Chapter III.
Regional Developments

In March, President Yeltsin fired the Chernomyrdin cabinet and named Fuel and Energy Minister Sergei Kiriyenko as the candidate for Prime Minister, but the Duma, where opposition forces such as the Communists are superior in numbers, rejected this twice. Implying the possibility of Duma dissolution, President Yeltsin adhered to the approval of Kiriyenko as Prime Minister, and the Duma approved his choice in the third round, avoiding dissolution. However in August, with the financial crisis growing increasingly severe, President Yeltsin fired the Kiriyenko cabinet. Yeltsin attempted to reinstall former Prime Minister Viktor Chernomyrdin, but met with fierce opposition from the Duma, and was eventually forced to make the political compromise of installing Foreign Minister Yevgeny Primakov as Prime Minister. Since his appointment, the Primakov Administration has been operating with relative stability. Meanwhile, President Yeltsin suspended his duties repeatedly during the last months of 1998 due to ill health and pneumonia. President Yeltsin has an enormous impact on Russian domestic politics, so that his health problems will continue to merit close attention. Under these circumstances, political forces are beginning to actively rally and merge toward the Duma elections in 1999 and the Presidential elections in 2000. President Yeltsin will definitely not run in the latter, and in the days to come eyes will be not only on the moves of such political leaders as Moscow Mayor Yuri Luzhkov, Krasnoyarsk Governor Alexander Lebed, Communist Party President Gennady Zyuganov and Yabloko leader Grigory Yavlinsky, but also on the moves of Prime Minister Primakov, who is often mentioned as a possible strong candidate.

Where 1997 saw cooling inflation, a shift to positive GDP growth and the realization of a stable exchange rate, a turnaround in 1998 left the Russian economy struggling. With worldwide economic uncertainty focused on the newly emerging markets, the crash in international oil prices reduced Russia's current account surplus and expanded the fiscal deficit, with economic fundamentals deteriorating. As a result, confidence in the Russian economy continued to wane, stagnating foreign capital inflows to a trickle and inducing capital withdrawals, and financial uncertainty ensued at the end of May. The Russian Government had been working on the fiscal deficit since 1995 using short-term bond issuance and offshore financing, but the accumulation of these short-term bonds subsequently became a major factor behind Russia's economic difficulties. In July, a US$22.6 billion package was announced in additional financial assistance to Russia to be provided by the IMF, the World Bank and Japan, and this calmed the situation temporarily, but confidence in the Russian economy ebbed still further in August, causing turmoil in the domestic banking system and an otherwise grave economic situation. On 17 August, the Government announced a series of measures, including the effective devaluation of the ruble and partial freezing of foreign debt payments, but economic turmoil remained unabated. Prime Minister Primakov announced a series of measures in November toward overcoming Russia's economic difficulties, but little optimism can be reserved as to the actual implementation and effectiveness of these. Also still underway are IMF negotiations, regarded as vital in economic reconstruction. It remains to be seen whether the Primakov Administration can steadily implement the various measures it has put forward and restore market confidence.

In 1998, Russia continued to regard as the basis of its diplomacy an emphasis on national interest and the promotion of foreign policy with a balanced focus in all directions, aimed at building a multipolar world, and in addition to promoting relations with the Commonwealth of Independent States (CIS), Russia also worked to strengthen ties with Europe and the Asia-Pacific countries. In a May speech at the Ministry of Foreign Affairs, President Yeltsin noted the necessity of developing a dynamic foreign policy in all directions toward the protection of territorial integrity, security, the democratization of Russian society, the implementation of reforms and integration of the Russian economy into the world market economy. At the same time, there was some opposition to single-handed U.S. control in regard to issues such as the nuclear tests conducted by India and Pakistan, the Kosovo issue and the inspection issue regarding Iraqi weapons of mass destruction. Russia also maintained its opposition to NATO enlargement. In addition to bilateral relations with the countries of the CIS, the G8 and Asia, Russia also worked to strengthen ties with the EU and APEC, with particularly marked progress in relations with China and India.