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Primakov Gets the Boot

Coming on the eve of an impeachment vote, Yeltsin's dramatic move presages a standoff with the Duma.
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A shiver went through global markets this morning as Russian President Boris Yeltsin -- playing the role of fickle contrarian who thrives on adversity -- fired Prime Minister Yevgeny Primakov in Moscow. Equity, currency and fixed-income markets fell, led by a 16.2% decline in the Russian Trading System Index from Tuesday's close. European markets have fallen in sympathy.

Fixed-income markets also dropped on fears that the recently completed


deal with Russia would be thrown off track, risking a wider range of debt defaults than envisioned just yesterday. With the looming specter of deep political instability, the Russian equity market -- one of the best-performing since Jan. 1 -- is likely to remain under a cloud and, depending on how far it tumbles, may give other emerging markets the jitters.

The worries have only been compounded by the resignation of U.S.



Robert Rubin

. Yeltsin's domestic concerns also give him a reason to retreat from discussions aimed at settling the crisis in Kosovo.

Yeltsin immediately named First Deputy Prime Minister and Interior Minister

Sergei Stepashin

as acting prime minister. Stepashin, one of the few remaining longtime Yeltsin loyalists in the government, was elevated to the status of first deputy just last week.

Yeltsin, whose poor health has apparently reversed somewhat in recent weeks, is a master of political intrigue and revels in making grand gestures to remind all who might have forgotten that he remains in power. The popularity of Primakov, a former spymaster who had become the country's most popular politician since being named prime minister in September, has plainly irked Yeltsin, who does not willingly share the spotlight with anyone.

Although Primakov steadfastly insisted he was not interested in becoming president, he has in recent months topped the polls for the July 2000 presidential election. This must have chafed Yeltsin, who may still quietly fancy the idea of remaining president for another four years, despite both the dubious constitutionality of another term and his own terrible health. Yeltsin's popularity ratings have not moved out of the single digits for months.

But topping Yeltsin's list of concerns is that the


, the lower house of parliament, will begin debate tomorrow over the impeachment of the president, with a vote expected by Saturday. The passage of one of the five motions of impeachment by the Duma would probably not result in his being forced from office; two courts stacked with Yeltsin appointees would need to approve the impeachment. But he is eager to derail the impeachment effort to prevent even greater tarnishing of his already-sullied legacy.

Ironically, the sacking of Primakov and the nomination of Stepashin open up the possibility for a constitutional nightmare, which may well do even greater damage to the Yeltsin legacy. The Duma and the president are sworn enemies, and the communist-dominated parliamentary body is likely to go to the wall with the president over Stepashin's nomination.

Look for a replay of the high-stakes game of chicken between the Duma and the president over confirmation of the acting prime minister, complicated by impeachment proceedings. To make matters worse, the Duma liked Primakov. The head speaker of the Duma commented earlier today that the sacking of the prime minister increased the chances of a successful impeachment vote against the president, and today it passed a nonbinding resolution urging the president to resign.

Under the Russian constitution, the president cannot dismiss the Duma if he is under impeachment charges. However, also constitutionally, if a prime ministerial nomination is not accepted three times in succession by the Duma, the Duma is automatically disbanded. While legal opinion has it that the former detail outweighs the latter, such constitutional niceties have generally been steamrolled by the president in the past.

In a statement released by the Kremlin, Yeltsin pointed to the need to improve the country's economic situation -- not political intrigue -- as the key motivation behind the sacking of the prime minister. During his nine-month tenure, Primakov managed Russia's continued economic decline, while bringing about a modicum of stability. But the veneer of stability is about as strong as a snowflake in May, and Primakov did little to try to bring about some of the deep-seated structural reforms that Russia so direly needs.

At heart, President Yeltsin may still care about true reform in Russia, and he may want one last push toward true radical reform. During a national television appearance Wednesday afternoon, Yeltsin explained that Acting Prime Minister Stepashin would give market reforms a fresh impetus.

But Yeltsin has expressed similar sentiments before. Also, by throwing the government into disarray at a key juncture in the process of winning funds from the IMF, Yeltsin may harm his dreams of reform and cause the government to default on international obligations.

World Bank


James Wolfensohn

confirmed that the bank's pending US$3 billion loan package was on ice until Russia has a new government.

Stepashin's meteoric rise to prominence may have more to do with Yeltsin's own desire for personal power and security than a sudden recognition of a burning reformist desire buried within the soul of the new acting prime minister. As minister of the interior, Stepashin controlled a vast web of power, including some 220,000 troops scattered throughout Russia. Stepashin's key role as a prominent hawk in Russia's disastrous military campaign in the breakaway republic of Chechnya in 1994-1995 -- while he was head of the


, the successor to the


-- demonstrated that he is not unwilling to use that power. Lastly, that Stepashin is a Yeltsin loyalist is also of paramount importance to the president, who fears prosecution of himself and his family by political enemies once he is no longer president.

The most liquid Russian issuers, particularly oil stocks that have enjoyed a dramatic run-up over the past several weeks such as




, are likely to continue to be under pressure as political uncertainty assumes center stage. Russia has hopefully relinquished the crown it earned last year as international capital markets spoiler.

Kim Iskyan is an equity strategist and senior analyst at Moscow-based brokerage firm and investment bank MFK Renaissance. MFK Renaissance has a buy rating on LUKoil (no underwriting relationship) and a buy rating on Surgutneftegas (no underwriting relationship). Iskyan began his career at the emerging markets trading desk of Oppenheimer & Co. At the time of publication, he held no positions in any companies mentioned in this column, although positions can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at