Thursday, May 31, 2007

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

In association with the Blog-Carnival : Russian Media, my rather modest contribution is published below. The article is also available to download in (PDF) format in case it is too long to read in a blog post. Please visit Krusenstern for more information on the Blog Carnival as well as articles by other authors (available in English and German) about the state of the Russian Media.

The presence of Russian president Vladimir Putin on national television is large, to say the least. Russian federal channels in their news segments talk exclusively about those in power. By some estimates the president, the cabinet, the parliament and the pro-Kremlin party United Russia together capture over 91% of news time. More intriguing is the fact that 71% of those 91% is positively inclined news, 28% is judged to be neutral and only 2% is clearly negative. Without looking at the objectiveness of these estimates, a glance at the 8-o’clock news on Rossiya or the 9-o’clock news on Perviy Kanal will convince even the casual observer of the truth in those surveys.

It is also fair to say that most of those reports are usually dull and purely factual, unless something extraordinary happens, like Mr. Putin’s speech in Munich, or a report on Russian minister for emergency situations Mr. Shoigu scolding his subordinates for a typical case of incompetence. The viewers do not receive the information they want, and with the approval rating of the Russian president floating around the 70% mark it is certain that what they really crave for is what happens in the life and most importantly in the mind of their president. These people must then turn to newspapers, and those who value quality reporting open Russian daily newspaper Kommersant and look for the latest article by Andrei Kolesnikov, a member of the so-called “Kremlin pool” of journalists. Such presidential pools are a usual practice in most Western states, where a group of journalists is fixed to work with the head of state and follow in “his footsteps” at home and abroad.

Kolesnikov’s articles are not the usual reports one might expect from a journalist traveling with a head of state, especially one traveling with Mr. Putin, who is now labeled as the “head of a gangster state” by some conservative reporters in the West. His reports are neither purely informational, nor entirely opinion pieces; they are not simply anecdotal stories, satirical observations, or unbiased studies. Instead they are narratives presented in fact to be “articles” but in essence being all of the above. Kolesnikov's reports, written in the as-it-happened narrative style, pay a lot of attention to details such as facial expressions and gestures, and poke fun at Putin and other leading politicians. "I wanted to prove that this can be a human interest genre," he once said in an interview with the St. Petersburg Times. Asked why he wasn't expelled from the Kremlin pool, he said, "If you don't lie, it's difficult to find a reason."

The chief editor of Kommersant, Andrei Vasiliev, recalls that people always ask him how come Kolesnikov is still working in the Kremlin, and has not yet been kicked out? The only response of Mr. Vasiliev is that “Putin really likes it (the work of Kolesnikov)”. This may be surprising since Mr. Kolesnikov sometimes approaches the line and on rare occasions crosses it outright. It was Mr. Kolesnikov who spread the word of President Putin’s sarcastic remark to the Israeli prime-minister regarding the criminal case brought against the Israeli president, which later turned into quite a scandal:

Vladimir Putin next, probably thinking that the microphones were off, (the press was already leaving the auditorium) said the following:

- Say hello to your president! He turned out to be a powerful man! Raped ten women! I would never have expected this! It was a surprise to all of us! We are all jealous!

This was a time when one does not believe what he hears. Mr. Putin, obviously wanted to show support for Mr. Olmert, who was in a difficult position, due to the proceedings against Israel’s President Moshe Katsav. Even more so, Putin wanted to show support for Mr. Katsav, but the latter was not at the negotiating table – even in the role of translator

Nevertheless, Mr. Kolesnikov has been working for Kommersant (up until 2006 owned by exiled Russian oligarch Boris Berezovsky) in the Kremlin since 2000 and will likely continue to do so; the journalist has since published two books summarizing his articles and including personal observations on President Putin. Unlike his predecessor Elena Tregubova, who is now seeking exile in London for fear of retaliation from the “all-mighty Kremlin”, Mr. Kolesnikov has done two key things according to Kommersant editor-in-chief Mr. Vasiliev: “one: it is clear to everybody how to write about Russian president Putin; two: no one except for Kolesnikov can write about Russian president Putin, in a way that can be readable.” For those who have been in touch with the Russian media, it is evident that Andrei Kolesnikov did for print journalism what Leonid Parfenov did for video journalism.

Andrei Kolesnikov began his journalistic career in sixth grade when he published an article in the regional newspaper “The Road to Communism”. After graduating with the country’s top degree in journalism from the Moscow State University, he started working for the newspaper “Uskoritel’” in 1988 (a game of words based on the slogan of the Soviet perestroika). The newspaper was quite liberal at the time for the region, and amid an election scandal Mr. Kolesnikov left the paper to work in Moscow. In the country’s capital he worked for the “Moskovskaya Pravda”, later for the “Moskovskie Novosti”, and finally in 1996 he settled in Kommersant. He was offered a position in the Kremlin pool of journalists in 2000 by Mr. Vasiliev, and according to the latter it took a lot of persuasion on his part. Mr. Kolesnikov was picked because of his prior meetings with Mr. Putin in a collaborative effort with two other journalists Natalia Gevorkyan and Natalia Timakova to write a book about Vladimir Putin when he was not yet president titled “From the First Person” (От первого лица). Kolesnikov did not want to take the job because he knew then just as he knows now that President Putin is a secretive person and his true character is hard to figure out; how then is one to report on his day-to-day activities? In a recent interview with Russian magazine Sreda (Среда) Mr. Kolesnikov said the following about Putin:

He is a very secretive person in all aspects. Closed in a way he was taught in the KGB, and closed in a way a person is closed based on his natural instincts. I cannot say I know this person. Once I heard a remark from one documentary movie director, making a movie on Putin. He said: “when I see Putin, I think I know what he is really thinking about; moreover I feel he is thinking of what I am really thinking of all of this.” This is a man, a director, who seriously lives with such an idea. It lightens up his entire life. He switches on the television, and a drama unfolds in front of him: Putin is saying something and in his mind seeks advice from him. And that is it, you can easily set up an appointment with a psychiatrist after that.

All that I know of Putin, I tell. I have nothing to hide because I don’t really know that much. Once a trendy magazine asked me about Putin, and then they were afraid to publish it after I told them everything. I was very surprised. I write about people I see every day and am not worried there will be any problems. If I were worried, I would have probably not written a single article.
Andrei Kolesnikov does not hesitate to make satirical remarks about President Putin answering questions about Russia’s “democracy” or human rights problems; he makes it clear that if freedom of speech is not present in Russia on television then Russia does not have freedom of speech. Yet he is not a journalist who writes opposing articles, and he probably believes that the profession of a journalist is not to write biased articles (opposing or supportive). This is one of the reasons behind his success, the reason why his views and observations of Kremlin life find so much common ground with the hero of his reports. It may seem he does not care about the consequences; maybe he does not, but only because the goal he sets for himself is to stand next to the man in charge of Russia and observe, rather than criticize, in miniature detail his environment. Whether the resulting observations will be critical, satirical, unilaterally supportive is up to the hero of those observations, sometimes it is Vladimir Putin, but often it is him in his interactions with colleagues, state officials and common people. During a meeting of President Putin and his French colleague Jacques Chirac, Kolesnikov observed and reported the following moment:

When the journalists were leaving the negotiating room, Vladimir Putin reached for his handkerchief, used it, and then could not restrain himself, and out of the best intentions offered it to Chirac. Chirac politely declined, and showed that he too had a handkerchief.

Jokingly, Mr. Kolesnikov explains that because the wives of top Kremlin officials enjoy opening up Kommersant every day to find out what has been said about their husbands in Mr. Kolesnikov’s articles, that he does not have any censorship problems. It may seem that the journalist is simply successfully playing a game of pleasing most officials and singling out a minority, so as to not get the blame from the entire state apparatus; by constantly shifting around the minority everyone gets to laugh at everyone else at some point in time.

But Mr. Kolesnikov’s credibility and reputation is not only solid among the heroes of his reports, but also among his colleagues, something that suggests professional work. On a recent visit of the Russian president to Minsk to see Belorussian president Lukashenka, some members of the “Kremlin pool” received a very nasty welcome. Not only were they sniffed by police dogs before entering the assembly hall, but a photo correspondent of Kommersant and an MK journalist were not let in due to their lack of accreditation. According to Mr. Kolesnikov, the Kremlin press-service played along with the Belorussian side, who denied the accreditation of the journalists for publishing unflattering material on President Lukashenka. Mr. Kolesnikov as a retaliation to both the Russian and Belorussian state press-services initiated a boycott of the event’s coverage by spurring up the rest of the “Kremlin pool” to leave the audience in a demonstrative fashion. According to Mr. Kolesnikov the Kremlin officials later did not shift any blame onto the journalists but instead issued significant signs of protest to the Belorussian side.

Yet the articles of Andrei Kolesnikov speak louder than any of his interviews and reports about him (including this one). My personal favorites are illustrated below, and focus on the Russian President’s two interactions with a journalist from Le Monde. As an end note, Mr. Kolesnikov recalls arguing to President Putin that he (Kolesnikov) had lost a feeling of living in a free country. He added that he also did not have a sense of fear one would have when living in a dictatorship. President Putin responded by saying: “you don’t think that maybe this is what I was aiming to achieve – that one feeling would disappear and the other would not yet be born?”

Excerpt from article on Russia-EU summit in Brussels (November 11 2002)

At this point the question of the French journalist surfaced. He asked why Russian troops in Chechnya use anti-personnel mines and whether Putin thinks that while fighting terrorism in Chechnya he is actually destroying the Chechen people.

The Russian president began approaching the issue from afar: he stated that no one could blame Russia for suppressing freedom. He later dwelled on the attempts to create a caliphate on Russian territory and later internationally. But then the Russian president turned directly to the journalist. He began to explain the imminent danger facing the journalist. He was in danger if he were a Christian, as radical-extremists hunt down Christians.

- But if you are Muslim, it will not save you either. Come to our country, it is multi-confessional with good doctors who can perform a circumcision on you… - Vladimir Putin paused trying to find the right words. – And I recommend the operation to be done in such a manner that nothing would grow back ever.

The Danish prime-minister tried to say something, but maybe changed his mind, or couldn’t find the words. And then all those at the table – Javier Solana, Romano Prodi – tried to make it seem as though nothing ever happened

Meanwhile, Vladimir Putin was already answering another question, when the French journalist, who just received a risky offer from the Russian president, stormed out of the assembly hall. Where could he have gone after the Russian President just communicated to him that there is no safe place for him to be?

Excerpt from article on a press conference of EU members and Russia in Rome (November 6 2003)

Meanwhile, I instantly recognized the journalist asking the question. I could never have forgotten his face. My mind treasures him like the most precious memory. It was the same man from Le Monde who a year ago asked Vladimir Putin about Chechnya in Brussels, at the same exact EU-Russia summit, and instantly received an offer to get a circumcision. And now he is here asking about the dictatorial regime building up in Russia in connection to Chechnya and the YUKOS trial:

- Do the EU and Russia have any conflicting views with regards to this and will the rule of law prevail in Russia

- No! – said Vladimir Putin firmly.

It is hard to say what the “no” should have been attributed to. In a desperate attempt to be unbiased I will say that, it may have reflected Mr. Putin’s relationship to the issue as a whole. What he could have said now, by the sheer force of the firepower was meant to surpass all he has ever said about terrorists in the toilet and journalists on the operating table. His words were to become the food for journalistic reports for many future months. They could have made or destroyed his presidential race. These moments should have become the moment of truth for the Russian president.

- No! – even more firmly, as if getting more air in his lungs, he said.

And at this moment the heavy hand of Silvio Berlusconi landed on that of the Russian president. Instinctively, Mr. Putin attempted to drag his hand back, but the Italian prime-minister, it appears was ready for this and did not let it occur.

NOTE: The author of the article is the author of “Russia’s True Tales of Terra” a blog on Russian foreign policy, business, economics and culture. The article has been prepared for the Blog-Carnival : Russian Media hosted by Krusenstern. Any reproduction of the article in full without express permission from the author is prohibited. To contact the author please e-mail:

The excerpts of Andrei Kolesnikov’s articles from Kommersant are available in open access at the Kommersant Library website only in Russian. For the purposes of this article they have been translated by the author.

Material used in preparation of this article, apart from excerpts from Andrei Kolesnikov’s books “I Saw Putin” and “Putin Saw Me”, include: Andrei Kolesnikov’s interview with “Sreda”, Andrei Kolesnikov’s interview with “BelGazeta”; Andrei Kolesnikov’s interview in the St. Petersburg Times.

Wednesday, May 30, 2007

US ABM shield - a part of something bigger

With Russia's recent launch of its new intercontinental ballistic missile (ICBM) with multiple warheads, the debates about European and World security along with the US ABM shield setup in Eastern Europe have heated up. Yesterday at a meeting of G8 foreign ministers, Russian foreign minister Sergei Lavrov traded barbs with his US counterpart Condoleeza Rice, the New York Times reports:

The idea that this somehow would degrade Russia's strategic nuclear deterrent is just ludicrous, and the Russians know it's ludicrous,'' Rice said. ''There isn't any military person who can imagine this system with a few interceptors and a few sensors and a few radars able to intercept the Russian deterrent.''

Lavrov took issue with that Wednesday.

''For us this is not ludicrous at all, and I hope our American partners will respect our analysis which we have presented to them in a very professional and detailed way,'' he said.

But how "ludicrous" are Russian concerns? The US planned shield in Eastern Europe by itself will not have a drastic attempt on shifting the balance of power between Russian and US nuclear deterrent capabilities, but recent analysis by a number of Russian military analysts have suggested that the US system is part of a bigger plan to counter Russia's nuclear capabilities. Although, I keep repeating that I am not a military expert, and thus cannot confirm or reject outright such analysis, its appearance as a headline in Russia's Izvestia and its very detailed analysis makes certain logical points. For most it may appear as an unlikely scenario, I hope so. I will summarize the excerpts from the analysis below.

The military analyst polled by Izvestia cite that with Russia having close to 650 missiles with 2000 nuclear warheads, any global ABM shields are useless to counter such threats, meaning the only viable way to counter an enemies capabilities is having a system to destroy them instantaneously. When the US ABM system becomes fully operational (not just in Eastern Europe) it will have the capability to destroy 250 missiles launched by an enemy, meaning the first preventive attack would have to destroy most of the remaining 400 missiles (in the case of Russia).

Due to Russia's vast territory, and a large spread of ICBM launchers, the only viable way of singlehandedly destroying most of the ground-based warheads is via guided missiles; the US Tomahawk missiles with a radius of 2500km have the ability to reach most of Russia's territory from areas where US naval forces have been detected or are currently stationed.

The US military concept adopted in the late 1990-s "Forward from the sea", according to the military expert, has the exact capabilities to make a lightning strike at Russia's remaining warheads. The system includes US Tomahawk missiles (range of 2500km); eight nuclear submarines with the ability to operate in the Arctic sea (carrying close to 1000 guided missiles); eight destroyers (DDG-85) with more than 4000 Tomahwak missiles (it is unclear whether this refers to all such ships or to those eight). The combined firepower on all US navy ships will reach 7000 units by 2010, giving the ability for the US to cover virtually the entire Russian territory.

The ABM system the US is building has two parts: one the Aegis 6.1 ensures the security of ground units, seaports, and navy units, and has the capability to destroy missiles at close range; the second Navy Area TBMD will unite all navy observation units, ground based locators, naval based ABM systems. These systems are set to destroy missiles soon after their launch when the missile does not yet have capabilities to maneuver. The systems to be installed in Poland and the Czech Republic are components of this system.

So what does this all mean. According to the military expert, if the US positions its groups of destroyers with Tomahawk missiles in the North Atlantic (Norwegian and North seas), the Pacific Ocean (Bering and Japan sea); and the Arctic, and synchronizes the launch times so that all of the Tomahawks reach Russian missile launch sites within 2.5-3 hours, and follows up by an attack by the Strategic Air Forces on the military bases in Russia, while locating and destroying any undestroyed missiles launched from Russia from its ABM complexes, the country will be decapitated in four hours (and such capabilities will come into play within the next few years).

This is why Russia has been protesting against the deployment of the US ABM system in Eastern Europe and has been threatening to use these systems as a target for its short range missiles. The only viable Russian response to an aggression as the one listed above would depend on the ability to track down the first Tomahawks launched from the Arctic, and within 10-15 minutes to destroy the US ABM systems in Eastern Europe, and the naval based ABM systems in the Atlantic and the Pacific, paving a clear way for a counter attack. Next, as the military expert argues, Moscow would have to "ask" Washington to self-destruct the launched missiles before a "nuclear winter" begins.

A second military expert confirms this view by citing Russia's recent development of mobile ICBM missile launchers, which could be undetectable to potential US strikes, such as the Topol M (pictured) and new navy destroyers. The rapid construction of the S-400 complex whose specific aim is to counter Tomahawk-type attacks also fits into this concept.

But most experts conclude that the chances of such a conflict taking place are extremely unlikely. The US is aware of Russia's circulating atomic submarines with the ability to strike any part of the Earth at any point in time. Yet the clear benefits that the US derives from establishing such an ABM system are the ability to gain an advantage in a nuclear conflict, with the ability to counter an attack from Russia, for example, better than Russia could counter an attack by the US. This advantage takes time to grow, but at some point it may become obvious to both sides who has the greater nuclear potential. Although never to be used, it is a mutually acceptable diplomatic tool of last resort. Russian president Boris Yeltsin used it to warn Russia was still a superpower and should be let in to regulate conflicts back in 1998 (preceding the Yugoslav crisis).

Many observers today forget about the current US ABM complexes in Alaska and other places, that are a supplement to the planned systems in Eastern Europe. It is rather naive to think that hundreds of billions of dollars are spent by the Pentagon to create a defensive mechanism against a threat that does not exist (rogue states) and to extend it beyond US borders on such a scale. This train of thought also means that Russia's actions are countering those of the US, event though one is biased into using the "shield" aspect of the US system while forgetting that one's ability to shield oneself means an ability to attack without being scarred, an invaluable tool in today's race for military superiority.

Tuesday, May 29, 2007

Portugese Prime-Minister Goes for a Run on Red Square

During his visit to Moscow, Portuguese prime-minister Jose Socrates went for a run Tuesday morning on Red Square of all places, as Kommersant reports. Flanked by ten security personnel in Portuguese colors Mr. Socrates made several laps around St. Basil's Cathedral and the History museum jogging past the mausoleum which still is host to Vladimir Lenin.

According, to Portuguese journalists, polled by the Kommersant correspondent, the jogging on the world's most important "squares" is not an unusual tradition for the Portuguese prime-minister. The Red Square has recently been positioned by the Russian government as a tourist-friendly destination, set to counter the general perception of it as a place for Soviet military parades. Although still being a host to annual Victory Day parades, it no longer hosts heavy weaponry, and is open for access to the public. In the winter-time a part of it is transformed into a public skating rink, which is often visited by Russian president Putin.

It is also a coincidence that May 28th was the 20th anniversary of the legendary flight, when German amateur aviator Mathias Rust landed a small Cessna 172B airplane (pictured) on Red Square, questioning the ability of Soviet air defense systems. Although Soviet radars tracked his plane while it was crossing into the Soviet Union, the military authorities were very hesitant to shoot it down, after a wide-ranging scandal when Soviet air defense systems shot down a Korean jumbo jet filled with passengers that did not respond to warnings of illegally crossing into Soviet air space several years earlier. It was a huge embarrassment to the Soviet military and led to a series of firings in the Soviet high command.

Twenty years later times have changes and the Red Square now hosts the Portuguese prime-minister who goes for a jog, Paul McCartney who sings "Back to the USSR" to a packed crowd during a concert, and an ice rink in the winter for kids.

You build Shields - We will build Rockets : Is Russia restoring the balance of Power or Distorting it?

Russia on Tuesday proceeded with a number of previously agreed upon actions to both affirm its stark opposition to any US ABM (Anti-Ballistic-Missile) complexes in Eastern Europe, and support its military status as a nation able to counter new developments from the United States. Parallel to that, Russia has proceeded to revamp the process associated with the conventional arms treaty which has caused a great deal of confusion ever since it was signed and ratified by Russia in 1999, but never ratified by the other European NATO-member states (Ukraine and Belarus ratified the treaty soon after 1999).

President Putin met the Portuguese prime-minister on Tuesday, whose country is set to take over the rotating presidency of the EU this year after Germany, to communicate Russia's stance on US ABM development in Europe as well as some unresolved issues between the EU and Russia, such as Polish meat. Russia also announced that it was calling upon the urgent meeting of Conventional Armed Forced in Europe (CFE) treaty members to discuss future actions. The same day, Russian Strategic Missile Forces stated that Russia's new inter-continental ballistic missile with multiple warheads had been tested. Although all three events are ultimately linked, the media has created a certain degree of confusion regarding the missile launch, presenting it specifically as a counter-measure to the current US plans and EU-Russia disagreements. The Associate Press originally cited Russian military expert Alexander Golts as saying: ''It seems to be a brand new missile. It's either a decoy or something that has been developed in complete secrecy".

Yet nothing about the rocket and plans to build it were new. The development is a response to US plans to distort the balance of power between Russian and US nuclear arsenals. Full-scale plans for development of the RS-24 rocket with multiple warheads began with the US withdrawal in 2002 from the Anti Ballistic Missile Treaty and with their plans to build a global ABM system (a part of which in Eastern Europe has caused so much debate). The same year Russia announced that it was forced to take actions to counter US military development to sustain its military superiority in case of a conflict, and began developing the RS-24 missile that has the capability to break through the new US ABM system.

The reason why Russia was forced to pursue such a course of action is outlined in Wednesday's Kommersant newspaper. The agreements signed between Russia and the US in 1993, which obliged both sides to cut their nuclear arsenals to 4250 warheads made Russia lose out in its military parity with the US, as these accords specified the destruction of ICBMs (intercontinental ballistic missiles) with multiple warheads (the foundation of the Russian nuclear arsenal). To counter the loss in superiority, Russia had to increase the amount of new mobile ICBM launchers (such as the 1997 built Topol M) and submarines carrying ICBMs, for which it had very little financing. The 2002 accords between Russia and the US obliged the sides to cut down their arsenals further below 2,200 warheads but did not specify the structure of the remaining arsenal like the 1993 accords. This allowed Russia to resume building ICBMs with multiple warheads, which is a much cheaper and efficient way to build up an ICBM arsenal, especially with Russia's small military budget and the US plans for an ABM Global missile shield. Tuesday's test was a long-sought process, yet the actual day of the test coinciding with harsh statements of Russian officials serve to give the testing a "show of force" motivation as well. Russia now plans to produce 20 such rockets annually and plans to increase its warhead arsenal up to 2000 warheads by 2015.

It is very important to note, that no treaties are being broken with the testing and the production of the rocket, and that the US departure from the ABM agreements in 2002 left Russia no choice but to strengthen the offensive side of its nuclear deterrent, much cheaper than building an analog of the US Global ABM shield. These new missiles are also not tied to a threat to Eastern Europe, as they are ICBMs with very broad ranges (specifically aimed at the US). A parallel development of a strong US Global ABM system and Russian ICBMs with multiple warheads will prolong the balance of power in nuclear deterrents according to the mutually assured destruction scenario, that has kept the world away from a nuclear war for almost sixty years.

Meanwhile Russia's actions to call for an emergency conference of the CFE treaty members is the continuation of Russia's actions to set forth a new set of agreements for Europe's armaments. Russia has grown very annoyed with the fact that it has so far been the only country to fully adhere to the treaty and that its obligations with the treaty have been tied by NATO members to a withdrawal of Russian military bases from Moldova and Georgia. It must be noted that the CFE treaty imposes caps on heavy military equipment placement in Europe (tanks, helicopters, artillery); military bases filled with regular troops do not violate its accords. Russia's anxiety about the treaty is also supported by the fast expansion of NATO toward its borders, which violated understandings reached in the late 1990-s between Russia, the US and other NATO members.

President Putin's recent successful visits to meet the heads of Austria, Luxembourg, and now Portugal, have been used to cement support for Russia's concerns about a new rearmament of Europe, associated with the deployment of the US ABM bases in Poland and the Czech Republic. The Russian president has already referred to US plans as creating a "powder keg" in Europe and provoking the start of an arms race. Most states in Europe with ruling social-democratic parties have expressed doubt in the need for the US shield, and most EU members have agreed that the US position for unilateral installment of such systems in Europe without constructive discussions with Russia was a very wrong path to take. The chairman of Germany's ruling Social Democrat Party Kurt Beck in a recent article for the International Herald Tribune has said: "if we are talking about common security then we need to have joint discussion on key means of attaining it", implying consensus within NATO itself (which does not exist today), and a discussion with Russia. He has also pointed out that:

Moreover, serious doubts have been expressed as to whether the defense system actually functions.

The United States has so far invested over $100 billion in the development of a defensive shield. That is a huge sum which, spent differently, could have achieved more for the security of the United States.

The world has arrived at a crossroads. It would be a ground-breaking decision if, acting in trans-Atlantic accord, we were to pave the way for a new round of global disarmament. In doing so, we would be sure of the support of the peoples of our countries and far beyond.

So far Russia's diplomatic efforts on the road to block US deployment of an ABM shield in Eastern Europe have proceeded rather successfully. As this blog said in previous posts on the issue, the goal of creating disagreements within NATO and the EU about the need for US ABM deployment has been achieved, with more European states expressing doubts on the need for such a defensive mechanism.

Russia will most likely not have the "veto" power on the issue of US ABM deployment in Eastern Europe, as the US side has said numerously, but what Russia hopes to achieve is that the European nations have "veto" power over it. The Russian position has always been to accept the US ABM deployment only unless there is consensus in NATO and the EU of a true need for such a system. The reasons behind Russia's anxiety are that the US shield is said to aim at Iran and North Korea, while having the ability to monitor the entire European part of Russia, where many strategically important structures are located. Russia has first of all expressed doubt that a need for such a shield exists, due to Iran's slim chances of developing ICBMs to target Europe within the next ten years, and second, it has found little support for the ABM shield to be placed in Poland and the Czech Republic over for example Turkey (where it would have a better "view" on the rogue states of the Middle East while not monitoring Russian territory).

As it looks from Russia's recent actions with regard to the CFE treaty, it may be initiating the start of discussions to draw up new treaties on arms in Europe; with the US current administration in urgent need to deploy the US ABM shield in Europe and so much confusion remaining over the CFE treaty, such discussions will most likely be backed by all sides and will be set to reduce the current deadlock associated with Russia's stronger diplomatic bargaining position compared to the 1990-s when the European security treaties were signed.

This topic has been carefully monitored by this blog, and it is an issue of utmost importance for Europe and the world, when treaties signed in the era of the cold war are outdated, and those signed in the 1990-s putting Russia at a disadvantage to its Western partners. Given a successful effort by Russia, Europe, and the US the world may see a whole new round of security treaties that would take into account the current geopolitical situation (for more information visit the previous posts on the US ABM issue below):

Sunday, May 27, 2007

Polish meat arrested in Germany - Is Russia finally right?

German law enforcement officials detained a truck with five tonnes of meat products, which was found to be below health standards (in other words rotten) originally coming from Poland, Russian informations service RIA Novosti reported on May 25th. The truck with the spoiled products passed unnoticed through German customs and was only stopped in Berlin, its final destination, where the meat was intended to be used in Turkish-type fast-food stands.

According to German officials the origin of the products is unknown, as the truck coming out of Poland had no accompanying documents for the Polish meat. German news portals have explained the situation of a truck passing through customs without on-board documents by stressing shortfalls in the level of customs and veterinary control within the EU.

For those who may not grasp the scale of hypocrisy the situation reveals, it must be noted that the EU has been backing Poland, which has opposed a ban from Russian regulatory agencies on exporting its meat-products into Russia since 2005. The same day that the truck with Polish meat was arrested EU Commission head Jose Manuel Barosso told a conference in Brussels:

"We believe there are no reasons for the ban. It's a discrimination. We don't feel it's fair," he added. "We in Europe have the highest consumer protection standards in the world. We would not allow Polish meat to be circulated in Europe if we thought it didn't respect those standards."

It is in part due to the meat conflict between Russia and Poland that the recent EU-Russia summit resulted in no treaties of cooperation being signed, as Poland issued a veto on any such agreements. Russia's position since 2005 centered on the fact that illegal meat of doubtful quality from Latin America was being routed through Poland for sale in Russia. Poland as well as some EU members have labeled Russia's protests as highly politicized, and have put doubts that quality problems with Polish meat or any meat circling through the EU could exist.

Apparently they do! Perhaps due to Russia closing its doors to such products, Polish food producers had to reroute these products to neighboring Germany. Not only does the issue reveal the apparent hypocrisy in the stance of the EU on Russia, but it reveals that EU has quality control problems of its own, which in terms of food products are worse than Russia's.

Friday, May 25, 2007

Weekly Roundup

A quick snapshot of the posts of the past week, in case you missed it:

1) Russian Journalists Fight Censorship - What do the firings at Russian News Service mean for Russian radio broadcasting?

2) Business Update: Airplanes and Metals (Aeroflot-Alitalia; Norilsk Nickel-LionOre) Russian business acquisition attempts abroad

3) The Change in Command is Russia's Biggest Problem: A summary of economic and political problems facing Russia amid the 2008 elections based on the views of Russian economist Nikita Krichevskiy (taken from Russian daily MK)

4) Russian Foreign Policy - A Mirror of the US, and a Bad One Too: Where has Russian foreign policy gone wrong, and what approach is best in the years to come?

5) As if We Could Have Forgotten - From London with Polonium: Looking for the best outcome in the Lugovoi extradition, of something like this exists

6) Russia Diversifies its Distribution Network - Beltransgaz: 13 years of negotiations with the "freindly" Belarus has finally given results; is Russia's grip on Europe tighter now?

7) Business Update: Norilsk Nickel - LionOre: Norilsk makes an affirmative statement in its pursuit of the Canadian commodity conglomerate; will this be the largest acquisition by a Russian company abroad?

8) Britain Goes Without Russia in Energy Needs: Should Russia Worry?

Today's honor for video of the week goes to Kalinov Most, for Rodnaya (Родная), a personal favorite

Recommended reading: From today's Times a good roundup of Russia today in less than 1500 words Putin’s hard line makes him enemies abroad – but many friends at home

Also, in case there were any doubts, there will not be a civil war in Ukraine; the first man to use force there is a dead man, Yuschenko and Yanukovich know this. Any comaprisons to 1993 in Russia are far-fetched except for the fact of opposition between the executive and legislative branches.

Thursday, May 24, 2007

Britain Goes Without Russia in Energy Needs : Should Russia Worry?

Several developments on the subject of EU-Russia energy cooperation have popped up yesterday that deserve attention. British PM Tony Blair in a statement in The Times talked about the future of British energy policy; the article, specifically the paragraphs below, caused a lot of anxiety in the Russian press, heightened by the tensions over the "severe cooling of British-Russian relations" amid the Lugovoi extradition:

As if that were not enough, we are now faced with countries such as Russia, who are prepared to use their energy resources as an instrument of policy. Over ten years I have watched energy policy go from being a relatively quiet backwater to something taking on a strategic importance that could be as crucial to our country’s future as defence.

Russian daily Vremya Novostey cites evidence for the specific anti-Russian nature of the British white paper on energy in the focus of PM Blair on the Langeled natural gas pipeline from Norway rather than on the Nordstream pipeline into Germany from Russia, as the principal future source of British gas. Another reason cited by the Russian newspaper is the shielding of the British energy market from Russian energy giants, in the face of Gazprom. The Russian monopoly was not cited as one of the consultants on British energy policy development, and rumors have circulated among top officials that Russian companies may no longer be given access to downstream energy operations on the British Isles.

Yet the language of the media seems to take too seriously the "threats", if they are such from Britain's white paper on energy. Britain was one of the least dependent countries in the EU on Russian energy supplies, and only recently has it felt the need to import large quantities of oil and gas, as the resources of the North Sea began shrinking. Many forget the mood that dominated the British energy regulators when news circulated of Gazprom's attempts to acquire British downstream operator Centrica; the mood was far from supportive explaining why the bid never materialized. Although Gazprom has set plans to increase its stake in the British energy market to 10% or more by 2010, no significant guarantees or notes of support were ever given by the British government.

Another quandary that should be noted when talking about British energy policy is their undefeated commitment to a 60% reduction in greenhouse gases below 1990 levels by 2050, which raises the need to create nuclear powerplants, and greener energy generators (wind, solar, wave, etc.), by itself reducing the dependence of Britain on foreign suppliers. The jab at Russia in the British prime-minister's speech probably means that the chances of Gazprom entering the British downstream energy market or Britain relying heavily on Russian oil and gas have gone from low to very low. British energy policy will not see a fundamental shift away from Russia as a major supplier, since the latter was never in such a position.

Little is lost from the new British energy policies; the rest of the EU has done a lot to keep relations in the energy sphere with Russia as warm as in a sauna. Austria, recently visited by President Putin, which passes on a third of Russia's energy supplies through its territory has signed a long-term supply deal with Gazprom until 2027, something that others in the EU are expected to do in the near future.

In another key development, European energy giants called for greater political support for increased business ties with Russian Gazprom, saying growing tensions between Moscow and the European Union should not be allowed to jeopardize energy security. As the International Herald Tribune reports:

As EU and Russian leaders continue to disagree, the bloc's big energy companies are making their own deals with Gazprom. With Russia as Europe's most important supplier of natural gas - demand for which is expected to rise sharply over the coming 10 years - officials at an energy conference in Berlin, sponsored by the Russian Gas Society said both sides had an interest in increasing energy security.

"It is about long term contracts, infrastructure joint ventures and asset swaps," said Uwe Fip, senior vice president of E.ON Rurhgas.

Edouard Sauvage, vice president of the supply division of Gaz de France, said the strategy toward Russia was to have reliable and secure contracts for energy delivery.

This is not surprising, since E.ON Ruhrgas is the only non-Russian company with a seat on Gazprom's board of directors and is part of the Nordstream project, set to deliver more gas into Europe via the Baltic sea reducing the transit bargaining abilities of the Baltic states, as well as Poland, Belarus, and Ukraine. Eni has also secured several long-term supply deals with Gazprom, as well as several asset purchases and swaps amid the auctioning of the defunct YUKOS oil company. Europe's energy companies have been very welcome in giving up operations in their own countries for anticipations of entry into the Russian market.

Russia's long-term success in being the exclusive supplier of energy to Europe (currently 30% for oil and 50% for natural gas) is rooted in the interconnection of the interests of European and Russian corporate giants who will lobby extensively future supply projects from Russia with the hope of taping Russia's oil and gas fields. These fields, such as Kovytka, Sakhalin, Shtokman, and others, despite government attempts to reduce foreign ownership will require heavy foreign participation, a lucrative source of revenue for the European energy giants, and something that they will fight for.

Britain's chances of becoming once again a self-sufficient country in terms of energy needs are slim, as nuclear power stations face mighty environmental hurdles and green energy has not yet been implemented in a major world economy to sustain more than 20% of energy needs. Norway by itself has little capacity to provide the deficiency, and the Middle East and North Africa hardly seem that more reliable suppliers than Russia. The hard-pressed lobbying of German, French, and Italian energy companies gives the confidence to say that any lack for Russian energy demand from the British Isles will be gladly made up by the rest in the EU.

Wednesday, May 23, 2007

Business Update: Norilsk Nickel - Xstrata

Russian mining conglomerate Norilsk Nickel on Wednesday morning confirmed its decision to stay in the bidding for Canadian LionOre by trumping the recent bid for the company from Swiss-based Xstrata by 10%, now offering $6.3 billion (C$6.8billion), representing a 28% premium on its original offer in early May; the entire bidding process has been covered in this blog in greater detail in previous posts.

Norilsk Nickel, the world’s largest nickel miner and a leading producer of copper, platinum and palladium, is highly interested in its smaller Canadian counterpart as it feels an urgent need to expand into foreign markets and become competitive in the global commodity crunch amid the aggressive consolidation ventures from global players like BHP Billiton, Anglo American and Rio Tinto. As Canada's Globe and Mail reports:

Norilsk “sold some oil and gas assets in the Soviet Union in order to build up its bank account — it sorely wants to get a hold of [Lionore] strategically,” said David Rea, chairman of Toronto-based Davis-Rea Ltd. “I think Norilsk will get it.”

Earlier this month, Norilsk confirmed it plans to spin off its energy assets worth roughly $7-billion (U.S.), a move that could help it fund a bid for LionOre.

Analysts said acquisitions were crucial as declining ore grades mean Norilsk's mines in the Russian Arctic are processing more raw materials to produce the same amount of metal.

“This acquisition could potentially change investors' views of Norilsk over time,” Mr. Pukhayev said, adding a greater world presence would cut political risk attached to the company.

Financial Times in today's article reports of people close to Xstrata, saying that the valuation for LionOre has become too pricey for realization of much future value, and that Xstrata is less likely to continue the bidding. A factor that supports this notion is the guaranteed deal breakup fee Xstrata is to receive from LionOre if Norilsk Nickel prevails in the bidding of $305 million. Yet analysts from Troika Dialog polled by the Wall Street Journal admit that at such high valuations LionOre may still be a good strategic fit for Xstrata which is a "customer" of LionOre.

The Russian company just as Xstrata received the backing from German regulatory authorities, adding to an earlier agreement from the Canadian Competition Bureau. If LionOre confirms the bid by Russian nickel giant to be superior for the shareholders, Xstrata will have five days to decide on its participation in the auction, otherwise the offer stands until June 18th.

The deal comes in the midst of record-high nickel prices, up 45% this year on the base of very high capital spending worldwide, and high demand for stainless steel, a primary component of which is nickel. If Norilsk Nickel succeeds in this deal it would be the largest foreign acquisition by a Russian business to date and would open up the doors for more such expansions from the likes of Severstal, Basel, Evraz Group, and others.

Tuesday, May 22, 2007

Russia Diversifies its Distribution Network: Beltransgaz

Over the past few days Russia in the face of its energy monopoly Gazprom has taken significant steps into mitigating its Belorussian partner as a threat to energy supply delivery into Europe. As Kommersant reports:

Gazprom has at last signed the contract for acquiring 50 percent of Beltransgaz shares. Thus, the monoploy gained access over the main pipelines thru which one fourth of Russia's natural gas is exported. The contract is the fruit of 13-year-long complicated negotiations. Gazprom decided to maximally hedge itself, stipulating that disputed be solved in a foreign arbitration court. Due to this condition, signing the contract nearly fell thru on Friday. Yet, experts believe that Belarus authorities still have the levers of pressure on the Russian monopoly.

The deal is worth $2.5 billion and the stock ownership will be transferred to Gazprom over a period of four years in four equal installments, further prolonging the sale process. Despite the contract being agreed upon after this New Year's standoff between the two sides over gas prices the details were only finalized now. The stake in Beltransgaz was the long sought prize by Russia, which felt it deserved for the long years of almost unconditional support for the Belorussian leader, largely unwanted in the West and claimed to be leading the last totalitarian regime in Europe by the US.

The tensity of the deal reached is highlighted by the fact that the resolution of legal disputes in the future was the leading stumbling block of the negotiation process. Despite many analysts claiming that Belarus has the ability to use methods that Russia is now using against Western oil companies and take away the asset in case of conflicts with Russia, the signing of the deal today, when relations between the two countries are rather cool, proves a very important point. Despite the pipelines going through Belarus being strategically important to Europe, President Lukashenko is not wanted in Europe, and has no other options that to make deals with the Kremlin and criticize the Russian government in public to maintain a level of credibility in the nation.

In a second move, this time to diversify its energy supply routes, the Russian government has ordered its energy ministry and state-owned Transneft to construct the second branch of the Baltic Pipeline System that is set to bypass Belarus in the transfer of energy supplies to Europe. The project value set to be at $2.5 billion will ensure the transfer of anywhere from 50 to 75 million metric tons of oil annually, with construction taking 18 months. Despite Russia's claims that the old Druzhba pipeline will be used to pump oil into Europe, analysts cited by Kommersant said that keeping intact two identical pipelines is economically unsound, and most likely oil supply transfer through Lithuania and Belarus via the Druzhba pipeline will be shut down in the years to come.

As If We Could Have Forgotten - From London with Polonium

Despite the unraveling in the Litvinenko case, my opinion on the issue has not changed. The fierce critic of the Kremlin, of whose existence no one knew until he became poisoned, was most likely killed due to his involvement in a plethora of shady deals, including those with Mr. Berezovsky, and his partners, Chechen terrorists, businessmen, and former security agents around Europe and Russia. I do not have a clue of who poisoned Mr. Litvinenko, but it seems strange for Mr. Lugovoi, who is now the prime suspect according to the Crown Prosecution Service, to have personally killed the former spy. Mr. Lugovoi, as reported by the Financial Times, is a flourishing businessman/entrepreneur, with former ties to the KGB and the Federal Protection Service. Does it not seem strange for a wealthy businessman to personally travel to London to kill his former business partner, and knowingly leave traces of poisoning around Europe for everyone to notice? This is especially strange since Mr. Lugovoi has had experience heading security organizations for Russia's state-run ORT TV Channel. As Copydude reports in his blog:

Lugovoi is a security professional. Professionals use fast acting toxins that don’t leave traces. End of story. Professional assassins don’t turn up for assassinations with their own passports and register at hotels in their own names. While millionaires like Lugovoi have people handle any dirty work. He doesn’t even clean his own shoes.

There is not much left to discuss in this story. Britain has created another stalemate situation with Russia, whose constitution clearly prohibits extradition of Russian nationals to foreign states, and leaves their fate to the trial by Russian law in Russia. Despite British officials claiming Russia's obligation to certain European extradition treaties, it has the full legal force to follow its constitution, thus Mr. Lugovoi will never be tried in the first place. Russia still is at odds with Britain for holding two characters highly welcome in the Russian prosecutor's office, Mr. Berezovsky, for serious fraud allegations and threats to mount a violent overthrow of the nationally elected Russian government, and Mr. Zakaev, for direct connections with Chechen terrorists. Britain also has the full legal right not to extradite these people who are granted political asylum in Great Britain. Any talk of an exchange of suspects is also out of the question, as it would primarily discredit the British side in the face of Europe and the US for obvious reasons.

Britain was forced by public opinion boosted by the ballooning of the issue in the worldwide media to bring the investigation to a close; this was a promise that British PM Tony Blair made in November of last year. Yet Britain must ask itself what benefit it wants to derive from the affair in the days to come, and how far it is willing to freeze up relations with Russia as a result of this case. As The Times reports today in a commentary piece:
Russian prosecutors left open the possibility that he could be tried in his homeland, a way of offering a compromise, should Russia want, although not one in which Britain might have much confidence.

Such an outcome seems the best for both countries, resulting in the minimum total loss of credibility on both sides and the marginal victory for the rule of law, if the trial of Mr. Lugovoi is held in Russia under Russian law, yet there is little prospect of that happening.

Russian Foreign Policy - a Mirror of the US, and a Bad One Too

Today US President Bush in a rare occasion has begun to voice his concerns over democratic progress in Russia as well as other pressing issues between the two states, such as Iran, Kosovo, US Missile Shield deployment in Europe, in the midst of a seeming showdown or a mutual freeze in relations. Reuters reports:

"You know, people in his government harbor suspicions about our intention, and I was trying to allay those suspicions. But there is a lot of tension with Russia, particularly with Europe now, that Russia is using her energy and denying market access to different countries, for example, Polish meat," Bush said.

Bush said he still is close to Putin personally but said "it's a very complex relationship" between the U.S. and Russian governments.

"He thinks they've got a democracy emerging there in Russia. Obviously there's a lot of suspicion about that, and I look forward to continuing to talk to him as to why he thinks his country is on the path to democracy. It looks like at times it's not to me," he said.

Bush, who will likely see Putin at a Group of Eight summit in Germany June 6-8, said he would be willing to "listen more about why he thinks that what he's doing is democratic in nature."

Despite the words of the US president being significantly less harsh than those communicated by President Putin in Munich in February, the cooling down in relations between the two former Cold War combatants has started as Russia began pursuing a foreign policy strategy almost identical to the country which it is criticizing; it is an even bigger paradox that such a foreign policy strategy has led to a giant loss of credibility for its North American counterpart.

The gas supply war against Ukraine, although necessary due to Russia's refusal to finance a government hostile to Russia by several billion dollars annually in cheap natural gas supplies, was proceeded with utmost haste; without consultations with outside partners in the face of the EU, which in the end proved to be the victims in the battle, after Ukraine simply started eating up European gas supplies from the pipeline on its territory.

The heavy economic sanctions initiated against Georgia, which, as Ukraine, was a host to a Western-backed "democratic" revolution, for detention of what it claimed to be Russia's spies working to overthrow the government, once again caused concern amongst EU and US partners.

Finally the face-off between Estonia and Russia landed the latest credibility blow to the Kremlin, with protesting around the Estonian embassy in Moscow, and by aggressive rallies in the Estonian capital, which was followed by debates on initiating unilateral economic sanctions against Estonia, an EU member. This event backfired completely, as the EU had to stand on the side of Estonia, claiming that economic sanctions against one of its members were de facto economic sanctions against the EU as a whole. What later followed was a pointless summit in Samara between the EU and Russia, where any treaties and cooperation agreements were blocked by anti-Russian feelings on the part of Estonia, Lithuania, and Poland.

All of these unilateral diplomatic wars with its neighbors backfired terribly for Russia. The recent failed EU-Russia summit was preceded by increasing demand on the part of Georgia and ruling factions in Ukraine to speed up integration processes with the EU and NATO, a clear anti-Russian position. Ukraine's president has been forcing through legislation to bar the Russian language from being taught in schools or used in administrative proceedings (for a country with close to 50% of the population speaking Russian, and a majority of that number not knowing Ukrainian this may cause havoc). The Georgian president hailed the opening of a museum of the Soviet occupation of Georgia, and many ruling government officials there now claim that Georgia was always occupied and oppressed by its Northern neighbor. Most of them forget the fact that Georgia was rescued by the Russian Empire from Muslim exploitation, and that the bloodiest men of Soviet history - Joseph Stalin and Lavrentii Beria were native Georgians.

What is even more disappointing, is that Russia's "bare bones" position in all of these disputes was right both legally and ethically, the execution went horribly wrong. The "democratic" Ukrainian president backed heavily by the West now faces an approval rating lower than that of George Bush, some fear his party won't make it into parliament at the next elections. Georgia, despite much democratic hype has not made any wide-scale economic progress and has pursued a strategy of heavy nationalism and unilateral love for George Bush; opposition parties in Georgia are facing government arrests, often on made-up pretexts including "spying" against Georgia. And Estonia's actions are simply ridiculous as they are supported by the Estonian prime-minister, Andrus Ansip, a former Communist party activist, who moved quickly up the party ladder back when Estonia was a member of the Soviet Union; he now has simply changed sides and attempted to win the backing of Estonian ultra-nationalists by ridiculing Red Army soldiers buried by the Bronze soldier monument, calling them either "drunken soldiers, who were run over by a tank", or "looters, who were executed".

The similarities with the US foreign policy almost long for identification. Refusing to deal with parties affected by a potential diplomatic conflict, or even refusing to build consensus on an issue has led the US to failure in Iraq, and its stance against North Korea and Iran. After several years of diplomatic failures it is now forced to return to negotiations with countries it considered "evil" - Iran and Syria, as their help is essential to resolving US security interests in the Middle East. Failure to negotiate has led North Korea to develop nuclear weapons, Iranians to elect a president openly hostile to the US, who threatens to wipe Israel off the map. US support of democratic freedoms coupled with failure to recognize and negotiate with those backed by a majority of a country has wiped out the potential for a peace settlement in Palestine fueling a stand-off in Palestine itself and giving Israel a green light to pursue military confrontation with its neighbors.

In the past, especially in the Soviet Union, the Kremlin's foreign policy centered on the "respect" factor. More specifically - "lust in exchange for goods" (military equipment, export subsidies, outright cash). In exchange Russia's "friends" would proclaim strategic partnerships and mutually inseparable ties for years to come. Russia never gained much from these "love affairs", except positioning military bases to counter the spread of US influence and maybe creating a market which would buy goods that the Soviet economy overproduced with money lent to that market by the Kremlin. This may be a prime cause for the misunderstandings on the Russian part of its relations with Georgia and Ukraine. Misunderstanding which lead to concerns on the part of the EU and the US

Pursuit of a more pragmatic foreign policy based predominantly on mutual economic and business interests will be more beneficial for Russia. Such policies do not play by the rules of a "win-lose" outcome, and offer means for negotiation, clear obligations, and more stable long-term relations. The "sphere of influence" policy, one based on the "respect" factor, can never be contracted, as the times of secret agreements have long passed with the end of the Second World War. Basing foreign policy on such a viewpoint of the current world leads to outright denial of consensus-based diplomacy, and proves extremely unstable; the sphere of influence can rarely be proven unless with military engagement or economic sanctions, with the former being unrealistic, and the latter often useless.

Russia's recent successes in pursuit of a policy of a tie-in of economic interests are clearly evident with it offering the right incentives to its Central Asian partners allying them at the expense of the EU and the US. Yet such a policy will be very tough to implement for Russia in the long-term, as it will require very substantial concessions on its part. A perfect example is the failure to build a sustainable cooperative organization on the post-Soviet landscape, with Russia demanding outright domination in all decision-making bodies, simply because its size and the size of the economy dwarfs most of its counterparts in those organizations. Russia is only willing to consider negotiating on an equal right principle with countries such as the G8 members, China and India. Yet it has been the smaller countries which have managed to put sticks into the wheels (or legs) of the giant, and hamper all the processes for Russia's movement forward, from entry into the WTO to cooperation agreements with the EU. Maybe it is finally time for Russia to operate on a principle of equality of all countries regardless of size at least in a broad context, no matter how tough this may seem. Otherwise, it may see an uglier version of itself by looking where denial of such a path has led the US.

Right now watching Russian and US attempts to undermine each other's foreign policies is like watching two barely floating ships firing at each other, while heading closer and closer into a rocky cliff.

Sunday, May 20, 2007

Slowly But Surely

Krusenshtern recently published what is now the latest (from what I understand) rating of the Top 50 Russia weblogs of the world in English and German. Russia's True Tales of Terra is proud to be storming its way into the Top-40 after close to a month of active existence (being at #41).

Although the true goal of this blog is yet to be determined as it is in an evolutionary phase, the motivations behind the author's writing you read here are clear: a simple attempt to present an unbiased and honest view on events in Russia; events both good and bad, whether political, economical, cultural or even sporting ones, all through a "reverse lens": fusing current events information and combining it with historic precedents and business/economic problem-solving.

With the election season in Russia already as hot as it may seem to be possible, the overall number of readers for Russian weblogs will increase in geometric proportions (hopefully) and some of that traffic will end up in RTTT (again, hopefully).

Saturday, May 19, 2007

The Change in Command is Russia's Biggest Problem

Russian daily newspaper Moskovskiy Komsomolets (MK) recently published an article by economist Nikita Krichevskiy (professor at Russia's State Social University) on the state of the government-sponsored national projects as well as the pace, structure, and funding of the new initiatives outlined in Putin's state address in April. The Russian economist speaks highly critically of virtually all sides of the way the funding is allocated and the projects are structured, and sees major risks associated with the change in political command and direction expected in 2008.

In his address to the state, President Putin for the first time clearly mapped out the spending amounts and areas where the excess government income will flow. The amount, which has been dubbed "Putin's trillion" (for the 1 trillion rubles or about 40 billion USD of government investments) will be allocated in the following ways:

  • 250 billion for reforms of the housing system (the reform itself is set to spread over five years, and given the projections for a reduced budget surplus, this figure will be the bulk of the investment into housing)
  • 300 billion for the fund whose aim will be to increase the well-being of the country's residents and sponsor economic initiatives to help current and future generations. As part of the project three new organizations (government-run) will be created: Bank of Development, Investment Fund, Russian Venture Company.
  • 100 billion will head toward development of highways and transportation infrastructure, which has been Russia's incurable problem
  • 180 billion (!) will be directed to the soon-to-be developed Russian Nanotechnological Corporation
  • 56-89 billion will head to the sponsorship of Russian fundamental science development
  • 20 billion (!) will be headed toward creation of a chain of libraries and academic information centers in the name of Boris Yeltsin, who recently passed away.
These projects by themselves envision the creation of six new governmental organizations at least, whose sole goal will be to attempt to ensure proper allocation of "Putin's trillion"; another giant leap to increase Russia's already ballooning bureaucratic titan. The Russian economist mentions that the funding for the housing reform (known in Russian as the Zh.K.Kh. (ЖКХ)) will come not from the current surplus but from tighter fiscal discipline, with its excesses and side-effects, as well as with the additional sale of government property or processes similar to the one pulled on YUKOS.

The rest of the funding, according to Mr. Krichevskiy will not come from the budget surplus but will come from unexpected inflows as a result of miscalculations in the budget prognosis. The current surplus of 1.5 trillion rubles for 2007 has already been allocated to either the stabilization fund or to unexpected funding. The head of the Ministry for Economic Development and Trade, Mr. Gref, has argued that the pace of capital spending, salary, and income growth is much higher than that calculated by the Economic Ministry, whose numbers are used in the budget. Mr Gref argues that the actual growth of the GDP in 2007 will likely surpass the forecast by 1.5% at least. If the Russian economist is right this means that the new initiatives will be funded by a best-case scenario of inflows; (aka) money that has not been received so far by the government; such a best-case scenario is also very highly correlated with the the price for a barrel of oil, revenues from which make up close to half of government revenues. Thus even before the problem of who will control the capital disbursement of "Putin's trillion" becomes a problem, the sourcing of the actual capital is unclear in the first place.

Another problem that Russia is facing, along with other developed and emerging economies, is that of the pension system funding. Mr. Krichevskiy argues that despite President Putin's speech not mentioning any real problems with the state-run pension system, the fact that 13% of government income will go toward funding the country's pensioners is an unhealthy sign for the economy. Every year the absolute amount of necessary funding (now at 918 billion rubles, just under 25 billion USD) will continue to grow, and the percentage figure may grow at a higher rate as the current budget's heavy oil revenue windfalls are not guaranteed. The pessimistic scenario is not due to volatile oil prices solely, but also due to the falling level of oil generation in Russia; the massive reallocations of ownership within Russia's oil and gas industry into the government's hands has played its role in reducing the efficiency of oil companies, with high oil prices acting as of a moral hazard.

The final problem highlighted by the Russian economist is ine of responsibility for the reforms and projects. With President Putin set to leave office, his economic staff has begun to slowly question and remove some of the funding initiatives (government pension matching initiatives have been reduced to fulfill the requirements for just 700,000 workers out of the current 67 million people workforce). To mitigate the likelihood of more of these scenarios, President Putin initiated a three-year budget mechanism, which once approved for 2007 will be a strict burden for the next Russian president until 2009.

However, the approaching change in command and the loss of power of the Yelstin clan of business owners and politicians (the structure of which is still a much debated topic among Russian political analysts) is set to see a new and very aggressive battle for Russia's assets. The YUKOS affair in 2003 was just one such example, but several credible sources, including the author of the article, Nikita Krichevskiy, predict that asset wars such as YUKOS will be numerous in the years to come. These processes will trigger, in the worst case scenario, fundamental changes to the "vertical of power" that was the cornerstone of President Putin's bureaucratic reforms. Side-effects of such changes will be either the return to power of regional leaders or a further concentration of economic and political power in the hands of the Moscow or St. Petersburg clans. Economic growth and the competitiveness of Russia's key corporate giants will be severely hampered if continuing arrests, flashy trials, and at worst asset sell-offs and shady restructuring processes occur. Depending on the harshness of such actions, Russian may well see and slip back to its chaotic times of the 1990-s.

Friday, May 18, 2007

Business Update: Airplanes and Metals (Aeroflot - Alitalia; Norilsk Nickel - LionOre)

Aeroflot - Alitalia

Aeroflot, which has been permitted into the second and most likely final round of bidding for the ailing Italian flagship carrier Alitalia has begun "hunting" for money to finance the deal. According to Vedomosti, Aeroflot, which has teamed up with Italian bank Unicredit, is looking to obtain 500-900 million Euros for the 39.9% stake of the Italian government in Alitalia. The Russian carrier intends to use only external funds in the deal, and has sent letters requesting funding proposals to the top twenty investment banks located in Moscow. Analysts cited by Vedomosti say that the credit that Aeroflot is seeking is fairly large but should be compensated by the steady cash-flow of the company and the virtual debt-free condition of Alitalia. Previously the blog has reported the news of Aeroflot seeking to buy Alitalia.

Meanwhile Alitalia is encountering events likely to trigger complications to the privatization of the company. The Financial Times reports that the airline is set to write-down over 400 million Euros in fleet value which will reflect negatively on its earnings this year. The company's shares have been in free-fall for the past weeks, already at 0.87 Euros, after it became clear that the target acquisition price of all the bidders will not exceed 0.50 Euros per share (a 40% discount to the company's current value. The company has recently been involved in a pay dispute with its staff which has caused major delays and contributed to the major losses to the company's bottom line. All these events are making the company seem cheaper for the bidders.

Norilsk Nickel - LionOre

In the continuing battle for Canadian nickel miner LionOre, the original bidder Swiss-based Xstrata trumped the bid by Russian Norilsk Nickel, now offering 16% more for the company representing a total of $5.6 billion. Xstrata's second offer represents a 35% premium to its original offer. Further disappointing the management of Norilsk Nickel, the Financial Times reports that Xstrata has gained approval for its second offer from LionOre's board, effectively locking up close to 20% of the company's shares. It has also received the necessary approvals from Canadian and EU authorities for the acquisition. The initial details of the deal were covered in a previous post in this blog.

Analysts cited by Vedomosti, claim that Norilsk Nickel must offer at least 20% more than Xstrata for the company to generate interest from the board and the shareholders of LionOre. Whether the deal at that point will be cheap remains questionable. Despite a greater business tie-up between LionOre and Xstrata, Norilsk Nickel is very keen to continue expansion into foreign markets to catch the last few waves of consolidation within the commodity industry. The Russian company, headed by Vladimir Potanin has till May 25 to come up with a competing bid.