Thursday, November 28, 2013

Russia Can't Grow and Steal at the Same Time

27 November 2013 | Issue 5264

Klipping The Moscow Times

Russia Can't Grow and Steal at the Same Time

The Kremlin's two key goals are to maintain political power and to enrich the ruling elite. At best, economic growth is the third-ranking goal, and it contradicts the two primary aims. Logically, the current Kremlin policy leads to economic stagnation.
Political analyst Yevgeny Minchenko captures the new system best with his concept of Politburo 2.0. This is no vertical of power but an old-fashioned feudal system, where the ruler functions as an arbiter or godfather between nine major lords: three private businessmen from St. Petersburg, three top state enterprise managers and three leading state officials. This system of rule is reminiscent of Soviet leader Leonid Brezhnev's Politburo in 1980, which stood out for its petrification. It can maintain political power for a long time, but it cannot be reformed. Such a system can only collapse.

The second goal of the ruling elite is its own enrichment. The concept of conflict of interests is unknown in Russia, and senior officials are never accused of corruption. The quickest road to riches is to receive an overpriced pipeline or road contract from the state or a state corporation without competition. Alternatively, a state manager can buy a private company expensively and demand a kickback. Or he can sell a state company cheaply and request a kickback from the private buyer. There are many other ways of corrupt revenues, such as extortion by private businessmen, theft and embezzlement, but they are more labor-intensive and generate less remuneration. Sometimes the perks are legal, as when the presidential administration distributes luxury housing to deserving officials. Yet all these means of elite enrichment are parasitical and harm economic growth.
During Russia's growth spurt from 1999 to 2008, growth was generated by the market reforms of the 1990s, ample free capacity, rising oil prices and redundant human capital. By 2008, the free capacity had largely been exploited, and the oil prices have leveled out at $100 to $120 per barrel with some fluctuations. No significant market reforms have been carried out since 2002.
From 2010-12, the growth rate moderated to 4 percent. A major cause of the lower growth was that the government bailed out the worst big state and private corporations during the crisis in 2008-09, so that they crowded out more productive companies. Arguably, the growth came from two sources: human capital and international economic integration.
Persistently, economic growth has come from the private sector, consisting of tycoons, small and medium-sized businesses and large foreign investors. The old oligarchs are now tightly circumvented. They are allowed to sell their companies to the state — when the state so desires — at a price determined by the state, but they are not allowed to buy other big companies, only medium-sized firms. Therefore, the biggest tycoons have little choice but to take their money out of the country. They have ceased being an entrepreneurial force.
The small and medium-sized enterprises are checked from all sides. Many have hit a glass ceiling and sell to the country's wealthiest businessmen for whom the glass ceilings are so much higher. Small enterprises are facing tougher taxation and government extortion, and hundreds of thousands have chosen to close down this year. The announced amnesty of 100,000 dubiously jailed businessmen dwindled to 1,000. President Vladimir Putin is now advocating harder tax repression of private firms through the Investigative Committee, which of course will aggravate corruption and further enrich officials of that agency. As the total number of enterprises declines, competition diminishes and productivity stagnates.
Paradoxically, the happiest companies in Russia may be large multinational corporations producing in the country. They roll in with their high technology and enjoy minimal competition, which drives up both sales and prices, though admittedly costs increase as well. Yet, their share of Russia's economy remains tiny, so they do not contribute much to economic growth.
Management consultants point to the shortage of good managers as the greatest bottleneck in the country's economy, followed by roads. The thieving at the top makes it impossible to build roads, so corruption is the key problem.
Until recently, much of the growth could be ascribed to skillful new managers moving to more poorly managed companies. With state companies expanding their dead hands over the economy, this process has gone in reverse. When Rosneft bought TNK-BP, one of Russia's best-managed big companies, Vedomosti reported that 90 percent of the 1,600 employees in the TNK-BP headquarters left, presumably many of them emigrated. Instead, Igor Sechin, an apparatchik without management experience, took over Rosneft and imposed his micromanagement.
Similarly, Russia adopted many liberalizing laws to enter the World Trade Organization, which helped open up the economy to more global competition. When Russia finally joined the WTO last year, this process also went into reverse. The Customs Union with Belarus and Kazakhstan is a harebrained protectionist scheme that will damage the Russian economy through trade diversion and by compelling the Kremlin to pay large subsidies to other countries that agree to participate.
Russia's economic problems are not financial. The budget remains close to balance and will be so even with a falling oil price because of the novel floating exchange rate. Although the current account surplus has dwindled, it is still in surplus, and Russia's international reserves are impressive at more than $500 billion.
Any fiscal or monetary stimulus would only cause higher inflation and more illegal immigration because Russia's economy is working at full capacity. Unemployment is low at 5 percent, while inflation remains a concern at 6 percent. Russia's investment rate is too low at 21 percent of gross domestic product and probably much lower in reality because of the extraordinary kickbacks. Russia needs to fight its top-level corruption before it can start building roads.
Unperturbed, at each of his many crisis meetings about falling economic growth, Putin proposes another mega investment that will undoubtedly aggravate corruption.
As long as the president pursues an anti-growth and pro-corruption policy, no economic growth is likely.

Anders Åslund is a senior fellow at the Peterson Institute for International Economics in Washington and author of "Russia's Capitalist Revolution."

Ukrainian Protests Compared to 2004 Orange Revolution

26 November 2013 | Issue 5263

By Oleg Sukhov

Klipping The Moscow Times

Sergei Chuzavkov / AP

Protesters squaring off with riot police in front of the Ukrainian Cabinet of Ministers building in Kiev on Monday.

Protests against the Ukrainian government's decision to delay an association deal with the European Union last week in favor of closer ties with Russia continued in Kiev on Monday, prompting memories of the 2004 Orange Revolution, while the EU issued a statement condemning Russia's actions in the dispute.
Just as nine years ago, the protests have been driven by a feud between pro-Western and pro-Russian forces over the future of Ukraine, a key geopolitical prize in eastern Europe.

The Kremlin was deeply angered by the outcome of the Orange Revolution, which saw demonstrators protest against the Russian government's favored presidential candidate and current Ukrainian President Viktor Yanukovych, who then lost to pro-Western politician Viktor Yushchenko in a re-run election. President Vladimir Putin has already accused the EU of being willing to sponsor protests to get its way this time around as well.
Russia appears to have the upper hand in this dispute, but the European Union may end up drawing Ukraine into its fold eventually.
"There is no geopolitical victory for Russia" in the suspension of EU talks, said Stanislav Belkovsky, head of the National Strategy Institute. "The vector for European integration is irreversible … and the current protests are cementing that vector."
According to various estimates, 50,000 to 200,000 people took to the streets in Kiev on Sunday, the largest protests since the Orange Revolution, while smaller rallies took place all over Ukraine. The Kiev protesters set up a protest camp on central square Evropeiska Ploshcha, clashed with police and tried to break a police cordon around the Cabinet building.
Most of the people either went home or were dispersed by the police by Monday morning. But some remained, and more protesters poured into central Kiev on Monday, flocked to the Cabinet building again, fought with police and blocked Vulitsya Grushevskogo.
The police used batons and tear gas to disperse the demonstrators, and the authorities initiated a criminal case against protesters who clashed with police on Sunday on charges of hooliganism and resisting arrest. In Lviv — the major stronghold of Ukrainian nationalism and pro-Western sentiment — about 10,000 students demonstrated against the government on Monday, and all classes at universities were canceled, Kommersant reported.
As the standoff with the government escalated, Ukraine’s center-right Svoboda party urged the parliament to pass a vote of no confidence in the Cabinet, while the liberal Batkivshchina party asked the Prosecutor General’s Office to initiate a criminal case against Prime Minister Mykola Azarov and the Cabinet for allegedly exceeding their authority by suspending the deal with the EU.
The EU reacted to the developments in the country by issuing a statement Monday decrying Russia’s actions in relation to Ukraine.
“While being aware of the external pressure that Ukraine is experiencing, we believe that short-term considerations should not override the long-term benefits that this partnership would bring,” said European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso in the statement. “It is up to Ukraine to freely decide what kind of engagement they seek with the EU.”
“Ukrainian citizens have again shown these last days that they fully understand and embrace the historic nature of the European association,” the EU leaders said, apparently referring to the protests.
“We therefore strongly disapprove of the Russian position and actions in this respect. Stronger relations with the EU do not come at the expense of relations between our Eastern partners and their other neighbors, such as Russia. The Eastern Partnership is conceived as a win-win where we all stand to gain,” they said.
Russia has been accused of pressuring Ukraine to suspend the deal with the EU by introducing cumbersome customs checks on Ukrainian imports and initiating a dispute over gas supplies in recent months. Putin said Monday that Russia would have to put restrictions on Ukrainian imports if the country signed the Association Agreement. During the 2004 Orange Revolution, Russia was also accused of interfering with Ukrainian events in favor of Yanukovych, while the Kremlin said Western money and intelligence agencies were behind the revolution.
Some observers said the current protests could trigger changes similar to the Orange Revolution, when hundreds of thousands of people protested on Maidan Nezalezhnosti in Kiev from November 2004 to January 2005 against perceived election fraud. As a result of the uprising, Yanukovych’s victory in a presidential vote was canceled, and Yushchenko came to power in a repeat election.
Jailed former Prime Minister Yulia Tymoshenko, one of Yanukovych’s chief political foes and a leader of the Orange Revolution, said Sunday that the ongoing protests marked an anniversary of the 2004 events.
“Due to a mystical turn of fate, Yanukovych again made us take to the streets during the same days of the month as nine years ago,” she said in a statement. “This means that we must complete what we failed to do after the 2004 Orange Revolution. We must once and for all expel corrupt clans out of the government.”
But Konstantin Zatulin, head of the CIS Countries Institute and a State Duma deputy, dismissed comparisons with the power transition of 2004.
“Color revolutions happened in countries where the government was weak and unconsolidated,” he said, adding that Yanukovych’s current position was strong, unlike that of then-President Leonid Kuchma in 2004.
The Orange Revolution was partially a result of Kuchma’s intrigues, and he lost his influence as a result of unsuccessful efforts to get his protege Yanukovych elected, Zatulin said. But now Yanukovych is fighting for his own future, not that of a successor.
“He will fight until the end,” Zatulin said.
Belkovsky said Yanukovych had already opted for a pro-European course, however, and was using the current delay in talks on the EU agreement as a bargaining chip to get $10 billion in EU loans that he needed for the 2015 presidential election.
Belkovsky added that Kiev was likely to sign an association deal with the EU within a year — and that the Kremlin can do nothing about it.

Contact the author at o.sukhov@imedia.ru

Why Yanukovych Spat in the EU's Soup

27 November 2013 | Issue 5264

By Yulia Latynina

Klipping The Moscow Times

President Vladimir Putin can now rejoice. Ukraine will not sign an association agreement with the European Union.
Russia focused its foreign policy for the last six months on preventing Ukraine from developing closer ties with the EU, and now it can claim complete success. Russia will always have one advantage over the EU in that Moscow has no qualms about spitting in its neighbor's soup, while Brussels would never stoop that low.
Of course, the most compelling reason Ukrainian President Viktor Yanukovych decided not to sign the Association Agreement was because he does not want to release former Prime Minister Yulia Tymoshenko from prison. This was a much more important factor than whatever Moscow threatened to do to in terms of economic sanctions if Yanukovych signed the agreement with Brussels. According to his punk way of thinking, freeing Tymoshenko would not just create a potential political rival. It would have made him look like a chump, and nobody would respect him.

But the main problem is that none of the three parties involved in this conflict — Yanukovych, Putin and the EU — is guided by rational considerations.
First, why would Europe have any interest in Ukraine? Is it a thriving economy? Does it have a real democracy? No, Ukraine is a corrupt, semi-authoritarian morass, and Europe wants it for the same reason it wants Greece: only as a means for expanding the EU bureaucracy. But now, in times of crisis, the European bureaucratic monster that imposes regulations on how sharp the curve must be on cucumbers and hands out subsidies for "clean energy" considers it a vitally important task to show the world that it is still a beacon of hope to surrounding countries. And imagine how many thousands of bureaucrats would be assigned to the Ukraine project alone. Given Ukraine's sorry political and economic state, any attempt to bring the country even close to EU standards would require huge human resources.
Meanwhile, not a single Western politician today is prepared to risk voters' lives or money in order to confront an international bully — that is, Russia. To save face, the West tries to explain why the bully is not actually a bully. The Tagliavini Commission's report on the 2008 Russia-Georgia war was a perfect example. Putin showed during the international security conference in Munich back in 2011 that he was the first modern politician to realize that Europe would make even greater concessions to new authoritarian regimes than former British Prime Minister Neville Chamberlain and former French Prime Minister Edouard Daladier.
Putin's problem is that after he had demonstrated his ability to manipulate Europe before the entire Commonwealth of Independent States, two of his students turned out to be even better at the game: Yanukovych and Belarussian President Alexander Lukashenko. Both hold little or no responsibility to their own citizens, both can switch their political course as swiftly and capriciously as medieval kings and both could not care less about the havoc such behavior wreaks with their economies. What's more, both have learned how to play the alliance-with-Putin card to manipulate Europe.
In this sense, Russia's use of blackmail against Ukraine to achieve a major tactical victory reflects a new geopolitical reality. In a world in which states foreswear the use of war to resolve their differences, victory will always go to those states willing to spit in their neighbor's soup without worrying about the cost to their own economies.

Yulia Latynina hosts a political talk show on Ekho Moskvy radio.

What the Soviet Union and Khmer Rouge Share

27 November 2013 | Issue 5264

By Marilyn Murray

Klipping The Moscow Times

I toured the Nazi death camps of Dachau in Germany and Terezin in Czechoslovakia in the 1970s and have stood in front of the Lubyanka in Moscow, where thousands were annihilated by the KGB. I also learned of the horrors of Soviet gulags from members of my own family and many of my Russian students. But the reality of inhuman torture never impacted me as deeply as walking through the Killing Fields and S21 prison of the infamous Сommunist Khmer Rouge in Cambodia.
Two weeks ago, I presented an all-day session in Phnom Penh, the capital of Cambodia, regarding the treatment of trauma to more than 100 health professionals from 21 countries. In preparation, I twice watched the award-winning movie, "The Killing Fields" and two documentaries regarding the period from 1975 to 1979, when the Khmer Rouge ruled Cambodia, and read more than 1,000 pages written by survivors of this reign of terror.
As I walked though Cambodia's bloody history, I was struck by the similarities of the Soviet and Cambodian Communist regimes. But I also was intrigued by the things that were different: Why did one last more than 70 years and the other only four?

Their similarities were:
• Citizens were required to pledge their highest loyalty to the Communist parties in both countries.
• Religion was not allowed. Places of worship were destroyed, and clergy were killed or imprisoned. The Party, called Angka in Cambodia, replaced God.
• The Party was never wrong. It was infallible and had to be obeyed without question. Violators faced imprisonment or death.
• The individual had no rights or value.
• If millions died to fulfill the goals of the party, their deaths were justified.
• Leadership was extremely paranoid and saw "enemies" everywhere, destroying anyone deemed to be a threat or disloyal.
• They confiscated all property and imprisoned or killed persons declared to be "enemies of the state": noble families, anyone connected with prior government, clergy, owners and management of business and industry, intellectuals and artisans who did not follow the Party line, and industrious peasant farmers.
• Collective farms were created where peasants were forced to turn over all private property and work only for the collective.
• Food shortages were widespread.
• Families were separated. Parents were told their priority was to work, and the Party would take care of their children.
• Everyone was declared equal, but the lives of Party leaders were radically different from the common citizen. They had better living conditions and food along with other special privileges. Meanwhile, they told the average person he must work harder and sacrifice more for the Party.
• Bribery and corruption were endemic.
But at the same time, there were many differences. Russia had a long history of education and culture. The Soviets saw education as one of their top priorities and had a literacy rate nationwide of about 98 percent. By demanding that every citizen had a good command of Russian, it guaranteed the absorption of nonstop Communist propaganda. Education was free, and many citizens had university degrees.
Music, literature, theater, art and the cinema were encouraged by the Party but were often heavily censored as was all the media.
Soviet leadership realized Russia was far behind Europe and the U.S. in industrialization. They determined not only to catch up but to exceed them. Urban industrial growth became the primary focus. New cities were established throughout the entire Soviet Union. Dams, electrification, water canals and railroads were primary projects.
They created a strong Communist youth movement starting in preschool to prepare children to be faithful Party members. Many Russians today have warm youthful memories of parades and patriotic events. Russians in general had strong national pride in the great accomplishments of their country.
In Cambodia, however, the Khmer Rouge was very different. Their major leaders came from landowner or civil servant families. They were intellectual urbanites largely educated in Paris, where they were introduced to orthodox Marxism-Leninism. Yet they initiated a paradoxical political program in the name of communism that made the destruction of all cities a primary goal and created a forced evacuation of every city dweller to the countryside. A primitive, rural agrarian culture devoted to Angka was declared to be the only path acceptable to the Khmer Rouge.
They closed all schools, hospitals, government offices, businesses, factories, the media and cultural activities. They executed anyone who worked for the previous government, police or military. Professionals, teachers, doctors and business owners were killed. Any connections with a foreign country or knowledge of a foreign language meant being accused of being a CIA agent and certain arrest and likely death. Anyone who wore glasses was labeled a member of the "intelligentsia" and subject to arrest and execution.
The majority of the Khmer Rouge soldiers were illiterate peasants armed with weapons from Russia and China. Their AK-47s gave them rank and authority. They seemed to enjoy shooting innocents at random. They were boys and girls starting from age 10. The average age was 15.
Men, women and children from the cities became "war slaves" who were forced to work from 12- to 20-hour days at hard labor in the fields, building roads and clearing jungle. They were overworked and starving. Each day, the sadistic Khmer Rouge picked people at random to torture and beat to death with shovels and axes. They did not want to waste bullets.
S21 prison, a former high school in the middle of Phnom Penh, had 17,000 prisoners, including children and babies. Only seven people survived. All the rest were savagely tortured then slaughtered and buried in the Killing Fields a few miles from the city.
Cambodia had a population of 7.3 million before the Khmer Rouge enslaved the country. It is estimated they created a genocide that annihilated about 2 million people, more than one-quarter of the entire population in four years. Those who survived suffered post-traumatic stress from their great loss of family, health, home, culture and country.
The Soviets enslaved and killed innocents, but they also built a country of educated people, many of whom were loyal Party members. The system, however, was flawed and thus eventually imploded. In Cambodia, the atrocities were so vicious, extreme, and widespread they gained no public support except within the ranks of the Khmer Rouge. Foreign invasion finally drove them from power after four years.
A person or entity that is obviously evil often is disarmed early on. But others who are able to hide their malevolence by appearing healthy and strong enjoy power and longevity.

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 over the past 11 years. Her latest book, "The Murray Method," is available in English and Russian.

Friday, November 22, 2013

My Clash With Homophobes on Russian TV

22 November 2013 | Issue 5261

By Michael Bohm

Klipping The Moscow Times

When I was invited to appear on Arkady Mamontov's talk show "Special Correspondent" on Rossia 1 to discuss gay rights last week, I jumped at the opportunity to express an alternative to the viewpoints offered by pro-Kremlin propagandists on state television.
Little did I know what was in store for me.

The show started with a 30-minute documentary-style film that claimed an aggressive, well-financed and organized Western homosexual lobby was forcing its values on Russia. If the country failed to defeat the threat, we were told, the number of homosexuals would increase. The film ended with a collage of scenes depicting rainbows in Russia — on a pharmacy, a supermarket, the covers of notebooks and on a sign in front of a business center. All of these rainbow symbols, it was explained, were part of an insidious Western conspiracy to propagandize homosexuality and corrupt Russia's fundamental moral and spiritual values.

After I said that the Kremlin's understanding of homosexuality is "primitive," the audience became enraged, screaming at me and demanding an apology. I felt like I was in the U.S. Deep South in the 1920s, speaking before an infuriated crowd of white segregations about equal rights for African-Americans.

After the film, Mamontov asked me, the only foreign guest on the show, the first question: "Why do you stick your nose in our business?" he said. "Why do you try to impose your alien values on us?"
The question struck me as odd. I am not a gay activist nor a representative of a Western government. I am an independent journalist who writes about what I observe, including what seems to me to be a backward attitude among many Russians toward gay people.
I began my reply by saying, "Russia is at a primitive stage in terms of its understanding of homosexuality."
My remarks were directed at Mikhail Degtyaryov, a State Duma deputy from the Liberal Democratic Party, who stood opposite me. Degtyaryov has authored a bill to create a state-funded program to "treat" homosexuality through psychological counseling so gays can "return to a normal life" as heterosexuals.
As I continued to speak, I noted that it has been about 50 years since the West classified homosexuality as a "disease," and no respected doctors or psychologists believe that homosexuals can be "treated."
I really wanted to ask Degtyaryov how he plans to treat homosexuals — through shock therapy, castration or the tried-and-true Soviet methods of prison terms and forced psychiatric confinement? Perhaps, however, he prefers more humane methods, such as mandatory Orthodox church education. Unfortunately, the show's host and my opponents were not interested in a serious discussion of the topic.
As soon as I pronounced the words "primitive stage," the studio audience of about 75 people tried to drown out the rest of my comments with an outburst of boos, whistles and shouts.
Another guest who stood opposite me, television journalist Andrei Karaulov, leapt into the fray, demanding that I apologize for "insulting the Russian people."
I refused. Why should I apologize for an opinion backed up by fact? Mamontov had invited me onto his show to share my opinion. Then, after I attempted to express it, I was accused of poking my nose into Russia's business and was told to apologize for doing so.
When I refused, the crowd erupted again, shouting at me: "Shame! Go home! Leave the studio!"
Degtyaryov went even further, calling me a podonok, or scumbag. He also threatened to "vmazat" me, a crude slang word that means to "pound someone in the face."
I felt like I was in the U.S. Deep South in the 1920s, trying to make an appeal for equal rights for African-Americans in front of an enraged crowd of white racists and segregations.
The television talk show was a classic "only-in-Russia" moment that most foreigners experience in one form or another if they live in the country. Imagine, for example, if a Russian journalist were to go on a U.S. talk show and say that the U.S. was at a "primitive stage" because of its George W. Bush-era policy of torturing suspected terrorists, nobody would see his remarks as an insult. Moreover, it is highly unlikely that anyone would demand that he apologize to the American people, threaten to punch him in the face, or scream insults at him from the studio audience.
Notably, during the television show, Mamontov never used the term "homosexual" and referred to gays only as "perverts" or "sodomites." Furthermore, he agreed with the conspiracy theory presented in the film, saying, "Western Sodomites are trying to sneak into Russia and mobilize a protest movement among our own perverts."
Mamontov wrapped up the show by declaring that a meteorite that fell over Chelyabinsk in February was a warning from God about the danger of homosexuality in Russia. If homosexuality is allowed to continue unchecked, Mamontov warned, God might pour fire and brimstone down on Russia as he did on Sodom and Gomorrah according to the biblical narrative.
"God does not tolerate sin," Mamontov concluded in a menacing tone. "We need to oppose it [homosexuality] so that we stay alive."
Mamontov got it all wrong. The major threat to Russia is not homosexuality but state-sponsored ignorance, intolerance and hatred for minorities — particularly when it is spouted regularly on prime-time television.
To be fair, homosexuality was only decriminalized in Russia 20 years ago, so it might be too early to expect a sea change in society's views.
Indeed, state-sponsored segregation and racism existed for 100 years in the U.S. South after slavery was abolished. But three main factors allowed the U.S. to finally eradicate state-sponsored racism. First, it had a powerful civil rights movement led by Martin Luther King Jr. that fought for and ultimately achieved equal rights. Second, official segregation and racism were limited to a relatively small number of states. Finally, the federal government — in particular Presidents Dwight Eisenhower, John F. Kennedy and Lyndon Johnson — supported the civil rights movement and, in the case of school desegregation in the South, even deployed federal troops to enforce equal rights for African-Americans.
Unfortunately, none of these political and social factors exists here. On the contrary, Kremlin spin doctors, lawmakers and the Russian Orthodox Church are actively propagandizing homosexuality as a Western disease, while state television is airing rabid homophobia that engenders even more intolerance among viewers. As long as this continues, Russia will remain stuck in that primitive stage.

Michael Bohm is opinion page editor of The Moscow Times.

Losing No. 1 Oil Spot Is Least of Russia's Troubles

04 November 2013 | Issue 5248

By Chris Weafer

The Moscow Times

In recent weeks, there has been a spate of reports again highlighting the rapid increase in U.S. oil and gas production, and the potential for much greater production to come over the next decade. Several of the reports have also alluded to the potential for significant shale gas production in Europe, but the main message is that the U.S. is set to become the predominant global energy powerhouse. Their conclusion is that the shale revolution is about to kill off Russia's growth and bring an end to the geopolitical swagger of President Vladimir Putin. A recent report on the subject, carried by the Washington-based think tank, Center for The National Interest, had the headline "Russia's Faltering Energy Empire." The message could not be clearer: Russia's Achilles' heel is energy, and the U.S. has it in its sights.
The impression many of these reports give is that Russia is critically dependent on hydrocarbon revenues — not only to fund the budget, but also to preserve social stability and popular support for the Kremlin. The reality, of course, is different, but these headlines and stories are still keeping far too many discretionary investors away from Russia because of the perceived risk posed by the development of shale in the U.S. and, eventually, in Europe.
Russia is no longer the world's largest gas producer and will probably within a year cede either the top or second placed spot in the oil industry. Currently, according to International Energy Agency, or IEA, data, Russia and Saudi Arabia are almost tied in terms of aggregate average daily oil production at about 10.8 million barrels per day, while the U.S. produces an average of 10.4 million barrels per day. The U.S. number is up from only 7.5 million barrels per day five years ago, while Russia's average output has gained only very modestly in that period.

According to IEA forecasts, by the middle of next year aggregate U.S. oil output is expected to top 11 million barrels per day, while Russia will likely have flatlined from today's average. Saudi Arabia's standing next year will depend on whether the current outages in Libya and Iraq have been restored or still have to be compensated for, but is also unlikely to be much above the current level.
In the gas sector, the reversal of positions between the U.S. and Russia has already been much more dramatic. Five years ago. the U.S. produced 570 billion cubic meters, or bcm, of gas annually, and last year that volume climbed to 680 bcm. Over the same period, Russia's production slid from 602 bcm to 592 bcm. Several U.S. forecasters expect the U.S. to produce between 800 and 880 bcm by 2030 and to dominate the global export market in liquefied natural gas.
Looking at those numbers, it is easy to see why so many reports have been predicting the end of Russia's period of growth and stability. This is damaging to efforts to attract a larger volume of long-term investment into the economy. Investors look for long-term growth stories and avoid those where the growth drivers are weak or perceived to be at risk of decline.
Several commentators, including myself, have long been highlighting the risk to the domestic economy posed by the rapid growth in U.S. shale oil and gas. It matters little whether Russia is the No. 1 oil or gas producer in the world or No. 10. What is more important is that oil and gas revenues still represent close to half of total federal budget revenues, while the nonenergy part of the budget is still running a deficit equal to about 11 percent of gross domestic product.
The message is not, as some industry managers have been calling for, that Russia now needs to invest heavily in developing its own shale resources, but that the country has a shrinking window within which to more rapidly push economic and industrial reforms. It is relatively easier to make significant changes in the economy and to initiate spending and incentive programs with oil averaging close to $110 per barrel than it would be if the price of oil where to collapse to, say, $60 per barrel because of an increased level of shale-based production.
This is also the message which the International Monetary Fund delivered in its recent annual review of the trends in Russia's economy. While sticking with a low forecast of only 1.5 percent growth for this year, IMF economists said they believed average annual growth of 5 percent might be achieved with faster progress in implementing its reform program. The IMF talked about the need to maintain a stable macroeconomic environment, to improve the business climate and investment attractiveness of the country and to pursue measures to boost productivity. This is a familiar list for sure.
But while we rightly focus on what more needs to be done to boost investment and to improve the business climate as part of the program to further reduce oil and gas vulnerability, it is worth reflecting on the fact that over the past 18 months, there has actually been more reform progress than seen over the previous decade. Russia's membership of the World Trade Organization just over a year ago has certainly not been without teething problems, but the terms of admission will prove to be an important catalyst for business reforms in the coming years.
There will be no other choice. The legislation to force state officials and bureaucrats to be more transparent with their income, and wealth is also an important step in fighting corruption. The fiscal rule, which caps the amount of oil wealth which can be spent, was a big step in budget reform. Putin's goal to move Russia up the ranking on the World Bank's Ease of Doing Business survey has already had some success as the recently released 2014 report showed an improvement from No. 111 last year to No. 92. This improvement in the ranking was due in large part to easier and fewer bureaucratic procedures to register property, open a new business, get hooked up to the electricity grid and get a construction permit. In addition, there have been significant financial market reforms, while the proposal to offer amnesty for many white collar criminals played a positive role as well.
Russia does not need to pursue shale oil or shale gas projects. It has an abundant supply of conventional hydrocarbons to maintain an adequate revenue stream for the budget, even with greater price volatility. It has no need to risk sitting on expensive shale projects if the price of oil and gas collapses as a result of a global supply increase. The pioneering U.S. producers may find themselves in that predicament before the end of this decade.
Russia has made great progress in reducing the vulnerability of the economy and the budget to oil and gas revenues over the past 10 years. Clearly, a lot more needs to be achieved, and the hope is that this can be done at an even faster pace than seen over the past 18 months. Let's hope a preoccupation with who is the biggest oil and gas producer does not prove to be a distraction. Size is not everything.

Chris Weafer is senior partner with Macro Advisory, a consultancy advising macro hedge funds and foreign companies looking at investment opportunities in Russia.

Kyrgyzstan, Eyeing Customs Union, Frets Over Migrant Workers in Russia

22 November 2013 | Issue 5261

By Malika Giles

Klipping The Moscow Times

Vladimir Filonov / MT

While some Central Asian immigrants feel at home in Russia, many find living and working conditions difficult.

BISHKEK, Kyrgyzstan — Kyrgyz high school students can sign up for lessons on moving to Russia, including crash courses on Russian legislation on migration, how to apply for work permits, and how to find jobs in Russia.
The optional classes — taught as part of the high school curriculum in the Central Asian country's Issyk Kul province — were designed after research by nongovernment organizations indicated that half the senior students in schools in Karakol, the region's administrative capital, planned to migrate to Russia upon graduating.

But one thing that might catch students by surprise are the sometimes dismal living conditions waiting for them in Russia — a thorny issue that has entered the spotlight as Kyrgyzstan prepares to join the Customs Union of Russia, Belarus and Kazakhstan in early 2015. Many in Kyrgyzstan fear the accession talks are not adequately addressing issues of labor migration.
"The problem of labor migration is still open," said Aigul Ryskulova, head of a working group established by the Kyrgyz president to develop proposals for a national migration policy.
While accession to the Customs Union will resolve certain economic issues, even making it easier for Kyrgyz migrants to work in Russia legally, Ryskulova said that not enough was being been done toward improving their living conditions.
Gulshaiyr Abdirasulova, a representative of the human rights group Open Viewpoint, said migrant workers' rights are often violated in Russia, with migrants living in dreadful conditions and having little access to health care.
In recent weeks, the issue of migration has become especially pertinent. Increasing ethnic tensions between Russian citizens and foreign migrants resulted in major clashes at two Moscow street markets in July and October. The incidents were followed by mass police checks on migrants.
Migration to Russia is seen as the route to success for many in impoverished Kyrgyzstan. Realizing this, the local education board in the in the northern Issyk Kul province, which borders Kazakhstan and China, asked a public organization called Shoola-Kol to provide the classes on how to legally work in Russia.
Still, a significant majority of migrant workers are employed illegally in Russia. According to official Russian data, 133,500 Kyrgyz citizens obtained nine-month work permits this year. But the Kyrgyz Labor, Migration and Youth Ministry estimates that in the last 10 months as many as 350,000 to 500,000 Kyrgyz citizens have worked in Russia.
Many migrant workers cite the difficult procedures entailed in obtaining a work permit as the main reason for working illegally, and it is unclear whether this situation will improve following Kyrgyzstan's accession to the Customs Union.
"Often when the authorities stop you, they say your papers are out of order or fake, even when you have all the right documents," said Ikrom Abudusharev, a Kyrgyz citizen who recently returned to his home city of Osh after working in a Russian computer shop in Kaliningrad for seven months.
Discussions on accession have touched upon migration. At a joint session between the State Duma and the Kyrgyz parliament held in Bishkek on Nov. 15, a lawmaker underscored Russian concerns that migrants needed to be able to speak the Russian language.
"Russia would like to see prepared, educated Kyrgyz labor migrants who speak the Russian language," said Leonid Slutsky, a deputy with the Liberal Democratic Party.
No one doubts that accession to the Russian-led trade bloc will give Kyrgyzstan a much-needed economic boost. Researchers studying the economic benefits say accession to the single labor market could increase migration by as much as 10 to 15 percent, and this, in turn, could lead to significant increases in migrant salaries and cash remittances.
So the outstanding question is whether Kyrgyzstan will seek — and secure — greater benefits during negotiations. This puts Russia, which has strongly pushed former Soviet republics to join the Customs Union, a potential rival to the European Union, in a difficult position as it struggles to balance its regional trade ambitions against rising anti-immigration sentiments among its citizens.
"Kyrgyzstan's accession to the Customs Union … will require parliamentary diplomacy and the resolution of other topics that are important for both countries," Slutsky told the joint parliamentary session.
A road map for Kyrgyzstan's accession to the Customs Union will be finalized within two months, Kremlin adviser Sergei Glazyev told reporters in Yerevan last week. A similar road map for Armenia's membership will also be completed by that time, he said.

Contact the author at bizreporter@imedia.ru

Ukraine Dumps EU in Favor of Russia

22 November 2013 | Issue 5261

By Anatoly Medetsky

The Moscow Times

Gleb Garanich / Reuters

A deputy wearing a T-shirt in support of Yulia Tymoshenko on Thursday.

Ukraine on Thursday suspended its course toward closer ties with the European Union in a major victory for Russia.
The Ukrainian Cabinet made the move just a week before a summit with the EU where the parties were planning to sign an association agreement, which would yank Kiev from Moscow's embrace.

The Cabinet cited “interests of national security” for the stunning reversal of the country's policy, telling various ministries to turn to Russia and other former Soviet republics in an effort to improve Ukraine's economy.
“The said ministries have also been instructed to resume an active dialog with the Russian Federation,” the Cabinet said, according to a statement on its website.
Ukraine would also “work with” the Russia-led Customs Union and the Commonwealth of Independent States, or CIS, the statement said.
A larger Ukrainian economy would provide more parity in relations with the EU, it said. The country's economy declined 1.3 percent in the first nine months of this year, compared to the same period last year.
President Vladimir Putin's spokesman said Thursday that Russia welcomed Kiev's desire to improve trade ties with Moscow, signaling satisfaction with a Ukrainian government's decision to suspend preparations for a landmark trade pact with the EU.
"We welcome the desire to improve and develop trade and economic cooperation," Putin's spokesman, Dmitry Peskov, said, Reuters reported. He called Ukraine a "close partner" and said Russia would respect any decision it made about the EU deal.
The Cabinet made the surprise decision after Ukrainian Prime Minister Mykola Azarov came from Russia where he took part in a meeting of CIS prime ministers, which he described as “one of the most successful meetings,” in a separate statement on the Cabinet website. He discussed building up bilateral economic cooperation and trade with his Russian counterpart Dmitry Medvedev.
In Thursday's decree, the Cabinet proposed creating a trilateral commission between itself, Russia and the European Union, which would look at ways to advance Ukraine's economic development. Ukrainian President Viktor Yanukovych first voiced the idea at the end of last month following a meeting with Putin in Minsk.
Opposition and European politicians bristled at the news of the turnaround.
Failure by Yanukovych to sign the agreement with the EU now would amount to "state treason,” provide “grounds for impeachment," opposition leader Arseniy Yatsenyuk said in comments about the diplomatic turnaround, Interfax reported. He also called for Azarov to resign.
Swedish Foreign Minister Carl Bildt said Ukraine hit the brakes because of Russia's threats of trade retaliation in recent months.
“Ukraine government suddenly bows deeply to the Kremlin. Politics of brutal pressure evidently works,” he said on Twitter.
Russia briefly stepped up customs inspections at the border with Ukraine in August; demanded immediate payment of the huge debt for natural gas; and warned it would tear up numerous cooperation deals should the former fellow Soviet republic sign the EU agreement.
Bildt added that shunning the EU would be a bane for Ukraine's declining economy.
It “will hardly help to turn away from EU reforms and toward Russia,” he wrote. It “kills FDI [Foreign Direct Investment] prospects.”
Earlier on Thursday, Ukraine's pro-presidential parliament rejected a set of bills that would have fulfilled a key condition for integration with the EU.
All six bills would have allowed the release of jailed former Prime Minister Yulia Tymoshenko, something the EU demanded in return for signing an association agreement with Kiev at a summit set for next week.
The EU sees Tymoshenko's seven-year prison sentence for abuse of office as politically motivated, as she was the strongest challenger to incumbent president Viktor Yanukovych during the latest elections in 2010.
"It is President Viktor Yanukovych who is personally blocking Ukraine's movement toward the EU," Yatsenyuk told parliament in an emotional speech after the vote to free Tymoshenko failed, the AP reported.
President Vladimir Putin had warned after the vote in Ukraine’s parliament that if the trade agreements were signed at the upcoming EU summit in Lithuania, Russia “could not leave the gates with Ukraine as wide open as they are today,” RIA Novosti reported.
Yanukovych previously objected to Tymoshenko's release, but the bills offered a compromise of letting the former prime minister — who suffers from a back problem — leave jail to travel to Germany for medical treatment.
The parliament, which is dominated by Yanukovych's allies including his Party of the Regions, failed to muster enough votes to pass the bills, as two top EU envoys looked on. Opposition lawmakers responded with chants of "Shame! Shame!" and urged Yanukovych to pardon Tymoshenko through a presidential decree.
In theory, Yanukovych could have made such a move before the summit begins in the Lithuanian capital Vilnius on Nov. 28. Or he could have allowed Tymoshenko to walk out of prison by having the parliament pass the legislation next week.
Yanukovych took a harder line in the talks with the EU in recent days, following a closed-door meeting with his Russian counterpart Vladimir Putin.
Yanukovych was away on a visit to Austria on Thursday and did not comment on the reversal.

Contact the author at medetsky@imedia.ru

Monday, November 18, 2013

Uranium Shipment Signals End of U.S.-Russian Nuclear Deal

18 November 2013 | Issue 5257

Reuters

Klipping The Moscow Times

Dmitry Lovetsky / AP

Representatives of participating companies sign containers with uranium to be used as fuel for nuclear reactors, prior to loading them aboard Atlantic Navigator ship, on a port in St. Petersburg, Russia, Thursday, Nov. 14, 2013

A 20-year-old deal that has powered American homes while reducing the risk of Russian nuclear material falling into the wrong hands approached its end on Thursday when the final shipment of uranium left St. Petersburg for Baltimore.
Under the 1993 HEU Purchase Agreement, Russia downblended 500 metric tons of highly enriched uranium, or HEU, from nuclear weapons into low-enriched uranium and sent it to the United States, where it was made into fuel for nuclear power plants.

Over much of the life of the deal, it was used to generate roughly half of all commercial nuclear energy produced in the United States, or nearly 10 percent of all U.S. electricity, according to the U.S. Energy Department.
"For two decades, one in 10 light bulbs in America has been powered by nuclear material from Russian nuclear warheads," Energy Secretary Ernest Moniz said of the agreement, commonly known as Megatons for Megawatts.
It provided cash and jobs in Russia's nuclear industry at a time, after the 1991 Soviet collapse, when fears ran high that impoverished scientists would sell secrets or "dirty bomb" ingredients.
It was "crucial for stabilizing the Russian nuclear complex at a critical time in the 1990s," said Matthew Bunn, a Harvard University professor and expert on nuclear security and proliferation.
He called it "perhaps the most successful U.S.-Russian cooperative effort to reduce nuclear dangers."
But times have changed. A richer Russia, while seeking to expand its nuclear energy industry, has resisted U.S. efforts to extend the agreement or to come up with another one to continue blending down HEU, Bunn said.
The deal was done when Russia wanted financial aid from the West. President Vladimir Putin, in power since 2000, has made a point of rejecting handouts and demanded that the United States treat Russia as an equal.
"It is too bad … that Russia has not decided to blend down substantial additional quantities of highly enriched uranium," Bunn said. "They still have far more than is plausibly needed for their military programs."
Despite arms control treaties such as the 2010 New START pact, Russia and the United States possess more than 95 percent of the world's nuclear weapons. Neither nation discloses how much highly enriched uranium it has.
But statements by Russian officials have suggested the 500 metric tons eliminated under the deal may have been slightly less than half of its total stockpile, which would leave it with enough HEU for thousands of warheads.
With uranium prices low after the 2011 accident at Japan's Fukushima Daiichi atomic power plant, Russia has "no need" now to blend down more highly enriched uranium for fuel, said Sergei Novikov, spokesman for state nuclear corporation Rosatom.
Rosatom's mining arm said Wednesday that it would freeze expansion projects due to low prices.
But Novikov suggested the lack of desire to take steps without U.S. reciprocation was also a factor, saying Russia was the only country to have blended down 500 metric tons of HEU. "Why should we do even more?" he added.
Moniz said Russia's total revenue under the program was about $17 billion. He said the United States had blended down more than 140 tons of its own HEU and had made a commitment to bringing that to more than 180 tons.
The end of the agreement will also affect the uranium market in the United States, where under deals negotiated to end a trade complaint, Russia will now only be able to supply about a quarter of the market.
Moniz and Bunn said participants had had plenty of time to adjust because they had known the program would end when 500 metric tons were shipped.

Thursday, November 14, 2013

Few Russians Would Consider Adoption, Poll Says

14 November 2013 | Issue 5255

By Gabrielle Tétrault-Farber

Klipping The Moscow Times

Vladimir Filonov / MT

A recent roll has inidicated that most Russians are wary of bringing an adopted child into their family.

Less than 20 percent of Russians would ever consider adopting a child, due to insufficient income, a lack of government support and poor housing conditions, according to the results of a poll released Wednesday.
But despite Russians' aversion to taking in orphans, the number of domestic adoptions is expected to more than double this year, from 6,600 to about 15,000, signaling that state measures to boost domestic adoptions may be showing results.

At the crossroads of demographics and politics, adoption has taken on increased significance in Russia after the loss of the U.S. as a destination for Russian orphans last year.
The passage in December 2012 of the Dima Yakovlev Act, which banned all adoptions of Russian children by U.S. citizens, led to renewed efforts to boost domestic adoptions and thereby to keep Russian children in the country. The Dima Yakovlev Act was a response to the U.S.'s Magnitsky Act, which imposes visa and financial restrictions on Russian officials implicated in corruption or human rights violations.
In February, parliament passed a bill that provides Russian parents with financial incentives to adopt a child, including tax benefits that increase with every child adopted and that are greater if the adopted child is disabled.
Those incentives seem to be having an effect, with Deputy Prime Minister Olga Golodets reporting last month that the number of children adopted domestically is set to reach 15,000 by the end of the year, representing more than a two-fold increase from last year's figure.
A poll released Wednesday by the Foundation for Supporting Children in Difficult Situations shows that public reluctance to adopt remains widespread, however.
Eighty-two percent of poll respondents said they would never adopt a child, while 16 percent said they would be willing to adopt a child at some unspecified point in the future, RIA Novosti reported.
Yet, according to the poll, most Russians believe that orphans should be adopted by Russian families.
Some 62 percent of respondents said growing up in an adoptive family is better than in a Russian orphanage, and more than 73 percent said they believe that adoption by Russian parents is preferable to adoption by foreigners. Another 32 percent of those surveyed said that foreign adoption was unacceptable under any circumstances. No margin of error was given for the poll of 1,952 people across the country.
Anecdotal evidence suggests that much work remains to be done to increase domestic adoption rates and to fill the gap left by planned adoptions by U.S. citizens.
Earlier this month, it emerged that only one of 33 orphans in St. Petersburg who were to be adopted by American families has been adopted domestically.
Sergei Kukhar, director of Moscow's Orphanage No. 18, said by phone Wednesday there had not been any noticeable changes in adoption patterns over the last year at his institution.
“The situation has stayed the same,” Kukhar said.
Children's ombudsman Pavel Astakhov said Tuesday that even last year the number of domestic adoptions (6,600) was about 2 1/2 times more than the number of foreign adoptions (2,600). Speaking at a conference on orphans' issues in Moscow, he also argued that domestic adoptions needed to be increased for demographic reasons.
“Demographic predictions show that by 2025, there will be 22 million Russian children compared to 105 million American children,” Astakhov said, RIA Novosti reported. “We should not be giving our children to the Americans.”

Contact the author at g.tetraultfarber@imedia.ru

Putin Builds Hydrocarbon Infrastructure With South Korea in Seoul

14 November 2013 | Issue 5255

By Alexander Panin

Klipping The Moscow Times

Lee Jin-man / AP

Vladimir Putin looking at a statue of Russian poet Alexander Pushkin after its unveiling in Seoul on Wednesday.

President Vladimir Putin and his South Korean counterpart Park Geun-hye presided over the signing of numerous deals in Seoul on Wednesday, as Russia strives to swell its significance as a trading partner for the Pacific Rim countries.
In accordance with tradition, the majority of these projects involved the transportation of hydrocarbons and other resources, though the two countries were also able to hammer out an agreement on a visa-free travel regime.

During Putin's visit, two funds were created that will channel resources into investment projects on Russia’s territory, including the Far East and Siberia.
The first of these, between the Russian Direct Investment Fund and Korean Investment Corporation will commit $1 billion to a joint investment vehicle. Russia’s state development bank, VEB, is setting up another fund worth the same amount together with Export-Import Bank of Korea, Putin said.
According to the Economic Development Ministry, trade turnover between Russia and South Korea in 2012 surpassed $22 billion, putting the country in 12th place among South Korea’s trading partners. Russia's main exports are crude oil, gas, coal and fish, while it imports automobiles, car parts and electronics.
China is South Korea's principal trading partner, followed by the U.S. and the European Union.
“Besides traditional oil and gas supplies, we are holding negotiations on joint production facilities in this sphere. In particular, we are talking about setting up large liquefied natural gas production plants in Russia’s Yamal and the Far East,” Putin said.
He also pointed to the high potential of the Northern Sea Route for transporting hydrocarbons.
“This means large orders for the shipbuilding industry and joint work to modernize port infrastructure,” Putin said, praising South Korean shipbuilders, whose government began supporting the sector as early as 1962. Since then it has become one of world’s best.
Russia plans to award South Korean shipbuilders a contract to build at least 13 liquefied natural gas carriers, South Korea's presidential office said Wednesday, Reuters reported.
The same day, Russia’s state oil powerhouse Rosneft and South Korean Daewoo Shipbuilding & Marine Engineering company signed a memorandum of understanding on shipbuilding cooperation.
Another agreement concluded in Seoul should facilitate Russia’s plans for deeper trade integration with the Pacific Rim countries.
Russian Railways and a consortium of South Korean companies — POSCO, HMM, and KORAIL — signed a memorandum of understanding that may reanimate the Trans-Korean Mainline.
In September, Russian Railways opened a fully reconstructed 54-kilometer rail link between the town of Hasan on the Russian border and North Korean port Rajin.
At first, Rajin will handle coal freight coming from Russia by rail to be shipped to China, South Korea and other neighboring Asian countries. Plans are in place to upgrade and equip it to be able to provide container services.
If a well-developed connection with the South Korean railway system, which there was to some extent before the Korean war, was built, the port would provide further trading opportunities for Russia, as the trade route would have a direct access to the Trans-Siberian Railroad.
Behind the big natural resource deals was Russia's interest in South Korean science and technology.
“Korea … takes first place in the level of IT development and is ranked second in the rating of most innovative countries in the world,” Viktor Vekselberg, the president of Skolkovo Foundation, said after signing two agreements with Korean partners on joint research projects, Interfax reported.
The goal is to set up a Russian-Korean innovation center in Skolkovo.
South Korea can also profit from the partnership, Vekselberg said, as Russia can provide its brainpower for the benefit of both countries and the global economy.
An agreement was signed between The Skolkovo University of Science and Technology, Russia's En+ Group and Korea's Electric Power Corporation to research optimal routes for electrical grid line construction in northeastern Asia, an area in which Russia has expertise to share.

Contact the author at a.panin@imedia.ru