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Wednesday, October 26, 2005

Kremlin makes 2008 elections crucial for stability

October 26, 2005 Prime-TASS - The powerful centralized system of government that has been created by President Vladimir Putin means that the outcome of the 2008 Russian presidential elections will play a vital role in determining the course Russia may take. The elections offer the promise of continued stability for eight more years, but a miscalculation by Kremlin power brokers during the run-up to the election has the potential to destabilize the country, analysts said. "I would say with almost full control over politics the Kremlin can organize any scenario it wants to in 2008, the question is whether or not the it will be able to ensure that the transition will proceed smoothly," Masha Lipman, scholar-in-residence and political analyst with Carnegie Moscow Center, said. "There are conflicting interests among both the Kremlin power groups and their clients outside the Kremlin. Whether a new balance can be achieved fluidly is the biggest question. Any type of (government) restructuring risks upsetting the balance," she added. The centralization of authority in the Kremlin makes the 2008 presidential elections at least as important as those which saw power transferred from Boris Yeltsin to Vladimir Putin in 2000, Roland Nash, chief strategist at Renaissance Capital, said. "The next president will inherit a system where there are far fewer checks and balances to the generation and legislation of policy," he said. "The possibility for political input elsewhere in Russia's system is limited by the concentration of authority in the Kremlin." Indeed, it is that concentration of authority in the Kremlin that has come under attack by critics from the left and the right. Putin's critics say that he had created a non-transparent political system in which all significant decisions depend on his own will and a close circle of friends and loyalists who are not public figures. In the meantime, he continues strengthening his "vertical of power." Both chambers of the Russian parliament are now under almost total control of the Kremlin. "During the 1990s, for the first time in Russian history, the firm grip of the state over Russia was loosened. In fact to such an extent that the government became inefficient and unable to fulfill its functions," Lipman said. "Putin proclaimed that he would undertake to consolidate the state, a legitimate task. But while the task was legitimate, the way he went about it was not by strengthening institutions, but by re-centralizing power in the Kremlin and making them irrelevant," she added. However, other analysts argue that a strong central authority is necessary to maintain Russia's stability and is keeping in line with Russia's history throughout which a centralized system of power existed, first under the tsars and later under the Communist Party. The current system was conceived not as a tool of the ruling elite, but to ensure a stable political and economic climate that is capable of bringing prosperity to the entire country, one analyst said. "This is the system that has historically existed in Russia and Putin and his allies believe that this is the only way Russia can be governed," Michael Heath, political analyst at Aton Capital, said. "There exists a uniform view that Russia should be governed through a vertical system of power. It is true that Putin's allies have benefited (from the centralized system), but the system wasn't created with that goal in mind. Rather, that was simply one of the results of the system's creation." But others vigorously disagreed. "I am not the only one who believes (this system was created for the benefit of the president and his allies)," Lipman said. "There was a recent survey (of Russian public opinion conducted in spring 2005 by Levada Center), in which 83% of those surveyed expressed the opinion that the Russian government is a close circle of people who only care about there own interests." Whether the current system of government can indeed bring prosperity and stability to Russia will likely in part be determined by the outcome of the presidential elections. A transparent, constitutional transfer of power would add a new layer of stability to Russia's political institutions, Nash of Renaissance Capital, said. "(It is my opinion) that Putin wants prosperity and stability, and has built a system of highly centralized control because he believes it is needed to push Russia in that direction and to protect it from slipping towards one of its two historical norms of chaos or totalitarianism," he said. But Nash warned that the same system is ironically the greatest threat to Russian democracy. "Unfortunately, the single major threat to Russia's stability and prosperity is that the system built by Putin could be used to push Russia toward the authoritarianism and state bureaucracy that could undermine the current promise of prosperity," he said. Historically, several countries have achieved strong economic growth under the guidance of a powerful central government. China is the most notable example, but the Chinese example is not feasible for the Kremlin as Russia and China are different in so many ways, analysts said. "Economically, they have hardly anything in common," Lipman said. "China is competitive on the world market and has been increasingly incorporated in the global economy, Russia can barely produce anything competitive except for raw materials. China's very strong advantage is cheap labor which is not the case in Russia. In my view, even though Russia may still have more freedom, the two countries are moving in opposite directions politically, China is gradually opening up while Russia is becoming more authoritarian," she added. However, the presence of a strong central government in post-Soviet Russia could have eased the painful transition to a market economy, Heath of Aton Capital said. "I think there is a lot of respect (in Russia) for the Chinese example," he said. "People wish the Soviet government had opted for gradual economic reform and avoided the political and economic upheaval that took place. The Chinese model would have been a much better model for Russia in the late 1980s. On the other hand in China you have absolute state censorship and a complete monopoly on power in the Communist Party and no one (in Russia) is advocating a return to a totalitarian state." Analysts declined to speculate on who exactly will become Putin's successor, but said that person will almost certainly have close ties to the Kremlin. In the case a successor is hand-picked by Putin, that person will almost certainly become Russia's next president, analysts said. "The most likely outcome is a compromise candidate, supported by all factions within the presidential administration," Nash of Renaissance Capital said. "Such a candidate would have little difficulty in getting elected but would find himself with less room for maneuver as president than Putin." While opposition political parties have been effectively marginalized, there still exists the potential for fierce competition between the rival power groups in the Kremlin as each jockeys for position before the elections. The Kremlin is often characterized as split between two interest groups with the relatively liberal progressives led by Head of the Administration Dmitry Medvedev on one side and the "siloviki," or representatives of the security forces, led by Igor Sechin, Medvedev's deputy, on the other side. "Simply because political conflict is no longer enacted in public does not mean to say that there isn't any," said Nash. "The occasional surfacing of politics into the public domain has indicated that there is plenty of disagreement within the Kremlin. "While policy creation without conflict can appear more stable, the absence of scrutiny and debate can result in poor policy. When there is little open debate, there is a danger that poorly designed or poorly constructed policy can become law," he added. The name of any successor will almost certainly remain a secret well into the run-up before the presidential elections in order to avoid political infighting in the Kremlin and assure a smooth transition of power, analysts said. "Conflict between the Kremlin factions is unlikely," Heath said. "Any person favored by Putin will be hidden until the end of the summer in 2007 and there will be no time to mount any type of opposition to the anointed successor. The faction will have no choice but to get behind the candidate and it would be very risky politically to oppose him with so little time to discredit or challenge him." Putin is constitutionally barred from running for a third term and has said repeatedly he will not seek to change the constitution in order to run for a third term. While Putin may intend to step down from the presidential post in 2008, it is unlikely he will stray very far from the Kremlin, analysts said. "At this point I tend to believe that he will step down in 2008, as he has repeatedly pledged," Lipman said. "Yet, I wouldn't rule out one hundred percent that he might change his mind forced by circumstances. If he does step down, he'd remain "in the ranks" as he said himself, that is will remain a key figure in the Russian power loop." In fact, Putin will probably remain one of the most powerful and influential people in Russia well after the 2008 presidential elections, analysts said. "Putin is likely to maintain a major role possibly as Prime Minister, possibly as the head of the state-owned oil and gas monopoly (Gazprom), and more likely as the leader of the largest faction in parliament (United Russia)," Nash said.

Tuesday, October 25, 2005

Russian industry and energy minister approves of capital outflow

Central Bank Forecasts $7 Bln Net Capital Outflow form Russia in 2005-2006WASHINGTON, October 25 (RIA Novosti, Alexei Berezin) - The Russian Minister of Industry and Energy said Tuesday that capital outflow in the country, expected to reach $8-9 billion this year, is proof that Russian business is venturing out in foreign stakes. "The outflow of capital ... is an absolutely legal process, which to a large extent denotes Russian companies' investment in certain projects and structures overseas," Viktor Khristenko said in Washington. The minister also said the process was normal and proved that Russian business, after succeeding domestically, had expanded to foreign venues. However, Khristenko cautioned against returning the same funds ventured by Russian companies abroad to Russia under the banner of foreign investment. "We must improve legislation and create sounder financial and banking systems to reduce risks causing the return of funds with the earmark of foreign investors," he said. Last week, Chairman of the Central Bank Alexei Ulyukayev said the net outflow of private capital could come in at less than the $9 billion expected in 2005. He said the net outflow of capital aggregated $2.8 billion in the first nine months of this year, a much lower rate than that logged for the same period last year.

Most Russians aware of international organizations

RBC, 24.10.2005, Moscow 19:42:57 - ROMIR Monitoring has conducted a survey among 1600 people in 100 cities and towns to discover the level of their awareness of international organizations. According to the results of the poll, 93 percent of Russians are familiar with the United Nations (the UN), 90 percent of respondents have heard about the Red Cross, and 84 percent of those polled are aware of the European Union. Moreover, 70 percent of Russians know about the World Bank, 68 percent mentioned the International Monetary Fund, and 51 percent of respondents know about UNICEF. Nearly 49 percent of Russians expressed positive attitude to the UN, 43 percent voiced neutral attitude to this organization and 8 percent of respondents revealed negative attitude to the UN. As for the Red Cross and UNICEF, four out of five respondents showed positive attitude to their activities. Regarding the European Union activities, 41 percent of Russians expressed approval; every second respondent voiced neutral position, and 7 percent of those polled demonstrated negative attitude.

Monday, October 24, 2005

Putin Wants Chelsea's Abramovich to Keep Governor's Office

15.10.2005 15:59 MSK MosNews - Russian President Vladimir Putin has backed billionaire Roman Abramovich, owner of British soccer club Chelsea, to stay on as governor of a desolate region in Russia's far north, the Kremlin said on Saturday. Putin, who now has powers to install governors subject to approval by regional assemblies, had been widely expected to support Abramovich for a second term in Chukotka, across the Bering Strait from Alaska, Reuters points out. Speculation that the 38-year-old tycoon, who spends a lot of time in Britain, wanted to pull out of Russia intensified last month when state-run energy giant Gazprom took over his Sibneft oil firm. Regional officials say Abramovich, Russia's No. 1 billionaire, was hesitant about staying on in Chukotka. But despite this, he offered to fulfill another term when his present five-year tenure expires in December. The Kremlin press service said Putin, who had been given a list of possible candidates for the post, had sent Abramovich's name for approval to Chukotka's local parliament. Unlike another oil tycoon, Mikhail Khodorkovsky, who this week was transferred to a prison camp in the Volga region to start an 8-year sentence for fraud and tax evasion, Abramovich has avoided falling foul of the Kremlin. The Kremlin has indicated it will tolerate Russia's oligarchs as long as they do not meddle in politics and will welcome them if — like Abramovich — they are publicly perceived to be loughing their riches back into Russia. Another tycoon, Viktor Vekselberg, was also encouraged by the Kremlin to put his name on a list of candidates to head neighboring Kamchatka in August. Vekselberg controls SUAL, Russia's No. 2 aluminium producer, and is a major shareholder of oil major TNK-BP.

Saturday, October 22, 2005

Putin, Wolfowitz discuss Russian finance, loans, G8, and CIS

MOSCOW, October 20 (RIA Novosti) - Russian President Vladimir Putin met World Bank President Paul Wolfowitz in the Kremlin Thursday for a wide-ranging discussion of economic issues. In particular, the two men focused on the country's financial system, WB loans for housing, judicial reform and special economic zones, G8 summit in Russia, and aid to the Commonwealth of Independent States. Putin said Russia's financial system was highly stable. According to the president, the progress at talks on possible WB loans to Russian regions without any guarantees from the federal center testified to the effect. "I think it is the right thing because the Russian financial system has proved to be highly stable," Putin told Wolfowitz, who became WB president in spring after James Wolfensohn's retirement. Putin also said that the WB had decided to provide a total of $13.5 billion for projects in Russia, which had used only $8 billion. He added that the WB's cooperation with Russian regions was very productive. According to Putin, there are "other projects at the federal level dealing with housing issues, and other vital aspects of the Russian economy and people's life." Wolfowitz, who arrived in Russia for his first official visit in his capacity Tuesday, said he was happy to have the opportunity to visit schools and hospitals outside Moscow to see what the WB could do for the country. Wolfowitz met Wednesday with Minister of Economic Development and Trade German Gref and agreed on a $100 million loan for further judicial reform and special economic zones in Russia in 2006. The WB is already implementing programs in Russia to combat AIDS and TB, to assist judicial reform, and combat corruption. In light of Russia's 2006 presidency in G8, Wolfowitz told Putin he was sure that next summer's G8 summit in St. Petersburg would be successful, but added that he was most interested in how the results of its work could be used for developing countries. Putin urged the WB to support countries of the CIS, because they needed particular attention from the international community. Putin also said he hoped relations between Russia and the WB would remain as good as they were under the previous WB president. Putin regularly met with Wolfensohn during his ten years in the post. Wolfowitz brought a light touch to the meeting by speaking in Russian, which he studied for two years, but then almost immediately switched back to English. He said his father had urged him to study the language to become a good mathematician.

Moscow Business Association to hold investment forum in Spain

MOSCOW, October 20 (RIA Novosti) - The Moscow International Business Association will open an investment forum in Madrid on Thursday, the association said. A spokesman said the four-day Moscow Invest forum in the Spanish capital would consider the investment climate in Russia and Spain, legal aspects of investment, investor expectations, and options for economic cooperation. Panel discussions on its sidelines will focus on issues such as financial infrastructure, current investment trends and prospects for the future. The mayors of Moscow and Madrid and senior Russian and Spanish government officials will be attending the forum, as will representatives of investment, construction, and real estate development companies. The first Moscow Invest forum was held in London in 1998. In subsequent years, it was hosted by Moscow, Tel Aviv, Berlin, Milan and the United Arab Emirates.

Wednesday, October 05, 2005

Russia's Central Bank reports private capital inflow of $2.9bln in Q3 2005

MOSCOW, October 5 (RIA Novosti) - Russia's Central Bank said in a posting Wednesday that net private capital inflow had reached $2.9 billion in the year's third quarter, as compared with the Q3 2004 outflow of $7.1 billion. In the year's first and second quarters, net private capital outflow (often used as a proxy for capital flight) amounted to $0.3 billion and $5.3 billion, respectively, the Central Bank said. Banks brought in $5.9 billion in the third quarter of 2005, $5 billion more than over the same period last year; businesses and households moved out $3.1 billion, $4.9 billion less than in Q3 2004. The Central Bank put 2004 capital flight at $9.3 billion, with an estimated $3.8 billion brought in by banks and $13.1 billion moved out by businesses and households.

Tuesday, October 04, 2005

Corruption becomes public evil No.1 in Russia

Moscow. (RIA Novosti political commentator Vasily Kononenko) - Addressing his CIS colleagues in Yerevan, Russian Minister of the Interior Rashid Nurgaliyev made a sensational statement: corruption has turned from local threat into a dangerous transnational phenomenon affecting all CIS economies. His revelations could be interpreted as a PR exercise, or an attempt to protect himself from the indignation of his compatriots and the growing irritation of the Kremlin. Indeed, hardly a week goes by without loud denunciations and special operations in his ministry against corrupt officials, gangs of murderers and robbers, or carjackers, not to mention the epidemic proportions of bribery on the roads. Nevertheless, there is more to Nurgaliyev's statement than a desire to enforce law and order in just one ministry. Apparently, the current streamlining of the tax collection system is being accompanied by the mounting efforts to revise the rules and regulations that permit the appalling corruption of the Russian officialdom to flourish. Addressing the regional leaders of the South Federal District in mid September, President Vladimir Putin stated that the rampant corruption and cronyism in the South paralyze business in the region. He added: "This is not just a problem of the South, but of the nation as a whole." According to a recent government decision, all draft bills and regulatory acts of branch ministries and departments will go through mandatory anti-corruption screening by independent experts. The authorities were forced to adopt such tough measures because of the increasing number of complaints from businessmen and ordinary people about ineffective legislation and unscrupulous officials. An investigation has shown that opportunities for corruption are often programmed into a law at the initial stages of drafting. When amendments to the law "On Medicinal Drugs" were examined, it became clear that only one provision appeared to be corruption- free. Many deputies report that "tacit bribe tariffs" have existed in the legislature for many years. For instance, adoption of the required law may cost a million dollars or more, while a major amendment may have a price tag ranging from tens to several hundred thousand dollars. An important inquiry in the current State Duma costs at least 7-10 thousand dollars. The Federation Council operates somewhat differently. Senators do not care for inquiries at several thousand dollars but set up groups of lobbyists and charge many times more. The National Anti-Corruption Committee has calculated that the annual turnover of petitions by deputies to high-ranking officials runs into billions of rubles. Polls of medium-sized businesses in Moscow, where a quarter of them is registered, have shown that "compensation" to officials of different ranks amounts to at least $600 million a month, or over seven billion dollars a year. Minister of Economic Development and Trade German Gref has admitted that bribes in housing construction reached $3.5 billion a year. One of the first steps Prime Minister Mikhail Fradkov took against corruption was a decision to double or triple officials' salaries. But it became clear a year later that this measure failed to yield the desired effect. Opinions on anti-corruption measures are divided. Some insist that it should be stamped out by force, whereas others claim that officials should be paid even more. Gradually, a comprehensive approach prevailed. It is based on five principles: drastic reduction in the state's intervention in the economy; severe criminal punishment for bribes; higher salaries to officials; social guarantees to government employees; installation of video cameras in government offices, and in all other places where officials may contact businessmen. But these measures will have no effect unless the authorities at different levels display enough political will to combat corruption, and create an atmosphere of intolerance to bribes. This is hardly feasible in a short space of time

Russia's shadow economy tops 40% of GDP

MOSCOW, October 4 (RIA Novosti) - Russia's "shadow" economy accounts for more than 40% of the GDP, a senior Russian Interior Ministry official told an international seminar on fighting economic crime Tuesday. Andrei Gorodetstky, deputy head of the ministry's economic security academy, said, "At the present time, the shadow economy has exceeded 40% of the GDP." Criminal capital leads to numerous crimes and law violations linked with money laundering, which undermine economic law and order and hamper economic growth, he said. Vladimir Zaitsev, director of the academy, said Russian authorities were seriously considering tax amnesty. "This process is complicated and difficult," Zaitsev said. "However, it has not yet resulted in the return of criminal capital to Russia, regardless of the benefits provided by the [Russian] authorities." In August, the Economic Development and Trade Ministry forecasted net capital flight from Russia would reach $8-$9 billion in 2005, compared with $9.4 billion in 2004. In a recent study, Fitch international rating agency said despite increasing macroeconomic stability, the high level of capital flight from Russia reflected a complex business climate and a lack of confidence in state institutions and observance of property rights.

Monday, October 03, 2005

Russia's Non-State Debt Reached $130Bln in H1 2005

Image by MosNews.com 03.10.2005 16:31 MSK MosNews - On Monday, Oct. 3, the Central Bank of Russia published a report regarding the state of Russia's external debt in the period between Jan.1 and July 1, 2005. According to the report, in the first half of this year the total sum of Russia's external debt (including state debt and debt by private corporations) grew by seven percent from $215.1 billion to $230.3 billion. The sum of short-term debts grew from $36.1 billion to $39.2 billion, while the sum of long-term debt obligations increased from $179 billion to $191 billion. The sum of external debt acquired by state institutions decreased by 7.3 percent from $97.4 billion to $91.2 billion, while the debts of the Central Bank of Russia increased from $8.2 billion to $9 billion. The main share of growth came from the debts acquired by non-governmental institutions. The volume of Russian banks' debt instruments grew by 15.2 percent, from $44 billion to $50.7 billion. The debts of non-financial enterprises grew even more, by 21 percent. In the first six months of 2005 the sum of their debts grew from $65.5 billion to $79.4 billion. The report shows that record rates at which the Russian state is decreasing its indebtedness to foreign creditors are unable to contain the overall growth of the country's external debt. The main result of this growth is an increase in the volume of debt instruments held by non-state economic entities. At the same time this information shows that foreign banks are not afraid to invest in the Russian economy, and gladly credit Russian banks and companies.

Bank of Russia on foreign debt increase

RBC, 03.10.2005, Moscow 14:13:44.On July 1, 2005, Russia's foreign debt in a foreign currency amounted to USD208.3bn, which is 5.53 percent higher than on January 1, 2005 (USD197.4bn). Russia's debt in the national currency has increased by 24.3 percent from USD17.7bn to USD22bn for the first half of 2005. The Bank of Russia disclosed this information in accordance with the IMF's Special Data Dissemination Standard. The total sum of the Russia's foreign debt has increased by 7.1 percent and amounted to USD230.3bn on July 1, 2005. Russia's short-term liabilities have increased by 8.6 percent during the first half of 2005 and amounted to USD39.2bn as of July 1, 2005, while long-term liabilities have increased by 6.7 percent to USD191bn.

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