Monday, January 31, 2005
Economic Growth Rate in Russia in 2004: 6.9%
Published: 31.01.2005 16:53 FC Information Agency -
Russia's economic growth rate for 2004 was 6.9%, Vice Premier Alexander Zhukov said at the IV session of the Russian economic and financial forum in Switzerland on January 31. According to him, it is one of the highest in the world and a relatively stable one for Russia.
Foreign Investors Positive about Work in Russia
Most foreign investors who attended the consultative council for foreign investment gave a positive assessment of their work on the Russian market, Russian Deputy Prime Minister Alexander Zhukov said summing up the results of the Davos meeting of executives representing international majors working in Russia.
No nationalization in Russia, deputy PM says
World Bank head comments on Russian economy
S&P GIVES RUSSIA INVESTMENT GRADE STATUS
The agency also raised Russia's short-term foreign currency rating from the B to the A-3 level, its long-term national currency rating from BBB- to BBB, and its rating by the national scale from ruAA+ to ruAAA, with the rating forecast remaining stable. The agency points out that Russia is the eleventh state now whose rating was raised by it from speculative to investment grade.
Helena Hessel, the agency's analyst, explained that the decision to revise the rating reflected major improvements in the country's debt level and its stock market liquidity abroad. In her opinion, these improvements are so substantial that they outweigh the serious and growing political risk which continues to be the main restraint on Russia's ratings.
In Helena Hessel's opinion, the fact that the Russian government has become a purely external creditor by the end of 2004 is a major reason for revising the rating in the context of [the country's] lasting political and structural problems. Besides, financial flexibility demonstrated by the government means more than other problems.
Friday, January 28, 2005
Russian Economy Minister Does Not Rule out Revision of Privatization
RUSSIA'S ECONOMIC GROWTH SLOWS DOWN DUE TO MISTRUST BETWEEN BUSINESS AND STATE
Thursday, January 27, 2005
NO SHOCKS ARE IN STORE FOR RUSSIAN ECONOMY IN 2005, PUNDITS SAY
One of the panelists, Yevgeni Gavrilenko, said that no severe economic upheavals were likely to befall Russia in 2005, but that the country would have to dramatically improve its investment climate in order to restore the confidence of foreign and domestic investors alike. Economic pundits predict further decrease in Russian exports and faster appreciation of the national currency in 2005. They expect the rate of economic growth to go down one percent year-on-year. GDP and inflation forecasts are somewhat harder for the analysts to make; the pace of GDP growth will depend largely on oil price fluctuations at the world's commodity markets, they say. As for the inflation rate, it is likely to stay somewhere within the 9%-to-15% range this year, says Andrei Belousov, head of Russia's Center of Macroeconomic Studies and Forecasts.
The panelists were divided over the perceived crisis in relations between the country's political leadership and corporate executives. Some argued that the business community's confidence in the government was crucial for economic growth. Others brushed this off as an overstatement, saying that the business-state relationship's actual impact on the economic situation was not all that serious. Belousov, for instance, maintains that only a narrow circle of moguls has been affected by the government's policies while for entrepreneurs of smaller stature, it's business as usual. But there is a conflict between large and medium-sized businesses, as big business has "privatized" many of the country's institutions, including the courts, the analyst said.
According to the panelists, there are lessons to be learned from failures in the first leg of the government's social security reform (this reform basically comes down to the replacement of welfare benefits with cash payments for pensioners, war veterans, and other economically disadvantaged population groups). These failures have highlighted the need for preliminary cost estimations and for coordination of implementation strategies with authorities on the ground.
Yaroslav Kuzmenov, President of Moscow's School of Economics, said he was "terribly pleased we have burned our fingers" while trying to effect the welfare reform. He believes the government must keep that negative experience in mind as it launches education and healthcare reforms. These two sectors remain 50 to 60% underfunded, and transformations here are harder to bring about, noted Kuzmenkov.
Tuesday, January 25, 2005
Wrong moves in CIS
BBC Monitoring Russia has been losing its positions in the post-Soviet area because of incompetent Kremlin spin doctors who tend to choose wrong allies to support. If this trend continues, Russia will find itself in a political predicament and this may affect the pace of its domestic reforms, argues Alla Yazkova, senior research associate at the Institute for International Economic and Political Studies. The following is the text of report headlined "Foreign-policy botch-work. Russia continues to play dangerous games in post-Soviet area" by Russian newspaper Nezavisimaya Gazeta on 18 January; subheadings have been inserted editorially: The new year 2005 promises a series of fresh surprises in the post-Soviet area.
The parliamentary election in Moldova is scheduled for March. Moldova's approach to the solution of many foreign-policy problems including the character of its relations with Russia, Ukraine, and Georgia and its decision to either retain its neutrality or step up the policy of Euro-Atlantic integration will depend on the future alignment of political forces.
It is necessary to look for ways to settle the Dniester Region conflict. If the election in Moldova takes place amid the same political sentiments that brought to power the liberal opposition in neighbouring Romania, Chisinau will even more actively insist on the observance of the decisions of the 1999 Istanbul summit, the elimination of Russia's military presence, and the bringing of an international peacekeeping contingent into the conflict zone. Tiraspol will respond to this with the further toughening of its stance. In this case Russia, which has rendered active support for the Dniester Region's separatist regime over the past decade, will face equally difficult problems in the region as the ones it encountered in Abkhazia or even more difficult ones.
Hotspots in the former Soviet territory appear more and more often due to the former elites' inability or unwillingness to take into account the growing trends to establish democratic norms in politics and society. In April, the Armenian opposition will celebrate the second anniversary of the adoption of the resolution on holding a referendum of confidence in President Robert Kocharyan in view of the doubtful results of the vote on his candidacy in the 2003 presidential election. The opposition's attempts to implement this decision was suppressed by the security structures in April 2004. All the indications are that the same scenario will be repeated this year also. Armenia is subject to growing international pressure due to the lack of constructive steps to settle the Nagornyy Karabakh problem and liberate the occupied regions of Azerbaijan. Meanwhile, in defiance of obvious logic Russia relies on the Kocharyan regime and renders it substantial support including in the military sphere. It is for this very reason that, according to representatives of the opposition gaining strength, Moscow is dramatically losing its influence and prestige in Armenian society.
Growing negative sentiments in relations with Moscow do not always lie on the surface, but exist both in the policy of the Central Asian leaders and that of Belarusian Old Man Lukashenka. The CIS is becoming increasingly reminiscent of a kind of discussion club, whereas the projects promoted within the framework of this organization are hardly feasible, as attested by attempts to form the Single Economic Area comprising Russia, Ukraine, Belarus, and Kazakhstan.
It cannot be ruled out that associations such as GUUAM (Georgia, Ukraine, Uzbekistan, Azerbaijan, and Moldova) can step up their activities based on specific common interests as a counterweight to this structure. In addition, most CIS countries become increasingly oriented towards the outer world and in this situation Moscow's persisting illusions and the lack of strategy based on existing reality cause dangerous mistakes.
More and more often sensitive spots on post-Soviet territory crop up due to the Russian political elite's inability or unwillingness to take into account the growing trends to establish democratic norms in politics and society.
Ukraine - the country where a globally unprecedented campaign to support a pro-Kremlin candidate was waged during the presidential election - proved to be the weakest link in the Kremlin's strategy and tactics last year. In Gleb Pavlovskiy's opinion, Russia "insufficiently participated in Ukrainian affairs;" meanwhile, it can specifically be reproached for its excessively active attempts to preserve the Soviet-type regime it controlled. Nor did it hesitate to fan separatist sentiments in the Russian-speaking southern and eastern regions of Ukraine. However, the Kremlin spin doctors proved unable to professionally cope even with this task and failed to get to the bottom of interclan disagreements or comprehend the distinguishing traits of Ukraine's national mentality, which were vividly demonstrated at the turn of generations. Therefore, the reputable German newspaper Frankfurter Allgemeine assessed the results of "aggressive intervention" on the part of the Russian "advisers'" as "foreign-policy botch-work."
Russia's interference in the election process in Abkhazia at all its stages was even more primitive. By getting involved in the purely internal and, in essence, illegitimate election process in the self-proclaimed republic Russia can suffer major losses in the long run, for it placed the interests of its own and foreign clan structures above its national interests. So far, this interference substantially weakened Russia's positions not only in Abkhazia itself, but also in Russia's relations with Tbilisi. If Russia aspires to become a civilized democratic country maintaining normal relations with its neighbours, it will sooner or later have to give up support for separatism including in Abkhazia. The sooner this happens, the better.
The experience of Russian policy in Georgia, Moldova, and Ukraine also exposed the threat of Russia's increasing sliding towards geopolitical opposition and in a number of cases confrontation with the Euro-Atlantic structures (the EU and NATO) and in the long run, also with the United States.
How come Moscow, which worked so hard to strengthen its positions in the West, is wasting everything in confrontation which cannot bring it any dividends anyway? It is, indeed, difficult to imagine a situation where Russia, acting in line with political logic, would consider it worthwhile to simultaneously worsen relations with the EU, OSCE, NATO and in the long run, also with the United States. Apparently, the temperature of Russia's relations with the West dropped to its lowest level since the Cold War during the Ukrainian crisis. Will Russia, left on its own, be able to withstand even "lukewarm confrontation" with the rest of the world? And how can this affect the continuation of the policy of domestic reforms?
Particularly since the post-Soviet states ever more actively choose the European direction for their development, which gives food for thought.
Troika Dialogâs forward equity placement and debt-financing calendar charts Russiaâs evolution towards a broader, deeper market. New equity financing, which we define as including strategic purchases, placements and IPOs, is expected to reach $9.7 billion in 2005. Not all of this supply will flow to the secondary market, but much of it may. Total equity financing of $34 billion through 2007 represents 15 percent of Russiaâs current market cap of $221 billion.
For 2005, most expected equity placements will come from the faster-growing and more under-represented industries. Remarkably, the largest sector, oil and gas, is not expected to gush equity placements in 2005. The still restructuring utilities are not likely to generate much in this line, either. Instead, in both absolute and relative terms, the telecom sector is set to dominate, with more than $6.1 billion in expected equity deals. The metals sector comes a distant second with $2.0 billion, and banks are expected to make a $1.0 billion-plus debut. The remaining $800 million is to be raised within the manufacturing, consumer and retail, transport and chemicals sectors. Such volumes look modest, but they are quite substantial on a relative basis for these less-liquid parts of the market.
Through 2007, the equity placement picture changes somewhat, with oil and gas, together with electricity, picking up some of the slack. In the next three years, we expect $19.4 billion in oil and gas equity placements. These are the largest absolute volumes, representing more than 16 percent of the sectorâs market cap of $124.7 billion. We may also see $800 million in electricity placements, which, however, will constitute only 4 percent of that sectorâs market cap of $21 billion. In relative terms, Russiaâs fast-growing consumer sector is expected to issue the most through 2007, in excess of $1.6 billion, or 38 percent of its current market cap of $4.3 billion. We expect the metals and telecom sectors to be the second and third most active in equity placements during this time, with a respective 23 and 21 percent of their current market caps.
The debt-issuance picture is similar to that for equity placements through 2007. In absolute terms, the oil and gas sector dominates, with $13.3 billion. On a relative basis, consumer and metals are again at the top of the list. Consumer sector debt issuance of over $1 billion would represent 166 percent of the sectorâs current net debt. For metals, the respective figures are $3.9 billion and 152 percent.
A closer look at the future equity and debt activities of each Russian sector yields a number of important conclusions.
Oil and gas: For oil and gas equity placements, Sibneft is the wildcard. While we expect a $14.4 billion strategic transaction in Sibneft by 2007, the fluid nature of Russian oil politics could play havoc with this timetable. On the debt-issuance side, Gazprom is king, even a Sovereign proxy. We expect it to sell more than $9.5 billion in debt through 2007, representing over 70 percent of the sectorâs total issuance and a third of all Russian corporate debt placements.
Electricity: Restructuring keeps Russian utilities out of the placement limelight through 2007. Indeed, the federal âgencoâ auctions in 2006 and 2007, worth upwards of $400 million each, may mark the early stages of equity-placement activity. We expect only $1.9 billion in debt issuance through 2007, mostly by UES. The sectorâs total debt issuance represents a bare 9 percent of its market cap, the lowest ratio in Russia. Compared with global utilities, Russiaâs are woefully under-leveraged.
Telecom: This is the star equity issuer of 2005. Of the five major deals expected in 2005, the privatization of Svyazinvest is clearly the most important, not only in terms of size ($3.6 billion of the sectorâs $6.1 billion in equity placements) but also as a means of reiterating Russiaâs political commitment to private ownership and revitalizing the countryâs largely dormant fixed line sector. We expect all of Russiaâs fixed line super-regional operators and currently traded mobile providers to tap debt markets through 2007, to the tune of almost $3.4 billion.
Metals: Next year will be an important year for Russiaâs metals, too. With $2.0 billion in projected equity placements, this sector comes second only to the telecom sector. We anticipate large gold, steel, titanium and aluminum equity placements in 2005. On the fixed income side, the Russian metals sector is gearing up but from an extremely under-geared base.
Manufacturing: Every large Russian manufacturing company (except the largest, AvtoVAZ) is likely to be involved in equity transactions in 2005 to 2006. The sector is also expected to raise $950 million in debt through 2007. While small in absolute terms, this makes up 38 percent of its market cap, the highest ratio among the sectors.
Consumer and retail: In the next three years, at least 14 consumer and retail companies may come to market, more than in any other industry. On a relative basis, consumer and retail is expected to be Russiaâs most active sector. Total equity deals of $1.6 billion represent 38 percent of its market cap, and bond placements of over $1 billion equal, to 166 percent of current net debt. Both these percentages are the highest among the sectors.
Banks: In 2005, a privatization and two potential IPOs could begin broadening this sector beyond Sberbank.
Other sectors: In smaller, less liquid sectors, expect to see a few privatizations, placements and IPOs in the next three years. Chemicals, however, are much like utilities, in that consolidation should limit equity and bond issuance until after 2007.
James Fenkner is chief equity strategist and head of research at Troika Dialog. This piece first appeared in the October edition of Troika Dialogâs âStrategy Monthlyâ report.
The Kremlin and business
Who Vladimir Putin trusts to run Russian business
Summary prepared by Hayk Sargsyan of CDI
It Is a quirk of Russian history that the country's best hope of recovering the influence lost by Moscow with the fall of the Soviet Union is through the energy business. A sub-quirk is that, even aside from spy-turned-president Vladimir Putin, a growing number of those presiding over Russian businesses were once involved with efforts to confound the West by other means. Such people do not exactly seem like ideal corporate partners. But, increasingly, it may be safer for investors to be with them than against them.
Some of these Kremlin henchmen have little or no business experience. And, for investors in the enterprises they help to run, they bring more specific risks. One is that, especially in the energy sector, they will make important decisions, as Paul Collison, an analyst at Brunswick UBS, puts it, in the interests of "only one shareholderthe state". And if the dismemberment of Yukos is any guide, Mr. Putin's crowd does not have an especially high regard for the rights of minority shareholders.
Those observers who remain bullish about Russia's business prospects argue that, in their heyday, the attitude of the oligarchs to corporate governance was much worse than that of KGB Inc today.
Unfortunately, the risks of betting on Russian firms in which the Kremlin does not have a say, especially those in competition with state-dominated interests, look even greater. For Mr Putin, predicts Chris Weafer of Alfa Bank in Moscow, putting his loyalists on the boards of firms such as Rosneft is only a prelude to ensuring that these firms become the undisputed champions in their industries. If he is right, in many non-state firms the dangers of poor governance will increasingly be eclipsed by the perils posed by government, in terms of licence revocations, access to pipelines and so onnot to mention, as Yukos discovered, surprise tax bills.
$161Bln of Taxes Collected in Russia in 2004 â Official Report
Tuesday, January 18, 2005
EBRD to Launch Multi-Million Lawsuit Against Russia's Abramovich
Russia fails to agree with Paris Club
On Friday, at a special meeting of the Paris Club held to handle âthe Russian issueâ, Sergey Storchak, the head of the international financial relations, public debt and national financial assets department of the Finance Ministry, stated that the terms discussed at the negotiations did not suit Russia, and proposed to start discussions anew.
At present, the deadline for reaching an agreement is uncertain. Some sources both in Moscow and Paris note that the negotiations will be resumed rather soon â within a few weeks. However, finance officials seem to want some political impetus.
âJudging from the standpoints that Russian and German representatives have assumed, I do not rule out the possibility that personal arrangements between Vladimir Putin and Gerhard Schroeder (the German Chancellor) will be required for a successful outcome,â a representative of a Paris Club creditor country said. In his words, itâs the Germans - Russiaâs chief debt collectors (Berlin will take up over USD20bn of the aggregate sum of Russiaâs debt to Paris Club creditors, which totals USD47bn) - who were tough, and thus frustrated the deal.
Meanwhile, it is namely Germany that is known to have triggered Russiaâs resolution to pay its debts off to the Paris Club ahead of schedule. Last June, the German Finance Ministry sold securities, secured by Russia's sovereign debt to Germany, to investors. The securities, issued on terms highly attractive for the market, equaled EUR5bn. Berlin resorted to the transaction on account of serious budget problems, yet, having procured active money, it spoiled relations with the Russian Finance Ministry for one thing, and impaired the market situation for another.
Investors were right to expect that securities with similar parameters would also be profitable to them (loans of Russiaâs big corporations could be referred to these). To avoid the risk of such operations recurring, the Russian Finance Ministry started to seriously think over the possibilities of premature debt discharge. First, Russian Finance Minister Alexey Kudrin announced Moscowâs desire to exchange non-market debt to the Paris Club for market instruments â Eurobonds. Ultimately, the terms of the German bond issue adversely affected negotiations between Moscow and the Paris Club. According to the source, all parties involved admitted at the opening of the negotiations that the terms of the transactions had to be âmarketâ terms.
Given that, it is namely German bonds that serve as the only market benchmark. Russian officials have been contending that the terms should be similar to those of the June issue (Germany sold the securities with an approximate 10 percent discount).
Yet, the price for the German securities has changed drastically since the date of the issue. One of the bondholders stated, âIf in summer, their price was 100 percent, now itâs 123 percent of the face value.â (The marginal value of securities is calculated in the same way as the nominal value, plus interest accrued throughout the whole of the circulation period). And it is this price that the German officials grounded their calculations on at the negotiations at the Paris Club. In other words, Russia was in no position to expect a discount, and going in the completely opposite direction, it was suggested that Russia should pay a sort of âbonusâ to the sum of the debt retired. Naturally enough, the Finance Ministry could not agree to such terms.
Vremya Novosteyâs source in a big investment bank points out that Berlinâs standpoint seems to be a cunning one. He explains that the growth in the prices for German securities is accounted for not only by poor floatation conditions, but also by how investors fancied further developments: âThe market thought Germany wouldnât make a second issue, Russia would buy back its debt to the Paris Club, and the German Eurobonds would turn into purely German liabilities, as opposed to securities secured by Russiaâs debt payments.â According to all appearances, that is what Russia is counting on. However, the negotiations are being drawn out, and the Germans may not wish to wait for âactive moneyâ from Russia for a prolonged period.
Already in October 2004, German Finance Minister Hans Eichel stated that in 2005, Germany proposed to boost the sales of national assets, so as to bring down the budget deficit, which had been above the ceiling of 3 percent of GDP, set by the European Union, for the third year on end. The assets include Russiaâs debt to Germany. To put it in other words, the June developments can easily be repeated. In this case, to retrieve all its debt obligations, Russia will have to pay far more than the current USD6bn. Moreover, the source says, Italy is likely to follow Germanyâs suit - Russia owes the former USD5.7bn. If achieved, agreements on the principles of Russiaâs debt payment to the Paris Club could sensibly improve the chance that the major rating agencies would upgrade Russiaâs sovereign rating in the immediate future. This is because such a transaction would reduce the dependence of Russiaâs debt repayment on macroeconomic factors like oil prices and world currency fluctuations.
Thereby, our country could maintain creditworthiness even in case the situation on commodity and currency markets worsened drastically. Simultaneously, a number of analysts observe that such a favorable course is only possible, provided that the terms of the arrangements with the creditors are fairly advantageous for Russia. Currently, Russiaâs gross debt equals only 25 percent of GDP, whereas in 1999, it made up to 120 percent. It is among the worldâs lowest public debt to GDP ratios. Analysts presume that in 2006, the country will manage to cut the debt to GDP ratio to 19 percent, and to 15 to 17 percent by 2008-2009. With rates reaching the above levels, experts believe the possibility of Russia encountering problems attending to its debts insignificant.
In this context, most analysts tend to regard Kudrinâs statement, that the subsidiary earnings from the stabilization fund expected above 500bn rubles are to be primarily used for foreign debt repayment, a positive one. This permits confidence in a soon repayment of Russiaâs debt to Paris Club creditors to the total of some RUR20bn (about USD714m). Preliminary forecasts put the volume of Russiaâs Stabilization Fund at RUR522.3bn (about USD18.65bn), as of January 1.
Note, that in November, the Russia that had earlier held a rigid position with respect to the Paris Clubâs offer to write off 80 percent of Iraqi debt, agreed to the motion, although earlier it insisted on writing off only 50 percent of overall Iraqi debt. Finance Minister Kudrin commented on the decision, and said that consequently Russia was hoping for a similar agreement with regard to its debts from Paris creditors - yet the parties failed to reach an agreement.
Monday, January 17, 2005
TEN MOST IMPORTANT RUSSIAN ECONOMIC EVENTS in 2004
MOSCOW, (RIA Novosti) - RIA Novosti presents ten most important economic events of the 2004 period.
1. An auction for the sale of 76.79 percent of all Yuganskneftegaz shares in line with a court verdict on forcing Yukos to repay its tax debts for the 2000-2001 period was held.
2. The dollar plunged against the ruble down to 2000 levels, with the euro's exchange rate against the dollar soaring from 1.26 in late 2003 to 1.35 by late 2004.
3. A stabilization fund was established. The Ministry of Finance predicts that its basic 500-million-ruble levels will be exceeded before the year is out.
4. A bill on replacing benefits with cash compensations was passed. According to its provisions, federal benefit-seekers shall have their benefits in kind replaced with cash payments.
5. Global oil prices hit an all-time high. A barrel of crude oil cost more than $50. Oil-barrel prices in excess of $25 entailed sky-high export duties. Meanwhile Russian gasoline prices jumped by over 30 percent this year.
6. It was decided to reduce unified social tax rates from 35.6 percent down to 26 percent starting next year in line with the national tax reform.
7. The Russian Central Bank's gold-and-forex reserves increased considerably, exceeding the $100-billion mark. As of late 2003, the Central Bank's gold-and-forex reserves stood at $77.8 billion, totalling $119.8 billion December 17, 2004.
8. Fitch, which is the world's second largest rating agency, elevated Russian debt to investment level. Moody's had granted investment-grade ratings to Russia last year.
9. A system for insuring bank deposits was created. As of December 22, 2004, that system involved 379 Russian banks. The clients of any specific bank, which is part and parcel of this system, will get not more than 100,000 rubles back in line with state guarantees, if their bank goes bankrupt.
10. The state auctioned off its remaining LUKOIL stake (7.59 percent) and that of the Magnitogorsk iron and steel plant (17.9 percent) within the framework of the 2004 privatization program.
Sunday, January 16, 2005
Capital Flight From Russia Quadrupled in 2004
IMF Is Worried by Deterioration of Russian Economy
Saturday, January 15, 2005
Chechnya - Who Holds the Key?
Russia's oil boom started in 1999 and dramatically increased after the Sept. 11 terrorist attacks due to instability in the Middle East, and American, European, Japanese and Chinese needs for alternative oil sources. American and British oil companies began investing heavily in Russian companies (for example, the BP acquisition of 50% of the Russian company TNK in 2002, forming TNK-BP).
Friday, January 14, 2005
Despite years of building a socialist and communist society, Russians have always had an entrepreneurial streak in them. The present day renaissance of entrepreneurship in Russia began in the 1980s with so-called "Komsomol capitalism" which helped many of today's oligarchs make their first millions...
Thursday, January 13, 2005
TOUGH RUSSIAN LAW DOES NOT MEAN FOLLOWING IT TO THE LETTER
Each culture and each civilization has its own specific features. Europeans have a long tradition of legal regulations that dates back to the Middle Ages. Riesling is served in one German town in glasses that have as many pinches (to prevent the glass from sliding out of your greasy hands) as were stipulated by a law adopted at the end of the 16th century. In Russia, with its different societal model, the tradition has been completely different: many spheres of private life lost their immunity from the law only in the short period under Lenin and then in the beginning of the Stalin era.
Every culture reacts to blatant injustices in its own way. Europeans, who traditionally respect the law, go to court and will hopefully find a suitable way for them to defend their rights this time. In Russia, however, the law is tough, but is compensated by the fact you do not have to follow it to the letter, to paraphrase Saltykov-Shchedrin, a writer and imperial administrator of the end of the 19th century. Most often, the law-enforcer, a policeman or an inspector, is the one who takes the final decision as to which legal restrictions are sensible and enforceable, and which are not.
However, such a situation can breed corruption, which the Russian media foresaw when discussing the laws on beer drinking and smoking. Nobody even thought for a single second that these laws would really be implemented. "It is not Europe here," wise Russians say shocked by how Europe (and the US) deals with their smokers, who account for a fair part of their society. The balance between freedoms and restrictions is what every society seeks. Clearly, different societies look at each other for comparison and sometimes borrow freedoms and restrictions, often importing others' mistakes with them.
Many could use Russia's experience. Here is what happened to the law on beer drinking: it was published at a time when the law on replacing benefits-in-kind with benefits-in-cash came into effect. No matter who is to blame, either parliament that passed the bad law or the local administrators who failed to enforce it properly, it is clear that at such an explosive moment it could be dangerous to ban Russians from drinking beer in the street. As for the law on smoking, even though it is less stringent than its European counterparts, it is not taken seriously yet but also represents a political risk.
The Russian press is currently debating the efficacy of the political system that is gradually being formed, as the pro-presidential party quickly and unanimously adopts laws that "its" president has to block. In the past, parliament was accused of debating laws for too long with the opposition, and sometimes even blocking them completely. Now it is the other way round. But Russia will gradually organize its political system, and, besides, its development is a never-ending process for any country.
However, a more interesting point is that Russia has borrowed these restrictions from Europe or the US. It has long been clear to an outsider that the law on smoking, for example, is openly repressive, causes a split in society and violates human rights. Still, our legislators chose to pass their "tobacco" law along with the law on beer drinking based on Western laws, even if they took on a more moderate tone.
Besides, laws and regulations of the kind are sometimesactively promoted through global economic mechanisms. Many airlines, for one, including Aeroflot, had to ban smoking on aircraft in the late 1990s, as they could otherwise be banned from landing, for example, in the US.
That no country, civilization or culture is ideal is obvious, as is the fact that they should learn from each other's mistakes. This is not merely true of beer drinking and smoking. Still, voters in many countries are under the illusion that their experience should be an example for others to follow.
Russian travel agencies today complain that their clients often refuse to go to Europe because of repressive laws, for example, for smokers, rather than the high rate of the euro. They also predict an influx of European tourists to Russia - the country of free people.
Wednesday, January 12, 2005
Russian "plane" turns around
On January 1, Russians will awaken to a new reality. Changes have been happening gradually over the past year, and it is easier to see them all at year-end. Most of them were not at all expected. Putinâs victory in presidential elections, resignation of Kasyanovâs government, failure of administrative reforms, the banking crisis, the triumph of "state capitalism", weakening of the opposition, rise of radical sentiment, series of terrorist attacks, Russia turning into a unitary state, Moscowâs foreign policy failures and chilly relations with the Westâ¦ Russians feel as if they were passengers on a plane making a U-turn, just as Russian foreign minister Yevgeny Primakov turned his plane around over the Atlantic in 1999.
Putinâs victory in the March 2004 presidential elections was followed by radical changes in the government. Reshuffles were in the same style as in the winter of 2003. People capable of playing an independent role, were replaced by âproject managers' loyal to the Kremlin. It seems bright ideas also left the administration, giving way to corporate interests of the bureaucracy. The result was quick. Though the new government was formed under the banner of administrative reforms, its structure doesn't correspond to the declared principles. Finally, administrative reforms were "beheaded" after their inspirer Dmitry Kozak was appointed presidential envoy to the problematic Southern Federal District.
As a result, much time was spent on government reshuffles and division of powers. There were also foreign policy failures. Moscow's habit of putting all eggs in one basket and betting on relations with ruling governments led to conflicts with Georgia and Ukraine. Moscow's rhetoric on the West increasingly resembles the Cold War times. Again, the country is surrounded by enemies seeking to disintegrate Russia and weaken its position in the world. Such ideas were expressed by Russian President Vladimir Putin and other top officials. Political reforms were in line with Moscow's new thinking. A series of terrorist attacks that shocked Russia and the whole world, was used as an argument for canceling gubernatorial elections and switching over from the federal model to a de-facto unitary state.
There were economic problems, too. Irresponsible statements by financial monitoring officials triggered a banking crisis, leading to higher than planned inflation and economic slowdown. Corporate interests of the bureaucracy came to the foreground, and the government gained control of Yuganskneftegaz, the main production unit of the embattled oil company YUKOS. Perhaps, the government also plans to claim other "tasty morsels". In late December, tax authorities demanded unpaid taxes from two leading telecommunications companies " VimpelCom and MegaFon. Attacks against companies not associated with the scandalous privatizations of the 1990s, angered liberal officials in the administration.
It is unclear who will win " liberals or law enforcement forces. In fact, the fate of Russian economy is at stake: either it becomes a liberal market economy or an economy with government control over key sectors. It seems the final choice in favor of state capitalism has not been made yet. The Audit Chamber has not yet published its report on the result of privatizations, which could shake Russiaâs corporate sector. And there are still liberal officials in the government and the presidential administration. So, Russia's "plane" is hovering in a steep turn.
COMMENT: What the Dickens Is Going On?
Western businesses hoped to gain access to the markets and resources of the former Soviet Union and to find an almost instant market economy with a recognizable banking system, Western-style management, the rule of law and protection of shareholders' rights.
Chapter Two: "Hard Times." The old naiveti on both sides is clear to us today. Both parties received bruises; while Russia lacked a coherent strategy for reorganizing its industrial base, Western triumphalism often rubbed salt in the wounds of the humiliations that Russia felt in the 1990s. This led to mutual suspicion.
But not all the news was bad. Successful relationships were established and Russian businesses grew (some into global players in their sectors). Today, significant reforms have taken place, while signs of growth in the SME sector are finally evident. So in pointing out what remains to be done, we should not downplay what has already been achieved.
Chapter Three: "A Tale of Two Cities." The wishes of both Moscow and the West remain similar. But the naivete has gone, along with some of the initial enthusiasm for cooperation. Recent developments have fuelled concern over the future of private investment in Russia.
Moscow needs to establish an environment in which legitimate business can proceed without undue friction. The banking sector should be modernized and placed under competent regulatory oversight. The state has recently reasserted its direct role in business, at least in the area of "strategic resources." But what is the best role of the state - to manage state-run enterprises, or to create a healthy environment for FDI and local investment? Also, Moscow needs to understand the public relations disasters created by threatening to tear up the licenses of foreign investors and the way the Yukos case has played out in the Western media.
The West has to recognize that "the State is back." In emerging markets like Russia, business needs to work properly with what there is and to influence what can be changed - and not just wait for ideal conditions.
Chapter Four: "Bleak House." There are several threats to the developing relationship. Above all, the current political system offers stability, but it increasingly feels like a pyramid standing on its head. When stability balances on such a narrow base, it can deteriorate rapidly should the base shift or disappear.
Confidence could suffer if the rule of law cannot be established, if investors cannot rely on agreements with the state and if bureaucratic interference (as opposed to proper regulation) makes life difficult. Investors could lose interest in Russia. I spend much of my time encouraging businesses to look at opportunities here. But they have other options. Businesses that find Russia too difficult may simply give up - and perhaps go to nearby China, with its sometimes more enterprising approach to working with foreign investors.
Finally, oil wealth can be a curse as well as a blessing. If oil prices were to fall, Russia would be left exposed. The key is to raise living standards while establishing economic diversity.
Epilogue: "Our Mutual Friend." Russia is still developing - economically, politically and socially. This makes it an exciting, but difficult place to be. Many changes are still needed, and problems will occur. But for now, the state is back and business has to get on with it.
A former ambassador to Moscow used to say how tired he got of hearing that "Russia is a very rich country." In fact, most of its citizens are poor by Western standards and the scale of the economy is on par with Portugal. What Russia does have are large amounts of natural resources - albeit mostly in places that make extraction difficult.
Will Russia become a market economy with a democratic system, or a kleptocracy inhabited by disenfranchised and nihilistic citizens? When I first started to work in Russia some 15 years ago, I used to say that it would take at least one generation, and more realistically two, for Russia and the West to understand each other. I still believe that the first post-Soviet generation must take charge before we will see what Russia has become.
According to a proverb, a pessimist tells you that things cannot possibly get any worse, while an optimist assures you that they most certainly can. By this definition, I am neither a pessimist nor an optimist about Russia.
We should take a long-term, historical perspective. Maybe our grandchildren will meet to discuss how the dream of European integration - like the dream of a Soviet utopia before it - led to a similarly bloated, corrupt and unaccountable bureaucracy, which enslaved its citizens and pampered its nomenklatura. Perhaps, as "dissidents," they will hold such meetings in secret - or perhaps in a free Russia?
Lord Cromwell, director of The Russo-British Chamber of Commerce, has worked as a consultant in Russia on parliamentary, public-sector and economic reform since 1990. He contributed this comment, based on his remarks at a Wilton Park conference in the UK, to Russia Profile.
RUSSIA ENTERS 2005 BRUISED BUT NOT BEATEN
To Europe and the United States, Russia looks chastened and embarrassed after a battery of foreign policy setbacks over the past year, increasingly isolated in its authoritarianism. To Russians and some of their neighbors, Russia looks like a vigorous economy with an iconic president, a pillar of stability in an unpredictable world. The perception gap is only widening.
To Russian officialdom, the biggest political event of the year was Vladimir Putin's re-election in March. Yet to outsiders his re-election was a foregone conclusion and was eclipsed by other events, such as the ex-Soviet Baltic states joining NATO.
The Baltic governments' rejoiced at being welcomed into this western club and severing their last remaining ties to Moscow. Putin and his compatriots were unhappy, yet the president suffered no drop in popularity as a result. Most Russians had long ago resigned to NATO expansion and hold Boris Yeltsin to blame for the phenomenon.
Still, the expansion fed a fear among Russians that blossomed throughout 2004, the fear of a U.S.-led juggernaut advancing on Russia, trying to surround it, isolate and humiliate it, and pounce on its oil wealth. The West and Russia trade accusations of imperialism yet ignore their own imperial tendencies.
Yukos provoked another deep divide. Some western governments worried that the oil company's demise was a terrifying signal to honest businesses in Russia and their investors. Russia's rich started spiriting their money overseas again. Yet the rest of Russia cheered the prosecution of an oligarch whose riches were less than clean. And multinationals like GE inked major deals with Russia despite Mikhail Khodorkovsky's travails. The selloff of Yugansneftegaz, Yukos' main production unit, to state-controlled Rosneft outraged western observers, who called it a brash and unjustified renationalization. In Russia it was viewed as the safe and logical conclusion to the whole affair, even if it was not exactly fair.
The North Caucasus gave Putin little rest in 2004, and briefly rekindled global interest in the Chechnya war. The death of Chechnya's pro-Moscow president Akhmad Kadyrov demonstrated the Kremlin's lack of control over the province despite four years of insistence that the large-scale fighting is over. The horrific school hostage-taking at Beslan and other terrorist attacks gripped the world. Overseas viewers condemned the attackers yet found little sympathy for the Russian troops' plight.
Russia won diplomatic victories at the U.N. following Beslan but lost all chance of western support for the Russian government's policies in Chechnya when Putin introduced his electoral reforms in September. Western commentators and politicians were appalled at his plan to ban elections for governor and independent parliament deputies. Russians, however, largely agreed to Putin's promise of keeping them safe through stronger government.
Tensions with the West have been building for some time, and were fed by Georgia's revolution in 2003. Russia's relations with its southern neighbor continued to sour in 2004 as Georgia's president overtook the pro-Russian leadership of the Adjaria province, and then again when Moscow's involvement in elections in Abkhazia backfired.
This erosion of Russia's power along its periphery didn't stop there. Next came Ukraine, where Putin's blatant support and mountains of Russian campaign advice failed to get Viktor Yanukovych elected. The bungled election turned Ukraine upside down, pushing normally passive Ukrainians into the streets to demand and win a new vote, which Viktor Yushchenko easily won Sunday.
Many Russians agree that Putin's misstepped grossly in Ukraine, yet Ukrainians will hardly abandon their northeastern neighbor. Yushchenko's first trip abroad will be to Moscow, in an acknowledgement of how much damage Russia could do to his fledgling tenure.
The momentum of the end of the Cold War and its residual good will have at last died. The foreign policies of Russia and western countries in 2005 will reflect this. But Russia remains a country of great potential for oil investment, IT development, tourism. Whether 2005 taps these depends largely on Putin. He won a strong new mandate in March elections and endowed himself greater powers through his electoral reforms in the fall, yet his position on the global stage, and even his own backyard, is wobbly.
Russia's 2005 also depends on the outside world: WTO membership, whether Russia stays in the G8, its future role in Iraq. Western leaders must choose how much to punish Russians for their president's actions.