Tuesday, January 29, 2013

How Russia Can Lead the G20

29 January 2013 | Issue 5056

Klipping The Moscow Times

Russia is taking the helm of the Group of 20, and with that honor comes a unique opportunity: to lead the international community toward sustainable, inclusive growth and shared prosperity in 2013.
The Russian government has pledged to focus its G20 presidency on practical solutions to stimulate growth and jobs, manage government debt and regulate the financial sector. Russia could lead in advocating yet another significant G20 priority: strengthening local capital markets.
Deep and efficient local capital markets contribute to global financial stability. They are the foundations for long-term economic growth. They provide resilience against volatility in capital flows and reduce dependency on foreign debt. They offer investment alternatives for social security funds, pension funds, insurance companies and other institutional investors that provide safety nets.
Local capital markets provide access to local-currency finance, which is essential for financing infrastructure and housing, sectors that underpin economic growth and long-term development. This enables small and medium-size enterprises to borrow in their own currencies, protecting them from foreign-exchange risk so they can grow and create jobs.
Without strong domestic capital markets and access to local-currency finance, the private sector cannot thrive. A thriving private sector is necessary to give people the opportunity they crave most: to improve their lives.
Russia wants to become an international financial center, and it recognizes that strong, deep domestic capital markets are needed to achieve that role. This year, the country implemented a number of reforms to strengthen its domestic capital markets and increase the participation of foreign investors. The Central Bank is putting in place measures to facilitate monetary flows and enhance market liquidity. The securities supervisor approved reforms that better support cross-border transactions and better protect international investors. In parallel, as it looks to boost its ranking in the IFC/World Bank "Doing Business" report, Russia is working to improve its investment climate and stimulate growth. All these reforms leave Russia well-positioned to lead the G20 agenda on developing domestic capital markets.
International financial institutions such as the International Finance Corporation and the World Bank can be valuable partners to countries as they seek to strengthen their domestic capital markets. For example, just last month the IFC issued its first Russian-ruble-denominated bond in the domestic markets. IFC's ruble bond is innovative because it offers inflation-protected returns to investors. The bond should encourage greater investor participation and pave the way for future inflation-linked issuances in the Russian market.
The World Bank's recent report on Russia's capital market recommends various reforms that will support market development, such as creating more benchmark government bonds, reducing the cost of private issuance and improving securities distribution networks to increase participation by small and medium-size enterprises and small investors.
International financial institutions can also help increase the availability of local-currency finance to the private sector. In Russia, the IFC has invested more than 40 billion rubles ($1.33 billion) since 2005 to support important sectors such as small and medium-size enterprises, health care and infrastructure. To meet the growing demand for long-term local-currency finance in the country, part of the proceeds from IFC's debut ruble bond will be invested in the domestic private sector.
Developing local capital markets is a long-term task. Countries must implement sound macroeconomic policies, achieve price stability and realize fiscal prudence. Local regulatory and legal obstacles must be overcome. There is an urgent need for reforms in capital markets, such as the introduction of primary dealer systems, which allow firms to act as market makers of government securities. Also needed are regulations that encourage market-making in government and corporate bonds, repo facilities that help finance dealer inventories of securities, and derivatives and hedging instruments for market and credit risks.
IFC, the World Bank and other international financial institutions are helping countries overcome some of these challenges, and Russia can use its influence in the G20 and similar forums to make a compelling case for encouraging domestic capital markets to thrive.
As the impact of the global financial crisis continues to spread and as large developing economies experience slower growth rates, the need to support development of local capital markets takes on a new urgency. At the G20 meeting in Seoul in 2010, world leaders asked international financial institutions to strengthen local capital markets and domestic-currency borrowing.
Under France's leadership, the IFC and the World Bank worked with others to create the G20 Action Plan for Local Currency Bond Markets. Collaborative efforts among international finance institutions continue today, and Russia is well-positioned to provide further impetus to their efforts. Through its leadership, it can make a unique contribution to ensuring long-term growth and stability.

Jingdong Hua is vice president and treasurer of the Washington-based International Finance Corporation, a member of the World Bank Group. Janamitra Devan is vice president of financial and private sector development at the International Finance Corporation and World Bank. This comment appeared in Vedomosti.

Lavrov Says No Baikonur Conflict With Kazakhstan

27 January 2013 | Issue 5055

ByIvan Nechepurenko

Klipping The Moscow Times

Bill Ingalls / Wikimedia Commons

A Soyuz TMA-13 spacecraft arriving at a launch pad at the Baikonur Cosmodrome. The space facility is on lease to Russia until 2050.

Foreign Minister Sergei Lavrov said Friday that Russia has no intention of halting its space projects at the Baikonur Cosmodrome in response to Kazakhstan's demand to limit the number of launches.
Speaking at a news conference with his recently appointed Kazakh counterpart, Erlan Idrisov, Lavrov said the disagreements between the two sides were minor and part of the typical negotiating process.
"Of course, questions arise when we talk about such a huge industrial complex as Baikonur," Lavrov said.
In December, Kazakhstan told Russia that it wanted to reduce the number of Proton rocket launches at Baikonur from 14 to 12, citing potential harm to the environment. The Soviet-built space launch facility is located in Kazakhstan and is on lease to Russia until 2050.
On Thursday, Izvestia reported that Moscow had sent Kazakhstan a diplomatic note threatening to withdraw from all joint space projects if Astana did not alter its position on the number of launches.
At Friday's news conference, Lavrov said: "Yes, there were questions about the number of launches. [But] the Russian side is doing everything it can to reduce the effect of these launches on the environment. For instance, we now use modernized Proton rockets."
Idrisov confirmed that there were no fundamental disagreements between the countries over Baikonur, or over any other issues.
The two foreign ministers met in Moscow on Friday to discuss prospects for further integration and a new partnership agreement.
Kazakhstan, one of Russia's main regional allies, is a member of the Eurasian Economic Community that is set to be transformed into a full-fledged Eurasian Union by 2015 and is part of a Customs Union with Russia and Belarus. It is also a member of the Collective Security Treaty Organization, a Russia-dominated military alliance.
Lavrov and Idrisov commented on one area in which the two countries are taking separate paths: whether or not to use the Latin alphabet for the national language.
In a national speech last month, Kazakhstan President Nursultan Nazarbayev declared that by 2025 the country would switch from using Cyrillic letters to Latin script as part of a modernization effort.
"We're approaching it [the switch] with a clear planning of resources, with preparation of all parts of society, in order not to forfeit our historical heritage and to prepare Kazakhstan for the new conditions of working in the 21st century," Idrisov said.
Turkmenistan and Uzbekistan have made the same move, in part to signify their independence from Moscow.
Konstantin Zatulin, director of the CIS Institute and a former State Duma deputy, said Kazakhstan's decision to follow those countries' example is a smart strategic move that has no serious implications for its relations with Russia.
"Being a wise Asiatic ruler, Nazarbayev sometimes makes certain moves, such as highlighting the importance of Kazakshtan's Turkic identity, to mark his own importance in the eyes of the Russian leadership," Zatulin said. "But fundamentally, Kazakhstan is firmly tied to Russia."
Idrisov mentioned that he had heard Moscow State University researchers had begun developing a concept for converting Russian into Latin letters.
Lavrov denied that such a plan was in the works, joking that there were certain Russian letters that did not exist in the Latin alphabet.
One of the letters Lavrov mentioned, which is typically transliterated as "yo," is associated with many Russian curse words.

Thursday, January 17, 2013

Putin and the Regions

17 December 2012 | Issue 5037

ByNikolai Petrov

Klipping The Moscow Times

Although PresidentVladimir Putin's state-of-the-nation address last week was largely an amalgamation of vague promises devoid of strategic vision, his comments on the regions were concrete and meaningful. It's worth taking a closer look at them because Putin elaborated on them during an earlier meeting with his inner circle and a subsequent meeting with his advisory Council of Legislators, consisting of lawmakers from the State Duma, Federation Council and regional legislatures.
Putin called for a strengthening of the economic base of the regions, complaining that only 10 of Russia's 83 regions are "donors" to the federal budget, while the rest are recipients of federal aid. One of the methods he announced in his message was the redistribution of tax revenues from the top down. As initial steps, municipalities would receive most tax revenues from small businesses, and a number of federal exemptions would be eliminated on property tax and a tax on land owned by legal entities. The land tax is slated to rise significantly in 2014.
At his meeting with the Council of Legislators, Putin recommended that the regions be enlarged as a second method. He pointed out that income levels vary widely between regions, and he blamed this on a disruption of the "natural connection that used to unite self-supporting regions." He cited St. Petersburg and the Leningrad region as examples, both of which were managed by a single Communist Party committee during the Soviet era. By the way, the Federal Security Service in that city and region is under a single management — as was the KGB.
Putin also cited small ethnic enclaves that are part of larger regions. Stressing that nobody is being forced into anything, Putin said that "people should themselves come to the conclusion that it makes good sense to combine into larger entities in order to more effectively solve social and economic problems." At the same time, he said, "super-regions are also undesirable," so everything should be within reason.
However, if Putin were to look at a map, he would see that the odd idea of boosting self-sufficiency by joining "weak" regions with "strong" ones does not work. The three largest "donor" regions are Moscow and the Yamal-Nenets and Khanty-Mansiisk autonomous districts. Moscow is already a super-region, and it would be difficult to join anything to the two other regions because of their remote northern location. What's more, the problem is not with the structure of the territories or regional governments. The problem lies first in the overly centralized nature of the tax system and second in the overreliance of the Russian economy on exports of raw materials.
Putin also mentioned ethnic republics in both his state-of-the-nation address and in his meeting with legislators. In the speech, he said, "We will not allow the emergence of closed ethnic enclaves in Russia, with their informal jurisdiction existing outside the country's common legal and cultural norms and disdainfully disregarding the accepted standards, laws and regulations." This might sound like an accurate description of the situation with Chechnya, but the words were probably aimed at Tatarstan.
Putin mentioned that the Kremlin was ready for a major new policy of bringing the leaders of the republics into the power structure. The actual method has yet to be worked out. It might, for example, follow the Dagestan model of indirect elections and be coupled with a consensus of a region's main ethnic groups. In any case, the problem is clear: Holding direct elections in national republics with complex ethnic issues carries the risk of destabilization.
What conclusion can be drawn from this? That the Kremlin realizes that decentralization is both necessary and inevitable but that it is not yet ready to make it a reality. Putin's proposals are inadequate.

Nikolai Petrov is a scholar in residence at the Carnegie Moscow Center.

Medvedev Wants Economy to Grow 5% Annually

17 January 2013 | Issue 5048

ByIrina Filatova

Klipping The Moscow Times

Igor Tabakov / MT

Senior economic officials, experts and businesspeople gathered at the Gaidar forum, which will be held in Moscow from Wednesday until Saturday.

Image 1 of 2

Prime MinisterDmitry Medvedevon Wednesday urged the Cabinet to ensure stable economic growth of at least 5 percent a year in the near future, a goal some officials said might require changes to current budget policy.
The major goal for the country's government is "to ensure transition to the path of sustainable economic growth of at least 5 percent," Medvedev said at an economic forum in Moscow. "We must have this purpose in mind and, based on that, attain stable growth of Russian citizens' wealth," he said.
Medvedev, who was speaking in a crowded hall full of international economic experts and government officials, outlined a number of measures he said are critical for ensuring macroeconomic stability.
Among other things, he called for stimulating private investment, developing small and medium-sized businesses and delivering on the plans to privatize state assets.
The announcement came as PresidentVladimir Putinwas assessing Russia's economic performance in 2012, calling the preliminary results "satisfactory."
Gross domestic product increased 3.5 percent between January and November, while unemployment remained as low as 5.4 percent, Putin said at a meeting with bankers and Kremlin officials, citing data provided by the Economic Development Ministry.
He added that inflation also remained relatively low last year and resulted primarily from the increase in food prices.
According to the Central Bank, inflation reached 6.8 percent last year. The regulator hopes that the annual inflation target of 5 to 6 percent will become realistic starting in the second quarter of this year, the bank's first deputy chairman, Alexei Ulyukayev, said at the forum.
However, Putin said it's too early for officials to relax, as the volatility of the country's key macroeconomic indicators throughout 2012 "causes concerns."
"According to the estimates by the Economic Development Ministry, annual GDP growth is slowing down. … Manufacturing and investment are demonstrating a similarly flagging dynamic. There are some problems in agriculture as well," he said, according to the Kremlin website.
The Economic Development Ministry sounded optimistic about the prospects of Russia's economic growth, with Deputy Minister Andrei Klepach saying that Russia's economy has the potential to show more impressive growth rates.
"We fall short of our growth potential," he told reporters on the sidelines of the forum.
But he warned that achieving the goal of 5 percent growth might require drastic changes to the existing budget policy.
"We can speed up the growth rates and attain GDP growth of … over 4 percent a year. But this requires serious changes, including, in my opinion, correction of the budget rule," Klepach said.
To ensure macroeconomic stability, Russia has adopted a policy that ties public spending to oil prices. For this year, the government planned the budget based on the expected oil price of $91 per barrel.
Given the current situation, the economy is unlikely to grow more than 4 percent per year, while a 5 percent increase is possible only if serious structural reforms are carried out across a number of industries, said former Finance MinisterAlexei Kudrin.
"Some steps that have been recently taken don't allow us to say that such a trend can arise," he said on the sidelines of the forum, referring to the reforms, Prime reported.
Meanwhile, Medvedev called for the government to deliver on its promises to reduce its involvement in the economy to help make businesses more competitive and ensure economic stability.
Authorities shouldn't postpone privatization until market conditions improve because implementing the plan is essential for increasing the economy's competitiveness, he said.
"Of course assets should be sold in favorable market conditions, but we can't wait for them forever, otherwise we'll never sell anything," he said.

Monday, January 14, 2013

Russia Comes Full Circle in 100 Years

13 January 2013 |

ByAlexei Bayer

Klipping The Moscow Times

During the Soviet era, the year 1913 was mentioned almost daily in books, newspapers, speeches by government officials and news reports. It was the last full year of the tsarist regime, before Russia entered World War I the following August. It was therefore customary to compare all economic statistics to those in 1913, be it the tons of coal mined, the number of tractors produced, the incidence of tuberculosis among children or literacy among peasants in the Vologda region.
By the 1970s, more than a half-century had passed and a lot had changed in science, technology and social development. By referencing their systems' achievements to 1913, Soviet officials were implicitly admitting that those achievements couldn't stand on their own merit — and, of course, could not withstand comparison to the standard of living in capitalist Western Europe.
Soviet propaganda kept declaring that the Bolsheviks came to power in a backward nation, transforming it into a highly developed industrial superpower in just two decades. Modernizing at such a remarkable clip, the Soviet Union was bound to catch up with the United States and overtake it — Nikita Khrushchev's favorite obsession — with the Soviet Union becoming the world's richest and most advanced nation. But the constant comparison to the underdeveloped Russian Empire somehow took the shine off the Bolsheviks' grand historical achievement.
Now that we've entered 2013, it may be useful to see what Russia has really achieved over the past century and whether it is indeed better off than the old tsarist empire. To begin with, Russia remains, much like 100 years ago, mainly a commodity producer, which is currently the source of its considerable wealth. The difference is that the Russian Empire was a major exporter of wheat, while today's Russia exports oil, gas and other industrial commodities. But in 1913, Russia was rapidly developing into a formidable industrial power. In just eight years since being defeated by the Japanese in the Far East, Russia covered considerable ground in catching up to the industrial powers of the day. Taking on Austria and Germany in a war that required a very high level of technological and infrastructural sophistication, Russia more than held its own.
Today, by contrast, Russia in many ways has come full circle. Its natural industrialization in the early 20th century was accelerated and extended thanks to the storm methods employed by the Bolsheviks in the 1930s and by the often misguided development during the subsequent years. Now Russia is falling further and further behind today's leading industrial nations in terms of production volumes, quality and technological sophistication.
Actually, it no longer makes economic sense to develop any industry in Russia. As long as oil prices remain so high, it is far less efficient to spend a barrel of Russian oil to produce something in Russia. On the contrary, it pays to export the barrel and spend the proceeds to import finished goods from China or Germany.
For all its nuclear weapons and a large military, Russia is far more dependent on the rest of the world and the price it sets for oil than the "weak" imperial Russia of old.
While Russia obviously produces more oil and gas than it did in 1913, it is running out of one vital resource after a century of social experimentation and bloodletting. Its population is ailing and dwindling, and it is importing unskilled workers while supplying brain power to high-tech companies, science labs and universities all over the world.

Alexei Bayer, a native Muscovite, is a New York-based economist.

Wednesday, January 9, 2013

How to Democratize Russia Without Revolution

26 December 2012 | Issue 5043

ByGordon Hahn

Klipping The Moscow Times

How to Democratize Russia Without Revolution

Opposition leaderBoris Nemtsovrecently said that the white-ribbon opposition’s leadership needs to emphasize to the public that they are engaged in a marathon rather than a sprint in the struggle for democracy in Russia. The remark came after low turnout for the Dec. 15 “Freedom March” in central Moscow.
To be sure, full democratization will not come overnight, but the timeline might not be as long as some think. The more authoritarian Soviet Union came a long way during Perestroika 1.0 in the late 1980s and early 1990s. With that in mind, the struggle during Perestroika 2.0 may be difficult but need not be especially long. Indeed, the opposition may be making things harder than they really are.
Fundamental regime transformation is unlikely to come about by way of either a peaceful or violent revolution from below — that is, a seizure of power by the societal opposition. More likely, it will be a negotiated transition in which street protests and other peaceful political action push the regime to make the necessary democratizing reforms. The best way to do that is not on the streets alone but through the ballot box. Thus, during Perestroika 1.0, a multifarious opposition composed of democrats, nationalists and moderate socialists both inside and outside the Communist Party nudged Soviet leaderMikhail Gorbachevtoward more reforms by using a broad menu of tactics, from mass demonstrations to victories at the ballot box.
Today’s battle requires a similar multipronged approach in which electoral victories must play a key, if not leading, role. Defeat at the ballot box could be the best way to scare and pressure the regime to undertake reforms and play politics according to democratic rules. To achieve this, the opposition should register as parties or join already registered parties like the Party of People’s Freedom or others depending on ideological orientation. Sergei Udaltsov’s Left Front, for example, might join the Communist Party or register its own party to run in elections.
The opposition has several years to organize and rally its forces for the State Duma and presidential elections in 2016 and 2018, respectively. In the meantime, opposition parties have the opportunity to practice, experiment and expand their networks through the intermittent gubernatorial and perhaps revived senatorial elections.
Close calls and defeats for the Kremlin’s United Russia can push PresidentVladimir Putinto make compromises and liberalize the system, as occurred this past year. One of the lessons for the opposition should be the effect of the original white ribbon movement’s first victory. The December 2011 demonstrations prompted then-PresidentDmitry Medvedevto introduce a series of electoral reforms during the following months — for example, the registration of the opposition leader Vladimir Ryzhkov’s Republican Party, which then united with the Party of People’s Freedom.
The dilemma for the opposition is that its more radical elements demonize Putin and the regime to the extreme, and this requires denigrating Medvedev’s reforms as insignificant. In this way, the opposition is denying itself its first victory and missing a crucial lesson of its first engagement with the regime.
Moreover, United Russia’s relatively poor showing in the Duma election and in previous regional elections played a role in the decision to introduce political reforms as a way of co-opting moderate opposition elements into the system — and off the streets. This is a dynamic that the opposition can use to become increasingly influential within the system, push for more reforms and make elections more free. Ultimately, the regime may agree to lose more elections, including federal ones. This could take more than one election cycle, meaning more than a decade of struggle similar to that which led to the fall from power of Mexico’s Institutional Revolutionary Party in the 1990s. On the other hand, more than one more federal cycle may not be needed if regional gubernatorial and legislative elections are taken advantage of to the greatest extent possible.
Mundane, painstaking work needs to be done for the opposition to be successful. This means more fundraising, organizational work, leadership selection, voter registration drives and effective campaigning. The kind of heroic revolutionism that the more radical leftist and nationalist elements within the opposition hope to use to bring a rapid collapse of the regime will be in less demand. Therefore, the new electoral agenda will have the added benefit of forcing some radicals to moderate their tactics and even their goals, thereby strengthening the moderate and democratic element within the opposition.
The electoral agenda should include:
• Diversifying the street opposition by incorporating its elements into existing political parties or creating new ones;
• Pushing for the legalization of election blocs in both federal and regional parliamentary elections, which Putin said in his presidential address he was willing to discuss;
• Developing opposition parties’ level of organization in part by institutionalizing a leadership and platform selection process;
• Expanding opposition parties’ presence in the regions using gubernatorial and regional legislative elections;
• Beginning a search for State Duma candidates in the regions, given the planned return to a mixed- party and single-mandate system, in which half the Duma seats will be apportioned according to the results of single-district races;
• Pursuing dialogue with the regime, especially on the issue of legalizing electoral blocs, while maintaining criticism of authoritarian aspects of its policies and the political system.
While bad, Putin’s regime could be worse in terms of both comparative and Russian historical standards. The regime has shown a willingness to make some compromises and limit its use of force. For example, the organizers of the recent illegal demonstration, a violation of the law that under Putin’s legal amendments brings with it tens of thousands of dollars in fines, were only briefly detained and were not charged.
The political system is sufficiently open. It can now be used to bring about change without incurring the risks of chaos and crackdown inherent in revolutions and attempts at revolution. The opposition simply needs to be tactically diverse and flexible enough to win the day.

Gordon Hahn, senior associate at the Center for Strategic and International Studies and adjunct professor at the Monterey Terrorism Research and Education Program at the Monterey Institute of International Studies, is author of “Russia’s Islamic Threat” and “Russia’s Revolution From Above, 1985-2000.”