Wednesday, November 28, 2012

New Georgian Economic Minister Counting on Russian Trade

29 November 2012 | Issue 5024

Reuters

Klipping The Moscow Times

Wikimedia Commons

The Black Sea port of Batumi is a hub of import and export for Georgia.

TBILISI — Georgia's new economic minister says his country, beset by high unemployment and low per capita output, wants double-digit growth rates in two or three years through the injection of pro-business policies.
It is also striving to restore trade tries with neighboring Russia, which were severed after a 2008 conflict, Georgy Kvirikashvili said an interview.
If Georgia were to mend economic ties with Russia, it might be able to rebuild bilateral trade, which has slumped to just 5 percent of total trade after peaking at 20 percent in 2006. That was before a Kremlin crackdown on imports of Georgian wine and mineral water.
Growth would come from Georgia's measures to boost midsize businesses, dismantle state monopolies, develop the stock exchange and attract foreign investors, Kvirikashvili said.
But it will take time. He forecast growth of 7 percent both this year and in 2013.
Kvirikashvili joined the government formed by billionaire Bidzina Ivanishvili following a shocking Oct. 1 parliamentary election win over the party of PresidentMikheil Saakashvili, leader of Georgia's democratic Rose Revolution in 2003.
Saakashvili passed market reforms that helped boost growth in the Caucasus state, which suffered civil war and economic collapse after the 1991 breakup of the Soviet Union. But the economy slumped after the brief war with Russia in 2008.
Now Ivanishvili, who built a multifaceted Russian commercial empire worth $6.4 billion before entering politics in his native Georgia, is promising a pro-business environment in the South Caucasus state.
"If a strong medium-sized-business class is created in our country, we expect to reach double-digit GDP growth within two or three years," Kvirikashvili said. "One of our main goals is eliminating monopolies and also protecting property rights, releasing the judicial system from political pressure and creating sustainable legislation."
Construction, tourism and financial services generated high growth from 2004 to 2007, and 24-hour electricity was restored in the country of 4.5 million.
There was also a concerted fight against petty corruption, while public services improved and tax collection became more efficient. In the World Bank's latest Doing Business Index, Georgia was the top-rated country in transition.
However, Georgia faces economic challenges, including a 15 percent jobless rate and economic output per capita that, at $3,230 last year, was lower than that of many former Soviet countries.
Saakashvili's administration also faced criticism from businesses for nurturing monopolies, for excessively meddling in the economy and for failing to provide clarity on tax law.
Experts say breaking up monopolies can stimulate faster growth in Georgia, which is being courted by the West as a key transit route for Caspian oil to Europe but jealously eyed by Russia, which recognized two breakaway regions as independent states in 2008.
The economy has been growing again since 2010, but with the new administration seeking to stimulate growth further, inflation could rise from recent levels of about 1 to 2 percent.
"Inflation is very low and I would say lower than it should be. ... That's why we project 4 to 5 percent annual inflation next year, as this level is normal and will be stimulating growth in business," Kvirikashvili said.
The new government is looking again at floating a 25 percent stake in the state railroad monopoly. The deal is expected to raise $250 million. It was postponed in May due to market volatility.
"We are talking about a 25 percent stake in Georgian Railways. ... I think it will be a good benchmark for foreign investors to assess risks in the country," Kvirikashvili said.
However, he cautioned that market conditions remained uncertain. He said the government also planned to develop the local stock exchange and integrate it with bourses in Eastern Europe.
"There were some preliminary talks with representatives of the Vienna and Warsaw stock exchanges. ... There is big interest from stock exchanges in Eastern Europe, plans for integration with them and merging of our platforms," Kvirikashvili said.
Kvirikashvili said he expected trade ties with Russia to be restored soon, as the government is getting positive signals from Moscow.
"The first positive signal is that Russia issued 1,000 permits to Georgian cargo shippers," he said. "We issued the same number of permits to Russian shippers."

Tuesday, November 27, 2012

Russia's European Prospects

28 November 2012 | Issue 5023

ByIgor Ivanov

Klipping The Moscow Times

In 1966, French President Charles de Gaulle's vision of a Europe "that stretched from the Atlantic to the Urals" was provocative. Today, PresidentVladimir Putinhas advanced an even more ambitious goal: "a common market stretching from the Atlantic to the Pacific."
In the race toward globalization, the stakes are high for both Russia and Europe. If Russia continues on its current path toward becoming solely a producer of raw materials, not only will it become increasingly vulnerable to global fluctuations in energy prices, but its scientific, cultural and educational potential will also decay further, eventually stripping the country of its global clout.
If Europe, for its part, fails to respond to the challenges of the 21st century, it will face chronic economic stagnation, rising social tension and political instability. Indeed, as industrial production migrates to East Asia and innovation remains in North America, Europe risks losing its position in the most attractive international markets. As a result, the European project itself could be called into question.
To avoid these outcomes, Russia and Europe must identify where their interests converge and work to establish a mutually beneficial partnership in those areas. But to foster such a partnership, they must first alter their negative perceptions of each other.
Many Russians do not regard Europe as a political and economic partner or even as an ally. In their view, Europe has already lost the battle for innovation and economic development and is gradually becoming an "industrial museum." Russia, they argue, should form partnerships with more dynamic countries.
Likewise, many Europeans believe that while a partnership with Russia might be an asset now, it would corrode Europe's economies and politics in the long run. If Europe wants to lead and prosper, according to this view, it should limit its ties with Russia as much as possible.
Ongoing disputes between Russia and the European Union reflect this mutual distrust. Russians accuse Europeans of taking too long to liberalize visas, blocking Russian energy companies' access to Europe's downstream markets, instigating anti-Russian sentiment in the post-Soviet era and trying to interfere in Russia's domestic politics.
Meanwhile, Europeans have serious reservations about Russia's human rights record, legal system, failure to adhere to European values and positions on international crises, especially in the Middle East. As a result, the prospect of closer cooperation remains distant.
Without a fundamental reset, relations between Russia and Europe will continue to decay, eventually turning into a benign neglect. Despite their common geography, history and economic interests, their strategic trajectories will diverge.
An alternative scenario relies on the powerful unifying impact of human capital, the defining factor in the quest for global influence. Human capital — not natural resources, production capacity or financial reserves — should constitute the foundation of Russian and European development policies.
Cultivating human capital requires a supportive cultural environment, a well-developed educational system and research and innovation centers. Many argue that in both Russia and Europe, supporting social infrastructure has become so costly that it is hindering the development of a more efficient and dynamic economy. Only by dismantling the welfare state, critics contend, can progress be made.
But curtailing social programs in both Europe and Russia would jeopardize human capital, their most valuable comparative advantage. Through enhancements to the welfare state's efficiency, Europe and Russia can achieve economic progress without sacrificing this crucial source of long-term growth.
Given their strong traditions of building human capital — and their motivation to continue to do so — Russia and Europe have much to offer one another. By focusing on the areas in which their modernization agendas overlap — from education to public health to environmental protection — they can identify ways to increase their human capital's efficiency.
While Europeans have reason to criticize Russia's shortcomings, they should also recognize that only two decades ago, Russia's political, economic, social and legal systems underwent a fundamental shift, which significantly affected its people's psychology, self-perception and behavior. Given Europeans' complicated experience with EU enlargement, they should understand the challenges that accompany such a profound change.
With this understanding should come recognition that Europe's current policy of demanding that Russia "mature" as a condition for cooperation is counterproductive. Russia will mature much more slowly in isolation than it will if it is integrated into European institutions.
Some progress has already been made. For example, participating in the Council of Europe has helped Russia improve its prison system significantly. Likewise, launching initial public offerings on European stock exchanges has strengthened Russian corporations' governance, social responsibility and treatment of minority shareholders. In short, more interaction, not less, should be actively encouraged.
Of course, Russia will probably not become a full NATO member in the foreseeable future, owing to the many structural, technical and psychological obstacles blocking its path. But political integration is feasible. Greater political cooperation would provide a context for discussing issues like the future of Afghanistan, global terrorism and nuclear proliferation.
The institutional integration of Russia into greater Europe will require strong commitment from both sides. In this globalized century, it is the only option.

Igor Ivanov, former foreign minister, is president of the Russian International Affairs Council. © Project Syndicate

Medvedev Assures France on WTO Behavior

28 November 2012 | Issue 5023

ByIrina Filatova

Klipping The Moscow Times

Russia and France signed an agreement Tuesday on creating a council to develop economic cooperation amid growing criticism from the European Union of some measures Moscow has introduced to support local manufacturers following accession to the World Trade Organization.A protocol to establish the Business Cooperation Council was signed at a meeting of Prime MinisterDmitry Medvedevwith French businessmen, which took place during his visit to Paris. The council's goal is to promote economic cooperation and generate new ideas on developing business ties, according to a statement published on the government website.
The functions of the new organization will include stimulating mutual investment, developing contacts between business and senior government officials, and advising on the measures to improve Russia's investment climate, said Geraldine Lemble-Pavlov, deputy chairman of the MEDEF International, a business lobby group.
MEDEF started the council jointly with the Russian Union of Industrialists and Entrepreneurs.
The organization will include representatives of Russian and French companies. It will be chaired by chief executive of Russian Railways Vladimir Yakunin and chief executive of aerospace company Arianespace Jean-Yves Lee Gall.
Yakunin — who is also co-chairman of the French-Russian Dialogue, an association with broader functions — said the Business Cooperation Council will focus specifically on strengthening the countries' economic ties. The first meeting of the group is expected to take place sometime in the next few months, he said.
Medvedev, who also met with his counterpart, Prime Minister Jean-Marc Ayrault and French President Francois Hollande, pushed for expanding Russia's cooperation with France, since a solid base for it already exists. The size of French investment into Russia's economy has reached nearly $10 billion, he said, according to the government website.
French companies are interested in cooperation with Russia, so the most common questions posed to Medvedev were about the government's priorities, said Lemble-Pavlov, who was present at the meeting with business leaders. She added that French businessmen showed interest in Russia's plans to develop high-speed railways, as well as the prospects of the country's energy industry.
The French business community also welcomed Russia's accession to the World Trade Organization — a move that Medvedev said would provide "good opportunities for cooperation with foreign partners, and France in particular."
Russia became a full-fledged WTO member in August, having brought the curtain down on its 18-year effort to join the global trade club. But EU officials again this week criticized some of the measures the country has introduced to support local manufacturers, following WTO-mandated decreases in import duties.
An unidentified EU official said that a ban imposed by Russia in March on the import of pigs for slaughter and the introduction of a recycling fee for imported cars that went into effect in September discriminate against importers and are against WTO rules, Reuters reported earlier this week.
The official, who spoke at a meeting of the WTO's Goods Council, said consultations with Russia are under way to resolve the controversial issues.
Japan and the United States joined the EU during the meeting in criticizing Russia's policy, the report said.
Resolving numerous disputes is routine work for the WTO, as many of its members are trying to protect their manufacturers, said Alexei Portansky, a professor in the global economy and policy department at the Higher School of Economics in Moscow. The reason for the fuss around Russia is that it's a new member of the trade club, he said by telephone.
For the European Union to push the dispute forward, it needs to submit an official claim, and if peaceful consultations don't bring a result, the Dispute Settlement Body will review the dispute, Portansky said.
Medvedev said Russia is facing "an uneasy period of getting used" to WTO rules.
"We'll of course be focused on our priorities and follow the rules set at the World Trade Organization," he said, adding that the country's next goal is to join the Organization for Economic Cooperation and Development.
During Medvedev's visit to France the two countries signed several documents, including a shareholder agreement between Peugeot-Citroen and Russian Railways, which is buying 75 percent of logistics company GEFCO from the French car manufacturer.
"The deal is to support GEFCO group's position in international markets thanks to growing into new destinations," and it will provideRussian Railwaysaccess to "state-of the art logistics technologies," the railway giant said in a statement Tuesday.
The contract formalizing the stake transfer for 800 million euros was signed earlier this month.

Thursday, November 22, 2012

Putin Says Economy to Suffer from WTO Entry

23 November 2012 | Issue 5020

Reuters

Klipping The Moscow Times

Russia's energy-based economy will take a serious blow from membership of the World Trade Organization coupled with a global slowdown, PresidentVladimir Putinwarned on Wednesday, singling out the most vulnerable sectors of the $1.9 trillion economy.
Higher unemployment and budget revenue shortfalls were likely to result from moves to cut some import duties to comply with WTO rules, Putin said, making domestically produced goods less attractive to cash-strapped consumers and businesses.
"We should understand that the initial period in WTO will require a serious adjustment of our economy," Putin told his Security Council, convened to discuss risks posed to national security by the World Trade Organization membership.
Russia's domestic animal farming, agricultural machinery, medical equipment, automotive, pharmaceutical, textile and food sectors were particularly at risk, he said.
"Because of the negative trends in the global economy, the risks linked to Russia's WTO obligations have grown," he said.
Russia joined the global trade club in August after 18-year negotiations. Putin said entry talks were helped by the global economic crisis, which made developed economies more willing to make concessions in order to gain access to new markets.
The president said Russia's so-called mono-cities, where at least 25 percent of the economically active population work at a single enterprise, were particularly threatened by measures resulting from the country's WTO membership.
About 15 percent of the 143 million population live in about 300 mono-cities, a heritage of the Soviet planned economy.
Such cities are potential hotbeds for social unrest, and during the 2008-09 economic crisis the government spent lavishly and sometimes applied political pressure on owners trying to keep the enterprises they were built around afloat.
However, overall WTO membership remained positive for the country's economy, said Putin, who did not question any of Russia's WTO obligations and added that Russia should defend its interests in the organization.
Putin, whose health has recently been under close scrutiny amid reduced appearances and canceled foreign trips, stuttered during his speech, saying "Russia will always lag behind" instead of "Russia will always defend its interests," mixing up two similar Russian words.
Council Secretary Nikolai Patrushev also told reporters on Wednesday that a U.S. bill, known publicly as the "Magnitsky list," was also discussed at the meeting but noted it would not threaten Russia's national security.
The bill would require the names of people believed involved in the death of Sergei Magnitsky, a lawyer for equity fund Hermitage Capital who died in jail in 2009, to be published, their U.S. visa applications denied and assets frozen.
Patrushev said the U.S. needed normal trade relations with Russia "for its own sake" while the bill was dictated by the U.S. domestic political agenda. He warned that Russia had "something to respond with" in case the bill was passed.
Government sources say Moscow is also getting ready to contest European Union energy rules, known as the Third Energy Package, which restrict Russian gas giantGazprom's control over its European pipeline assets.
The EU, Russia's largest trade partner, has criticized Russia's plans to levy scrappage fees on imported vehicles and a ban on European live animal imports. The dispute has affected work on the Russia-EU framework agreement.

Russia Opposes NATO Missile Deployment on Turkey-Syria Border

23 November 2012 | Issue 5020

Reuters

Klipping The Moscow Times

Russia opposes the possible deployment by NATO of Patriot missiles near Turkey's border with Syria, the Foreign Ministry said Thursday.
"This would not foster stability in the region," ministry spokesman Alexander Lukashevich said of Turkey's request that the Western military alliance deploy the missiles.
On Wednesday, NATO ambassadors met to consider Turkey's request, which followed weeks of talks between Ankara and NATO allies about how to shore up security on its 900-kilometer border to avoid a spillover from the Syrian civil war.
French Foreign Minister Laurent Fabius said in Paris on Thursday that France backed Turkey's request.
"There is no reason to object. It is purely defensive," he told BFM TV.
Turkey has repeatedly scrambled fighter jets along the frontier and responded in kind to stray shells flying into its territory during the conflict in Syria, where an estimated 38,000 people have been killed since an uprising against President Bashar Assad's government began in March 2011.
"The militarization of the Syrian-Turkish border is an alarming signal," Lukashevich said at a weekly briefing. "Our advice to our Turkish colleagues consists of something else entirely: to use Turkey's potential influence on the Syrian opposition to seek the start of an inter-Syrian dialogue as swiftly as possible and not to flex their muscles and move the situation in such a dangerous direction."
Russia has vetoed three UN Security Council resolutions aimed at putting pressure on Assad and accuses the West of encouraging militants fighting his government.

What the U.S. Oil Revolution Means for Russia

21 November 2012 | Issue 5019

ByChris Weafer

Klipping The Moscow Times

What the U.S. Oil Revolution Means for Russia

The optimist will tell you that Russia is no longer a petrostate. Incremental growth is now coming from the consumer sectors, while there is less contribution from the oil-and-gas sector. While the budget clearly does depend on the volume of oil and gas revenues to balance, changes by the Central Bank and the Finance Ministry since the 2008 crisis mean the economy can still grow about 3 percent annually with much lower oil revenues because the resulting budget deficit can be easily covered by expansion of the low debt load. But the realist will say that while growth is coming from outside extractive industries, the confidence factor, which sustains consumer spending and domestic investment, is directly linked to oil revenues. What's more,the practice of funding the budget via debt expansion can last for only a few years.
So long as the government delays making the tough decisions necessary to push ahead with the agenda of business and economic reform, it is only a matter of time before the next crisis comes as a result of lower oil prices. The basis of the next crisis is already visible. It is the steady and significant growth in the production of nonconventional oil and gas in the U.S. For the world's traditional oil and gas producers, like Russia, a big storm is coming. Based on current projections of rising U.S. production and the effect this will have on global oil market dynamics, that storm will start to blow very strongly in 2014 or 2015 at the latest.
Russia is a member of an exclusive club of countries that boast meaningful economic growth and healthy balance sheets and have surpluses in both their budgets and their current accounts. Despite the slower growth reported for the third quarter and the weaker trend reported earlier this week, the economy should deliver between 3.5 and 4 percent growth in gross domestic product this year in some of the consumer indicators for October. That is more than twice the growth rate expected for the group of developed economies and is in line with the average growth expected for developing economies outside of the Asia region.
Therefore, Russia should be a safe place for investors, and the stock market should be benefiting from the fact that the country has low relative risk. But this is not the case. When you look at such investor sentiment indicators as the underperformance of Russian equity-market indexes, the current valuation of Russian equities and the low volume of investor money coming into the country this year, the picture reflects a high level of investor concern. The government may be willing to take the bet on high sustainable oil revenues, but investors are not.
The main reason for investor's concern is oil, specifically the fear that Russia's government is not doing enough to diversify the economy away from oil risk against a backdrop of uncertainty over the future of traditional energy markets. One reason for that uncertainty is the fast growth in supply of nonconventional oil and gas, mainly shale oil and gas from the U.S. Other factors include planned production increases in the Canadian sands, growth of conventional oil output in Iraq and the expected start of Kazakhstan's Kashagan oil field in early 2013. That doesn't even factor in the possible growth in shale gas across Europe. That supply source is currently blocked because of environmental concerns, but the reasonable assumption is that those concerns will be eased once the U.S. starts to benefit from the competitive advantage of cheap domestic energy.
The expected growth in U.S. oil and gas supply is the most serious concern for Russia and other leading energy exporters. The U.S. currently burns almost 20 million barrels of oil per day, or just over one-fifth the world total. To feed that requirement, the country needs to import about 11 million barrels of crude every day, mainly from the Middle East. But with domestic supply of nonconventional oil increasing and more consumers switching to cheap gas, the U.S. import requirement has already begun to fall. Several years ago, the country needed to import more than 12 million barrels of oil per day. By the end of next year, that is expected to fall to 10 million barrels per day. What's more, according to a recent study from the International Energy Agency, the U.S. may become completely energy-independent within two decades.
No matter how you look at those numbers, the growth in supply of nonconventional oil and gas is a game-changer for the global oil industry. The long-term outlook from the International Energy Agency assumes that the decline of the U.S. as the world's major buyer of crude will be matched with continued growth in demand from China, India and the Middle East. Hence the agency's conclusion that the price of oil can still reach $125 per barrel in real terms by the end of this decade. That is $215 per barrel in nominal terms. If that does actually turn out to be the case, Russia will remain in good economic shape, albeit without progress in reforming the economy and improving the business environment. Meanwhile, growth will stay stuck in a narrow range around 3 percent annually, which is above average for developed countries over the past few years but below average for developing countries.
The reasons investors are still nervous about Russia oil risk despite rosy price forecasts is that long-term oil projections have almost always been wrong. Historically, it has often been more profitable to take the view that is the opposite of the industry consensus. The fear of so-called peak oil, when the world no longer has enough incremental supply to satisfy growing demand, has been a regularly forecast event over the past 60 years and frequently drove prices higher. But in 2000, we had headlines suggesting that the world was "drowning in oil," and analysts were projecting prices at $8 per barrel.
Relying on long-term oil projections is inherently dangerous. But that is exactly what the Russian government is doing. By delaying reforms, the country is relying on the International Energy Agency's price and demand projections and assuming that the storm clouds now gathering in the U.S. will dissipate. China, India and the rest of Asia will have to continue growing annual oil imports by more than 1 million barrels per year for the next 10 years to compensate for the expected cut in U.S. imports and the growth in supply from Iraq and elsewhere. That is nothing short of wagering future economic growth by rolling the dice in a game where nonconventional oil and gas are changing the odds.

Chris Weafer is chief strategist at Sberbank Investment Research.

Wednesday, November 21, 2012

How to Entice More Tourists

18 November 2012 | Issue 5016

ByScott Antel

Klipping The Moscow Times

The economic impact of tourism is too big to ignore, but unfortunately Russia is doing just that.
Money spent on hotels, restaurants, transportation and related events contributes 2.8 percent of global gross domestic product and 98 million jobs, or 3.3 percent of global employment, according to the World Travel & Tourism Council, the industry's global monitoring body.
These numbers are expected to grow 4 percent annually through 2022, well above that of most industry sectors, driven by burgeoning demand from the new middle class in emerging economies and an aging population in developed economies that has time and money to travel.
Not surprisingly, Russia's share of global tourism is well below global and country averages. Russia's combined direct and indirect impact of tourism comprises 5.9 percent of GDP ($106 billion), 5.4 percent of total employment (3.9 million) and visitor export revenue of 3 percent of total exports ($16.8 billion). At the same time, however, tourism ranks third in Russia's export earnings, after the extractive and chemical industries, and ahead of the country's automotive, chemical and communications sectors in terms of GDP and employment.
Compared with other BRIC countries, Russian tourism lags behind Brazil and China by about 30 percent in terms of GDP contribution and expected sector growth. China long ago identified tourism as one of the five economic pillars of its industrial policy. Does Russia have an industrial policy? If so, where does tourism fit in?
What's more, Russia is a big net export loser in tourism, as Russians take more than twice the number of trips and spend three times more abroad than inbound tourists do in Russia.
Russia spends around 0.6 euros (76 cents) per inbound tourist compared to a world average of 6 euros ($7.60). And what is spent is spent badly. The typical approach by a Russian federal or regional tourist agency is to travel to Cannes, Berlin or another tourist convention event, set up a stand, and go shopping there. No surprise that these trips do little to help the country's tourism sector.
To make friends and new business, you must host the party, not go to someone else's party. Invite the key tour destination deciders, such as tour operators and travel writers, to Russia, entertain and show them the country in all its big, brash, unusual splendor. This is essential, particularly given Russia's image problem that is part a leftover of the Cold War and part self-inflicted.
Encouragingly, the government has agreed on a federal tourism development program and promised $11 billion in funding through 2018. Moscow, for its part, has allocated funds for advertising the city via social media. The success of these efforts will depend not just on if and how the funds will be spent, but how well the authorities listen to tourism industry participants who know the market and what is needed.
A government-industry dialogue would also mark a notable change from recent times when Russian tourism officials were "too busy" to meet or openly hostile to those invested in and trying to develop the industry.
Of course, other major issues need to be tackled to address Russia's tourism deficit. These include inadequate and expensive transportation and accommodation infrastructure, poorly developed and tourist-unfriendly attractions with little accommodation for elderly and disabled visitors, perceived security concerns and high prices. These structural problems clearly will take time to remedy.
But the easiest quick-fix remedy would be not modification, but abolishment, of Russia's expensive, timeconsuming and self-defeating visa regime. What is the point of it? If seems as if it is more an issue of national pride. "Foreign consulates treat us like dirt," the Russia argument goes, "so let's reciprocate." It would be much better if Russia adopted an on-arrival visa regime at the airport for a nominal fee of $20 or so. This approach shows more enlightened self-interest.
A government tourism development strategy that prioritizes the involvement of industry participants in mapping its direction and allocating its resources makes too much economic sense to ignore. Boosting the tourism sector would help diversify Russia's economy and create clean, safe and socially interactive jobs. It would also produce a valuable dividend by boosting Russia's global image, something the country drastically needs.

Scott Antel heads the hospitality & leisure group for DLA Piper in Russia/CIS and Turkey.

Rethink Before You Reset

18 November 2012 | Issue 5016

ByRichard Lourie

Klipping The Moscow Times

The United States' best foreign policy is its own example. Millions around the world watched in admiration as the U.S. voted without strife or a whiff of corruption in the recent presidential election, with the loser conceding graciously. The election looked especially good compared to China's simply proclaiming the country's new leadership. The only suspense had been whether the new Chinese president would take control of the military immediately or not. He will, and this has significant foreign policy implications.
Things get a bit more complicated, of course, when the U.S. moves from example to pursuing its own interests in action.
What will most likely be the main foreign policy challenges for President Barack Obama's second administration, and what part will Russia play in them?
Though Russia and the U.S. do have significant unilateral business, like the reduction of their nuclear stockpiles, Russia is more important to the U.S. as a component in a larger strategy.
The immediate crises are in the Middle East: the Syrian civil war and Iran's potential to develop nuclear weapons. Russia has been one of the main obstacles to any international cooperation on Syria. The power to thwart is better than no power at all. But Central Asia may hold a solution to the Middle East.
The Middle East is beginning to diminish for the U.S. in one essential way: By 2030, the U.S. is expected to be the largest oil- and gas-producing country in the world and a net exporter. It is China whose power and importance grows rapidly for the U.S., while the Middle East's gradually diminishes.
The central foreign policy question for the U.S. is whether China is evolving into something that needs to be "contained" or only "balanced."
China feels vulnerable on its seaways, which it depends on for much of its energy and raw materials. It is also vulnerable in two vast western regions, Tibet and Sinjiang, with a large Muslim, Turkic-speaking population who feel more at home in the culture of Central Asia than among the Han Chinese.
If the U.S. ultimately regards China as dangerously ambitious, it will need to do more than balance it. Being able to pressure China from near its western border will require good relations with the (mostly) bad regimes of Central Asia. Russia will view this as unconscionable meddling in its natural sphere of influence.
Yet there may be a cause for shared Russian and U.S. interests in the region. One of the aging strongmen of Central Asia, Islam Karimov of Uzbekistan orNursultan Nazarbayevof Kazakhstan could fall ill or die soon. With no clear successor and the example of the Arab Spring in mind, tumult could easily sweep through Central Asia. Russia's already restive Muslim areas in the North Caucasus could become a target for jihadists on the move. The already dangerous flood of heroin from Afghanistan could increase. In that case, it would be useful to have U.S. military bases with intelligence-gathering capabilities in Central Asia that could also later serve as a barrier against Chinese designs on Russia's fertile and underpopulated Far East.
The U.S. offer to Russia could be something like: You help us put out the fires in the Middle East so we can turn our attention to the Far East, which is where the real action is going to be. We'll help you there when chaos sweeps Central Asia or Chinese aggression focuses not only on barren rocks in the South China Seas but on Russian lands near the Chinese border.
Relations must be rethought before they are reset.

Richard Lourie is the author of "The Autobiography of Joseph Stalin" and "Sakharov: A Biography."

Germany's Cold Shoulder to Russia

20 November 2012 | Issue 5016

ByHannes Adomeit

Klipping The Moscow Times

German-Russian relations do not qualify as a strategic or modernization partnership. The relations have turned from closeness and cordiality to disillusionment and disappointment. We saw ample evidence of this last week at the 12th annual round of the German-Russian civil society forum, or the Petersburg Dialogue, and the 14th round of inter-governmental consultations held simultaneously in Moscow.
It was a foregone conclusion that the meetings, including the talks on Friday between PresidentVladimir Putinand German Chancellor Angela Merkel, would be more strained than ever.
German politicians are becoming more worried about Russia's slide toward authoritarianism, attempts made to reassert Russian control over other former Soviet republics and the Kremlin's more assertive foreign policy.
This concern was clearly expressed in a Nov. 9 resolution passed by the German parliament titled "Strengthening Civil Society and the Rule of Law in Russia Through Cooperation." It was timed to be ready before the Petersburg Dialogue and to support the government in helping to persuade the Kremlin to change course.
Participants in the dialogue on both sides and at all levels were anxious to see how Merkel would handle the issue in her talks with Putin, including any of the 17 recommendations that the German parliament had formulated for the government to take into consideration.
The parliament wanted Merkel to reassert Germany's commitment to the "modernization partnership" with Russia but at the same time stress that such a partnership should not be limited to economic and high-tech matters. It should also include the promotion of democracy, human rights and a law-based state, the active engagement by the citizenry and the rise of a broad middle class.
In the analytical part of the resolution, the German parliament noted that under Putin, "legislative and legal measures have been taken that are aimed at widening control of active citizens, criminalizing critical engagement and pursuing a confrontational line against government critics."
How, then, did Merkel respond to the parliament's recommendations? She failed to embark on direct criticism of Putin or engage in a comprehensive condemnation of the system he has created in Russia. Typically, her approach was balanced, assuring Putin that she considered the German-Russian relationship to be characterized by friendship and partnership. Merkel also said Germany wanted Russia to be successful, but clarified that "our friendship will not grow if we sweep everything under the rug."
In her view, the things that should be cleared up were precisely some of the issues that the German parliament had raised, including the requirement that nongovernmental organizations that receive funds from abroad register as "foreign agents," the law on treason and the harsh sentence that two members of the Pussy Riot punk band received.
Predictably, Putin responded to Merkel's criticism with a mixture of irritation and denial. He also leveled countercharges at what he considered to be civil and human rights violations in Germany.
Earlier, Kremlin spokesman Dmitry Peskov chimed in, deploring the "anti-Russian rhetoric" in Germany. Russia's ambassador in Berlin, Vladimir Grinin, said the German parliament's resolution was "not constructive," and a spokesman for the Foreign Ministry even stated that, in view of a "plethora of slanderous statements" by Andreas Schockenhoff, deputy head of the Conservative Party's parliamentary group and author of the parliament resolution critical of Russia, Schockenhoff would no longer be regarded as an "official person with the authority to express the view of the federal government." Indeed, the Russian participants in the Petersburg Dialogue acted as if Schockenhoff did not exist.
The more frigid atmosphere in German-Russian relations had been highlighted earlier, when Putin visited Berlin on June 1. In contrast to his previous visits in Germany, Putin stayed only six hours in Berlin, sandwiched between an earlier stopover in Minsk and the next stop in Paris.
The meetings in Moscow last week were equally brief. They included talks with eight German government ministers, three secretaries of state and several high-ranking representatives of German business with their Russian counterparts. They also included conversations between Putin and Merkel privately and in the plenary meeting and a reception at the German embassy. All of this was wrapped up in half a day.
In the end, it is doubtful that Putin got the point. German leaders are increasingly adopting the position that Russia is heading in the wrong direction, which makes it difficult to develop a true strategic or modernization partnership between the two countries.

Hannes Adomeit teaches EU-Russian relations at the College of Europe's Natolin campus in Warsaw.