Japanese Prime Minister Arrives to Boost Business Ties and Restart Territorial Talks

29 April 2013 | Issue 5119

Reuters

Klipping The Moscow Times

TOKYO — Japan and Russia expect to clinch up to 20 deals, launch an investment fund and reopen talks on a territorial row that has kept them from signing a peace treaty formally ending World War II when Japan's prime minister holds talks in Moscow this week.
Japan also expects Russia to present a proposal for Japan's participation in building a pipeline connecting East Siberian gas fields and a planned $38 billion Vladivostok gas hub built by Gazprom, Deputy Chief Cabinet Secretary Hiroshige Seko said late last week.
The summit, which is due to start Monday between Shinzo Abe and President Vladimir Putin, the first between leaders of the two countries in a decade, may open the door to progress in the long-stalled territorial talks given converging strategic interests and a Japanese premier who, for the first time in a decade, appears to have the influence and staying power needed to make commitments.
Japan is the largest importer of liquefied natural gas, or LNG, in the world and could provide Russia with the money and technology to develop its under-populated east. Japan, for its part, sees Russia as a strategic partner as it looks to diversify and cut the costs of LNG imports, which shot up after a 2011 disaster at its Fukushima nuclear plant.
"With the aim of diversifying energy supplies in mind, we look forward to an offer from the Russian side during this visit," Seko said. He added, however, that a major deal on the project was unlikely during Abe's visit.
Abe's trip follows two months of talks on expanding gas-supply agreements, in which Japan has been pressing Gazprom to present a detailed plan of the Vladivostok project that would spell out the potential role of Japanese companies.
Abe will be accompanied by a 120-strong business delegation including 30 to 40 chief executives of trading houses, banking, healthcare and agriculture companies, Seko said.
"We want to sign up to 20 MOUs [memoranda of understanding] between Japanese and Russian companies and launch an investment platform," he said. Japan Bank for International Cooperation and the Russian Direct Investment Fund are looking to start a fund of up to $1 billion to encourage investment in Russia, sources said.
The two countries will hold a business seminar on Tuesday attended by, among others, representatives of Olympus Corp, Sumitomo Heavy Industries and Kawasaki Heavy Industries according to an agenda.
"With this business mission, we want to convince Russia of the merits of having a good long-term relationship with Japan," Seko said. "Through forming strong personal ties between the leaders, we want to make Russia feel that by quickly solving the Northern Territories issue, Japan can contribute to the development of Russia and Siberia in particular."
A dispute over four sparsely populated islands in the Pacific, known as the Northern Territories in Japan and the Southern Kuril Islands in Russia, has prevented the countries from signing a peace treaty ending World War II. The issue has overshadowed relations for more than 60 years.
"Until now, because of the Northern Territories, Japan wasn't able to talk to Russia about matters other than energy. That issue has always been a major bottleneck," Seko said. In February, Abe said he wanted to find a "mutually acceptable solution" to the row.
The islands were seized by the Soviet Union after it declared war on Japan on Aug. 8, 1945, just days before Japan surrendered, forcing about 17,000 Japanese to flee. They are near rich fishing grounds and close to oil and gas production regions of Russia.
Abe's visit comes a month after a Moscow trip by Chinese leader Xi Jinping. Deals between the world's biggest energy producer and its biggest customer, China, have been hard to come by. Xi's visit yielded a deal for Russian state giant Rosneft to gradually treble oil supplies to China, but the sides are short of a deal on the supply of pipeline gas to China, thwarted for years by prices.
Related articles:

Russia Has 3-5 Years for Economic Reform, Minister Says

30 April 2013 | Issue 5121

Klipping The Moscow Times

Economic Development Minister Andrei Belousov has warned that Russia has "three, four, a maximum of five years" to carry out structural reforms to the economy before the global energy balance changes, possibly leading to a 20 percent to 30 percent drop in oil prices and economic stagnation.
"It is critically important that Russia enters that period with at least the main parameters of the reforms completed," Belousov said Monday at a staff meeting at the Economic Development Ministry.
He said Russia should conduct large-scale reforms equivalent to 7.5 percent of the country's GDP, or 3.5 trillion to 5 trillion rubles ($112 billion to $160 billion) per year for the next five years.
The reforms should be carried out in health care and education, the pension system, utilities, the armed forces and civic infrastructure, he said.
The government should also undertake measures to develop non-mineral sectors of the economy and promote the development of the Far East and the Kaliningrad region, he said.
Belousov noted that unless Russia can bring its annual economic growth to 5 percent to 6 percent, the reforms would not succeed and "the window of opportunity" will be lost.
Observers said the minister's broad call for reforms went beyond the more specific objectives that ministers usually focus on, Vedomosti reported.
Belousov's plan may reflect his growing influence ahead of his possible move to the Kremlin, where he may replace Elvira Nabiullina as a presidential economic aide. Nabiullina was recently appointed as head of the Central Bank, observers said.

Russia, Japan 'Determined' to Conclude Peace Treaty

30 April 2013 | Issue 5120

By Ivan Nechepurenko

Klipping The Moscow Times

Kirill Kudryavtsev / AP

President Vladimir Putin shaking hands with Japanese Prime Minister Shinzo Abe at the Kremlin on Monday.

During the first visit of Japan's prime minister to Russia in over a decade on Monday, leaders of the two countries expressed "firm determination to conclude a peace treaty" after 67 years of largely futile attempts to resolve the territorial row over the Kuril Islands.
The four islands, with a total size five times the territory of Moscow, prevented Russia and Japan from concluding a peace treaty following World War II.
Japan called for the disputed archipelago, which had been seized by the Soviet Union in 1945, to be returned, but Russia stayed firm in its sovereignty claims over the territory.
Japanese Prime Minister Shinzo Abe met with his Russian counterpart Vladimir Putin to "build new momentum" and "set a future course" for Russia-Japan relations.
"I feel that we have established personal and trusting relations," Abe said at a news conference after his talks with Putin, Interfax reported. "We came to the shared opinion that we should intensify contacts between our two countries' leaders in the future."

‘Japan needs this problem to keep boiling. That will be the only news, if it happens.’
Viktor Pavlyatenko

Leaders of Russia and Japan had stalled discussions over a possible peace treaty and the Kuril Islands amid mushrooming irritants in recent years, including then-President Dmitry Medvedev's 2010 visit to the islands and repeated allegations that Russia invaded Japanese airspace.
Just last Saturday morning, Japan's Defense Ministry said it scrambled fighter jets when two Russian Tu-142 planes flew close to its national border.
Russia has denied violating Japan's airspace.
Alexander Konovalov, head of the Institute for Strategic Assessment, told The Moscow Times that the negotiations were a major success, since both sides expressed determination to resume peace treaty talks for the first time in a decade.
"But it is unlikely that any major progress is possible with regard to the Kuril Islands," he said, adding that "the sides should just start using this territory jointly."
Abe seemed to stymie any hope for joint use, however, saying at the news conference that Japan would be "against the joint use of the South Kuril Islands with foreign states."
Viktor Pavlyatenko, a researcher at the Russian Academy of Sciences' Institute of Far Eastern Studies, said the main reason why Japan decided to boost peace treaty talks is to reinvigorate public attention surrounding the issue.
"Japan needs this problem to stay afloat and keep boiling. That will be the only news, if it happens. Otherwise, I do not expect any other changes," he added.
In contrast, Konovalov said the fact that the sides "articulated their political will and gave instructions to ministries to work on solving all issues" is still a positive sign.
In one notable achievement at Monday's meeting, Russia and Japan agreed to establish a permanent framework for consultations between their foreign and defense ministries.
Apart from political issues, the meeting also had a prolific economic agenda.
Putin said bolstering economic-humanitarian ties would be crucial to create "the best conditions to build trust and make us solve the most complex issues."
Russia has been trying to develop its Far East region by funneling billions of dollars into it's infrastructure, including building two giant cable-stayed bridges in Vladivostok for the 2012 APEC Summit held in the city.
Resource-poor Japan is seen as a pivotal country for providing investment into Russia's Far East, as well as importing 39 percent of the liquified natural gas from Russia's Sakhalin I project.
Both leaders confirmed their desire to exploit natural opportunities in the economic sphere.
"Russia is full of resources, while Japan has advanced technology. With that in mind, it seems to me that our countries have mutually complementary beneficial relations," Abe said in an interview with Itar-Tass just before arriving in Moscow.
The two leaders will get a chance to exploit these opportunities in the near future: Abe invited Putin to pay an official visit to Tokyo in 2014.

Contact the author at i.nechepurenko@imedia.ru 

Why I Love Russia (Despite Everything)

30 April 2013 | Issue 5120

By Marilyn Murray

Klipping Moscow Times

Moscow? Russia? Is it safe to live there?"
This is the response I often receive when people learn I spend half of the year in Moscow. Many people from the U.S. assume that Russia is a dangerous place and that I, as a single female, should not attempt to live there. When my daughter visited me in 2004 and saw the exterior of my Stalin-era apartment building she gasped and said, "Mother, I can't believe you are living in a place like this!"
Even boxer Mike Tyson shook his head when he came to see me and said, "This is really bad. It's like where I grew up in the slums of Brooklyn."
"Welcome to my hood," I quipped.
The exterior door of my apartment building gets painted now and then, and the babushka who cleans the interior works hard to keep the cracked cement and broken tiles on the floor as free of snow, mud and dirt as possible. The tiny elevator works most of the time but occasionally reeks of spilled alcohol or urine. When I arrived 10 years ago, it was almost impossible to keep a light bulb in the small hallway outside my apartment door. The darkness, coupled with awareness that our stairwell is a favorite drinking spot for the young men in our building, often draped a veil of uneasiness over me as I struggled to fit my key into the lock. I am aware that many of the robberies here occur from the time you enter the building until you enter your apartment. As I step inside, I always quickly engage all three locks on my door and utter a prayer of thanksgiving for arriving safely.

Despite living in a run-down building, elevators that smell like urine, being kept up all night by noisy, drunk neighbors and being robbed once on the street, I still love Moscow.

We have the standard small playground in our courtyard where many of our residents gather day and night. It was cleaned up this year with new playground equipment, flowers and grass. It actually looks quite presentable now. I do feel safer when I come home late at night and know that usually several people will be relaxing in the courtyard. The most apprehensive trek is on a narrow sidewalk between the side of my apartment building and a fence. I have to walk this gauntlet every day to get to the street and the metro. The local alcoholics use this passageway for a urinal and it is literally like trying to navigate in an outhouse. It is unlit so at night it becomes rather treacherous to watch where I step and also be aware of the possible presence of other people. I always am relieved to turn the corner and see our little playground with young lovers sitting on a bench as I head for my apartment door.
My apartment building is next to the metro and thus is a gathering place for young and old. From my fourth-floor windows, I watch a most interesting panorama. In addition to the normal shoppers, families and friends, other characters appear. I awoke one night at 3 a.m. and looked out to see three, black-leather-jacketed men materialize from a large Mercedes. One carried a bulging briefcase, and as they passed directly below me I could see pistols emerging from the waistbands of each man. I knew they probably were making a night deposit in the new bank on the ground floor of our building. On many weekends, I am kept awake all night by the raucous partying below my bedroom window: young men drink, laugh, sing, yell and fight. The following mornings reveal a sea of vodka and beer bottles.
If someone had been watching from my window one afternoon last year, they would have seen me being robbed of my billfold as I exited the small store next to our building. When I realized what happened, I went back inside the store and they took me to the back room to look at their surveillance film. They stated it probably was a couple of young men from the North Caucasus.  We scanned the film to find anyone likely to fill that description. But much to our surprise, we found the thieves were female and not Caucasus native. Since that moment, the store staff now gives me special attention, and even the stock boys greet me and offer to carry my bags.
I have lived in my little apartment in Moscow longer than any one place in my entire life. And despite all the craziness here, I often feel as though I have a passionate love affair with Moscow and Russia. Like any passionate relationship, there are good features and also messy ones. A relationship works if the good outweighs the bad.
The people in Moscow who I consider my friends include the smiling young man in the stand where I buy my weekly rotisserie chicken who always has mine ready when he sees me coming. On numerous occasions I have met him on the street, and he goes out of his way to greet me even if he is with a group of friends. There is the woman who runs the fruit and vegetable kiosk who is always excited when I return to Moscow and leans far out of her window to give me a hug. One time when I entered the small store in the basement of our building, a woman came toward me with a big smile and outstretched arms. I knew she looked familiar but could not place her. At first I thought maybe she was one of my students. But as she hugged me and asked how I was, I realized she was the woman who resided in the little compartment in the corner of the basement where I exchange my dollars for rubles. For years I had only seen her head and arms through a small window, but that didn't help when I tried to identify her outside of her cage.
In the U.S., I do not know my neighbors in the condo building where I live. No one in the supermarket where I shop ever greets me by name or knows when I am in or out of the country. I can travel all over town and rarely see anyone I know, and that city is one-fourth the size of Moscow. Yet in Moscow, I have been in the center of this huge city and have run into as many as five people I know well in one day. It makes me feel very much "at home," and I understand why Moscow is sometimes called "a large village." This exciting, outrageous, captivating and sometimes dangerous city will always own a piece of my heart.

Marilyn Murray is an educator specializing in the treatment of trauma, abuse and deprivation, with more than 2,000 people attending her classes in Russia and other countries from the Commonwealth of Independent States over the past 10 years. Her second book, "The Murray Method," was recently released in English and Russian.

Like It or Not, Russia Is a Global Financial Power

09 April 2013 | Issue 5106

By Martin Gilman

Klipping The Moscow Times

Sometimes a slight, even if it results from an error of omission, can have unintended consequences.  A recent example of a slight to Russia occurred three weeks ago during a late Saturday night marathon negotiations between the troika — the European Union, European Central Bank and International Monetary Fund — and the president of Cyprus on March 16-17.
The Cypriot economy had thrived in the past decade on an outsized banking sector and tourism, both of which appealed to Russians in particular. Joining the eurozone in 2008, Cyprus was considered as a safe, efficient low-tax location for financial operations by those whose own countries were viewed as being inherently riskier and more costly. But its two big banks became insolvent after huge losses on their holdings of Greek sovereign bonds in March 2012.  The writing has been on the wall ever since.
Going into that Saturday night negotiations in Brussels over a bailout program for Cyprus, the Germans made it clear that the troika could provide no more than 10 billion euros ($13 billion). The Cypriots would have to find the rest. In an effort to prevent the liquidation of the country's two major banks and hence the destruction of the economy's basic business model, they proposed the stunning idea of taxing all depositors in all banks, even insured deposits and even in banks which had nothing to do with Greek debt. Nobody said no, so the troika went along with the proposal.
Waking up to the news about the deal that was stuck in the wee hours on March 17, the Russians were incredulous. President Vladimir Putin reacted immediately, calling the proposed deal "unfair, unprofessional and dangerous."
It's easy to appreciate why Russians, in particular, felt indignant. Moody's estimated that Russian deposits in Cypriot banks were worth about $31 billion, out of about $90 billion in total at the end of January, according to the Central Bank of Cyprus.
Despite their obvious and direct interest in the outcome, the Russians were not consulted by the EU authorities. The Russian position had been to rely upon the IMF as the honest broker in the discussions to represent its interests as a creditor. IMF policies should have ensured that the debt problems of a country's banks should force losses on bank creditors, not the sovereign — and certainly not on the insured depositors.
Interestingly it was not just Putin who was irate. The next day, the Financial Times in an editorial noted that the deal was "destabilizing as well as morally unconscionable."
Of course, the IMF should have never allowed itself to be cornered in the negotiations. This may have been the price it paid when it appointed a person with a lot of politically savvy but little economic background to head the organization. In any case, the Cypriot parliament obliged by rejecting the deal, paving the way for the less bad outcome of sacrificing the country's two big banks, as the IMF and Russian government had originally sought.
This recent flap over Cyprus is hardly the first time that Russia, the largest external creditor of a country that was hit by a debt crisis, was excluded from the negotiations by the other minor creditors. It invites a comparison to the mid-1990s when Western official creditors grouped in the Paris Club dictated debt deals with countries like Bulgaria, Vietnam and Algeria, while Russia, having inherited the claims of the former Soviet Union, was by far the largest single creditor. Its interests were treated cavalierly, and it was assumed to accept the terms agreed by the others. Finally in the case of Cambodia in 1995, the Russians finally drew a line in the sand, and the IMF had to recognize the equal validity of Russian claims and insist that Russia be respected by the Paris Club. Russia finally joined the Paris Club as a creditor in 1997.
Ironically, the slight by the Europeans in dismissing the relevance of Russia as a creditor in the case of Cyprus is increasingly at odds with the reality of Russia's status as one of the world's largest creditor countries. After all, immediately after the Cypriot parliament refused to ratify the Saturday night deal and everyone seemed to have egg on their faces, Russia was seen as the only potential rich sugar daddy that might help. That is why Cypriot Finance Minister Michael Sarris showed up in Moscow within days, with begging bowl in hand.
Ignoring Russia as a major creditor country has a long history, no doubt associated with lingering Cold War prejudices, the recent memory of Russia's own default in 1998, and political inertia where inconvenient new facts that might disturb the status quo are brushed aside as long as possible.
In fact, in financial terms, Russia shares many of the characteristics of northern European creditor countries such as high savings, current account surpluses and large net creditor positions. Moreover, Russia has much lower debt. So it is ironic that the lingering image of Russia is one more commonly associated with the southern periphery countries of the eurozone.
Russia's status as one of the world's largest creditors, with the third-largest external reserves and extensive private and public ownership of foreign securities, needs to be acknowledged. The world may not be comfortable with the idea, but Russia as a financial power cannot be ignored. Even if Russia's claims on Cyprus were mostly held privately, the Russian sovereign has a stake in ensuring that such episodes are not repeated.
So it was not surprising that at last month's BRICS summit in South Africa, the leaders launched a development bank pledging $10 billion each as initial capital, outside the framework of the Bretton Woods institutions. If Russia and other like-minded new creditors cannot reshape the balance of power in existing global  institutions such as the IMF and World Bank, then they have the capability to create their own. Political will has been lacking so far, but Europe's slight could yet boomerang.
Even then, Russia is going to have a long uphill struggle with engrained world views to get a little respect. But money talks. As the Russian government and private sector increase their net creditor positions, it will become harder to ignore.

Martin Gilman, a former senior representative of the International Monetary Fund in Russia, is a professor at the Higher School of Economics.

Russia's Stunning Self-Destruction

29 April 2013 | Issue 5119

By Alexei Bayer

Klipping The Moscow Times

Alexei Bayer

Early in the 20th century, three powers were vying for economic supremacy. The United States took over leadership in the Anglo-Saxon world from Britain. Newly unified Germany was also an economic giant, but it was, as the saying goes, too big for Europe and too small for the world. The rest of the world fought two wars to contain it, and by the end of the 20th century most German lands and the German sphere of influence in Central Europe became part of the U.S.-­dominated West.
Then there was Russia. It had boundless territory, a huge and diverse population, a wealth of natural resources and enormous potential. By the start of World War I, it had begun to realize its potential, but when the war ended it had adopted a dead-end Communist ideology, turned inward and, while claiming to blaze a new trail for mankind, removed itself from international economic competition.
Russia did achieve a measure of economic success behind the Iron Curtain, but once its economy was integrated with the rest of the world in the early 1990s only two of its industries turned out to be internationally competitive. It still sells some $10 billion worth of armaments annually, being a distant second to the U.S., but this is a drop in the bucket compared to revenues it derives from oil, natural gas and other commodities.
Over the past century, Russia expended massive capital, both financial and human, to be able to pump crude out of the ground and deliver it to end-users. Its own economy produces little else that the rest of the world — and, for that matter, its own population — wants. A rather poor return on investment indeed.
Russia's oil production has been growing after bottoming out 15 years ago. It has surpassed the mark of 10 million barrels per day, making the country the world's largest producer. Output in the former Soviet Union is now higher than the short-lived peak achieved in the 1980s, and a larger proportion is exported. Oil prices have been high, but they would have been even higher had it not been for Russian oil. China and other emerging economies would have developed far more slowly, and Western prosperity could have been undermined by oil shortages.
Russia's largesse toward the rest of the world doesn't end there. Russia's oil earnings were not used for investment into the Russian economy, infrastructure or quality of life. The traffic jam on the elite Rublyovskoe Shosse outside Moscow, which has been called "the most expensive parking lot in the world," is the best visible symbol of what Russia got out of its oil wealth.
Not so the rest of the world. In the past five years alone, some $350 billion was taken out of Russia in the form of capital flight. The money ended up in real estate holdings from the Baltic Sea to the Adriatic, as well as in France, Britain and Miami Beach, greatly alleviating the impact of the global financial crisis on those countries in general and on their property values in particular. As the Rublyovka traffic jams and numerous fancy boutiques around Moscow show, foreign producers of luxury goods also have reason to cheer Russia's oil boom.
We don't know what the future holds for Russia, but its past 100 years present a spectacle that is wholly unprecedented in world history: a nation that first deliberately destroyed its enormous economic potential and then squandered and pilfered the little that remained.

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

Russia Plans to Establish Air Base in Belarus

24 April 2013 | Issue 5116

Reuters

Klipping the Moscow Times

Handout / Reuters

Belarussian President Alexander Lukashenko, left, greeting Defense Minister Sergei Shoigu in Minsk on Tuesday.

The military plans to deploy fighter jets in Belarus this year and eventually establish an air base in the former Soviet republic, Defense Minister Sergei Shoigu said.The moves would increase Russia's military presence in Belarus, viewed by Moscow as a buffer between Russia and NATO, and could unnerve neighboring members of the Western alliance.
Russia agreed in 2009 to set up a joint air defense system with Belarus, and talks were held before then on establishing an air base there, but few concrete steps have been taken.
"We have begun considering the plan to create a Russian air base with fighter jets here," Shoigu said Tuesday at a meeting with Belarussian President Alexander Lukashenko in the capital, Minsk.
"We hope that in 2015 there will be a regiment of warplanes [in Belarus] that will serve to defend our borders," Shoigu said in a portion of the meeting shown on Russian state television.
Shoigu said the plan is for the first fighter jets to arrive in Belarus this year. Russian aviation regiments normally consist of roughly 60 warplanes.
While Russian and NATO officials say armed conflict between the former Cold War adversaries is all but unthinkable, relations are strained and former Soviet satellites now in the Western alliance are particularly wary of the Russian military.
An anti-missile shield the United States is deploying in Europe together with NATO nations is a chief source of tension.
Shoigu's remarks coincided with a meeting in Brussels at which Foreign Minister Sergei Lavrov told NATO that Moscow still wants guarantees the system would not be used against Russia, despite a recent decision to scale it back.
Ruslan Pukhov, director of the Moscow defense think tank CAST, said the deployment of fighters in Belarus would do little to increase security and would be seen by Russia's Western neighbors "as a display of hostility."
Russia has a military presence in a number of former Soviet republics, including air bases in Kyrgyzstan and Armenia, and it is the most powerful nation in the Collective Security Treaty Organization, a security alliance of former Soviet states.
Russia uses a Soviet-era early-warning radar station in Belarus and has supplied it with weapons including air defense missile batteries.
Lukashenko told Shoigu that the West "should understand that if they look at us will ill intentions, we will react," according to Belarussian state news agency Belta.
But he made no specific public comment on Russia's plans for the deployment of fighters or a base, and the Foreign Ministry declined to comment.

A Moscow Times reporter contributed to this report.

U.S. and EU Can Learn Much From Abenomics

23 April 2013 | Issue 5116

By Joseph Stiglitz

Klipping the Moscow Times

Japanese Prime Minister Shinzo Abe's program for his country's economic recovery has led to a surge in domestic confidence. But to what extent can "Abenomics" claim credit?
Interestingly, a closer look at Japan's performance over the past decade suggests little reason for persistent bearish sentiment. Indeed, in terms of growth of output per employed worker, Japan has done quite well since the turn of the century. With a shrinking labor force, the standard estimate for Japan in 2012 — that is, before Abenomics — had output per employed worker growing by 3 percent year on year. That is considerably more robust than in the U.S., where output per worker grew by just 0.37 percent last year, and much stronger than in Germany, where it shrank by 0.25 percent.
But as many Japanese rightly sense, Abenomics can only help the country's recovery. Abe is doing what many economists have been calling for in the U.S. and Europe: a comprehensive program entailing monetary, fiscal and structural policies. Abe likens this approach to holding three arrows — taken alone, each can be bent; taken together, none can.
The new governor of the Bank of Japan, Haruhiko Kuroda, comes with a wealth of experience gained in the finance ministry and then as President of the Asian Development Bank. During the East Asia crisis of the late 1990s, he saw firsthand the failure of the conventional wisdom pushed by the U.S. Treasury and the International Monetary Fund. Not wedded to central bankers' obsolete doctrines, he has made a commitment to reverse Japan's chronic deflation, setting an inflation target of 2 percent.

Abe has implemented athorough program ofmonetary, fiscal andstructural policies.

Deflation increases the real (inflation-adjusted) debt burden, as well as the real interest rate. Though there is little evidence of the importance of small changes in real interest rates, the effect of even mild deflation on real debt, year after year, can be significant.
Kuroda's stance has already weakened the yen's exchange rate, making Japanese goods more competitive. This simply reflects the reality of monetary-policy interdependence. If the U.S. Federal Reserve's policy of "quantitative easing" weakens the dollar, others have to respond to prevent undue appreciation of their currencies. Someday, we might achieve closer global monetary-policy coordination. But for now, it made sense for Japan to respond, albeit belatedly, to developments elsewhere.
Monetary policy would have been more effective in the U.S. had more attention been devoted to credit blockages — for example, many homeowners' refinancing problems, even at lower interest rates, or small and medium-size enterprises' lack of access to financing. Japan's monetary policy, one hopes, will focus on such critical issues.
But Abe has two more arrows in his policy quiver. Critics who argue that fiscal stimulus in Japan failed in the past, leading only to squandered investment in useless infrastructure, make two mistakes. First, there is the counterfactual case. How would Japan's economy have performed in the absence of fiscal stimulus?
Given the magnitude of the contraction in credit supply following the financial crisis of the late 1990s, it is no surprise that government spending failed to restore growth. Matters would have been much worse without the spending. As it was, unemployment never surpassed 5.8 percent, and in the throes of the global financial crisis it peaked at 5.5 percent. Second, anyone visiting Japan can see the benefits of its infrastructure investments.
The real challenge will be in designing the third arrow, what Abe refers to as "growth." This includes policies aimed at restructuring the economy, improving productivity and increasing labor-force participation, especially by women.
Some talk about "deregulation," a word that has rightly fallen into disrepute following the global financial crisis. It would be a mistake for Japan to roll back its environmental regulations or its health and safety regulations.
What is needed is the right regulation. In some areas, more active government involvement will be needed to ensure more effective competition. But many areas in which reform is needed, such as hiring practices, require change in private sector conventions, not government regulations. Abe can only set the tone, not dictate outcomes. For example, he has asked firms to increase their workers' wages, and many firms are planning to provide a larger bonus than usual at the end of the fiscal year in March.
Government efforts to increase productivity in the service sector probably will be particularly important. For example, Japan is in a good position to exploit synergies between an improved health care sector and its world-class manufacturing capabilities, in the development of medical instrumentation.
Family policies, together with changes in corporate labor practices, can reinforce changing mores, leading to greater and more effective female labor force participation. While Japanese students rank high in international comparisons, a widespread lack of command of English, the lingua franca of international commerce and science, puts Japan at a disadvantage in the global marketplace. Further investments in research and education are likely to pay high dividends.
There is every reason to believe that Japan's strategy for rejuvenating its economy will succeed. The country benefits from strong institutions, has a well-­educated labor force with superb technical skills and design sensibilities and is located in the world's most dynamic region. It suffers from less inequality than many advanced industrial countries, and it has had a longstanding commitment to environment preservation.
If the comprehensive agenda that Abe has laid out is executed well, today's growing confidence will be vindicated. Indeed, Japan could become one of the few rays of light in an otherwise gloomy advanced-country landscape.

Joseph Stiglitz, a Nobel laureate in economics, is university professor at Columbia University.

Traces of Russia in Boston Bombing

22 April 2013 | Issue 5115

By Georgy Bovt

Klipping The Moscow Times

When television footage of the explosions in Boston was first broadcast, I happened to notice that one of the blasts occurred directly under the Russian flag. (Flags were posted from every country whose citizens were taking part in the marathon.) But I did not attach any significance to it at the time. After all, how could there be any connection between Russia and the events in Boston?
Then I saw a link on Facebook that led me to an online forum where people were discussing, in all earnestness, the idea that corrupt businesspeople and officials responsible for the 2014 Olympic Games in Sochi were behind the attack. The theory is that their own corruption had made it impossible to finish preparations on schedule, and that the Boston bombing would give them a legitimate pretext for raising the threat of terrorism and moving the venue for the Games while pocketing the money that Moscow has already poured into the project. This whole discussion struck me as conspiratorial nonsense, as the latest evidence that some of my compatriots still believe that the sun revolves around the Earth and that everything that happens in the world is either an organized plot against Russia or else the result of corrupt Russian officials pursuing their own selfish interests.
While I was reading that drivel, I lost sight of one thing: Many of the millions of people conversing through social networks are ignorant and uninformed, and so it is inevitable that any manner of delusional thinking will eventually gain such a following as to become world news. That is how the "Russian factor" in the Boston bombing first appeared.
The Czech ambassador in Washington hurriedly issued an official statement in which he asked Americans not to confuse the Czech Republic with Chechnya. "The Czech Republic and Chechnya are two very different entities," the message read. "The Czech Republic is a Central European country. Chechnya is a part of Russia." The reason for his concern is that many social network users do not differentiate between Chechnya and the Czech Republic. For those who do know the difference, the U.S. media has clarified that the brothers and suspected terrorists Dzhokar and Tamerlan Tsarnaev are from a "region near Chechnya."
The reason they are not more specific is that Americans are generally familiar with Chechnya — thanks to reporting from two past wars there — but know nothing about nearby Dagestan, the region where the brothers were living when their parents applied for and received political asylum in the U.S. They know even less about Kyrgyzstan, the former Soviet Central Asian Republic to which the Tsarnaev family was deported during the rule of former Soviet leader Josef Stalin and where the brothers were born and spent their early childhood.
The average person thinks that since Chechnya is in Russia, the Boston terrorists suspects must be Russians. A Russian friend of mine planning a business trip to Boston might therefore be justified in fearing that U.S. passport control officers will question him closely concerning the purpose of his visit. Russia's image in the U.S. has never been good during the 10 years President Vladimir Putin has been in power, and now a pair of "Russian immigrants" blow up innocent people on the streets of Boston. That will only tarnish Russia's image even further. That is probably why Chechen leader Ramzan Kadyrov rushed to write on his social network page that the Tsarnaev brothers have no connection to Chechnya, that they grew up in the U.S. — where, in fact, they did spend the last 10 years — and that the roots of this problem must be found there.
Of course, political leaders are all very clear on the situation. Putin called U.S. President Barack Obama to offer help in the investigation of the terrorist attack and to remind him of the importance of cooperation in the fight against global terrorism. We don't know if Obama reminded Putin that in January, Moscow cancelled a number of agreements on sharing each country's law enforcement resources and information that could have reinforced the fight against terrorism. After all, greater mutual trust engenders more effective cooperation. Nor is it clear whether either of them mentioned the fact that in 2011 the FBI questioned Tamerlan Tsarnaev, the eldest of the brothers, at the request of the Federal Security Service. The FSB was looking into his possible connection to Chechnya's criminal underground. But it is also possible that the FBI did not interrogate Tamerlan as thoroughly as it might have because the U.S. media at the time portrayed Chechen insurgents as "freedom fighters" resisting Putin's authoritarian Russia. The family was probably given refugee status for having been "persecuted" by Russia.
In any case, one series of propagandistic stereotypes and myths has now spawned another set of untruths. Together, they contribute to a situation in which civilized states have become hostages to their own political correctness and mutual distrust, rendering them helpless to present a unified front against Islamic radicalism and terrorism. That movement sets out to destroy all of Judeo-Christian civilization, most of which lies in the West, but part of which is also in most of Russia.

Georgy Bovt is a political analyst.

What Russia Must Do to Become a Normal Nation

22 April 2013 | Issue 5115

By Dieter Wermuth

Klipping The Moscow Times

The macroeconomic situation in Russia remains outstanding, with relatively low public and private sector debt, low inflation, a strong balance of payment and, for the time being, a relatively small government budget deficit. But capital spending by Russians and foreigners suffers from the perception of a weak rule of law. Russia has set itself a clear target to improve things and has signed international agreements that commit the government to live by the rule of law. On paper, it has accepted that one of the highest courts is in Luxembourg, outside its area of control. Germany, France, Britain and others have given up sovereignty in this respect. If Russia followed this model in earnest and also implemented an effective system of checks and balances, the investment climate could improve a lot.
One of today's puzzles is the low valuation of Russian equities. On average, they cost just 5.2 times the expected profits of 2012, while Canadian stocks trade at 13.3 times earnings and Norwegian stocks at 10.9 times. The message from price-to-book ratios is similar. If a company is attractive for investors, the ratio should be well above 1. But Russian stocks average only 0.7, whereas Canadian and Norwegian stocks presently trade at 1.71 and 1.52. Creating conditions that bring valuations on par with those of other stock markets would do wonders for the country's spending on capital goods, including foreign direct investment, the growth rate of real gross domestic product and thus for the standard of living.

If Russia initiates institutional reforms, the value of Russian assets could easily double.

One way to achieve this is to create an institutional framework similar to that of the democracies of Western Europe. This is just as important as broadening Russia's production base and reducing its dependency on raw materials. Indeed, a comprehensive and state-of-the-art institutional framework is probably the precondition for growth and stability. Economists place more emphasis on the role of institutions in development, such as independent courts, media, regulators and central banks. They also highly value a fair and efficient tax system, genuine opposition parties that have a reasonable chance to oust the existing government in free and fair elections, an incorruptible bureaucracy, good and affordable schools and universities and a well-maintained infrastructure.
Russia has serious deficiencies in all these areas and pays the price in the form of undervalued equities and real estate as well as fairly high real interest rates. The investment ratio is simply much too low for a country that aims to catch up with its rich Western European neighbors. Despite its rich natural resources, Russia is an unnecessarily poor country.
One approach to improve things is to use the European Union's "Acquis communautaire" as a guide for institutional reform. Norway and Turkey, very successful economies for some years now, have done this without being members of the EU. The Acquis covers the EU Treaty, the whole body of laws, decrees and guidelines passed by EU institutions as well as the judgments of the European courts. These are binding for all 27 countries, and new members have to fully adopt them. Dauntingly, the complete edition of the text comprises 31 volumes and more than 85,000 pages. But Cyprus and Malta have shown that it can be done, so Russia's parliament and civil service could certainly do it as well.
For years, Russians did not care much about institutional reform. They were able to increase their spending at a higher rate than the growth of production, as export commodity prices have outpaced import prices. Until recently, the general feeling has been that the standard of living continues to improve all the time. Since this was not accompanied by political and institutional progress, the rising middle classes are getting restive, demanding a bigger say in the country's decision making process.
To rely on ever higher commodity prices is not a sustainable growth model. There is no guarantee, of course, that prices will remain high. Every so often they crash and cause havoc in the rest of the economy. The 8 percent decline in the country's GDP in 2009, the 80 percent fall of stock prices between the middle and end of 2008, the 36 percent depreciation of the ruble against the dollar during that time, and the collapse of the real estate market were direct consequences of the crash of raw material prices, in particular the price of oil, which imploded from $147 to $33.50 between July and December 2008. To this day, markets are not yet back to pre-­crisis levels.
If Russia had more robust institutions and took the rule of law seriously, investors would demand lower risk premiums for holding shares of companies and government and corporate bonds, which is another way of saying that asset prices could be much higher and the cost of capital correspondingly lower. A big increase in capital spending is needed to wean the country from its reliance on commodities. China's impressive growth model has at its core very high saving and investment ratios. Anything that helps to boost these must have top priority for policy makers.
Right now, the value of Russia's firms that are traded at the stock exchange is about 17 trillion rubles ($536 billion). Incidentally, only about a quarter of that is the so-called free float, the tradable part of the stock market. For a large country like Russia, these are miniscule numbers. Not only that, there is also a notable lack of a layer of medium-sized and mostly family owned firms below the small group of listed companies. In Germany, they are the backbone of the economy.
If the government could credibly show that it will initiate an institutional reform process on the basis of EU standards, the valuation of Russian assets could easily double, cutting the cost of capital expenditures by half. Perhaps more important, Russia would become a more normal country where people like to live, rather than emigrate.

Dieter Wermuth is a partner at Wermuth Asset Management.

Putin's Leadership Trap

14 April 2013 | Issue 5109

By Vladimir Frolov

Klipping The Moscow Times

When elected president in 2000, Vladimir Putin's first order of business seemed straightforward: strengthen the Russian state and bring it back from oligarchic control and regional warlordism. Consolidation was in order.
There were two ways to achieve that.
One way was taking a low view of human nature and would have required rebuilding formal political institutions to increase their capacity for checking power-grabbing appetites of politicians. This would have meant an emphasis on formal rules and procedures and their strict observance by all levels of government. Transparent rules and their unbiased enforcement would have guarded the state against destructive influences. Free and fair elections and equal justice under the law would have been central to the regime's legitimacy.
The alternative way was to build a highly personalized system of power that relies heavily on personal relationships and shadowy deals enforced through a selective application of informal and constantly changing rules. This required making the presidency, with the multiple security agencies at its disposal, politically dominant, while consistently gutting the power and legitimacy of all other state institutions. Elections would have to be tightly managed to guard against unplanned outcomes.
To be fair, Putin in 2000 was facing a situation where some institutions did not work, while others were captured by groups openly hostile to him. He viewed the institutions he did not personally control as likely threats to his rule.
He set out to use what Alyona Ledeneva of University College in London and author of the forthcoming book "Can Russia Modernize?" calls "informal governance" — personal networks and relationships, friends and loyalists in key positions and street-gang bargaining — to achieve the desired outcomes that could not be obtained through formal channels.
But what was initially intended as stop-gap measures to enact badly needed reforms, quickly acquired a logic of expanding the president's power through arbitrary, informal rules.
This logic views supreme power as flowing down from the popular elected leader to other political institutions who aspire to legitimacy while serving as little more than decorations. With decisions taken at the very top and objectives secured through informal instruments of governance, public institutions could simply imitate their constitutional functions.
Thus, the parliament does not legislate on its own but only adopts those initiatives that have been supported or introduced by the presidential administration, reducing the legislators' role to a rubber-stamp formality. Putin's 2010 off-the-cuff remark that he had thought of disbanding the State Duma at the height of the economic crisis in 2009 to expedite his anti-crisis measures demonstrates that public institutions are expendable if they stand in his way.
The end result: Inefficiency permeates state institutions. Unused, or undermined, formal institutions become weak and atrophy. They bleed competent workers. People shun them as they seek to serve their needs through informal networks of governance.
The country falls into what Ledeneva calls the "modernization trap of informality," or, simply put, when there are no effective people you can trust to run the country. The informal networks become unmanageable, loyalties corrupted, results diminished, and the nation's long-term vision is undermined.
Today, Putin is trying to make his system of informal governance more efficient. The war on corruption, the "nationalization of the elites," the People's Front are all tools to boost the projection of his power through informal instruments. The People's Front, for example, has the grim potential for supplanting all formal political institutions by creating a pretense of direct popular rule by an attentive national leader. The trap of informality becomes inescapable.

Vladimir Frolov is president of LEFF Group, a government relations and PR company.

What the World Really Needs From the BRICS

15 April 2013 | Issue 5110

By Dani Rodrik

Klipping The Moscow Times

In 2001, Goldman Sachs' Jim O'Neill famously coined the term BRIC to characterize the world's four largest developing economies — Brazil, Russia, India, and China. But, more than a decade later, just about the only thing that these countries have in common is that they are the only economies ranked among the world's 15 largest (adjusted for purchasing power) that are not members of the OECD.
The four countries have very different economic structures: Russia and Brazil rely on commodities, India on services, and China on manufacturing. Brazil and India are democracies, while China and Russia are decidedly not. And, as Joseph Nye has written, Russia is a superpower in decline, while China and (less markedly) the others are on the rise.
Yet, in a strange case of life imitating fantasy, BRICS — the original four countries, now joined by South Africa — have formed a grouping of their own with regular meetings and policy initiatives. Their most ambitious effort to date is the establishment of a development bank.

The world does not another development bank but greater leadership on global issues.

At their meeting in Durban in March, the five countries' leaders announced that their "New Development Bank" will focus on infrastructure investment in developing countries, which, they said, was constrained by "insufficient long-term financing and foreign direct investment." They pledged to make an initial capital contribution to the bank that would be "substantial and sufficient for the bank to be effective in financing infrastructure." A second initiative announced in Durban is the creation of a $100 billion contingent reserve facility to deal with "short-term liquidity pressures."
It can be cause only for celebration that the world's largest developing economies are regularly talking to each other and establishing common initiatives. Nonetheless, it is disappointing that they have chosen to focus on infrastructure finance as their first major area of collaboration.
This approach represents a 1950s view of economic development, which has long been superseded by a more variegated perspective that recognizes a multiplicity of constraints — everything from poor governance to market failures — of varying importance in different countries. One might even say that today's global economy suffers from too much, rather than too little, cross-border finance.
What the world needs from the BRICS is not another development bank, but greater leadership on today's great global issues. The BRICS countries are home to around half of the world's population and the bulk of unexploited economic potential. If the international community fails to confront its most serious challenges — from the need for a sound global economic architecture to addressing climate change — they are the ones that will pay the highest price.
Yet these countries have so far played a rather unimaginative and timid role in international forums such as the G20 or the World Trade Organization. When they have asserted themselves, it has been largely in pursuit of narrow national interests. Do they really have nothing new to offer?
The global economy has operated so far under a set of ideas and institutions emanating from the advanced countries of the West. The United States gave the world the doctrine of liberal, rule-based multilateralism — a regime whose many blemishes highlight the lofty principles according to which the system has generally functioned. Europe brought democratic values, social solidarity, and, for all its current problems, the century's most impressive feat of institutional engineering, the European Union.
But these old powers have neither the legitimacy nor the power to sustain the global order into the future, while the new rising powers have yet to demonstrate which values they will articulate and promote. They have to develop their vision of a new global economy, beyond complaints about its asymmetric power structure. Unfortunately, it is not yet clear whether they have the inclination to rise above their immediate interests in order to address the world's common challenges.
Their own development experience makes countries like China, India, and Brazil resistant to market fundamentalism and natural advocates for institutional diversity and pragmatic experimentation.
They can build on this experience to articulate a new global narrative that emphasizes the real economy over finance, policy diversity over harmonization, national policy space over external constraints, and social inclusion over technocratic elitism.
But they must stop being supplicants, and act like real leaders, understanding that others, too, including advanced countries, face challenges that sometimes require policies that put the domestic economy first. And they must work to uphold the bedrock principles of the global economy that have served it — and them — so well in the last 60 years: non-discrimination and multilateralism.
Ultimately, though, the BRICS must also lead by example. The human rights practices in China and Russia, and their suppression of political dissent, are incompatible with global leadership. These authoritarian regimes must reform themselves at home if they are to exert any kind of moral claim abroad.

Dani Rodrik, professor of international political economy at Harvard University, is the author of "The Globalization Paradox: Democracy and the Future of the World Economy." © Project Syndicate

North Korean Threats Could Lead to Apocalypse

04 April 2013 | Issue 5103

By Ian Buruma

Klipping The Moscow Times

Nobody would care much about North Korea — a small and isolated country of 24 million people, ruled by a grotesque dynasty that calls itself Communist — if it were not for its nuclear weapons. Its current ruler, Kim Jong-un, the 30-year-old grandson of North Korea's founder, is now threatening to turn Seoul, the rich and bustling capital of South Korea, into "a sea of fire." U.S. military bases in Asia and the Pacific are also on his list of targets.
Kim knows very well that a war against the U.S. would probably mean the destruction of his own country, which is one of the world's poorest. His government cannot even feed its own people, who are regularly devastated by famine. In the showcase capital, Pyongyang, there is not even enough electricity to keep the lights on in the largest hotels. So threatening to attack the world's most powerful country would seem like an act of madness.

North Korean rulers managed to survive only by playing one foreign power off another.

But it is neither useful nor very plausible to assume that Kim and his military advisers are mad. To be sure, there is something deranged about North Korea's political system. The Kim family's tyranny is based on a mixture of ideological fanaticism, vicious realpolitik and paranoia. But this lethal brew has a history, which needs to be explained.
The short history of North Korea is fairly simple. After the collapse in 1945 of the Japanese empire, which had ruled quite brutally over the whole of Korea since 1910, the Soviet Red Army occupied the north, and the U.S. occupied the south. The Soviets plucked a relatively obscure Korean communist, Kim Il-sung, from an army camp in Vladivostok, and installed him in Pyongyang as the leader of North Korea. Myths about his wartime heroism and divine status soon followed, and a cult of personality was established.
Worshipping Kim, and his son and grandson, as Korean gods became part of a state religion. North Korea is essentially a theocracy. Some elements are borrowed from Stalinism and Maoism, but much of the Kim cult owes more to indigenous forms of shamanism: human gods who promise salvation. (It is no accident that the Reverend Sun Myung Moon and his Unification Church came from Korea, too).
But the power of the Kim cult, as well as the paranoia that pervades the North Korean regime, has a political history that goes back much further than 1945. Wedged awkwardly between China, Russia and Japan, the Korean Peninsula has long been a bloody battleground for greater powers. Korean rulers only managed to survive by playing one foreign power off against the other, and by offering subservience, mainly to Chinese emperors, in exchange for protection. This legacy has nurtured a passionate fear and loathing of dependency on stronger countries.
The Kim dynasty's main claim to legitimacy is juche, the regime's official ideology, which stresses national self-reliance to the point of autarky. In fact, both the current Kim and his father were typical Korean rulers. They played China against the Soviet Union, while securing the protection of both. Of course, this did not stop North Korean propagandists from accusing the South Koreans of being cowardly lackeys of U.S. imperialism. Indeed, paranoia about U.S. imperialism is part of the cult of independence. For the Kim dynasty to survive, the threat of external enemies is essential.
The fall of the Soviet Union was a disaster for North Korea, as it was for Cuba. Not only did Soviet economic support evaporate, but the Kims could no longer play off one power against another. After the Soviet collapse, only China was left, and North Korea's dependence on its northern neighbor is now almost total. China could crush North Korea in a day just by cutting off food and fuel supplies.
There is only one way to divert attention from this humiliating predicament: propaganda about self-reliance and the imminent threat from U.S. imperialists and their South Korean lackeys must be turned up to a hysterical pitch. Without this orchestrated paranoia, the Kims have no legitimacy. And no tyranny can survive for long by relying on brute force alone.
Some people argue that the U.S. could enhance security in northeast Asia by reaching an agreement with the North Koreans — specifically, by promising not to attack or attempt to topple the Kim regime. The Americans are unlikely to agree to this, and South Korea would not want them to. Apart from anything else, there is an important domestic political reason for U.S. reticence: a Democratic U.S. president cannot afford to look "soft." More important, even if the U.S. were to provide such guarantees to North Korea, the regime's paranoid propaganda would probably continue, given the centrality to juche of fear of the outside world.
The tragedy of both Koreas is that no one really wishes to change the status quo. China wants to keep North Korea as a buffer state and fears millions of refugees in the event of a North Korean collapse. Meanwhile, South Koreans could never afford to absorb North Korea in the way that West Germany absorbed the broken East Germany when the Iron Curtain fell. And neither Japan nor the U.S. would relish paying to clean up after a North Korean implosion, either.
And so an explosive situation will remain explosive, North Korea's population will continue to suffer famines and tyranny, and words of war will continue to fly back and forth across the 38th parallel. So far, they are just words. But small things —  the proverbial gun shot in Sarajevo — could trigger a catastrophe. And North Korea still has those nuclear bombs.

Ian Buruma is professor of democracy, human rights, and journalism at Bard College. © Project Syndicate