Tuesday, October 30, 2007

Final note...

"For of men it may generally be affirmed, that they are thankless, fickle, false, studious to avoid danger, greedy of gain, devoted to you while you are able to confer benefits upon them, and ready, as I said before, while danger is distant, to shed their blood, and sacrifice their property, their lives, and their children for you; but in the hour of need they turn against you."

-Niccolo Machiavelli - "The Prince"

This Blog is now officially closed. I wish Vladimir Putin all the best in his next few months as Russian president. And I hope the next few decades will be less hectic than those fateful first decades of the previous century.

Thanks for reading, commenting, and thanks for writing about Russia. Continue to do so, I know of few other countries with more sphinx-like political systems than Russia. The real expert will notice when the sphinx is bluffing.

All the best!

-nikolay i.

Sunday, September 16, 2007

What will remain of Fradkov...

Although he has a long way to go before he can catch up to the manner of speech similar to Yeltsin's prime-minister Viktor Chernomyrdin, Mikhail Fradkov in his almost four year tenure has left the Russian public with a bunch of strange quotes. Some are tough to translate into English, so I did the best I could with the others.

"It is time to grab the bird by the horns"

"You journalists, all write that we the siloviki don't know a thing about economics. Yes, I am not an expert in macroeconomics, but my goal as prime-minister is to not make stupid mistakes"

"We have to figure out where to place empty buckets to collect the oil windfall, and how to properly pour with them certain vegetable patches, and we should not forget about the seedlings"

"This question has two keys. One of them, you don't know where to inset. It is important to extract this key so it doesn't break when it is inserted"

"Just chewing, and chewing; when they will spit it out is hard to guess"

"I am happy that we created an investment fund. Although it is empty, it does not spoil the picture"

"How would you define civil service? It is a certain blockhead, who gets little money and always wants to steal something on the side"

"We have already exited from our short pants"

"It is highly unnecessary to show the prime-minister with his twist of the tongue. But try to see the mimics behind the words, even though I speak much more words than I did before"

Putin and Zubkov - Less complex than it seems

When things get complex and unpredictable in Russian politics, most political observers seem to want to go with the flow and tangle things up more and more. While looking for an elephant in a glass of water in the appointment of Viktor Zubkov for the post of Russian prime-minister, many forget the underlying facts of the current economic environment.

While it is undoubtedly true that Mr. Putin would like to leave for the next president a cabinet he himself approves of, and one that would somewhere deep down guarantee the continuity of his policies, Mr Zubkov's expertise is crucial to the problems that Mr. Putin values for the future - financial and economic security.

Russia has already seen the first phases of speculative capital outflow from its capital markets, which resulted in a slight but nevertheless decrease of 5.5 billion USD to its foreign currency reserves. Although, the expected outflow was almost two times less than expected, more withdrawals could be on the way, since it is still unclear if and when the US economy slides into a recession, and who it will pull along with. The amount of sepculative capital still floating in Russia is at a high level, with many investors waiting for results in their carry-trade positions (borrowing in low-interest currencies and buying higher-yielding ruble securities).

As an expert close to the Kremlin, journalist and editor of weekly Profile magazine Mikhail Lenotiev, stated in a recent interview with Ekho Mozkvy radio-station the previous economic bloc of the Russian cabinet did not concern itself enough with financial and economic security of the Russian market despite lobbying from the President's administration. As a result most of Russia's major banks now appear in very shaky positions. As a result of overly generous lending practices around the world and the massive credit boom in Russia, these banks (Russian Standard, MDM Bank, Alfa Bank) are 30% funded by foreign capital. Such a level is highly dangerous to the system according to the first deputy director of Russian Central Bank Gennadi Melikyan.

Add to that the ballooning debt of Russian firms, most of which is owned by foreign investors/banks, the rapidly expanding individual/small business credit market, and a small glitch in the world economy could result in the closure of two or three major banks. The consequences of such a move for the Russian economy will be very severe. Mr. Zubkov, is an expert in all of the above issues and resolving them will be one of his primary missions for the next year at least.

Vladimir Putin's recent statements about Viktor Zubkov's potential as a successor in 2008, and the existence of two more such candidates (besides Sergei Ivanov and Dmitri Medvedev) are his last attempts to throw mud in the water and postpone his decision-making until after the December elections. Even more so, Mr. Putin is reluctant to give an easy ride to the presidency to anyone of the top candidates (Ivanov or Medvedev) by giving one of them a seat as prime-minister. With all of the top seats in the government taken, it is likely that Mr. Ivanov and Mr. Medvedev will have to battle it out from equal positions, providing the elections in March with a substantial aura of "free-election status".

Any talk of Vladimir Putin playing a complex chess game to regain his seat in 2012 (and light the Sochi Olympic flame in 2014) are even more speculative than those about Mr. Zubkov's potential as Russian president. The very day Vladimir Putin loses his seat, he will lose air-time, he will lose his influence, and he will be slowly losing his popularity. Even if the next president has a weak power base behind him, the very fact of being a president is significant enough to battle all major powerbases withing the government and within the President's administration.

No one knows this fact better than Vladimir Putin, who in 2000 faced the entire "Family" (Boris Yeltsin's family members and their loyal supporters along with the oligrachs). Mr. Putin by 2004 managed to convert a cabinet and administration structure of 4:1 against him into a 4:1 for him by carefully utilizing the influences of siloviki bloc. The next president will surely not want to sit and wait four years until Mr. Putin rides into the Kremlin on top of a white horse with shining silver armor.

Sunday, August 05, 2007

Blog is on Break!

This blog is on break again. It is August and no news is really coming out anyway. Plus, the never-ending moving process lives on. Hopefully, August 20th will get the blog going again. For now the traditional Music Video - Mongol Shuudan - Moskva. Great song. Enjoy

Thursday, July 26, 2007

Lessons from history: "Zinoviev Letter" - USSR and Britain in 1924

Looking at Russo-British relations in the past one finds startling examples, often they are very close replicas of the current stand-off between the two sides. Whether or not appropriate conclusions can be drawn from historic lessons is a different question.

After the Conservative party in Britain lost the December 1923 elections, in January of the following year the Labor party for the first time in its history was granted the opportunity to form the cabinet under the new prime-minster Ramsey MacDonald. In February of that year, Britain formally recognized the young republic of USSR, and diplomatic relations were established on February 2, 1924.

In October of 1924, the British parliament was dissolved after the Labor party lost a crucial vote over the need for criminal persecution of the chief editor of "Workers Weekly" newspaper D.R. Campbell for inciting the military to mutiny if they were sent to counter the protesting workers. Shortly thereafter on October 25, just four days before the scheduled elections the British Foreign Office published in the "Daily Mail" a secret letter whose author was the head of the executive committee of the Comintern Grigoriy Zinoviev, the revolutionary-exporting arm of the new Communist republic.

The letter contained instructions to the British communists regarding tactics to increase socially-stirring propaganda within the army as well as plans to attract Labor party members into the revolutionary scheme. The letter had an effect of a media-bomb and made the biggest contribution to the Labor party's defeat in the elections to their Conservative rivals. They ended up being outnumbered in parliament by more than 3:1.

The new conservative government formed in November under Stanley Baldwin (including Winston Churchill in the spot of chancellor of the exchequer) informed the Soviet Union that bilateral agreements signed with the Soviet republic by the Labor government would not be fulfilled. Diplomatic relations were terminated for a long period.

When British archives for that period were being declassified in the late 1990-s, Jill Bennett one of the chief historians of the Foreign Office began an extensive research process into the "Zinoviev Letter". As was concluded the letter had probably been a concoction by elements of the SIS (MI6) based in Riga, Latvia to help the Conservatives defeat Labour in the 1924 election. In 2006, a new biography of Desmond Morton, Churchill's Man of Mystery: Desmond Morton and the World of Intelligence by Gill Bennett, confirmed that it was a hoax perpetrated by Morton, then with the Secret Intelligence Service of the British government.

Whether or not this particular fact of history is a good lesson for current observes of the Litvinenko and Lugovoi scandals, one clear lesson is that neither side in the dispute should be given the benefit of the doubt; the "presumption of guilt" concept directed at Russia from the West is at best immature, at worst a big deteriorating factor to the scandal. Both sides have interested parties who reap benefits from the diplomatic stand-off; both have the ability to influence the conflict accelerators - the media, the "independent" branches of the state.

Friday, July 20, 2007

Cartoon of the Week

Cartoon of the week; na zlobu dnya as the Russians would say - UK-Russia relations (author unknown)


The Russian government may feel a little more relaxed now that they know who they are dealing with in the diplomatic "war" with Britain. As The Daily Telegraph reported, so far eight British cabinet ministers have confessed to smoking cannabis at various stages in their life and in various amounts. Unfortunately, UK foreign secretary David Miliband and prime-minister Gordon Brown explicitly denied smoking cannabis; had it been the other way round it would explain a lot.

Thursday, July 19, 2007

Global private equity re-enters Russia: TPG-Seventh Continent

After approaching some semi-serious hurdles in the US private equity firms are looking for fresh markets; on the top of their to-do list may be Russia. TPG, formerly Texas Pacific Group, was reported to be in early-stage talks to acquire a 50 percent stake in Russia's 7K-investholding, which is in control of one of the country's top supermarket chains Seventh Continent.

The initial purchase price estimated at $1.1-1.2 billion is tiny by Western standards but TPG has expressed the possibility of investing a further $5-7 billion into the supermarket chain over the next nine years if the deal goes through.

Private equity firms generally buy publicly traded companies, taking them private, restructure them and later spin-off as public entities for a handsome profit. TPG with more than $40 billion under management is the only foreign buyout firm operating in Russia, having opened its doors in Moscow this spring. Since then it has expressed an interest in seven or eight projects in Russia. The Seventh Continent deal is the first such project announced.

The deal could be a good opportunity to develop one of the least active areas of global finance in Russia, private equity. As the Financial Times reports:

Carlyle, the US firm, closed its Moscow office in 2005 and ditched plans for a $300m Russian fund. TPG sold off an investment it made in Russia’s PIT brewery, which was bought by Heineken in 2005.

The Russian investment market is dependent on insiders, such as Baring Vostok Capital Partners, which announced a $1bn fund in March for mid-sized investments. Alfa Capital Partners, Sputnik Group and Sun Group are also active.


Seventh Continent, or Sedmoi Kontinent, was one of Russia’s first supermarket chains, opening three stores in Moscow in 1994. By December it had 123 stores, after expansion into regions outside the capital, generating $288m of revenue in the first quarter of 2007.

The move also highlights the strong opportunities for profit in the Russian food retail industry. Yet plenty of competition still exists; X5 retail group, another Russian food retail conglomerate and owner of the Pyaterochka and Perekrostok supermarket chains, has announced plans to invest more than $10 billion dollars in its stores over the next 5-7 years.

The child sent to murder Berezovsky

On June 28th 2006, Russian president Vladimir Putin caused quite a stir in the press when he unexpectedly kissed a child in the tummy during a tour of the Kremlin. Yesterday The Sun reported that on June 21 2007 (almost exactly a year later) an assassination attempt on Boris Berezovsky was foiled by Mi-5 and British Police in London. The details were the following

Police seized the suspect on suspicion of conspiracy to murder after a plot was uncovered for a hitman to kill an outspoken “enemy of Moscow” at the Hilton Hotel on London’s Park Lane.

The assassin was accompanied by a child in a cold-blooded attempt to avoid raising suspicion.

But MI5 and MI6 intercepted intelligence about the plot — due to have been carried out within the last fortnight.


You connect the dots. Such a pity that the "great" book by the "defenders of Russian liberties" Alexander Goldfarb and Marina Litvinenko "The Death of a Dissident" has already been published. It could have been a great epilogue. Thanks to vladimir.vladimirovich.ru for this ridiculous idea. By the way the cold-blooded assassin was deported to Russia, not arrested (because he had no weapons with him!); but no information on the whereabouts of the child. Perhaps he is Putin's successor.

Wednesday, July 18, 2007

Russia's response: Bombers intercepted in British airspace

Russia may be preparing a very unusual response to the British actions to expel Russian diplomats and tighten visa regulations amid the Litvinenko affair and Lugovoi extradition. As The Times reported today, apparently the British airforce was ready to intercept two Russian bombers on Tuesday who were very close to breaching British airspace.

Two Tu95 “Bear” bombers were dispatched from their base on the Kola Peninsula in the Arctic Circle and headed towards British airspace.

Russian military aircraft based near the northern port city of Murmansk fly patrols off the Norwegian coast regularly, but the RAF said that it was highly unusual for them to stray as far south as Scotland.

Two Tornado fighters, part of the RAF’s Quick Reaction Alert, took off from RAF Leeming, in Yorkshire, to confront the Russian aircraft, after they were shadowed by two F16s from the Royal Norwegian Air Force, The Times has learnt.

“The Russians turned back before they reached British airspace,” an RAF spokesman said.


The newspaper was quick to say there was no evidence to suggest the incident was related to the chilling of relations which has accelerated over the past week, but it is a damn big coincidence. The Russian airforce chief colonel-general Zelin denied reports of Russian long-range bombers approaching close to or breaching foreign airspace yet confirmed that bombing divisions were performing the usual exercises to train the crews for long-range operations.

General Zelin also found the RAF statements of Russian planes changing their course after seeing RAF planes as nonsense, as such operations are planned several months in advance and have nothing to do with politics.

According to Russian daily Vzglyad this was the second such incident since the end of the Cold War; the first occurred this spring, which downplays the coincidence aspect of the situation.

The Tu-95 long-range bomber is a very old airplane and has been in service in the Russian air force for over 50 years now, yet it still has a range of 15,000 km. Unlike the Tu-160 which is considered the core of Russian long-range aviation, the Tu-95 is expected to be in service till 2010 and maybe for a few years after.

Monday, July 16, 2007

Patriot Games : the end of the Litvinenko scandal is near

Britain's response to Russia's refusal to extradite Andrei Lugovoi voiced by the new foreign secretary David Miliband was the most direct response out of all for Britain to maintain face and look firm, and unless any unforeseen actions will be taken by a third party, after Russia's response, the Litvinenko affair will finally reach a dead end.

Britain's response was aimed specifically at Russian agencies that are suspected of aiding Andrei Lugovoi. The four Russian diplomats that will be extradited are as is the usual case in such practice officers of Russia's security services working under diplomatic cover. The visa cooperation consultations which will be suspended affect mostly visas for Russian governmental officials, specifically those of the executive branch, again the various ministries, security services and the President's administration. As Gazeta.ru reported, from now on most of the governmental contacts between Russia and Britain will have to be sanctioned from the very top to get clearance.

The actions of the UK foreign ministry were carefully planned not to hurt regular Russian citizens visiting or working in Britain, and most importantly Russian companies which have established a high degree of mutual dependency in various spheres of involvement from energy cooperation to plain-vanilla IPOs and real estate purchases in London. Mr. Miliband began his report by saying that the situation was paradoxical in that economic ties between Russia and the UK had never been so strong.

Now Britain is waiting to see the actions of its Russian counterpart, it has already heard the Russian foreing ministry calling out Britain's actions as "immoral" and masterminded at the highest levels with the goal of politicizing a criminal investigation. Most analysts expect Russia to extradite four British diplomats and perhaps continue putting pressure on the British Council. But apart from that the options to act rationally for both sides are exhausted.

There can be no talk of cooperation between the criminal investigators of the two sides. Britain claims it has an abundance of evidence to support its claim of Lugovoi's guilt and Russia claims it has received no substantial evidence, referring to it as hearsay. Mr. Lugovoi appearing in an interview with Russia Today television network seated in front of a bookcase with a very visible volume of Sherlock Holmes even complained that he had received no invitation to come to the UK for his trial.

But what happens next? The possible scenarios are in abundance yet all of them seem very unlikely. First, the trial of Mr. Lugovoi may occur in Moscow; second, the trial may occur in a third country; third, Russia will use the issue as a trading tool on the global arena. All of the scenarios stumble on two facts. Both the UK and Russia are in the conflict too deep and it is too late for any of the countries to back off without a major reputation blow (neither the new Brown government wants it nor Putin's administration). The UK also refuses to extradite Russia's most wanted targets - the happy couple of Mr. Berezovsky and Mr. Zakaev. So any potential for mutual concessions on the issue of a possible trial are already slim.

Russia's possible use of the Lugovoi extradition as a bargaining tool in the Iran or the Kosovo debate is ruled out by Russian foreign policy expert Fedor Lukyanov. In an interview with the Financial Times he states that "Russia’s opposition to an international plan to prepare Kosovo for independence is a matter of principle and not a bargaining position designed to extract some sort of concessions from the west."

Thus as of today both the UK and Russia are in a position where they have saved face in front of their own people (yet for Russia a significant blow was made to its reputation on the world stage thanks in part to the foreign press). Financial Times columnists Phillip Stephens has called Britain's actions minimal, but they are enough to put a freeze on the conflict without further consequences for both sides. Is the Lugovoi extradition that important of an issue for British citizens? I do not believe it is even in the top three priorities of the new Labor government. It is definitively lower than the goal of expanding economic cooperation with one of the fastest growing emerging economies, Russia.

Even if the Lugovoi extradition was a priority, Britain in the eyes of its citizens and in the eyes of its Western partners is the victim of a "hostile" Russia and so is painted white; it does not need anything more than that.

Russia fails to bury its dead; Red Army soldiers stored in a garage


It can be tough to fight for a just memory of the Red Army's fallen soldiers in Estonia, Poland and other countries when you cannot assure an appropriate burial for the soldiers in your own country. In Russia's western-most region of Kaliningrad 45 bodies of Red Army soldiers are being stored in a garage of a volunteer digger for two years now, as the regional government continuously puts off their burial.

As local web-portal Kalinirgrad.ru reports, the head of the digger group "Consciousness" Andrei Klimenko is one of many who are voluntarily searching for the millions of Soviet and German soldiers buried in the forests, rivers and lakes of Russia. According to Mr. Klimenko appropriate laws exist and even financing is plenty, but for some strange reason the local bureaucracy does not get its hands to the job.

But even when they do, like on June 22 of this year (the anniversary of Nazi attack on the Soviet Union) they do it carelessly. On June 22, 95 Red Army soldiers were buried with all appropriate honors, yet according to Mr. Klimenko some of them were Italian soldiers found near Strelna; they were in Italian military uniforms who ended up being buried as Red Army soldiers. But complaining was useless.

Recently nine bodies of Red Army soldiers were found by the diggers during a reconstruction of a theater in Kaliningrad; they were exhumed and buried appropriately, but the three bodies lying underneath a nearby statue of German poet Schiller were left alone. The diggers had no opportunity to identify them and feared that those bodies would follow the fate of the 45 bodies lying in Mr. Klimenko's garage, completely unwanted by local authorities. In the relatively small Kaliningrad region alone 150,000 soldiers fell, of those only 120,000 have been found.

If a war is indeed not over until the last victim is buried, the war for Russia will spread out over decades. But time is running out; Russia's newer generation is not far from placing the Great Patriotic War into the history books as just another event with little significance for the future; a truly saddening perspective.

Sunday, July 15, 2007

Test yourself in "new" Russian history

There have been many comments about the recent initiative of Russian president Vladimir Putin to "rewrite" Russian history. If you ever were curious of what would be written in the newly adopted (or as they are referred to "recommended") history texts (one of them is pictured), Kommersant's Vlast weekly magazine offers a test to check your knowledge (in Russian). Having taken the test, I am proud to have gotten 2 out of 8 answers correct, which hopefully implies I have some objectivity remaining in my knowledge. Below are some of the questions and the surprising answers:

1) Complete the phrase: the Soviet Union was ______:

Answer: an example and a guide of a just state for millions of people all over the world

(My answer was the SU was a social state, and etc. etc. - I was wrong)

2) Complete the phrase: The result of Stalin's repressions was _______:

Answer: the formation of a new administrative class that was adequate for the goal of modernization at a time of limited resources

(My answer was that the repressions shattered the ability of the SU to defend itself resulting in devastating losses in 1941 - wrong yet again)

3)
Complete the phrase: The YUKOS trial buried all hopes of _______:

Answer: oligarchs to maintain their control over Russia's natural resources

(No surprise here)

4) Multiple choice: A sovereign state requires:

Answer: the ability to independently produce military armament

(My answer: the ability to carry out internal and external foreign policy independently - Wrong again)

In the end this "new" history is probably better than studying the History of Marxism or the History of the Communist party, but it is getting closer every year.

Saturday, July 14, 2007

Russian military throws a giant open-air party for draftees

Perhaps the Russian military personnel in charge of the dreaded draft are getting their act together. The military commissioner of Bashkortostan together with the city of Ufa's popular club Pravda for the second time now organized a giant open-air Ibiza-style clubbing event with a slight military touch.

As reported on Russian NTV television channel (video available here in Russian) the event included very cute dancers doing what they do best on Russian tanks and other military vehicles. One of Russia's most popular dj-s DJ Groove was in charge of music. Fireworks and massive foam-making machines were also major attractions of the event.

As the military commissioner Timofey Azarov said in an interview "we must communicate with the younger generation in their language. This is why we are hosting the event for the second time. The area in front of the draft station will be turned into a giant dancefloor for the whole night. Hyped dj-s will be hosting the event and the highlight of the night will be 1500 cubic meters of foam which will cover the guests. Patriotic songs will also be played, and guests will see a demonstration of military skills as well as new military equipment on the big screen."

The draftsmen claim the event has had a very positive effect on the attitude of young men toward military service. Last year in the city of Ufa eight thousand men were drafted and only 300 were avoiding service (for various reasons); this is the opposite of what usually happens. Even avoiding statistics this is probably the smartest idea to date coming from the Russian military draft unit, which is in dire shape (Sean's Russia Blog goes deeper on this topic); at least some of them appear to be doing their job effectively. More pics are below.


Thursday, July 12, 2007

Berezovsky's lawyer says he "does not give a damn" about client

The lawyer appointed to Russian business tycoon Boris Berezovsky (pictured), after the latter decided to boycott his trial, has said in an interview with Russian daily Izvestia that he "does not give a damn" about the trial.

Boris Berezovsky is being charged in absentia with embezzling 214 million rubles from Russian air carrier Aeroflot at some point in the 1990-s and could face up to 10 years in prison. Mr. Berezovsky told his personal lawyers not to defend him and not to have anything to do with the trial which he terms as politicized.

The Russian government thus appointed Mr. Dudkov, 62 years of age, as a free lawyer for Mr. Berezovsky, who was granted political asylum in London a few years back. In his interview, Mr. Dudkov stated that the court appoints a lawyer closest to the proceedings, and Mr. Dudkov just happened to be nearby. He was surprised that a free lawyer was appointed for economic proceedings, as usually such an appointment is made for poor people and even "bums".

When asked about the likelihood of winning the trial, Mr. Dudkov referring to it as a Soviet-style proceeding laughed and said it "was impossible", although he quickly said he had not even read the trial material.

So yet another comical page is added to the history book of the Russian rule of law. It is strange then when Russian officials complain about Britain's recent remarks of a flawed Russian legal system.

Wednesday, July 11, 2007

Britain and Russia drift further apart over Lugovoi

The row over the Litvinenko poisoning between Russia and the UK seems to be escalating very rapidly this week. Such haste is rather strange since no real developments have happened in the case since Andrei Lugovoi's (pictures) notorious press-conference (the main suspect in the case according to UK authorities) in Moscow more than a month ago. The Guardian reports:

The Foreign Office and Downing Street are preparing to send a strong signal to the Kremlin following its refusal to extradite Andrei Lugovoi, the former KGB agent suspected of murdering Alexander Litvinenko last November.

The government was last night considering counter-measures to show Britain's extreme displeasure at the Kremlin's decision, and the seriousness with which it takes the "terrible" murder of Mr Litvinenko - a British citizen and fierce critic of the Russian president, Vladimir Putin. The options include the possible expulsion of Russian diplomats from the London embassy, and the withdrawal of cooperation in several areas, including education, trade, social affairs and counter-terrorism.

Although the Russian government officially announced the refusal to extradite Mr. Lugovoi last Monday, Moscow's stance was not new, and no real doubts existed about it since Britain asked for the extradition a few months ago. The Russian side has three motivations behind its actions.

First, extradition of its citizens is barred by its constitution. Second, it has so far seen no evidence in British documents that make Mr. Lugovoi a suspect in the case; if it does, it promises to try him at home. But third, and most important, is Russia's counter-action to Britain's refusal to extradite Boris Berezovsky (the notorious Russian tycoon, who is plotting to set up a coup in the Kremlin) and Ahmed Zakaev (a spokesman for the Chechen terrorists); both were friends of Alexander Litvinenko, and Russia has deep suspicion of their involvement in the affair.

Many analysts have pointed out to Russia's obligation to extradite Mr. Lugovoi, thus overriding the Russian constitutional ban, based on its signing of the 1957 European convention on extraditions, which according to some overrides domestic laws. Yet Kommersant has interviewed a number of experts in the field with differing opinion. One of these experts, a law professor at Russian RUDN university claims that the suspect must be deemed guilty in both countries for the extradition to occur. Another expert, senator Mikhail Margelov says that Russia has already faced criticism for ignoring its constitution from the European Human Rights court for extraditing its citizen to Turkmenistan several years ago.

Britain is fully aware that Russia will never extradite Mr. Lugovoi, just like Russia has come to terms with the fact that Mr. Berezovsky and Mr. Zakaev will never leave the UK. British authorities are in a difficult position. The new government is forced to take action to prove its tough stance with Russia and its commitment to solving the Hollywood-like riddle in which many Londoners were affected.

Britain's actions are limited; Russian energy companies toward which economic sanctions may be applied will always find alternative markets in Europe or Asia. BP and Royal Dutch Shell on the other hand are having trouble holding on to their assets in Russia, and are grateful for anything that is left to them by the Russian regulatory agencies. The only real threat is a full blockade for Russian companies into the UK financial market, which will also impact London as a financial center, where Russian IPOs account for a quarter of new equity raised.

The situation will only get worse. Talk of a break in diplomatic relations is too unrealistic and even excessive. But it is obvious that any future cooperation will be chilly. If the affair over Litvinenko was a provocation of some sort (it is hard to explain any other scenario) it has worked perfectly. Both sides now have little area for maneuver, and Russia's reputation on the international arena has been dealt a very powerful blow.

Tuesday, July 10, 2007

Finding holes in the US Missile Defense Shield

In an interesting commentary in Le Monde, French historian Alexandre Adler calls out some obvious inconsistencies in the US plans to deploy its missile defense shield in Poland and the Czech Republic. The bottom line in his article is something that has been discussed and concluded numerous times and claims that Russia's position is justified as it sees no basis for the system, it sees no threats, it sees no justification for such rapid action.

But Mr. Adler brings into point the fact that although NATO countries have agreed with the US regarding the need for the system, the missile defense system will be under US management.

The envisaged system will form part of the US strategic forces, not those of NATO, taking all right of inspection or discussion from the European allies, as well as from the Russians, represented in Brussels by a liaison mission whose importance was once deemed to be considerable.

Despite US promises to give the right of inspection to Russian military officials of the planned missile defense sites, the fact that the system will be out of NATO jurisdiction means Russia will have little say in what happens next to the system as it will not be able to use its position in the Russia-NATO council (Russia fears most the future expansion of the missile defense sites). The military aspects of the system are also briefly analyzed in the Le Monde commentary:

Thanks to the radar system set up on Czech territory, the two main Russian intercontinental missile bases would at last be covered by permanent means of observation; currently, only satellites, whose field of vision remains random, enable the United States to monitor the silos. That means quite simply that the United States would acquire an antiforce first strike capability whose nightmarish threat had, however, disappeared at the end of the eighties.

Mr. Adler suggests the US use the proposal by Vladimir Putin regarding the Gabala station in Azerbaijan; yet we are all aware of the slim chances for that scenario. The military aspect of the US defense shield is still not clear. Some military observers say it will not work in Poland and Azerbaijan or Turkey is a good location, others have a diametrically different position. This concerns both Russian and European observers. The last aspect continues to make the US missile shield issue balancing predominantly in the political sphere of observations.

Can the US take Gabala alone?

With the 10th Annual US-Azerbaijan Security Dialog recently ending in Washington signs are emerging of a troubling position for Russia amid its Gabala radar base proposal. Russia offered the base as a replacement for the planned US radar in the Czech Republic a few months ago and Russia's president confirmed the proposal at a meeting with his US colleague in Kennebunkport in early July.

Although US Secretary of State Rice turned down the offer last week, the Gabala radar base still dominated the discussion between Azeri and US officials. Despite a very neutral statement from the Deputy Foreign Minister of Azerbaijan about the Gabala base being a US-Russia issue that must be discussed with Azerbaijan once the two sides reach a consensus, the US has all reasons to take the Gabala base issue into its own hands.

The Gabala radar, built in 1986 in the USSR to monitor missile launches in the Middle East and the Indian ocean, by chance, ended up in Azeri territory and is now being leased by Russia with the lease term expiring in 2012. Russia's plans to build a similar base in its southern region of Krasnodar underlines its awareness of someone else using the radar after 2012. Azerbaijan and Georgia have for a long time been thinking of closer cooperation with NATO or the United States by itself. Why shouldn't the US then wave goodbye to Russia's offer and wait till 2012 to takeover the radar, finally establishing a solid presence in the Caucasus area and getting the opportunity to monitor its "official" foe Iran?

One reason is the growing role of Azerbaijan in the Caucasus region thanks to the rich oil resources. Unlike Georgia, with its frail economy and little hope for being a completely sovereign state, Azerbaijan has been careful in throwing itself to the mercy of either Russia or NATO/US. The Azeri government is also fearful of threats from Iran, with which it has a number of bilateral peace-aimed security agreements. For Azerbaijan, US-Russian cooperation would be the ideal scenario guaranteeing warm relations with both sides. However, the scenario of the US leasing the radar base does not seem unattractive for the Azeris either given Russia's preparation to copy the radar on its own territory.

The Gabala radar base idea was not that innovative for the Pentagon's plans for a global missile defense system. Lt. Gen. Henry Obering, director of the Missile Defense Agency at the U.S. Department of Defense, made a proposal this spring to deploy elements of a missile system in Europe and the Caucasus. The Bush administration and the Pentagon did not initially rule out locating military facilities in Azerbaijan or Georgia. In the opinion of American military experts, Azerbaijan has a major advantage over Georgia: It has the Gabala radar.

In the end, Russia's position may seem like an utter disaster if the US does establish presence in Azerbaijan and takes over the Gabala radar base, which despite being Azeri property is considered by the Russians as their own. Western presence in the Caucasus without Russian consent is one of the most feared security questions for the Kremlin. Up until now it was assumed that Georgia was on the quickest path toward NATO or US presence on its territory. Now Russia has created a similar scenario for Azerbaijan. As the topic develops talks of Putin's Gabala proposal as being aimed to prolong Russia's presence in Azerbaijan look more and more correct.

Wednesday, July 04, 2007

Sochi secures the 2014 Winter Games

Such an event I could not miss. Russia securing the 2014 Olympics in Sochi startled me. The entire proposal which two years ago seemed like a ridiculous government initiative (just think: Russia's warmest city hosting the Winter games!) turned into the most polished, hard-lobbied project not only to promote the candidate city but to promote Russia in the world. The 2014 olympics should, if all goes as planned, do just that.


Despite previous comments about Korea's advantages as another route to the booming economies of Asia, Russia's figuring in Ernst & Young's report as the #5 most attractive destination for investment if not beat out Korea's advantage, at least tied it.
The Russians put an impressive show of strength in Guatemala, by flying in their huge jumbo cargo airplane carrying the equipment needed to sustain an artifical ice rink. Not to mention the multitude of past Russian olympic champions and the "captain" of the team flying on the presidential jet Vladimir Putin himself (the Austrian chancellor took a regional flight to Guatemala). At least the Guatemelis were impressed by Russia's bidding.

Sochi 2014 means first of all a good image for Russia and a solid base for cultural expansion beyond its borders (again if all goes as planned). It also means a promotion of sports in Russia, and a healthy lifestyle, something needed for a population that is dying out fast. Of course, one can imagine the problems that will be associated with government funding, aka property wars, and plain vanilla looting; but I do not think China is much more efficient in its organizing of the summer games in 2008 (the difference is the harsher punishments).

Congratualtions to Sochi. Condolences to Pyongchang and Salzburg; but Korea and Austria have hosted the Winter Olympics before, Russia has not.

Monday, July 02, 2007

Blog Break - Russian Media Blog Carnival Wrapup

I bring my apologies for the lacking of posts in recent days. The exciting process of moving has captured my entire schedule. As a substitute I would like to summarize the Russian Media Blog-Carnival that took place in June, and from what I have read was a success. I bring the links from all the authors (not all in English) below. A big thanks to Jurg Vollmer of the Krusenstern blog for coordinating the event. I will hopefully be back next week, and will miss out on the guessing about what the Bush-Putin summit really meant after all.


Weblog

Location

Lang.

Article

Published

Frankfurter Rundschau, Monika Porrmann

Germany

D

"Russische Blogger schreiben wie die Saporoger Kosaken"

May

Russia's true tales of terra, Nikolay I.

USA

E

"He writes about Putin, and it’s interesting! Andrei Kolesnikov’s Real-Life Putin"

01 June

diVERse, Kalle Kniivilä

Sweden

S

"Är det spegeln det är fel på eller…"

02 June

Russia Blog, Nicolai N. Petro, Professor of political science at the University of Rhode Island

USA

E

"Needed: Better Western Coverage of Russia"

03 June

UPLOAD, das PDF-Magazin

Germany

D

"Die russische Blogosphäre ist ein Who’s Who der Intelligenzija"

04 June

Roger Blum, Director of the Institute of mass communication studies IMW at the University of Berne

Swiss

D

"Medien in Russland und in der Schweiz - ein Vergleich"

05 June

Krusenstern, Jürg Vollmer

Swiss

E

"The Russian newspaper 'Novaya Gazeta' is a paradox!"

06 June

diVERse, Kalle Kniivilä

Sweden

E

"Is something wrong with the mirror?"

07 June

Krusenstern, Jürg Vollmer

Swiss

D

"Die russische Zeitung 'Nowaja Gaseta' ist ein Paradox!"

08 June

Mark MacKinnon, two-time winner of Canada’s top reporting prize and former Moscow bureau chief for "The Globe and Mail"

Russia and Canada

E

"The missing ingredient"

08 June

Sean Guillory, historian from Los Angeles

USA

E

"Old Russian Newspapers"

10 June

Krusenstern, Jürg Vollmer

Swiss

D

"Die 5000. Ausgabe von Ogonjok, der ersten Illustrierten Russlands"

11 June

Gedankenjournal, Andreas Solf

Ukraine and Germany

D

"Erwartungshaltungen russischer Rezipienten gegenüber Medien"

12 June

Ulrich M. Schmid, Professor of Russian Culture and Society at the University of St. Gallen

Swiss

D

"Elena Tregubova: Einblicke in die Gängelung der russischen Medien"

13 June

Joachim Dethlefs, Freelance Journalist and Blogger

Germany

D

"Englischsprachige Russland-Blogs"

14 June

Alexander Günther, Historian and "Readers Edition"-Editor

Germany

D

"Der russische Nationalbolschewismus und seine Medien"

15 June

Eduard Steiner, Russian correspondent of Austrian national daily newspaper “Der Standard”

Russia and Austria

D

"Die Journalistin Jewgenija Albaz: Was soll ich fürchten?"

18 June

Eduard Steiner, Russian correspondent of Austrian national daily newspaper “Der Standard”

Russia and Austria

E

"Yevgenia Albats: What should I be afraid of?"

19 June

Heribert Prantl, head of the national desk of the "Süddeutsche Zeitung" and most cited author of editorial commentaries in German press

Germany

D

"Putin denkt und lenkt"

20 June

Krusenstern, Jürg Vollmer

Swiss

D

"Der Kreml droht Journalisten mit Berufsverbot"

21 June

Simon Sturm, Student of Journalism at the University of Dortmund

Germany

D

"Rheinskaja Gazeta - die erste russischsprachige Tageszeitung Deutschlands"

22 June

Gedankenbörsen-Blog, Rafael Wiedenmeier

Swiss

D

"Die Medienlandschaft von Kasachstan"

25 June

Krusenstern, Jürg Vollmer

Swiss

D

"Ein Jahrhundert Journalismus in Russland an einem Tisch"

25 June

Sarmite Elerte, Editor-in-chief of Latvia’s leading newspaper "Diena"

Latvia

E

"The role of the media in new democracies"

26 June

Russia Blog, Nicolai N. Petro, Professor of political science at the University of Rhode Island

USA

E

"Russia's New Cyberwarriors"

27 June

Nina Schneider, Swiss video-editor and language instructor at the Russian State University for the Humanities RGGU in Moscow

Russia and Swiss

D

"Ausser den Vorzeichen hat sich seit der Sowjetunion nichts verändert"

27 June

Max Schmid, Russian correspondent of Swiss Public broadcasting Radio SR DRS and winner of Swiss-Russian Journalist Award

Russia and Swiss

D

"Mückenstiche oder das Hündchen, das den Elefanten anbellt"

28 June

Nurija Fatychowa from Tscheljabinsk for "fluter.de" - Das Jugendmagazin der Bundeszentrale für politische Bildung

Russia and Germany

D

"Seelen-Striptease oder Netz-Demokratie?"

28 June

Sergej Guk, commentator of "Voice of Russia" * "Голос России"

Russia

D

"Russische Journalisten sind in der Nacht mutiger"

29 June

Krusenstern, Jürg Vollmer

Swiss

D

"Russischer TV-Sender NTW gehört nun zu 100 Prozent Gazprom"

29 June

Natalja Lipowa, journalism student at the Saint Petersburg State University

Russia

D

"Existiert die Pressefreiheit in Russland?"

30 June

Thursday, June 28, 2007

Root for Sochi-2014 - Apparently it's close

The race to host the 2014 winter Olympics is predicted to be as tight as the 2005 battle for the 2012 summer games, when London managed to yank out the winning bid at the last moment of voting from Parisian hands.

This time around, the three competitors are South Korea's Pyongchang, Austria's Salzburg, and Russia's Black sea resort town of Sochi. Despite various concerns about Sochi having lower chances to host the Olympics, the New York Times reports that an index compiled by Olympics specialist website Around The Rings concludes that all three contenders are level with 83 points, less than a week before the voting in Guatemala on July 4th.

Salzburg had led through the two-year campaign but concerns raised in an IOC evaluation report had allowed the two others to catch up just in time, ATR said.

ATR said its index was based on multiple visits by its correspondents to the cities over the past two years and coverage of their presentations around the globe.

"Scrutiny of bid documents and interviews with bid officials, IOC members and other sports leaders also influenced the rankings," it said.

In the previous ATR power index, released in April, Salzburg led on 82 points, followed by Pyeongchang on 77 and Sochi on 75.


Although Sochi's funding is very well-outlined and backed by the Russian government's multi-billion Federal Target Program, it lags behind the competitors in the number of Olympic complexes built. Out of 11, it so far has zero. Compare that with a seven out of eleven for Salzburg. But then again Austria's sporting complexes will be older than those of Sochi when built. What remains strong is the public support for the Olympic games in Russia, for which Vladimir Putin has become the leading promoter in the international arena.

Sochi has positioned itself as a unique geographical destination. While the higher reaches of its mountains are covered with snow virtually all year, in the summer it is the top Russian beach resort. In fact it is the warmest Russian major city. The fact that the likes of Roman Abroamovich, Russian billionaire and owner of Chelsea FC, have been making big investments in the area is also a big confidence factor.

Yet as the Guardian reports, South Korea may be extremely attractive especially after the Beijing 2008 games, and will serve a further boost to the expansion of the Olympics movement into Asia and with it corporate sponsors willing to tap the Asian market. The IOC members reviewing Sochi have given it marginally lower reviews than Salzburg and Pyongchang earlier on as well.

However, the IOC is a strange organizations as are many, needless to say, and so the voting will probably yield a big surprise. One would hope the surprise will be in store for Sochi.

Wednesday, June 27, 2007

Photo of the Day

Vladimir Putin and NATO chief Jaap de Hoop Scheffer (Courtesy of Kommersant)



Tuesday, June 26, 2007

PwC and Yukos - Additional validity for the Russian prosecutors or not?

In an unprecedented move for worldwide assurance practice PricewaterhoueCoopers (PwC) withdrew 10 years worth of audit opinions regarding the now bankrupt Yukos oil company. PwC said yesterday it suspects that former Yukos management may have provided inaccurate information to its auditors, and thus Yukos's financial reports certified by PwC for the years 1995-2004 should no longer be relied upon.

The reason for the withdrawal of opinion according to PwC was the existence of intercompany and arm's length transactions between Yukos and its subsidiaries which were never properly classified and which were an inseparable component of its money-laundering scheme. As the Financial Times reports:

“Company management many times declared to us that [the companies]… were not related parties,” the letter says, a copy of which was first obtained by Russian newspaper Vedomosti. During a criminal investigation by prosecutors into the company “we received information that showed [these companies] were controlled by the shareholders of Group Menatep Limited and were used to their advantage,”it says. Baltic Petroleum, South Petroleum and Behles traded Yukos oil from 1995 to 1999. Group Menatep is Yukos’s majority shareholder.

PwC also said management failed to provide enough information on whether Russian entities later used by Yukos were arm’s length transactions or not, and also failed to disclose enough information on “significant payments” the company paid to entities owned by the shareholders of Menatep Bank, which went bust in the August 1998 financial crisis.

PwC previously said it stood by its audits of Yukos and its internal trading structures, which the letter appears to refer to.


Such an issue has a multitude of repercussions both for the future of the Yukos affair and for the future of PwC. Withdrawing 10 years worth of audit work has not been done in the case of billion dollar corporations. Even the infamous Arthur Andersen did not withdraw its audit work for Enron, despite being indicted then for intentional participation in creating fraudulent schemes for the US energy giant. PwC's actions inadvertently claim that the auditor either knowingly participated in the Yukos schemes or it was too dumb to find out about it (in 10 years worth of audits). Both scenarios are extremely negative for the respected auditor.

Mikhail Khodrokovsky's (the former CEO of Yukos, now in jail for fraud) lawyer Mr. Amsterdam, told the Financial Times that PwC worked with Yukos on constructing most of these trading structures and on making sure they were compliant with both Russian and international accounting standards. If this event is in fact true, it proves that PwC was providing consulting work for Yukos and must have been aware of any and all transactions of the now bankrupt oil company.

Another implication that stems from PwC's actions is the international validity given to the Russian prosecution which has successfully pursued its case against Yukos in Russia, resulting in a $27bln unpaid tax bill, and ultimately leading the company into bankruptcy. The Russian government thus has also cleared itself of any possible lawsuits from international shareholders for intentional and wrongful actions against Yukos. PwC's actions, although suspicious, give assurance that Yukos was indeed a hotbed for fraud schemes. Such was the claim made by Russian daily Kommersant.

All would be fine if not for one fact. The Russian government is pursuing its own investigation into PwC'a involvement in the Yukos affair. The investigation could result in a suspension of its license to do business in Russia, where it has a significant financial interest. PwC is the biggest auditor in Russia and audits the state's two biggest energy companies - Gazprom and Rosneft. PwC has already paid to settle some charges last year, but has lost in court on further charges, which it is set to appeal in July. Some see PwC's statements as a surrender to the forceful actions of the Russian government and an attempt to indirectly settle the dispute through friendly actions.

Such a theory has ample evidence. The fact that Gazprom and Rosneft have reinstated PwC as their auditor is strange. Since the audit teams in a particular industry are closely related, this would mean that the partners that have been involved in auditing Yukos are most likely involved in the Gazprom and Rosneft audits and share employees on those jobs. Gazprom and Rosneft are thus denying potential problems or wrongful actions that PwC may have committed in the Yukos audits and confirming the auditor's best reputation. In other words, they deny that PwC may harm their reputation. Would any US energy company hire Arthur Andersen to perform an audit in 2001 or 2002, shortly after the bankruptcy of Enron? I would guess not.

The issue will see further developments in July, when PwC's appeal will he heard in court. If the Russian government is in fact attempting to give validity to its actions, the proper course to take would be at least to suspend auditing licenses from any and all partners involved in the Yukos audits (if that has not already been done) or ban PwC from auditing the oil and gas sector. In any case Gazprom and Rosneft should reconsider having PwC as an auditor, unless they openly believe that it is being bullied by the Russian government.

Monday, June 25, 2007

Muesum of Soviet Occupation of Ukraine

The initiative to open a museum of Soviet occupation of Ukraine came from the Ukrainian president Viktor Yuschenko, after he saw a similar show of historic distortion in Georgia (where the museum of Soviet occupation of Georgia is located). Yet to avoid a backlash from a strong opposition, the Ukrainian museum is sponsored by an NGO, the "Memorial" group.

The museum had always been there, but its original title "Museum of totalitarianism" did not attract much visitors, its renaming into the "Museum of Soviet occupation" attracted a landslide of protesters, and later actual visitors. The American ambassador together with NATO representatives have been among the visitors. As the reporter of Russia's daily Izvestia strolled through the outskirts of the museum, she observed the following:

"Ukraine under Hitler was much better off than during the Soviet Union", - the museum tries to show. President Yuschenko leaves the issue without comment. "Hitler's troops promoted the Ukrainian theater. They temporarily halted Stalin's repressions. The Soviets destroyed the Ukrainian republic, founded in 1918", - say the museum members. (The Ukrainian republic was shortlived and in the early 1920-s was incorporated into the young Soviet Union, the Western part was "occupied" by Poland - blog author)

The founder of the museum battles Soviet totalitarianism by hunting for archives in Russia. He is helped by the Moscow and St. Petersburg branches of the "Memorial" group. We send our delegates with "Kiev" cakes and Ukrainian "gorilka" (Ukrainian home-made vodka - blog author) to their archives. In return we get documented materials, of which we could not have dreamed of.

Now the museum knows all about three Ukrainian golodomor's (labeled in Ukraine as intentional starvation campaigns - blog author), about the slave-like existence of peasants who were denied internal passports, and how the Russians systematically ate all of Ukraine's produce.

When the Izvestia correspondent asked why the perpetrator behind all the "evil crimes" against the Ukrainian people was labeled as "Moscow" and not the "Communist party", the museum members claimed that that was the way the archives explained it. Perhaps, also the Ukrainian museum fails to show that millions of Russians died of starvation during the golodomor, something that was acknowledged by Ukrainian president Yuschenko. This makes the whole event unlikely to be a planned act of genocide against the Ukrainian people.

The same goes for repressions against the kulaks (wealthy landowners), which hit the fertile lands of Russia as much as Ukraine. The majority of repressions against the party apparatus hit Moscow more than any other city in Russia. The founders of the museum also forget the multitude of benefits their nation received under the so-called "Soviet occupation". The Crimean peninsula given to Ukraine as a gift, an unthinkable act in world practice also does not appear in the museum as an exhibit.

There is nothing wrong in portraying the enormous amount of wrongdoings of the Soviet regime. No one denies them. Yet, it is very different to portray the wrongdoings of the Soviet regime as intentional "crimes" initiated by Russians against Ukrainians, Georgians, and anyone else. Forgetting Nazi Germany's acts of genocide on Ukrainian territory, which together with Belarus saw perhaps the greatest amount of SS activity, including executions, village burning, slave labor, than most Soviet regions at the time, is close to being a crime by itself. Total civilian losses in Ukraine during three years of Nazi occupation are estimated at 5-8 million.

In an online survey hosted by Izvesita, 57% of respondents jokingly said that it is Ukraine who occupied Russia, because the Russia of the ninth and tenth centuries had its capital in Kiev, now the capital of an independent Ukraine.

Sunday, June 24, 2007

Diplomacy failed, business will succeed : What next for Russia?

With Russia's diplomatic rockets having not reached their goal of getting Russia's concerns about European rearmament across, the remaining question is "what now?"

On June 15th, the only true remaining obstacle to US ABM deployment in Eastern Europe was overcome, a consensus within NATO over the US "defense" system was reached. Russia lost its only remaining bargaining tool - a split opinion in Europe over the deployment. The same day it became clear that Russia's proposals to redefine the Conventional Armed Forces in Europe treaty (CFE) which so far has only been ratified by Russia, Ukraine and Belarus, went down the drain. Russia's plan to substitute the US ABM deployment in Europe with its Azerbaijan base in Gabala has been de-facto rejected in its proposed version. The marginal hope that remains is President Putin's scheduled meeting with his US counterpart on July 1-2 in Maine. But marginal is too optimistic a word for that meeting.

Russia's diplomatic proposals find little support and Russia's concerns find little compassion. One of the reasons is that the "camp" which Russia is positioning itself against consists of a perpetual number of allies with intertwined defense/political/economic interests. Russia on the other hand is in most cases left by itself. And no matter how much it claims to be a superpower, it must take a major divisive issue such as Iraq to bring together separate European nations into a temporary "diplomatic alliance" with Russia, presumably against the US. And even then, as we saw, the United States has the upper hand.

Russia's only competitive advantage, its natural resources, on the other hand have been giving Russia economic prosperity and influence despite any military or political alliances in the world. And so far the business aspect of Russia will be the only factor that will back its attempts to influence and shape the world around it to ensure the protection of its national interests.

Just the past week highlights this scenario very clearly. The recent St. Petersburg Economic Forum was followed by the long-awaited sale of TNK-BP's stake in the massive Koykta gas field (with reserves on par with natural gas reserves of Canada) to Russian Gazprom. And as with an earlier "forced" sale of Royal Dutch Shell's stake in Sakhalin-2 to Gazprom on claims of "environmental damage", the executives of the British oil giant seemed undeterred by the deal. The worst BP could have faced was a forced sale of its stake in the TNK-BP joint venture which accounts for a fifth of BP's oil reserves.

On Saturday Russia's Gazprom and Italian energy firm Eni signed a memorandum of understanding on the possibility of constructing a pipeline under the Black Sea to supply natural gas from Russia to the EU. The most paradoxical statement made during the signing was that of Italian energy minister Pierluigi Bersani, who claimed the project "strengthened energy security in Europe". This is despite the multitude of talks within Europe aimed to diversify its energy sourcing away from Russia in fear of it cutting off supplies motivated by political tensions.

And yet another side of Western business leniency toward the harsh realities of doing business in Russia came up on Sunday, when PricewaterhouseCoopers (PwC) withdrew ten years worth of auditing opinions on the now bankrupt Yukos oil group, whose ex-chief yuppie oligarch Mikhail Khodorkovsky resides in jail for fraud. Revoking ten years worth of audit work is an unprecedented practice, and has not been repeated even by the auditor of Enron and WorldCom Arthur Andersen, despite the audit team's conviction in intentional wrongdoings in audit procedures. PwC's actions now give international validity to Russia's prosecution for dismantling the oil firm for accusations of fraud.

Business activity in Russia has defied any political developments and criticism toward Russia in the Western world. Thomson Financial rated Russia number three in the world for the amount of capital raised through IPOs, closely trailing the US and China. Russia's primary trading platform RTS, was ahead of New York's Nasdaq and the NYSE in the amount of capital raised in IPOs. With the price of oil predicted to head only upward due to a now constantly prevailing excess demand for energy resources, and with the world economy able to digest such high energy prices preventing potential drops in demand due to excessively high prices, the macroeconomic situation for Russian energy companies flush with cash resembles heaven or something close to it. For Russian companies outside the oil & gas industry a government flush with cash from oil revenues is a great supporter to have as well.

Business then is the only force Russia has. And classifying it as a force does not mean it must be used to bully. Creating intertwined business interests between Russian, European, American, and Asian conglomerates ensures a consensus based approach to problem solving between those countries where business ties are highly linked. In the medieval times a king would marry his offspring to foreign royalty. Now, the protectionist feelings in many of the world's major economies have translated that principle into cross-border ownership of major corporations.

The recent tie-in of Russia's Basel with Canadian Magna International, Norilsk Nickel's attempts to purchase Canadian LionOre, Aeroflot's desire to expand into the European airline industry through a stake in Alitalia, and finally Gazprom's tentacle-like pipelines sooner or later will integrate the Russian economy fully with that of the West. The prerequisites for such a scenario are the limits to protectionist behavior of the Russian government only to strategic sectors and only if it is warranted for a country's national interests and not for the corporate interests of the Russian company (think Gazprom). Creating a continuously stable environment at home is another. Yet the promotion of Russian business expansion is one of the few routes Russia has left to secure a dominant position for itself in the world.

Wednesday, June 20, 2007

Gazprom wants all of Sakhalin : Is the monopoly too big to handle?

The Russian government may now have a very big headache to deal with in its oil and gas sector, its own creation - Gazprom. The more you feed the giant, the greedier it gets. After the Russian monopoly was given sizable stakes in most natural gas projects on Russian soil, in some cases the stakes were taken away from foreign companies, as well as being granted the exclusive right to export Russian natural gas, Gazprom remains unsatisfied.

Earlier this week, Gazprom's deputy head Sergei Ananenkov stated that because Gazprom would not be able to fulfill the natural gas supply requirements to Russia's Far East before 2014 with its new Sakhalin-3 project, it should be given the right to buy the natural gas produced on Sakhalin-1 (co-owned by Exxon Mobil and Rosneft, among others) who are already in talks of exporting that gas to China.

Many see such statements as Gazprom's attempts to wrest control over all the major Sakhalin energy projects. After buying out Royal Dutch Shell's 50% + 1 share stake in Sakhalin-2 late last year amid active pressuring from the Kremlin to revoke Shell's license for the project outright, Gazrpom with the help of the Russian government's several ministries is seeking to attain control over the Sakhalin-3 project without a formal auctioning process. And now, Gazprom has been complaining about the violation of its unique natural gas exporting right status while the companies controlling Sakhalin-1 plan to export gas to China.

Kommersant cites experts saying Gazprom's statements of a deficit of energy resources in Russia's Far East are only a pretext. Gazprom's real goal is to negotiate export prices to China out of Sakahlin-1 itself (and presumably decide on further allocations of natural gas) rather than let the consortium members do it. Right now exporting natural gas is a much more lucrative business than selling it within Russia, due to a large disparity in prices and government subsidies.

As Vremya Novostey reports, Gazprom's actions are already seeing criticism from the Russian government. Russian minister of Natural Resources Yuri Trutnev has communicated his discontent with the transfer of Sakhalin-3 to Gazprom without a formal bidding process, calling it a procedure not in compliance with Russia's regulations. Russian finance minister Alexei Kudrin called out Gazprom's aggressive actions aimed at preventing its competitors to have any ability to export gas by blocking possible pipeline construction projects.

Yet another interesting development arises in Gazprom's recent statement. Not only is it attempting to affirm its power over foreign-based energy giants doing business in Russia, now it is also battling another Russian state-owned giant Rosneft, a large stakeholder in Sakhalin-1 and a contender for Sakhalin-3. The Russian governmental ministries now find themselves in a delicate position in the middle of a corporate dispute; some as Alexei Kudrin, have already picked sides.

Many have warned the Russian government of ballooning the size of Gazprom to a point when it would be both hard to control and harder to manage. The former is already a fact. Will Gazprom be able to deny the latter is a matter of time. Upon assuming control of Russia's key natural gas-producing projects Gazprom will have to show that it can work as effectively as its foreign colleagues, who have been moved to the sidelines with the help of the Russian government.

Tuesday, June 19, 2007

Surkov on Russia's ideology: "We will definitely get screwed!"

Vladislav Surkov, deputy head of the Russian President's Administration, regarded by many as the Kremlin's chief ideologist last week discussed Russia's strategy, ideology and political culture. The speech was a first in terms of its scope, its forward-looking nature, its philosophical thoughts, and has been regarded by some as an attempt to formulate a "Russian ideology".

The core of the lecture focuses on Russia's individualistic culture (collectivism in Russia is considered a myth by the lecturer) and its continuing uniqueness in development from its Western partners. The speech bases much on Surkov's discussion last year where he explained Russia's developing political system as a "sovereign democracy", again based on its differences and uniqueness in the world of democracies. Yet the lecture has much to say regarding the faults of Russia's current system, one without an ideology, and without any political thought. Surkov regards the centralization of power as unjustified in Russia in the long-run.

Surkov's speech serves to break the deadlock of political thought in Russia caused by the Bolshevik regime. The century-old Russian debate focused on the conflicting views between the so-called "Slavo-philes" (those thinkers that associated Russia's development separate from the West in terms of culture and in terms of political systems) and the "Westerners" or "Zapadniki" (those thinkers that rooted for change in Russia's archaic political structure and called for the convergence of Russia's development and integration in the then developing European democratic order).

I bring some of the excerpts from Surkov's speech taken from the United Russia party web site. The parts are translated by the blog's author, so apologies for any inconsistencies, if such are to be found. Some may regard this post as being a hail of praise for the Kremlin's ideology; in fact those who analyze, criticize, and praise Russia must understand its way of thought. This is why it appears here:

On Russia's unique way of thought

Russia’s new democratic order comes from the European civilization. But is implemented as a very differentiated Russian version. It does not deny Russian culture and evolves along with it, not despite it.

Trubetskoy remarked that “Russians are more prone to understanding the world under as an organic whole, unlike the West, where philosophers dwell upon the world’s mysteries, segregating them into parts for further analysis”. Iosif Brodsky wrote of “Russian millennialism”, which assumed an “idea of a simultaneously changing world order” and of a “synthetic essence of the Russian language”.

According to this version synthesis dominates analysis in our philosophical and cultural practice. Idealism dominates over pragmatism, imagery over logic, intuition over reasoning. A Russian is more interested in time rather than in the structure of a clock. So, the idea of grasping the essence of a whole structure rather than the manipulation of a structure’s individual parts lies in the center of our culture; collecting, not dividing.

On Russia's idealistic approach to life

Once we had a goal of building communism. We thought that once we would build it, we would have to do nothing. But that would require very fast construction of communism so that we could start “doing nothing” as soon as possible. The average person thought of communism as a place where one has to “do nothing”, but where everything is in abundance. The same way people talk of democracy. I hear often: we have to build a democracy. This assumes some sort of an end-goal, where once democracy is built, one can relax and have a pleasurable life. It is the same as saying that we need to “build” a person. A person always evolves; whether he becomes better or worse is a different question. He is not static, and nothing is static. But such is the property of an idealistic view of life, where ways of life are dwelled upon and attempts are made for their installment on Earth.

On complaints from the West

Those who complain need such a democracy in our country whereby their lives would be better off. We need such a democracy where we would be better off; where all our people would be better off. We wish the same for everyone else.

Some say that in the 1990-s the West considered Russia to be a democracy. This is a defect of memory. Of course our weakness and our stupidity were rewarded. But stupidity and weakness are not democracy. The International Herald Tribune wrote in 1994, that the “regime [in Russia] is not leaning toward a democratic transition, which assumes a market economy and a political democracy”. The Washington Post in 1998 called Russia a “developing unpredictable autocracy”. The Washington Inquirer labeled the regime “undemocratic, and Forbes a year later called Russia a “gangster state”.

Thus, stories about Western influence on Russia being caused by flaws in our democracy today are nonsense. This is what Iver Neumann a modern day researcher writes: “[At all times] irregardless of what social practices prevailed at a specific period, Russia was always viewed by the West as an anomaly. Due to the fact that exclusion is a requirement for integration, a temptation to focus on the differences of Russia arose for the sake of a European integration”.

I believe our difficulties with the West – stem from a translational barrier, and are difficulties in communication between two cultures of the same origin but of different mentalities. These difficulties have roots much deeper than current economic, military or stylistic differences.

Russia is interested in a convergence with Europe, as without access to intellectual resources of the West, the creation of an innovative economy looks impossible.

Criticizing Russia's current stance

It is highly unlikely for someone to come to Russia to find new technologies, quality financial services, effective management, blockbuster movies, or stylish clothes. Investors come to our country to buy oil, gas, and forest. In the world’s segregated production system we are not engineers, bankers, designers, producers and managers. We are miners, woodcutters, and oil refiners. We are rather greasy folks from the outskirts. Why is it that way? We regard ourselves highly educated and highly cultured. Why are we so educated with our university diplomas feeding mosquitoes on an oil pond? Such bright and intellectual descendants of Gogol, Stravinsky, Prigozhin, we sweat on a quarry and in a meat-packing factory. Maybe we have not lived up to the height of our national culture? Maybe not everything is okay with our education?

Right now our country is filled up with money and a bureaucracy coupled with a deficit of creativity. Primitive structures and vertical methods of management dominate. The speed of informational transfer and social mobility is very low.

We have to exit this standstill, overcome the shock and state of confusion, which have captured our society in the face of an approaching future. We look like those folks from the countryside who have found themselves in the city’s business center. We are in a world full of noise, light, people running around, surrounded by those “too smart” and too tricky, by traders and commissioners. We look like suckers when we stare at all of this with our mouths and eyes wide open. All we do is defend ourselves so that we don’t get screwed. We will definitely get screwed, if we continue to stand and stare with our mouths wide open.

Consolidation and the centralization of power was necessary to save a sovereign nation and to move it from an oligarchy to a democracy. But today, and definitely tomorrow it may be justified only if it can transfer Russia to the next, and a much higher quality level of development.