May 18th 2005 · Prague Watchdog / Emil Souleimanov · PRINTER FRIENDLY FORMAT · E-MAIL THIS · ALSO AVAILABLE IN: CZECH 

Chechnya: Economic Renewal or Embezzlement?

By Emil Souleimanov, special to Prague Watchdog

The economic renewal of war-ravaged Chechnya, for which Russia had been striving the past few years, is just as controversial as the Russian "anti-terrorist operation" still underway in this republic. Slices of the Chechen pie are at stake, offering tremendous profits. And its not only controlling the oil wells and hundreds of illegal mini-factories that produce gasoline and kerosene from local oil, but also access to the large sums of money from the federal budget that has been flowing into Chechnya ever since 2000, when the republic’s administration was created.

Since then the representatives of the republic's and federal governments as well as various special commissions have regularly met to coordinate and supervise the allocation of federal funds for Chechnya’s renewal. Over and over again complicated programs were set up and then modified for revitalizing the social and economic areas and aiding the country´s infrastructure. These ambitious projects envisioned, among other things, creating thousands of job opportunities, constructing new apartments and rebuilding already existing ones, agricultural support, education and healthcare system renewal, improving the damaged environment, and building new cultural and sports facilities.

This renewal policy was carried out in the spirit of such slogans as “Peaceful Renewal of the Chechen Republic Continues” or “Visible Changes for the Betterment of the Republic”; reports were regularly published stating that the “renewal had entered a new stage.”

The successful evaluation of this policy has long since replaced battlefield information in the Russian media, with the exception of frequent news about the ongoing elimination of terrorists and so-called illegal armed groups.

The Chechen Pyramid

Listing all the different authorities involved in Chechnya’s economic restructuring would be quite tiresome for the reader; furthermore, providing a precise analysis is virtually impossible due to a lack of information about the work, the set-up, and rights and powers of individual institutions. The annual updated reports that are part of the Federal Target Program entitled “Reconstruction of the Economic and Social areas of the Chechen Republic” serve as the only quasi understandable guidelines, since the actual contents remain only on the paper it is written on.

It has been gradually revealed that the system’s main drawback was not so much in its bad personel policies, but rather structural mistakes in the organizational process itself. The rights and powers were insufficiently defined, which led to bad planning on the part of the participants during transactions and decisions about the renewal, as well as arranging for supervision over the fulfillment of their commitments. Trying to trace these various chain of events has become an extremely difficult job even for the special state offices who, in order to find out what the real situation is, must rely on the secret service to ferret it out.

In addition, because of the local tribal-clan-togetherness tradition in Chechnya, relatives and close friends have been appointed to lucrative jobs as their loyalty to the ruling clan is indisputable. Therefore, professional ability plays a marginal role in placing people in responsible positions. As a result, the corrupt system and massive tunneling of money is the direct consequence of a system that redistributes compensations and benefits to Chechens from monies that continuously flow from the federal budget. And this very same system also provides a breeding ground for confrontations to erupt among the competing authorities, clans and individuals.

Generally, we can say that some sort of an administrative and economic pyramid was created in which all participants who want to profit from the distributed funds must round out their share to the highest number. “Budgetary measures for Chechen renewal continue to be consistently misappropriated, which concerns all the parties involved: regional administrative directors, divisional heads of various Russian companies, and CEOs of Chechen enterprises. Everybody steals….,” stated the Russian newspaper Nezavisimaya Gazeta in 2003. This means that in present day Chechnya we are now witnessing a corrupt and functioning pyramid system that is typical of the post-Soviet southern states..

One Billion Here....One Billion There

When Sergei Stepashin, the newly appointed director of the Accounting and Review Chamber of the Russian Federation, said in late 2000 that the renewal program failed, many understood that this indicated the forthcoming resignation of Akhmad Kadyrov, the Moscow-backed administrator of the Chechen Republic. It was generally assumed that Kadyrov would not survive his six month interim period in office and would be replaced by General Gennadi Troshev and the Chechen government would be led by a military general-governor.

Even though Kadyrov pointed out that of the promised 1.115 billion rubles only 119 million reached Chechnya, very few were willing to listen. It then emerged that at Kadyrov´s request, 30 million rubles were taken from the federal budget to subsidize 30,000 Grozny University students. This became an embarrassment since at that time no more than 1,000 students were registered at the bombed-out university; and none ever did receive any money. Yet, in the end, Kadyrov managed to keep his post.

The above examples are minor compared to the much bigger scandals that followed afterwards. Shortly after his appointment, Viktor Khristenko, Chairman of the Government Commission for Renewal of the Social and Economic Areas of the Chechen Republic, said that by the end of 2000 the federal center would invest about 7.5 billion rubles from “different sources” into revitalizing Chechnya. The officials, however, failed to explain what happened to the difference between the two official amounts (1.115 billion and the 7.5 billion rubles).

And two years later the situation was not much better. Vladimir Kravchenko, in charge of the Chechen Prosecutor´s Office, officially stated that “in 2002 the losses arising from misuse of funds and other financial wrongs surpassed 128 million rubles.” In his report he also said that every year about 700,000 tons of oil and oil products were stolen and taken out of the country for which 209 people, mostly administrative employees, were held liable.

However, this did not prevent further misappropriation. In 2003 the Accounting and Review Chamber (Schyotnaya palata) of the Russian Federation said that 21 million rubles were stolen, and up to 366 million had been needlessly used. Considering that 3.44 billion rubles were to be invested into the country, this very same office in its later report stated that “none of the rebuilt industrial facilities were made operational.”

According to the aggregate figures presented by Russian Prime Minister Mikhail Fradkov in the middle of 2004, sixty two billion rubles had been allocated since 2000 for the revitalization of Chechnya. He added that “analysis of the course of the Federal Target Program for the Reconstruction of the Economic and Social Areas of the Chechen Republic shows that efficient implementation of program measures has been decreasing each year.”

However he also said that investments into renewal would continue to increase. The Russian Minister of Economic Development and Trade, German Gref, made a similar statement, saying that investments into Chechnya in 2005 would increase from 3.8 to 5.8 billion rubles.

Money initially begins disappearing in Moscow

This catastrophic condition cannot be solely blamed on the Chechens. According to the Stepashin office report published in November 2001, only 57 million rubles were misappropriated in Chechnya; yet 40% of the funds allocated for renewal never even entered the republic. Part of the problem is that monies are being stolen in Moscow before they even reach Chechnya. And three years after this report was published the situation has still not changed. The 2004 report states that “out of the 1.32 billion rubles allocated by the Russian Ministry of Finance to carry out the Federal Target Program in the first quarter of the year, only one billion was transferred into Chechnya’s budget, of which only 361.6 million rubles were used.”

The Moscow-backed Chechen administration was very well aware of the risk for ”early misappropriation” of the federal funds. Under Kadyrov’s motto, “We in Chechnya know best where and in what we should invest”, he continued persevering to increase his control over the flow of money. As early as 2001 he managed to get a considerable share of stocks in the Grozneftegaz Company, founded by the then Russian Prime Minister Mikhail Kasyanov. Despite all of Kadyrov´s efforts though, the controlling interest went to the Rosneftegaz Company with a significant state share. In 2004 actual control of the major part of the oil wells by the republic’s administration (Kadyrov’s clan in reality) was legalized and by the end of the year was signed into agreement between Putin and Alu Alkhanov, Kadyrov’s successor.

The use of goodly profits from the sale of more than a million tons of Chechen oil each year was easy to incorporate into the official draft, which counts on the economic independence of Chechnya being achieved in the final stage of renewal. The very same idea was recently included in Gref's plan, which seeks gradual assistance increases to Chechnya along with providing it with a favorable investment climate. The economic scientist, Salambek Maigov, commented on this idea by saying: “Chechnya must not be a passive receiver of assistance that is part of the Federal Target Program. Instead, they have to come forth as the initiators of developing and implementimg definitive projects.”

However, the question remains whether any perspective investors exist who would be willing to invest in this war-torn country where nightly shootings are common and potential partners may be kidnapped. So far no similar plans have proved to be illuminating, even though the rhetoric remains unshaken.

Chechen Prime Minister Sergei Abramov is even seriously considering opening up a Chechen Disneyland and a huge Water Park for Southern Russian visitors. Yet plans to turn Chechnya into a tourist paradise have not been met with a positive response from either possible investors or people in the neighboring areas. So the prospects of a speedy renewal of this war-ravaged land still seem very far away.

Emil Souleimanov, PhD, is a political scientist. He works at Charles University in Prague. Contact:


 · Illegal expenditure of government money revealed in Chechnya (PW / Timur Aliyev, April 16, 2005)
 · The Chronicle of Reconstruction (website of the Moscow-backed Chechen government)
 · The Federal Target Program for the Reconstruction of the Economic and Social Areas of the Chechen Republic
 · Chechnya started to slowly rise from ashes (PW / Yevgenia Borisova, December 19, 2001)



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