REGIONAL ECONOMIC STRUCTURES AND CO-OPERATION ACTIVITIES IN THE BLACK SEA BASIN AND CAUCASIA
Mehmet Bulent ULUDAG

Journal of Turkish Weekly, Turkey
June 21 2006

1. The Roots of Europeans’ Interests to the Black Sea and Caucasia

The division of Europe into a more developed West and a less-developed
East has been rooted at least from the 9’th century. A very
sharp line has already been formed to cut Europe into two parts
both economically and socially, after 1500. This line had almost
closed the notorious Iron Curtain of the Cold War period for 40
years. It was re-constituted in 1947 the status quo of the age of
Charlemagne on the 1130’th anniversary of his death. The responses
of the West of Europe to the East are always similar to each ones,
although enemies were different from age to age like Huns, Avars,
Hungarians, Otthomans or Russians. Historically Eastern Europe was
perhaps culturally European, but never economically developed like
Western Europe. Only some parts of the East Germany, the Bohemian
and Moravian parts of Czechoslovakia that today constitute the Czech
Republic and in some part of Hungary, Slovenia and Croatia, and perhaps
the Baltic republics were historically similar to Western Europe.

Post-war Marshall Plan has brought a restricted help to Western
Europe. The East also seemed to succeed, they had the massive increases
in electric, coal, steel and oil production to show for it.

By various indeces of economic production of steel, energy, etc. and
human capital or social welfare, health and education, several
countries in Eastern Europe narrowed the gap and in some cases even
overtook countries in Western Europe in the 1950s and 1960s. In the
1970s, the Soviet Union and Eastern Europe maintained the recently
narrowed gap in this economic competition. Because of recessionary
lower growth rates in the West, western loans fled to the East
and allowed eastern borrowing from the West. But in the 1980s, the
Soviet Union and Eastern Europe all missed the technological train
and lost the race. Thus 70 years in the Soviet Union and 40 years
in Eastern Europe of politics and ideology of socialism seem not to
have substantially and definitely changed the economic positions of
these regions. Some parts of Russia and the Ukraine were westernized
by Peter the Great and industrialized by him, Witte, and Stalin. But
most of the former Soviet Union still has a third world economy, like
Brazil, India, and China. The Transcaucasian and Central Asian regions
are not even likely to be Latin Americanized, politically Lebanonized
like the former Yugoslavia. The revolutions of 1989 in Eastern Europe
and the breakup of the Soviet Union were the consequences of their
participation in a single world economic system. In the longer run,
the incorporation of Eastern Europe and some parts of the former Soviet
Union into a European economic bloc may help Western Europe survive
in the world economic disturbance by strengthening its ability to
compete against the Japanese led East Asian and the U.S. led American
regions. Western Europe increasingly need traditional markets in
Eastern Europe and the former Soviet Union, the Middle East and Africa.

But the relationship of West-East Europe cannot be described only
a simple raw material-labour force-market triangle as it was in the
widely-known imperialistic theories. The West has now realized the
importance of a sincere unification with its Eastern part. It is not
only a unification, but also will be a partnership and constitution
of a common European political identity. These "Unified" Europeans
have several interests in the Black Sea basin and Caucasus region. It
can be argued in 5 articles following;

Cultural, historic, ethnic ties. Most country and people in the Region
and the Basin has Christian traditions

Economic interests, hydrocarbonic energy resources and transportation
systems

Strategic and political interests, relatively an area of competition,
rivalry and hostility, collapse of the concept of "the sphere of
influence" with globalization

Environmental responsibilities, touristic potential

Black Sea and Caucasian countries are also objects of European
enlargement.

2. General Characteristics of the Black Sea Basin and Caucasia:

The west, north, east coasts of Black Sea Basin and the region
from the north of the Araxes river to the Kuban and Terek Rivers,
namely Caucasia have lived together a common misfortune period for a
long time in XX’th century. These former central-planned economies
of South-Eastern Europe and Caucasia has now transformed to an
free-market economy. Social and political reflections of this process
has also changed in each regional actor. Basic charecteristics of each
country effects regional economic co-operation efforts. Within this
framework it is necessary to review establishment process of national
and democratic states, and formation of national economies, foreign
economic relations; and to make some observations and predictions;
and to offer alternatives for all regional economic movements and
developments.

The Black Sea is one of the most remarkable regional seas in the
world. It is the most isolated sea in the world, and similar to a
"water enclave" or lake. It is almost cut off from the rest of the
world’s oceans, but is 2212 metres deep and receives the drainage
from a 420,000 square kilometre basin, covering about one third of
the Continental Europe, including some areas of seventeen countries:
Austria, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech
Republic, Georgia, Germany, Hungary, Moldova, Slovakia, Slovenia,
Romania, Russia, Turkey, Ukraine, Yugoslavia. Its unique outer
connection is the Bosphorus, a 35 Km natural channel, 40 metres deep.

Europe’s second, third and fourth rivers (the Danube, Dnieper and
Don) flow to the Black Sea. It would take about one thousand years
to replace all of the salt water at the present flow rate through
the Bosphorus, if such an isolation idea would be occured. This is
another aspect which constitute the Sea’s uniqueness.

The Black Sea coastal zone is populated with approximately 16
million inhabitants and with 4 million tourists visiting the
region every year in summer seasons. Black Sea countries’ coastal
populations: Bulgaria 714,000; Georgia 650,000; Romania 745,954;
Russian Federation 1,159,000; Turkey 6,700,000; Ukraine 6,800,000;
and as a total 16,768,954. Inadequate management of marine resources
and pollution from the economic activities by the population in the
Black Sea basin destroyed the ecosystem of the Black Sea. The Black
Sea is an almost closed sea being bordered by countries with intensive
agriculture and several harbors without or with very limited water
treating capacities. The Black Sea has suffered a tragic decline in
the last thirty years. The main product of the sea is fish. It has
been calculated that the Black Sea can sustain at least 350,000 tons
of fish per year. It may provide food for all 16 million people that
live in the coastal zone and another millions of guests. The Black
Sea resorts can accommodate five million tourists per year and these
would bring a billion dollars into the coastal economy. More tourism
means a rich economy and more jobs. The trade already means hundreds
of millions of dollars. Today, the Black Sea is badly ill but is not
dead yet. The most significant process degrading the Black Sea has
been the massive over-fertilisation. Oil pollution also continues to
threaten Black Sea. The Black Sea’s fisheries have been seriously
damaged as a result of eutrophication, overfishing and "alien"
species. Hundreds of kilometres of highways and railway lines have
been constructed along the edge of the sea, limiting the development
of coastal tourism or wildlife reserves.

Another problem is erosion and land degradation. Erosion results
in large economic losses. Tourism began to fall into decline when
eastern European citizens were allowed to travel more freely abroad
in the mid 1980s. The tourism industry in the region needs new
investments. Complicated and unfriendly immigration and customs laws
can discourage foreigners. There are even more compelling reasons to
protect this sea and the Black Sea countries have agreed to co-operate
in the future. Immediate measures have been taking by the Black Sea
countries, to improve the polluted state of the Sea. In April 1992,
after six years of negotiations, the Convention for the Protection of
the Black Sea against Pollution is signed in Bucharest, Romania. This
Convention contains important legal measures and this process brought
the Black Sea Action Plan in 1993.

Caucasia, for those persons who know it, is like a paradise on the
earth. The peoples of the Caucasus, despite linguistic, ethnic and
religious differences, share a common history and traditions.

This beautiful garden with its potential for development has been
reduced to a battleground where people slaughter one another for the
sake of artificial frontiers. The peoples of the region have been cut
off from each other, divided and Balkanised. Some great powers outside
from the region consider the small, weak, divided Caucasian states as
pawns in the whole region as a gigantic chessboard. An offensive move,
a response, and the result is a war, an assassination, an explosion,
a military coup or a bloodless revolution. These small countries can
not make any progress by artificial barriers. Georgians, Abkhazians,
Armenians, Azeris, Chechens, and all the other peoples of the region
needs another unity like the EU on the basis of complete equality,
democracy, fraternity and friendship. In the near past it had been
observed such a unity.

The Bolshevik Revolution united forcibly the peoples of the Caucasia
in a socialist federation. This new process had pulled the Caucasus
out of semi-feudal backwardness and opened some ways to economic and
cultural development through a nationalised planned economy. Stalin
and his successors much of this good work was undone. Socialist
internationalism was replaced by Great Russian chauvinism.

Before establishment of their different relationships with the
EC and other European associations, all peoples of the Black Sea
Basin and Caucasia, except Turkey, have lived together a common
experience as a result of Soviet influence: Comecon joined together
450 million people in 10 countries on three continents. The level
of industrialization from country to country differed and a large
national income difference existed between European and non-European
members. Physically, militarily, politically and economically the
Soviet Union was its dominant member. In this system the decisions
handed down from above ignored the influences of market forces or
private initiative. Comecon had no supranational authority to make
decisions or to implement them. But Soviet domination of Comecon was
a reality which derives from its economic, political, and military
power. The Soviet Union possessed 90 percent of Comecon members’ land
and energy resources, 70 percent of their population, 65 percent of
their national income. Asymmetries of size and differences in levels of
development among members deeply affected the institutional character
and evolution of the organization. The overwhelming dominance of the
Soviet economy necessarily meant that the relations inside Comecon
took the form of bilateral relations between the Soviet Union and
other members of Comecon. There is no such an inequal distribution
of power, neither economically, politically or militarily, physically
in the EU. After such an experience for many Black Sea and Caucasian
nations Europeans’ experience on integration seems so interesting.

3. The Nations of The Black Sea and Caucasia in The Post-Soviet Era

The some current economic data shows a positive trend of stable growth
of GDP in the Black Sea riparian countries. The annual growth of
GDP in these countries in year 2002 has realized 4.3% for Bulgaria ,
5.4% for Georgia , 4.3% for Romania , 4.3% for Russian Federation,
7.8% for Turkey and 4.5% for Ukraine. These countries of the Black
Sea region are facing serious economic and financial problems. In
general terms, the Black Sea riparian and Caucasian countries can be
categorised and characterized as follows:

Romania and Bulgaria are both Black Sea countries and they
are also both located in the lower Danube River Basin. Both
countries are still in a challenging period of political, social
and economic transition. Romania and Bulgaria are in the process of
EU full-membership having clear priorities in the requirements for
potential entry in 2007, it has been endorsed them detailed roadmaps.

Ukraine has the longest coastal line of the Black Sea and is
also located in the lower Danube River Basin. Georgia and Russian
Federation they are both located in the Black Sea basin, and they
are both polluters and victims of pollution to the Black Sea. They
all face serious economic problems and are in transition. Turkey has
the second longest coastal line along the Black Sea. As regards the
economic criteria, Turkey has significantly improved the functioning
of its market economy, while macroeconomic imbalances remain. Turkey
is an "EU Candidate Country".

Ukraine is the second largest country in Eastern Europe and has
preferred independence in 1991, this has been resulted the dissolution
of the USSR. During World War II total civilian losses during the
war and German occupation in Ukraine are estimated between five
and eight million. Ukraine is one that saw some of the greatest
bloodshed during the war. After the Second World War, the borders
of Soviet Ukraine were extended to the West uniting most Ukrainians
under one political state. In 1954, Crimea was transferred from the
RSFSR to Ukraine. Ukraine was a founding member of the Commonwealth
of Independent States. Ukraine now depends on Russia for most energy
supplies, especially natural gas. After 1991 the government liberalised
most prices and erected a legal framework for privatisation, but
output by 1999 had fallen to less than 40% of the 1991 level. The
GDP in 2000 showed strong export-based growth of 6%.

This was the first growth since independence. Industrial production
also grew 12.9%. The economy continued to expand in 2001-2004 period.

This is largely attributed to steel and arm exports and selling an
enormous aircraft carrier to China.

Georgia, perhaps has been the most misfortunated country for last
15 years between 1989-2004, both in the Black Sea Basin and in
Caucasia. Opposition pressure on the communist government has caused
9 April 1989 events in Tbilisi, when 22 people has been killed by
local KGB. This insurrection resulted in an open, multiparty and
democratic parliamentary election held on October 28, 1990. Election
was won by the "Round Table" coalition headed by the leading dissident
Zviad Gamsakhurdia, who became the head of the Supreme Council of the
Republic of Georgia. On March 31, 1991 a referendum on independence
was approved by 98.9% of the votes. Formal independence from the Soviet
Union was declared on April 9, 1991. Gamsakhurdia was elected president
on May 26, 1991 with 86% of the votes. He was widely criticised to
be an authoritarian style of government.

Situation was worsened and came to a head on December 22, 1991, when
armed opposition groups launched a violent military coup d’etat,
besieging Gamsakhurdia and his supporters in parliament building
in Tbilisi. Gamsakhurdia fled to Chechnya in January 1992. The new
government invited Eduard Shevardnadze to become the head of a State
Council in March 1992. In August 1992, a separatist dispute in the
Georgian autonomous republic of Abkhazia escalated. The Abkhaz fought
back with help from paramilitaries from Russia’s North Caucasus
regions and alleged support from Russian military stationed in a
base in Gudauta. In September 1993 the government forces suffered a
catastrophic defeat, All of them has been driven out with the entire
Georgian population of the region. Around 14,000 people died and
another 300,000 were forced to flee. Ethnic violence also flared in
South Ossetia and 100,000 refugees fleeing into Russian-controlled
North Ossetia. On September 24, 1993, in the wake of the Abkhaz
disaster, Zviad Gamsakhurdia returned from exile to organise an
uprising against the government. This alarmed Russia, Armenia and
Azerbaijan, and units of the Russian Army were sent into Georgia
to assist the government. Gamsakhurdia’s rebellion collapsed and he
died on December 31, 1993. In a highly controversial and dishonoured
agreement, Shevardnadze government agreed that it would join the CIS.

Shevardnadze survived a bomb attack in August 1995. His government
and his own family were blamed associated with pervasive corruption.

He won presidential elections in November 1995 and April 2000
with large majorities, but there were persistent allegations of
vote-rigging. Shevardnadze’s close relationship with the United States
considered as a counterbalance to Russian influence in the strategic
Transcaucasus region. Georgia became a major recipient of U.S. foreign
and military aid, signed a strategic partnership with NATO and declared
an ambition to join both NATO and the EU. The country secured a $3
billion project to build a pipeline carrying oil from Azerbaijan
to Turkey via Georgia, the so-called "Baku-Tbilisi-Ceyhan" or BTC
pipeline. Reformists headed by Mikhail Saakashvili, Nino Burjanadze
and Zurab Zhvania united to oppose Shevardnadze’s government in the
November 2, 2003 parliamentary elections. The elections were widely
regarded as being rigged. After the opposition’s massive demonstrations
in the streets of Tbilisi, Shevardnadze resigned on November 23,
2003. On January 4, 2004 Mikhail Saakashvili won the Presidential
Elections with a huge majority of 96% of the votes. Washington openly
supported the Opposition. Since the fall of the USSR, Caucausia has
been the centre of a struggle between Russia and the USA for control
over its rich resources and oil wealth. In this great power struggle,
Georgia has a key position which strategically located on the Black Sea
south of Russia and north of Turkey. Russia remains a key power in the
region, and has been trying to reduce American influence. Moscow has
accused Tblisi of giving support and refuge to Chechen fighters. But
same Russia has backed separatist movements in Abkhazia and Ossetia,
as a means of weakening Georgia. After Shevardnadze’s resignation,
a radical, pro-U.S. opposition has come to power in Tbilisi. The new
president faces many problems. More than 230,000 displaced persons
is an enormous strain. Peace in the separatist areas of Abkhazia and
South Ossetia remains fragile. Considerable progress has been made in
negotiations on the Ossetian-Georgian conflict, and negotiations are
continuing in the Georgia-Abkhazia conflict. After the Rose Revolution,
relations between the Georgian government and semi-separatist Ajarian
leader Aslan Abashidze deteriorated rapidly.

Abashidze forced to resign and flee Georgia. Relations with Russia
remain problematic due to Russia’s continuing political, economic
and military support to separatist governments in Abkhazia and
South Ossetia. Georgia still remains a very poor country by European
standards because of its widespread corruption. Many Georgians thinks
of the independence period was a "nightmare" and desires return to
"the happy days of the Soviet Union" The Georgian Government promised
economic reform desires the revival of the ancient Silk Road as the
Eurasian corridor, using Georgia’s geography as a bridge for transit of
goods. Integration into the NATO and the EU remains the main goal of
Georgia’s foreign policy. Georgia continues to support the coalition
forces in Iraq sending a total of 850 troops. In February, 2005 Prime
Minister Zurab Zhvania died, and Zurab Nogaideli was appointed as the
new Prime Minister. The US President George W. Bush visited Georgia
on 9-10 May 2005 and addressed to tens of thousands of the Georgians
at Tbilisi Freedom Square.

After Romania’s Communist regime was overthrown in late 1989, the
country experienced a decade of economic instability and decline.

Starting from 2000 the economy was transformed into one of relative
macreconomic stability, high growth, low unemployment and increasing
foreign investment, and is currently among the most developed in
Southeastern Europe. Economic growth since 2000 has averaged 4-5%,
rising to 8.3% in 2004. This has characterised Romania as one of the
fastest growing in Europe. Romania was granted in October 2004 the
much desired ‘functional market economy’ status by EU officials, and
is expected to join the EU in January 2007. Romania’s per-capita GDP
is estimated to be $9,700 at end of 2005. The national budget is 38.1
billion euro for 2006 which represents 33.1% of GDP. Having its own
natural resources, Romania has intensively developed its agricultural
and certain subsequent industrial sectors over the past 20 years.

Romania is largely self-sufficient in food production. Romania
possesses extensive facilities for oil refining and semiconductor
fabrication. Inflation in 2004 was registered at 9.2%, and is expected
to fall to 6.5% in 2005 and 4.5% in 2006. Unemployment in Romania is
at 5.2% in January 2006, which is very low compared to other large
European countries such as Poland, France, or Germany.

Since the late 1990s, there have been several economic reforms to
join the EU in the agricultural and financial sectors. Towards end
of 2005 a significant amount of Romania’s major companies have been
privatised. In comparison to its neighbours, Romania has a high number
of small to medium sized enterprises. Foreign investment has increased
significantly since 2003, reaching 5.1 billion euro in 2004. Total
foreign investment in Romania for 2005 was 6.3 billion euro. Austria,
as an investor country, is leading with more then 6,7 billion euro
total from 1990 until 2005. Romania’s economy grew 5.9% in the first
quarter 2005 compared with the same period last year.

Currently GDP growth is forecast at 5.9% per annum. Romania’s economy
is characterized by a huge potential of tourism. Tourism of Romania
has attracted 880 millions euro investments in 2005. The majority
of Romania’s trade is oriented towards the countries of the European
Union. Among the Black Sea coastal countries, Romania is the unique
one which have the closest position to the EC standarts economically,
politically and culturally.

The economy of Bulgaria has contracted dramatically after 1989 with the
collapse of the Comecon system and the loss of the Soviet market. The
standard of living fell by about 40%, only to regain pre-1989 levels
in June of 2004. In addition, UN sanctions against Serbia and Iraq
effected very negative on the Bulgarian economy. GDP grew 1.4% in
1994 for the first time since 1988, and 2.5% in 1995.

Inflation surged in 1994 to 122%, fell to 32.9% in 1995. Future
prospects are tied with the country’s integration with EU’s economic
structures. Since 1990, Bulgarian trade has shifted from former Comecon
countries primarily to the European Union. But Russian oil exports to
Bulgaria make it Bulgaria’s largest single trading partner. In December
1996, Bulgaria joined the World Trade Organization. Total direct
foreign investment from 1991 through 1996 was $ 831 million. Germany
was the largest investor. The first round of mass privatization finally
began in January 1996, the second and third rounds were conducted in
Spring 1997 under a new government. As of 2006 Bulgaria is considered
a working market economy and has finalized many of the required
reforms. In April 1997, the Union of Democratic Forces government won
parliamentary elections. The government’s structural reform program
includes: 1) privatization, 2) liberalization of agricultural policies,
3) reform of the country’s social insurance programs, 4) reforms to
strengthen contract enforcement and fight crime and corruption.

With the dismemberment of the Soviet Union in December 1991, the
Russian Federation became an independent country. Russia was the
largest of the fifteen republics that made up the Soviet Union,
accounting for over 60 percent of the GDP and over half of the
Soviet population. Russia was widely accepted as the Soviet Union’s
successor state in diplomatic affairs and it assumed the USSR’s
permanent membership and veto in the UN Security Council. Prior to
the dissolution of the Soviet Union, Boris Yeltsin had been elected
President of Russia in June 1991 in the first direct presidential
election in Russian history. In October 1991, as Russia was on the
verge of independence, Yeltsin announced that Russia would proceed
with radical market-oriented reform also known as "shock therapy."

Russia today shares many continuities of political culture and social
structure with its tsarist and Soviet past.

The conversion of the world’s largest state-controlled economy into a
market-oriented economy would have been extraordinarily difficult. The
policies chosen for this difficult transition were 1) liberalization,
2) stabilization, 3) privatization. The programs of liberalization and
stabilization were designed by Yeltsin’s deputy prime minister Yegor
Gaidar. These programs widely known as "shock therapy" which began
days after the dissolution of the Soviet Union, when on January 2,
1992, Russian President Boris Yeltsin ordered the liberalization
of foreign trade, prices, and currency. Under the stabilization
program, the government let most prices float, raised interest
rates to record highs, raised heavy new taxes, sharply cut back on
government subsidies to industry and construction, and made massive
cuts in state welfare spending. These policies caused widespread
hardship as many state enterprises found themselves without orders
or financing. Russia’s economy sank into deep depression by the
mid-1990s, was hit further by the financial crash of 1998, and then
began to recover in 1999-2000. Russia’s economic decline is far more
severe and more protracted than the Great Depression, which nearly
paralyzed world capitalism following 1929.

It is about half as severe as the catastrophic drop borne out of
the consequence of the First World War, the fall of Tsarism, and the
Russian Civil War. Household incomes and expenditures indicate that
whereas 1.5 percent of the population was living in poverty in 1988,
by mid-1993 between 39 percent and 49 percent of the population was
living in poverty. Average per capita monthly income had fallen,
in dollar terms, from $72 to $32. Meanwhile life expectancy dropped
for men from sixty-four years in 1990 to fifty-seven years by 1994,
while women’s dropped from seventy-four to about seventy-one.

Alcohol-related deaths skyrocketed 60 percent in the 1990s. Deaths
from infectious and parasitic diseases shot up 100 percent, mainly
because medicines were no longer affordable to the poor. There are
now roughly one and half times as many deaths as births per year in
Russia. According to official Russian data, in 1994 the national
gross domestic product (GDP) was 604 trillion rubles, about US $
207 billion. This was about 4 % of the United States GDP for that year.

But this figure underestimates the size of the Russian economy.

Adjusted by a purchasing-power parity formula to account for the
lower cost of living in Russia, the 1994 Russian GDP was about US $
678 billion, making the Russian economy approximately 10 % of the
United States economy. In 1994 the adjusted Russian GDP was US $ 4,573
per capita, approximately 19 % of that of the United States. A second
important measurement factor is the extremely active so-called shadow
economy, which yields no taxes or government statistics but which a
1996 government report quantified as accounting for about 50 % of the
economy and 40 % of its cash turnover. By 2004 the average income has
risen to more than $100 per month, thanks to a large extent to high
oil prices. But the growing income is not being evenly distributed. The
social inequality has risen sharply during the 1990s. Structural reform
lowered the standard of living for most groups of the population, thus,
reform created powerful political opposition. An Indicator of these
frustrations was the Communist Party of the Russian Federation. Russian
voters often rejected economic reforms and yearned for the stability
and personal security of the Soviet era. During the Yeltsin years in
the 1990s, these groups were well organized, voicing their opposition
to reform through strong trade unions, associations of directors of
state-owned firms.

The struggle for power in post-Soviet Russia culminated in political
crisis in the fall of 1993. Yeltsin dissolved the parliament on
September 21, ordered new elections and a referendum on a new
constitution. The parliament then declared Yeltsin deposed and
appointed Aleksandr Rutskoy acting president on September 22. On
October 4, Yeltsin ordered Special Forces and elite army units to
storm the parliament building, the "White House" as it is called.

Rutskoy, Ruslan Khasbulatov, and the other parliamentary supporters
surrendered and were immediately arrested and jailed. The official
count was 187 dead, 437 wounded. Thus the transitional period in
post-Soviet Russian politics came to an end. A new constitution
was approved by referendum in December 1993. Russia was given a
strongly presidential system. Radical privatization went ahead. The
old parliamentary leaders were released without trial on February 26,
1994. The new capitalist opportunities presented by the opening of
the Russian economy in the late 1980s and early 1990s affected many
people’s interests, especially well-placed bosses and technocrats in
the Communist Party, the KGB, and the Komsomol. The Yeltsin government
hoped to use privatization to spread ownership of shares in former
state enterprises as widely as possible to create political support
for his government and his reforms. The concentration of immense
financial and industrial power extended to the mass media.

One of the most prominent of the financial barons, Boris Berezovsky,
who controlled major stakes in several banks and companies, exerted
an extensive influence over state television programming for a while.

Corruption covered everywhere in the new Russia. Most Russians today
have come to regret the collapse of the Soviet Union in 1991. Even
Vladimir Putin, Boris Yeltsin’s handpicked successor, stated in
a campaign speech in February 2004 the dismantlement of the Soviet
Union a "national tragedy on an enormous scale," from which "only the
elites and nationalists of the republics gained." He added, "I think
that ordinary citizens of the former Soviet Union and the post-Soviet
space gained nothing from this. On the contrary, people have faced
a huge number of problems." The mafia already remains a significant
force in Russia. The drugs industry alone has a turnover of $ 8-9bn
a year, compared to a state budget of $ 20bn. More generally, the
shadow economy remains large, and tax evasion and corruption pervasive.

Russia is one of the most industrialized of the former Soviet
republics. But Russian industry today is antiquated and highly
inefficient. Russia inherited most of the defense industrial base of
the Soviet Union, so armaments are the single-largest manufactured
goods export category for Russia. Efforts have been made with varying
success over the past few years to convert defense industries
to civilian use. Russia comprises roughly three-quarters of the
territory of the former Soviet Union but has relatively little area
suited for agriculture because of its arid climate and inconsistent
rainfall. Northern areas concentrate mainly on livestock, and the
southern parts and western Siberia produce grain. Foreigners are not
allowed to own farmland in Russia. Foreign investment in Russia is
very low. Cumulative investment is about $ 4 billion. Russian capital
flight estimated at about $ 15 billion annually. World prices continue
to have a major effect on export performance, since commodities,
particularly oil, natural gas, metals, and timber comprise 80% of
Russian exports. Ferrous metals exports suffered the most in 2001,
declining 7.5%. On the import side, steel and grains dropped by 11%
and 61%, respectively. Foreign trade rose 34% to $151.5 billion in
the first half of 2005, mainly due to the increase in oil and gas
prices which now form 64% of all exports by value.

Trade with CIS countries is up 13.2% to $23.3 billion. Trade with
the EU forms 52.9%, with the CIS 15.4%, Eurasian Economic Community
7.8% and Asia-Pacific Economic Community 15.9%. Trade volume between
China and Russia reached $29.1 billion in 2005, an increase of 37.1 %
compared with 2004. China’s export of machinery and electronic goods
to Russia grew 70 %, which is 24 % of China’s total export to Russia
in the first 11 months of 2005. During the same time, China’s export
of high-tech products to Russia increased by 58 %, and that is 7 %
of China’s total exports to Russia. Also in this time period border
trade between the two countries reached $5.13 billion, growing 35 %
and accounting for nearly 20 % of the total trade. Most of China’s
exports to Russia remain apparel and footwear. Russia is China’s eighth
largest trade partner and China is now Russia’s fourth largest trade
partner, and China now has over 750 investment projects in Russia,
involving $1.05 billion. China’s contracted investment in Russia
totaled $368 million during January-Spetember of 2005, twice that in
2004. Chinese imports from Russia are mainly those of energy sources,
such as crude oil, which is mostly transported by rail, and electricity
exports from neighboring Siberian and Far Eastern regions. In the near
future, exports of both of these commodities are set to increase, as
Russia is building a giant pipeline to Pacific Ocean with a branch
to Chinese border, and Russian power grid monopoly UES is building
some of its hydropower stations with a view of future exports to
China. Independent Russia’s foreign policy is emphasizing cooperation
with the West in solving regional and global problems. But Russia
opposed the expansion of NATO into the former Soviet bloc nations of
the Czech Republic, Poland, and Hungary in 1997 and, particularly,
the second NATO expansion into Baltic states in 2004. In 1999, Russia
opposed the NATO bombing of Yugoslavia for more than two months, but
later joined NATO peace-keeping forces in the Balkans in June 1999. A
union agreement between Russia and Belarus was formed on April 2,
1996. The agreement was tightened, becoming the Union of Russia and
Belarus on April 3, 1997. Further strengthening of the union occurred
on December 25, 1998, and in 1999.

4. Summary of Regional Analysis on the Black Sea and Caucasus

It is necessary to encourage co-operation areas like oiland natural
gas transport, environment, tourism, security policies among the Black
Sea countries. The Leaders of the Black Sea and Caucasus countries
founded the Organization of Black Sea Economic Cooperation, as a
regional forum in 1992. Within this project energy transport issue
has a special importance. By this way it will be possible to expand
ties with the European Union. Oil companies and regional governments
are keen to find alternatives to shipping Caspian oil through Turkey’s
busy Bosporus Strait, already used to transport more than 50 million
tons of oil a year. In June 2006, the new Baku-Tbilisi-Ceyhan pipeline
will start operation, carrying Caspian oil 1760 kilometer across
Azerbaijan and Georgia to Turkey’s Mediterranean coast, the Gulf of
Alexandretta. Another proposed pipeline across Turkey from the Black
Sea port of Samsun to Ceyhan is also building. The organization’s
12 members Greece, Albania, Armenia, Azerbaijan, Bulgaria, Georgia,
Moldavia, Serbia-Montenegro, Romania, Russia, Turkey and Ukraine also
signed a declaration pledging closer cooperation, in areas from energy
and tourism to fighting organized crime and ties with the European
Union. Part of that cooperation includes plans to connect regional
electricity and natural gas networks across to western Europe. Armenia,
Azerbaijan, Georgia, Moldavia and Ukraine are already receiving EU
assistance with financial aid and advice on market oriented reforms
through the EU’s new Neighborhood Policy program. The BlackSeaFor group
for naval cooperation was also founded. The problem of globalization
and its effect on the navies of the Black Sea countries, BlackSeaFor
peacekeeping operations, and environmental protection in the Black
Sea region. Turkey has suggested that the question of BlackSeaFor
participation in anti-terrorist operations should also be touched
upon. Officials of the Georgian Defense Ministry and NATO navy
commanders take part in the conferences. Six Black Sea countries
(Ukraine, Bulgaria, Romania, Georgia, Russia and Turkey) signed
the agreement on founding BlackSeaFor in Istanbul (Turkey) on April
2, 2001.