan. This shift has not significantly hampered operations, but the changes have complicated logistics and thereby added considerable expense.

The opposition in Tajikistan appears to be growing more radical.

Uzbekistan is taking dramatic steps away from the West.


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Washington responded in mid-June by inviting Muhammad Solih, exiled leader of the banned Erk (Freedom) opposition party, to Washington to meet with high-level officials in the last few days of June. This is a direct challenge to Karimov, who sees the democratic, moderate Islamist Erk party as a very real threat given its appeal among much of the Uzbek population. In response, Karimov went to Russia, where both the Uzbeks and Russians said they have evidence that jihadist elements from Pakistan and Afghanistan started the violence in Andijan and that the Uzbek government acted correctly.

K e y I s s u e s

C o o p e r a t i o n A g a i n s t U . S . I n f l u e n c eWith the jihadist war now a less-pressing concern for Washington, U.S. President George W. Bush’s administration has returned to the more traditional geopolitical concerns of trying to weaken Russia and China, which had been its top projects before Sept. 11, 2001. The United States has been pushing a geopolitical offensive in the former Soviet Union — and now inside Russia itself — to put the country on geopolitical life support. Washington has also begun to attack China’s economic strength with more aggressive demands for a revaluation of the yuan, a move that could push China’s enormously over-leveraged financial system over the edge.

Compounding these concerns was the collapse of the European Union (EU) as a geopolitical entity in June following the French and Dutch rejections of the draft EU constitution. Both Russia and China were counting on a unified EU to help restrain U.S. power, but now that the idea of Europe has been shat-tered, both need to look for other options. For each, the other is the best alternative.

Expectations for concrete results of Chinese President Hu Jintao’s meeting with Putin in Moscow are high, as China and Russia realize that they must begin working together now if they are to stand a chance against U.S. global influence. Sources in the Kremlin report that the two sides were expected to sign a series of important agreements July 1.

Washington has returned to its traditional goal of trying to weaken Russia and China.

China and Russia realize that they must begin working together now.


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These call for Russia to sell China more advanced weapons systems, for a renewed Russian pledge to build a long-awaited oil pipeline from Western Siberia to northwest China, for China to promise $12 billion of foreign direct investment in Russia by 2020, and for the two countries to increase bilateral trade to $60 billion by 2010 from $21 billion in 2004. The two will also promise to expand trade beyond the spheres of energy and arms.

These agreements continue a very steady and clearly discernible trend toward closer Sino-Russian ties. That trend continues at the July 5 summit of the Shanghai Cooperation Organization (SCO) in the Kazakh capital, Astana. The heads of state of all six SCO members — China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan — are attending the summit. The SCO has been little more than a regional security talking shop since its creation in 2001, but the July 5 meeting is likely to see the grouping become a far more significant organization.

With the United States politically pressuring the regimes of all six SCO countries — possibly excepting Kyrgyzstan — and aggressively seeking to expand its influence in Central Asia, the SCO’s members have a specific reason for unified action for the first time in the existence of the organization. This collectively perceived need for self-defense — and the fact that the United States has already made considerable progress in increasing its regional influence — should push the SCO members to act quickly in their collective defense, starting with the July 5 summit.

Sino-Russian cooperation will not take a break after the July bilateral and SCO summits. At the end of June, China and Russia announced their intention to hold large-scale joint military exercises in August that were first agreed to in December 2004. This will continue the momentum in the development of bilateral cooperation between the two.

R e - e v a l u a t i n g t h e U . S . P u s hWashington has no plans of halting its efforts to push back Russian influence and weaken Russia internally. The newest struggle started in June over the separatist region of Transdniestria, a predominantly Russian region that was part of Moldova until conflict broke out after independence. The region is sandwiched between Ukraine to the east and Moldova to the west. In June,

The SCO is likely to become more than a regional security talking shop.


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the Moldovan parliament — with the support of Ukraine, the United States and the EU — passed a resolution demanding that Russia withdraw its troops and arms from the region.

A review of the first round of changes achieved by the United States, however, in its political offensive in the FSU shows that things are not going as Washington had hoped. In Moldova and Kyrgyzstan — and most prominently in Georgia and Ukraine — the new regimes have employed some authoritarian measures to consolidate their hold on power and attack their political opposition. This is increasing instability in already unstable countries, and that instability is joined by deteriorating economic conditions only worsened by the political environments. The Bush administration has become quietly aware of these situations, but it is still publicly being very supportive of the new governments. Its doubts increased, however, as June saw pronounced rises in instability in all four countries.

This will not deter the United States from its goal of weakening Russia, but it will likely cause the United States to slow down its forward progress as Washington will likely look not only to stabilize the new governments in July, but put out feelers for potential replacements that might better represent its interests if need be. In the meantime, Washington remains strongly focused on Azerbaijan, where parliamentary elections are scheduled for November and President Ilham Aliyev faces more pressure to take a more pro-Western line or face a U.S.-backed “velvet revolution.”

R u s s i a : I n s t a b i l i t y a t t h e To pRussia now finds itself at an inflection point, turning more toward confrontation with the United States. The failure of V-E Day in May to live up to the Kremlin’s hopes for establishing an understanding with Washington set the tone for this shift. This process, however, is occurring slowly, and still may not be fully completed if President Vladimir Putin proves unwilling to challenge the West, as his past actions suggest. Russia seemed to be considering its response in June and was accordingly quiet in terms of a concrete response to the fallout from V-E Day — though rhetorical warnings from Moscow of excessive U.S. influence increased, and there were meetings with potential allies such as India and China.

The new regimes are more authoritarian than Washington had hoped.

The U.S. push will likely slow down its forward progress.


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The relative quiet, however, masked rising turmoil inside Russia’s power circles that reveals the extent of Putin’s concern over domestic issues. Economic news indicating that the Russian economy has hit a wall was seemingly a daily occurrence in June, though there were bits of positive news as well. Overall, significant indicators showed worrisome trends, with economic growth slowing quickly, inflation staying in double digits, oil exports declining in the first quarter of 2005 and capital flight approaching Russia’s record 1990s levels.

Russia’s growing economic problems made it clear that only reforms and increased foreign investment can now stabilize the economy’s accelerating decline, and the prospect of losing some economic gains to foreigners is only fueling internal competition. The siloviki — members of the national security establishment — and oligarchs tied to state firms want to allow minority foreign investment in state enterprises, while powerful oligarchs in charge of private companies who fear competition with Western firms want to block foreign investment. Liberal ministers in the Kremlin are in favor of a larger opening to foreign investment and broader reforms, and the siloviki and state oligarchs would be happy to see the liberal ministers out of the way to give them more control over economic policy.

Putin realizes that he needs to bring foreign investment into Russia, and into sectors other than energy so that Russia can be more than a provider of natural resources, but doing so will come at the cost of certain domestic power players. He cannot stand by idly, however, and let the economy falter, as it will damage his political standing and threaten his position. Even if he tries to make scapegoats of liberal ministers such as Economy Minister German Gref and Finance Minister Alexei Kudrin for political purposes, the economic situation will continue to deteriorate without changes. He will need to act, and this will set off greater internal struggles inside Russia’s power circles.

Russia’s economic problems demand reforms and increased foreign investment.

The necessary reforms will set off greater power struggles inside Russia.


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T h e M o n t h A h e a d :F o r e c a s t s f o r J u l y

H i g h l i g h t s : • Responses to the U.S. political ofensive • G-8 summit yields little for Russia • Rising instability in Russia • Rising instability in the Fergana Valley • Militarization of the Caspian accelerates

R e s p o n s e s t o t h e U . S . P o l i t i c a l O f f e n s i v eThe United States will become somewhat distracted by problems with its new FSU regimes — in Georgia and Ukraine in particular — in July. It will work to bolster them and suggest more moderate courses of action, while simultaneously reaching out to potential replacements. This will slow the overall pace of its political offensive in the FSU, but it will still find time to focus on Azerbaijan, where it is pressuring President Ilham Aliyev to take a more pro-U.S. line or face a U.S.-backed revolution in November’s parliamentary elections.

Russia’s response to Washington’s geopolitical push will become more concrete in July. The Sino-Russian summit will see bilateral relations move forward and set the stage for continued steady progress in building bilateral ties. Stratfor does not believe, however, that these ties are sufficiently strong for the two to come out publicly and explicitly declare their intention to work together to resist U.S. influence at this summit. Neither is presently strong enough to take on Washington alone, and they do not yet trust one another sufficiently to pledge to do so together, at least not publicly. Nonetheless, the results of the summit will not be lost on Washington, which could very well respond by trying to dial up the political pressure on both countries before their bilateral cooperation can expand further.

The SCO summit will provide the organization’s members with an opportunity to jointly demonstrate their willingness to resist U.S. influence and ability to cooperate on a regional scale. Though rhetorically the summit is seeking progress toward both greater security and economic integration, the most important development will likely be in the military sphere, where the SCO could take a giant leap forward. The instability in the Fergana Valley

Neither Russia nor China is strong enough to take on Washington alone.


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— and in Kyrgyzstan in particular — has left the Kyrgyz government feeling vulnerable to internal and external radical forces, given the weakness of its own security and military forces. Consequently, the government has been openly discussing the need to enhance security, particularly in the southwest area around the city of Osh.

We believe the SCO summit could call for the creation of an SCO rapid-reaction force, the first dedicated military force of any kind under the SCO banner. This force could either be permanently deployed at a base in an unstable region such as southern Kyrgyzstan, or exist as dedicated forces in


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each member-state that would train and conduct exercises together and be available for rapid deployment.

Another intriguing likely outcome of the SCO summit will be the acceptance of the applications of India, Iran, and Pakistan for observer status in the SCO. While their role in the organization and the organization’s effectiveness remain to be seen in the longer term, the immediate effect of the additions of India, Iran and Pakistan will be to give the SCO considerably more international weight in the eyes of many countries, including the United States.

In the South Caucasus, a similar drawing of lines will continue. The United States, Russia and Iran are now in full-blown competition over influence in the South Caucasus. Armenia will continue moving closer to Russia, without closing the door to tighter relations with the West. The United States and Iran will continue to jockey publicly and behind the scenes in July over an established U.S. military presence in Azerbaijan, and Iran’s recent election of a hard-line president could add some fuel to the fire for both Washington and Tehran. The United States will continue to wield decisive influence over Georgia.

T h e G - 8 S u m m i tThe G-8 summit scheduled for July 6-8 in Scotland will not yield any significant results for Russia. The agenda the United Kingdom selected for the summit focuses primarily on climate change and African debt relief. Russia recently made its first deal under the Kyoto Protocol to sell emissions rights to Denmark, so it may make further progress with other G-8 countries in this regard given the agenda. It also will likely make progress in agreeing on terms for early debt repayments to the Paris Club, facilitated by high oil revenues. Aside from these issues, however, Russia likely will not come away with anything of significance, except perhaps for a critical response from the Bush administration following the China and SCO summits.

The addition of India, Iran and Pakistan will give the SCO more international weight.

The SCO summit could call for the creation of a dedicated rapid-reaction military force.

Russia will not come away with anything of significance.


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M o r e I n t e r n a l I n s t a b i l i t y i n R u s s i a With the United States geopolitically pressuring Russia from the outside, and the economy now creating growing pressure internally, Russia’s power circles are being strained in multiple ways. Putin knows that he must act both geopolitically and economically, but the question is whether he will take decisive enough action to reverse Russia’s geopolitical, and now economic, decline.

July will see him making his initial geopolitical efforts starting with the summits with China and the SCO. On the economic front, Russia will step up its call for increased foreign investment and begin taking administrative steps to improve the investment climate. We do not, however, expect clear breaks to be made on either front in July.

Putin knows that taking decisive action means making enemies in Russia’s increasingly complex and fluid array of power players, and he will therefore try to avoid doing so at all costs. He also will try to avoid antagonizing Washington as best he can, though if a disagreement should occur — over Russian weapons sales to China, for example — Putin will likely back down from direct confrontation. July, then, will likely see Putin testing the waters both economically and geopolitically to see just how far he can go without upsetting his preferred balance of interests both at home and abroad.

One area in which Putin will not back down is in the North Caucasus. Russia’s offensive against jihadists in the region will continue unabated, with Russian security forces further degrading the militants’ capabilities. With the level of success the offensive has had, large-scale terror attacks are less likely, but they cannot be ruled out.

In contrast to the military success Russia is having in the North Caucasus, Moscow will see its political troubles in the region grow. Putin has recently installed or renewed the mandate of presidents in the North Caucasus republics who have established corrupt, nepotistic regimes that have disrupted the balance in the region’s elite-clan structures. As ruling clans have become more entrenched in these republics, resistance to their dominance is growing. These regions have seen increasing numbers of demonstrations and political instability in recent months, and this will continue in July.

Will Putin take decisive action to end Russia’s decline?

Putin will not back down in the North Caucusus.


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M o r e I n s t a b i l i t y i n t h e F e r g a n a Va l l e yIn Uzbekistan, relations with the West will continue on a downward slope, and this will translate into a continuing shift by Tashkent toward Russia and China in July. The U.S. base in Uzbekistan will become an increasingly controversial issue as Washington re-evaluates its relations with Tashkent in comparison to the strategic importance of the base to operations in Afghanistan. As U.S.-Uzbek relations deteriorate, however, internal cracks in the Karimov regime will also likely become increasingly visible in July. Efforts by Karimov to make peace with the Fergana Valley clans who backed the uprising will likely only result in him making enemies on both sides. More demonstrations potentially accompanied by violence are likely, and guerrilla-type attacks on government installations and officials are possible in July. Also, Karimov’s ability not only to maintain order, but to keep his position, will likely begin to come into question.

Kyrgyzstan holds presidential elections July 10, in which the winners have already been chosen. With the country’s two most popular politicians running on a unity ticket and polling more than 80 percent of the electorate, Kurmanbek Bakiyev and Felix Kulov will be president and prime minister respectively. Their alliance will go a long way toward stabilizing the government, but more unrest is likely in July — the security forces remain weak, and resistance will continue from organized crime and from business elite members opposed to the government and possibly tied to ousted President Askar Akayev. The Bakiyev-Kulov alliance will eventually show signs of cracking — the two do not get along particularly well and both see themselves as potential presidents — but there will be no such signs in July.

Tajikistan will also become progressively unstable as Rakhmonov intensifies attacks on the opposition and his dominance of the country’s politics provides further encouragement for internal enemies. Popular demonstrations are unlikely, but isolated bombings near government buildings — like the one that occurred in June — could be repeated. The June departure of Russian border guards from the Tajik-Afghan border will likely result in a dramatic worsening of the security situation, with drug traffickers and Islamist militants

Karimov’s ability to maintain order and keep his position is in question.

Tajikistan’s security situation will worsen a�er the departure of Russian border guards.


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taking advantage of not only the weaker border security provided by less-motivated and less-trained Tajik guards, but also corrupt commanders and officials in Tajikistan.

M i l i t a r i z a t i o n o f t h e C a s p i a n P i c k s U pThe Caspian Sea is slowly heating up militarily. Turkmenistan and Ukraine signed an agreement in June for Kiev to provide $500 million of military hardware and upgrades in exchange for natural gas deliveries. In response to the movement of Russian military equipment from Georgia to Armenia in June and then the Ukraine-Turkmenistan deal, Azerbaijan announced that it would roughly double defense spending using revenues from high oil prices.

This is likely the start of a trend that will see the Caspian’s littoral states steadily focusing on increasing their military presence in the sea. Washington’s attempt to increase its military influence in the Caspian is polarizing the region, as Washington tries to bring Azerbaijan, Kazakhstan and Turkmenistan under its military umbrella, with Russia and Iran responding by moving closer to one another and making joint plays for the other three. All five countries have significant hydrocarbon reserves that provide them with sufficient revenue to allow them to purchase military equipment. July may not see significant developments in this regard, but further indications of geopolitical competition accompanied by an arms race in the Caspian will likely be apparent.

Washington’s move into the Caspian Sea area is polarizing the region.


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T r e n d s , S tat s a n d I n d i c at o r s

Armenia

Azerbaijan

Belarus

Georgia

Kazakhstan

Kyrgyzstan

Moldova

Russia

Tajikistan

Turkmenistan

Ukraine

Uzbekistan

N/A = not available

All data are provided by the governments of respective countries, unless otherwise noted.

1 IMF 2 UNCTAD3 U.S. Census

3.38

8.52

22.7

4.90

42.6

2.15 1

2.60

613

1.60

27.0

62.0

47.5

3.20

8.35

9.80

5.13

15.1 KZ 20043

5.04

4.40

143

6.70

6.50

47.5

26.8

1,056.25

1,020.60

2,320.41

955.200

2,842.67

425.570

590.910

4,274.76

238.810

4,153.85

1,305.26

1,772.39

10.1

10.2 Total ‘04

11.0 Year on Year

7.30 Jan - Apr ‘05

9.10 Q1 ’04 - Q1 ‘05

7.10 Total ’04

5.70

7.10

10.6

7.20

112

4.40

0.114 Jan - Sep ‘04

0.783 2004

0.248 Q1 ‘05

0.338 20032

8.424 2004

0.503 Jan ‘04

0.165 2004

11.70 2004

0.032 20032

0.225

8.700

0.070

8.9 Q1 ‘05

1.4 Total ’04

1.9 Dec ‘04

12.6 Total ’04

1.5 Q1 ‘05

3.0 Apr ‘05

8.0 Q2 ‘04

7.7

40.0

60.0

3.3

0.6

.195 Jan - Sep ‘04

3.74 Total ’04

13.7 Total ’04

0.24 Jan - Apr ‘05

15.1 20032

0.86 Total ’04 1

1.00 Total ’04

204 Total ’04

0.91 Total ’04

4.00 Total ’04

11.3 Apr ‘05

3.70 Total ’04

0.37 Q1 ‘05

3.58 Total ’04

16.3 Total ’04

0.63 Jan - Apr ‘05

9.35 20032

1.13 1

1.80 Total ’04

130 Total ’04

1.20 Total ’04

2.85 Total ’04

10.5 Apr ‘05

2.80

7.0 Total ’04

0.9 Apr ‘05

18 2

0.4 Apr ‘05

0.6 May ‘05

0.9 Apr ‘05

0.1 May ‘05

1.0 Feb ‘05

7.1

14 Total ’04

12

3.0 Total ’04

0.59 Mar ‘05

0.74

1.56

0.46 Apr ‘05

8.68 May ‘05

0.40 May ‘05

0.39

147 Jun ‘05

0.14

3.03

12.8

1.60

GDP

bil

lions

USD a

t 200

4 mar

ket p

rices

Popu

latio

n mi

llions

GDP

per

cap

ita

billio

ns US

D at 2

004 m

arke

t pric

es

GDP

gro

wth

%

chan

ge fr

om ye

ar pr

eviou

s

Inco

min

g FD

I co

ntrac

ted bi

llions

USD

Unem

ploy

men

t % Ex

ports

billio

ns US

D

Fore

ign

Curr

ency

Res

erve

s

billio

ns US

D

Impo

rts

billio

ns US

D

Infla

tion

CPI %

chan

ge fr

om m

onth

previo

us


J U L Y 2 0 0 5

T r e n d s , S tat s a n d I n d i c at o r s

Armenia

Azerbaijan

Belarus

Georgia

Kazakhstan

Kyrgyzstan

Moldova

Russia

Tajikistan

Turkmenistan

Ukraine

Uzbekistan

*Closing Rates

Beginning

561.00

4,908.0

2,151.2

2.0400

131.73

43.750

12.601

28.376

2.7804

5,200.3

5.0553

969.36

Low

561.00

4,908.0

2,151.2

2.0400

131.73

43.750

12.581

28.358

2.7804

5,200.2

5.0552

969.36

High

561.00

4,908.0

2,151.2

2.0400

135.68

43.750

12.601

28.680

2.7804

5,200.3

5.0553

969.36

End

561.00

4,908.0

2,151.2

2.0400

135.27

43.750

12.582

28.630

2.7804

5,200.3

5.0552

969.36

Regional Currency Rates


J U L Y 2 0 0 5

N o t e w o r t h y E v e n t s

June 1, NATO/UZBEKISTAN: NATO’s Parliamentary Assembly unanimously condemns Tashkent for “a disproportionate use of force” in Andijan, calling upon NATO members to cease all military support for Uzbekistan if the country fails to allow an international investigation.

June 2, RUSSIA/UZBEKISTAN: Russian Foreign Minister Sergei Lavrov says his country has information that Chechen rebels participated in the May 13 Andijan uprising in Uzbekistan. Lavrov says remnants of the Taliban, Islamist extremists and the Islamic Movement of Uzbekistan were involved.

June 2, RUSSIA/INDIA/CHINA: The Russian, Chinese and Indian foreign ministers meet and announce that their countries will cooperate further in the economic sphere, including transport, technology, energy and agriculture. They also issue a joint call for a reform of the United Nations.

June 3, RUSSIA/CHINA: After 40 years of negotiations, China and Russia sign a final agreement on the two nations’ eastern border. China’s legislature ratified the agreement April 27, and the Russian Federation Council approved the deal May 25.

June 4, AZERBAIJAN: Opposition members in Azerbaijan hold a large demonstration rally in the capital city, Baku, urging the government to resign and allow free elections.

June 6, RUSSIA: The Kremlin announces that Russian President Vladimir Putin’s two key media advisers are setting up a 24-hour English news station to enhance Russia’s image abroad. Broadcasts are set to begin at the end of the year.

June 7, UKRAINE: Ukraine’s ex-prime minister and opposition leader Viktor Yanukovich gives a deposition before Kiev’s organized crime commission, as a witness in a case examining the transfer of about $1 million to the Donetsk regional government while Yanukovich was prime minister in 2004. Yanukovich describes the government’s order for him to come in for questioning as politically motivated and denies that the transfer was in any way illicit.


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June 8, RUSSIA/WTO: Maksim Medvedev, head of the Russian delegation negotiating Russian entrance to the World Trade Organization (WTO), says that after it enters the WTO, Russia will sue the European Union over anti-dumping rules imposed on Russian exports. He also says Russia hopes to enter the WTO next year.

June 8, RUSSIA/UKRAINE: Gazprom CEO Alexei Miller accuses Oleksiy Ivchenko, head of the Ukrainian petrochemical firm Naftohaz Ukrayiny, of allowing 7.8 billion cubic meters of Russian natural gas to go missing during the November “Orange Revolution.” As a result, Gazprom demands $400 million in payment from the Ukrainian firm.

June 8, GEORGIA/UKRAINE/AZERBAIJAN/MOLDOVA: Ukrainian President Viktor Yushchenko says he has asked Turkish President Ahmet Necdet Sezer to act as a “permanent observer” in GUAM, a group composed of Georgia, Ukraine, Azerbaijan and Moldova.

June 9, U.S./UZBEKISTAN: Four Republican and two Democratic U.S. senators, led by John McCain (R-Ariz.) and Joseph Biden (D-Del.), call for the Bush administration to consider taking action in the United Nations against Uzbekistan if Tashkent does not allow an independent investigation into the violence that occurred in Andijan in mid-May.

June 9, BELARUS: A poll conducted by the Independent Institute for Socioeconomic and Political Science in Minsk shows that 47 percent of Belarusians — an all-time high — favor accession into the European Union.

June 10, KYRGYZSTAN: Zhirgalbek Surabaldiyev, a member of Kyrgyzstan’s Parliament and a supporter of ousted President Askar Akayev accused of organizing pro-Akayev demonstrators in March, is shot and killed in the center of Bishkek.

June 10, RUSSIA: Sergei Ivanov, head of the Russian Defense Ministry, saysthe Russian Defense Ministry’s 2005 arms purchase and development budget will be around $6 billion, more than “we annually get from the entire arms business.”

June 10, CHINA/RUSSIA: Chinese and Russian executives sign several contracts worth a total of $1.5 billion. The deal includes the Baltic Pearl Residence Complex to be built in St. Petersburg, a deal worth $1.25 billion.


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June 10, MOLDOVA: The Moldovan parliament passes a resolution demanding that Russia withdraw its troops and arms from the separatist region of Transdniestria by the end of 2005.

June 11, KYRGYZSTAN: Unknown assailants in Bishkek attack acting President Kurmanbek Bakiyev’s election campaign headquarters, reportedly looking for information regarding Bakiyev’s schedule and transportation as well as that of campaign manager and Vice Premier Daniyar Usenov.

June 13, RUSSIA/U.K.: British Prime Minister Tony Blair meets Russian President Vladimir Putin in Moscow to discuss the agenda for the G-8 summit scheduled for July 6-8, which Britain will chair.

June 13, TAJIKISTAN: A car bomb explodes in front of the Tajik Emergencies Ministry and close to the office of a major Russian bank in the center of the Tajik capital, Dushanbe, wounding at least five individuals.

June 13, INDIA/RUSSIA: Sonia Gandhi, president of India’s ruling Congress party, and Indian External Affairs Minister Natwar Singh arrive in Moscow for a four-day visit slated to include talks with Russian President Vladimir Putin in St. Petersburg.

June 13, EU/UZBEKISTAN: Luxembourgian Foreign Minister Jean Asselborn says the European Union is prepared to sanction Uzbekistan based on Tashkent’s refusal to allow an independent international investigation into the Andijan uprising.

June 14, TURKMENISTAN: Amnesty International reports that Turkmenistan faces a large-scale public health crisis.

June 14, RUSSIA: Russia announces the first release of ruble-denominated bonds outside Russia. Russian President Vladimir Putin says the bonds, issued by the European Bank for Reconstruction and Development and valued collectively at $175 million, represent a step toward full exchangeability of the ruble.

June 15, UZBEKISTAN: Restrictions imposed by Uzbekistan, reportedly in response to U.S. criticism of the civilian deaths during the unrest in Andijan, cause the United States to shift search-and-rescue planes and heavy cargo flights away from the U.S. Khanabad-Karshi airfield in Uzbekistan to Afghanistan and Kyrgyzstan.


J U L Y 2 0 0 5

June 15, KAZAKHSTAN: Kazakh opposition group For a Just Kazakhstan says a “purge of the political and media environment” is preceding the Kazakh presidential election scheduled for December 2006. The group also accuses the government of buying weapons and arming internal security forces and police in an attempt to strengthen its control over the country.

June 15, RUSSIA: The Ministry of Economic Development and Trade reports that the Russian economy grew 5.3 percent on an annual basis through the first four months of 2005 and that industrial production during the same period was 4.2 percent. Both growth rates are down from the same period in 2004 in which Russia posted gross domestic product growth of 7.3 percent, and industrial production growth of 6.9 percent.

June 16, RUSSIA: Rosoboronexport, Russia’s state-run arms export firm, reveals the geographic distribution of Russian arms sales abroad for the first time — in 2004, 45 percent of sales ($2.3 billion) went to China, 35 percent ($1.79 billion) was sold to India and 4 percent ($200 million) to Vietnam.

June 16, RUSSIA: Gazprom’s board of directors approves the sale of 10.74 percent of the gas company’s shares to the Russian government for $7.15 billion, gving the government a majority stake in the firm.

June 17, KYRGYZSTAN: Police in Kyrgyzstan use tear gas to disperse up to 5,000 protesters gathered at the presidential building in Bishkek to support businessman Urmat Baryktabasov, who has been barred from participating in the July 10 presidential election on the grounds that he is a citizen of Kazakhstan. Riot police had earlier driven hundreds of protesters from inside the building, which also houses the Central Election Commission.

June 17, KYRGYZSTAN: Interim President Kurmanbek Bakiyev says that opponents of the government paid the protesters who stormed Kyrgyzstan’s presidential administration building in Bishkek.

June 17, GEORGIA: Tbilisi says it has no plans to allow any foreign military bases in its territory once the Russians have left. The government also denies claims that there were economic commitments made to the Russians in relation to the troop withdrawal.

June 17, AZERBAIJAN: The Modern Musavat Party stages a protest in the capital, Baku, demanding the November Parliamentary elections be free and fair.


J U L Y 2 0 0 5

June 19, UKRAINE/MEXICO: Mexican President Vicente Fox arrives in Ukraine with a delegation of Mexican business leaders to meet with Ukrainian President Viktor Yushchenko, Prime Minister Yulia Timoshenko and Parliament Speaker Vladimir Litvin. The Mexican-Ukrainian summit is expected to increase cooperation on bilateral trade and investment and produce a joint declaration on the resumption of economic, political and cultural relations, including the opening of the first Mexican embassy in Ukraine.

June 20, RUSSIA: Finance Minister Alexei Kudrin says that sometime in 2005, the government will bring the real value of the ruble up to the levels that preceded the financial crash of 1998. He also says the ruble will be fully convertible by 2007 and that convertibility could bring in greater foreign investment.

June 20, RUSSIA: The Russian Federal State Statistics Service reports that Russia’s gross domestic product grew 5.2 percent in the first quarter of 2005. From January to April 2005, foreign trade turnover increased to $106.9 billion, an increase of 34.9 percent. Imports increased 25.3 percent to $34.2 billion.

June 21, RUSSIA/MEXICO: Four documents on Russian-Mexican cooperation are signed during Mexican President Vicente Fox’s official visit to Moscow. They include a letter of intent on energy cooperation, an agreement on legal assistance in criminal cases, and ministerial agreements on civil aviation and health protection.

June 21, RUSSIA/CHINA: The Chinese Foreign Ministry announces that Chinese President Hu Jintao will arrive in Russia on June 30 for a two-day official visit. From Russia, Jintao will head to Kazakhstan for a meeting of the Council of Heads of State of Shanghai Cooperation Organization (SCO) countries.

June 23, RUSSIA: Russian President Vladimir Putin says Russia is concerned that Afghanistan still hosts terrorist-training bases and that foreign spies are operating there.

June 23, NATO/TRANSCAUCASUS: The NATO secretary-general’s special representative for the Caucasus and Central Asia says NATO will support Armenia if its government decides to reject Russian military presence in the


J U L Y 2 0 0 5

country. The representative says Russia’s military presence represents no obstacle for Yerevan-NATO relations, especially since Armenia consented to the Russian bases’ presence.

June 24, RUSSIA: The Organization for Economic Cooperation and Development reports that foreign direct investment in Russia grew in 2004 to $11.7 billion, nearly double the previous high of $6.5 billion invested in Russia in 2003. The presence of foreign companies such as Toyota Motor Corp., Ford Motor Co., General Motors Corp., Renault and Volkswagen AG, coupled with an increase in the production of consumer goods, is cited as the reason for the increase.

June 24, RUSSIA/TAJIKISTAN: Russia’s and Tajikistan’s defense ministers sign an agreement handing over the moveable assets of the Russian base in Tajikistan to the Tajik government.

June 27, UKRAINE/NATO: NATO Secretary-General Jaap de Hoop Scheffer says Ukraine might join the NATO peacekeeping missions in Sudan’s Darfur province and Afghanistan. Ukrainian peacekeepers would receive a U.N. mandate to participate at the technical cooperation level, assisting in communications and supplying military hardware and aircraft to NATO peacekeepers.

June 27, RUSSIA/CHINA: Russia sends a proposal to China suggesting the two countries hold a bilateral conference in December to develop trade and cooperation. A Kremlin spokesman says the conference would involve researchers, government officials and businesspersons.

June 28, RUSSIA/FRANCE: Officials from French oil and gas company Total CFP and Russian gas firm Gazprom announce that the two companies have signed a memorandum to cooperate on the development of the Shtokman natural gas field in the Barents Sea.

June 30, RUSSIA: Chinese President Hu Jintao begins his four-day visit to Russia and his summit with Russian President Vladimir Putin.

June 30, RUSSIA: Russian state oil firm Rosneft says it will boost year-on-year production 350 percent in 2005 to 1.5 million barrels per day (bpd). Officials say nearly all of the increase will come from its acquisition of former Yukos subsidiary Yuganskneftegaz. The company also plans to increase natural gas production by 38 percent in 2005 to 2.9 billion cubic meters.


J U L Y 2 0 0 5

J u l y a n d B e y o n d

July 1, RUSSIA: The summit continues between Chinese President Hu Jintao and Russian President Vladimir Putin in Moscow.

July 2-3, RUSSIA: Chinese President Hu Jintao visits Novosibirsk, the largest city and scientific-industrial center in the Asian part of Russia.

July 4-5, KAZAKHSTAN/SCO: The Shanghai Cooperation Organization (SCO) holds its summit in the Kazakh capital of Astana. Presidents from the organiza-tion’s six member nations — Russia, China, Uzbekistan, Kazakhstan, Kyrgyzstan and Tajikistan — are expected to attend.

July 5-8, G8: Russia participates in the G-8 summit held in Scotland.

July 10, KYRGYZSTAN: Presidential elections are held.

TBD, RUSSIA/CHINA: The two countries sign a status-of-forces agreement for troops participating in the August Russo-Chinese military exercises.

C h a n g e s

Commonwealth of Independent StatesRussian Prime Minister Mikhail Fradkov was elected Chairman of the Council of the Heads of Governments of the Commonwealth of Independent States, replacing Moldovan Prime Minister Vasile Tarlev.

RussiaRussian President Vladimir Putin on June 2 signed into law an amendment to the Federal Constitution Law’s Article 7. The amendment says that a candidate whom the president nominates for prime minister must be a Russian citizen and cannot have citizenship in another country.

Following up on an initiative suggested by Justice Minister Yuri Chaika, Putin on June 8 asked the Justice Ministry to create a decree allowing the ministry to monitor Russian laws.

On June 10, the Duma passed an amendment to the tax law eliminating the inheritance tax and limiting the tax on gifts to close relatives. The Russian Federation Council approved the bill June 22.


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Putin appointed Sergei Razov to the post of ambassador to China on June 10. Razov, 52, most recently served as a deputy foreign minister, and was Russia’s ambassador to Poland from 1999 to 2002. Razov replaces Igor Rogachev, who was transferred to another position. Putin also appointed former Deputy Foreign Minister Yuri Fedotov as Russian ambassador to the United Kingdom. Grigory Karasin, the former ambassador to the United Kingdom, was named a deputy foreign minister.

Putin nominated several regional governors and presidents in the month of June, including incumbent Aleksey Chernyshev as governor of Orenburg oblast, Viktor Maslov as governor of the Smolensk Region, incumbent Vladimir Chub as governor of Rostov oblast and Murat Zyazikov as president of Ingushetia. Putin also nominated Taimuraz Mamsurov to succeed North Ossetia-Alanian President Aleksandr Dzasokhov, who resigned.

On June 20, Putin signed into law a treaty on Russian use of Kazakhstan’s Baikonur Cosmodrome. The treaty permits joint cooperation on use of the site and ensures its effective use.

William Burns is likely to be named the U.S. ambassador to Russia, it was reported June 22. Burns is the former assistant secretary of state for Near Eastern Affairs.

The Russian Duma on June 29 rejected an amendment to the electoral law that would allow the president to sit more than two terms. The proposal received 32 of the necessary 226 votes to pass.

Putin signed orders June 29 to organize the Year of Russia in China in 2006 and the Year of China in Russia in 2007. An organizing committee will be set up to meet with a counterpart organization from China. Dmitri Medvedev, head of the Kremlin, will chair the Russian organizing committee.

UkraineUkraine’s Cabinet lifted a ban June 11 on the privatization of strategic enterprises — put in place in February 2005 — on the condition that all privatizations would be agreed upon by the Cabinet. The chairman of the State Property Fund, Valentin Semenyuk, said the government hoped to earn more than $1 billion from privatizations in 2005.


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Ukraine will take measures to suspend the processing of adoption papers for foreign families, including those in the United States, the Ukrainian government announced June 13. Adoption procedures already under way will continue. Ukrainian Minister of Family, Child, and Youth Yury Pavlenko and U.S. Health and Human Services Secretary Michael Leavitt made the agreement. In return, Ukraine is allowed to monitor how children adopted by U.S. families live. Ukraine has not ratified the Hague Convention on Inter-Country Adoption.

GeorgiaThe Georgian Parliament adopted a law June 7 which makes visas unnecessary for visitors from the United States, European Union, Japan and Canada for a period of up to 90 days. The new law is meant to promote tourism in the nation. A similar proposal is being considered for Russian citizens visiting Georgia.

Davit Usupashvili was named the leader of the Georgian opposition Republican Party on June 28. His major goal will be to make over the Republican Party and restructure it to “respond to current needs.”

KyrgyzstanKyrgyzstan’s acting president Kurmanbek Bakiyev resigned the post of prime minister in accordance with the Kyrgyz election code June 20. Bakiyev will hold his post as acting president. The first vice prime minister and the other vice prime ministers are sharing the duties of prime minister.

BelarusBelarusian President Aleksandr Lukashenko was elected June 20 to chair the next meeting of the Eurasian Economic Community (EurAsEc) in 2006. The summit will be held in the Belarusian capital of Minsk. The previous chairman of the EurAsEc summit was Kazakh President Nursultan Nazarbayev.

EstoniaThe Estonian Parliament ratified a border treaty with Russia on June 20.


J U L Y 2 0 0 5

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