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.

Business Update: Aeroflot - Alitalia (Looking more confusing)

The situation surrounding the auctioning of a 49.9% stake in Alitalia by the Italian government is becoming more and more puzzling. The auction process, for which Russia's state-owned airline Aeroflot is a leading contender, may not even happen after all.

Out of several contenders for the stake in the Italian carrier, only two remained at the end of May, after a US-based consortium including private equity giant TPG left the bidding sying it was "too complex". The remaining two bidders, Aeroflot (supported by Italian bank Unicredit) and AirOne (Italy's second biggest airline) began complaining in the past week about the unsatisfactory conditions of the auction.

Aeroflot's management stated that it would not buy the stake in Alitalia "at any price" due to unsuitable conditions set by the Italian government. AirOne complained that it was being denied crucial financial information of Alitalia necessary to establish a proper bidding strategy.

So while originally Aeroflot was cited by many as being an outsider to the bidding process, due to the Italian government's requirements to keep an "Italian image" for the airline under a new owner, the Italian government may now have to pursue any chance it has to get the ailing airline off its hands. Selling it to Russian Aeroflot may not be that bad of an idea anymore.

Alitalia has been having very serious trouble, and has been forced to drop its government ownership due to EU regulations limiting the amount of cash a government can infuse into its own companies. Alitalia has reported losses for six of the past seven years, has been aggressively turning around management, and has suffered from very strict labor unions.

Why would Aeroflot want the sickly airline? For one, it would give the Russian airline a sizable stake in the EU airline industry, and for the Russian government it would give a bigger market for which to sell its newer regional jets. Russia's other airline AirUnion has already purchased Hungarian airline Malev earlier this year.

The Italian government is now facing a situation where it can simply create a monopoly if it sells its stake to AirOne in an auction where only one bidder is present (if Aeroflot withdraws from the bidding, which Alitalia has denied). It may have to restart the auctioning process from scratch, or convince the remaining bidders, which today have been joined by Matlin Patterson Global Advisors LLC (part of the TPG-led consortium which dropped out in May), that it may be more flexible in the sell-off. The bidders have until July 2 to decide on their course of action.

Monday, June 18, 2007

Moscow - World's Most Expensive City

Be sure to bring plenty of cash next time you come to Moscow. Mercer Human Resources Consulting, according to the Financial Times, has placed Moscow for the second year in a row at the top of the list of the world's most expensive cities for expatriate employees. The continuing weakness in the dollar made sure that New York would be knocked out of the top 10 in Mercer's list.

The top 10 were dominated by European cities, with London claiming the #2 spot, and Geneva, Zurich, Copenhagen, and Oslo closely in pursuit.

It must be noted that the survey is not focused on providing figures for an average expense for an average city citizen, rather its goal is to provide a ballpark figure of what an employer would need to be pay an employee in a particular city. The survey is neither a clear picture of the well-being of a city. The basket of goods includes a luxurious two bedroom apartment (presumably in the city center), as well as reasonably high expenditures for clothing and entertainment.

Moscow's position at the top of Mercer's table may most likely be attributed to the extreme shortage of upper-middle-class housing projects and appropriate infrastructure. Such shortages obviously push up prices drastically. Office space in central Moscow costs close to 50% more than in downtown Manhattan. The situation with apartment housing in central Moscow is similar.

The picture is improving as fast as it can, given the obvious bureaucracy associated with the Russian capital. Moscow city is well under construction (pictured) and roads, subway lines, and, most importantly three and four star hotels (which are in such shortage) are planned to be added in vast quantities very soon.

Friday, June 15, 2007

Weekly wrapup

A quick snapshot at this week's posts:

1) Russia cements its power as an economic powerhouse : summary of the St. Petersburg Economic Forum and some of the prospects for Western businesses in Russia

2) Surprise, surprise, Mr. Blair - Gazprom goes for Britain : What is behind Gazprom's renewed bid to get a foothold in the British energy market?

3) Scissors are cutting up the Russian oil & gas industry : The outlook on the Russian oil & gas sector pressured by taxes and heavy regulation is grim

4) Operation Barbarossa - Doomed from the start : a brief look into history at how bad the Nazi plan was to invade the Soviet Union

5) Some eau de cologne with your vobla? - Alcoholism in Russia : While the government is fighting to increase the birth rate, the death rate is nullifying the effort

Finally the honor for video of the week goes to the great Chaif, one of the original rock bands of the late 80-s, who are popular and well today. Their song "Oy-yo" is difficult to translate yet is great for a drinking rout in the kitchen with friends (for further information see article (5) above)

Thursday, June 14, 2007

Some eau de cologne with your vobla? - Alcoholism in Russia

Russia's government may be better off fighting the staggering fall in population by reducing the death rate rather than giving incentives to new births. According to a medical study published in the Guardian today, almost half of all working-age men who die in Russia, die as a result of alcohol abuse. And this is not entirely due to vodka, as one might presume, but due to the consumption of eau de cologne, antiseptics, and medical tinctures.

David Leon, of the London School of Hygiene and Tropical Medicine, and colleagues examined records and interviewed the families of 1,750 men who had died in Izhevsk from 2003-05. The men were compared with 1,750 who were still alive. They found that problem drinkers and those who drank alcohol not intended for consumption were six times more likely to have died young than those who did not have a drinking problem. The chances of an early death were particularly high for those who got their alcohol from eau de cologne and other unorthodox sources - they were nine times more likely to die.

The authors say that men impoverished after losing a job through drinking may be forced to resort to drinking household products containing pure alcohol. Among those who were still alive, 47% who drank such products were jobless compared with 13% who stuck to vodka and beer.

According to a study published last year, Russians over 15 consumed on average 15.2 litres of pure alcohol a year (roughly 4 gallons). Despite recent government crackdowns on alcohol factories producing liquor without following regulations, most recently involving the suspension of licenses from 320 such factories, the drinking trend has not seen a sharp decline for the past several years. Even worse, when new regulations regarding alcohol duties required repackaging new and existing liquor products came out, the result was a disappearance of vodka from the stores; alcohol poisonings jumped as the poorer people immediately switched to cheap cologne and anti-corrosion liquids.

According to the World Health Organization, Russia is rated as the worst alcoholic country in the world with 2.5 million registered alcoholics, and with alcoholism linked to 72% of murders and 42% of suicides.

These numbers are staggering even for those aware of the troubles in this area of society. The Russian government has been right to give large incentives to women giving birth to their second and third child to increase the very low birth rate, yet the problem of alcoholism, which has been termed a "national tragedy" has received attention yet seen little effort. The solution is extremely complex with any sort of a prohibition law being a very wrong path to follow. Shutting down too many vodka producers for not following regulation also carries similar consequences with a bigger threat for a shift to pure-alcohol consumption.

Operation Barbarossa - Doomed from the Start

As the 66th anniversary of Nazi attack on the Soviet Union approaches, the blog is taking a look into history, and finding some facts which have not appeared in many Russian textbooks, or Western documentaries. A particular book by Geoffrey Megargee titled "War of Annihilation" is dedicated to the events of the year 1941 on the Eastern front; the author attempts to shed light on the true involvement of the German army's high command in the atrocities committed on the Eastern front, as many German generals have often shifted this blame toward the leadership of the Reich and the the heads of the SS.

A brief segment of the book highlights the obvious miscalculations that the German military planning committed in the wake of the invasion. It is often accepted by many that the German army was invincible going into the Soviet Union, yet the level of preparation for the invasion in June of 1941 gave the Nazi machine little chance of a quick success, even before they met their foes. The result would be a disastrous four year war that would bring down the Nazi state itself.

The successful work of Soviet counterintelligence prevented Nazi Germany from ever getting their hands on much material. Its agents were constantly flanked by Soviet security service members and any aerial reconnaissance revealed army formations only very close to the border. This left the military strategists to make large-scale assumptions that would fit with the general directions coming out of the High Command.

The result was disastrous. The number of Soviet men under arms was estimated at two million, when the real number was four million. The number of tanks was underestimated by a factor of 2.5, and the Soviet new T-34 tanks that were far superior than most German equipment were not even considered. The German planners also overestimated the number of units staged close to the border, thus underestimating the time it would take for the encirclement and destruction of the Soviet army in the Blitzkrieg.

In addition, the assumption that the Soviet Union could shift production to the Urals and beyond (which it did in the autumn of 1941), which had already been industrialized, was quickly scratched. The biggest assumption of the Nazi planners - that the Soviet regime would collapse in a matter of months after the attack was not backed up at all:

As for the expectation that the Soviet regime would collapse, the generals could only base that upon the broadest assumptions - assumptions that are interesting indeed, coming from men who served a totalitarian regime themselves. The fact was that the Germans went forward despite a general lack of information about their enemy, and in the face of some facts that should have called their plan into question.

If those problems were not enough, the German industry was not fully shifted to focusing on land-based military production, as the assumption of a quick campaign against the USSR meant that a sea-based campaign against Britain was still a short-term perspective. The shortages that the German army faced in men, munitions, and equipment for such a vast campaign was obvious. Some planners forecast that rubber tires and gasoline would run short as early as July; that by early October the supply of trained replacement soldiers would run out, and that the army was starting the campaign with a serious shortage of officers.

The shortage of supplies meant that the army would have to live off the land at the expense of the people living on it. Operation Barbarossa assumed thus the starvation of millions in the Western part of the USSR. And this was an unplanned atrocity. The planned atrocities we all know of. None of these facts should deny the unprecedented effort of the Soviet people to defeat Nazi Germany, it only shows that the Soviet Union had other given advantages in its hands before the war even started.

Wednesday, June 13, 2007

Scissors are cutting up the Russian oil & gas industry

Oil & gas companies operating in Russia have been crushed in the past few years by record-high taxation, making their business perspectives seem very unattractive. And given the fact that Russian companies now dominate the sector, courtesy of the Kremlin, Russian companies bear most of the taxation burden.

The taxation, which many have termed "Kudrin's scissors" (after Russia's Economic minister Alexei Kudrin) involves taxing 90% of the revenues (not profits) gained when Russian crude (Urals brand) trades above 25$ per barrel. Given the fact that Urals brand crude oil has been flirting above the $50 mark, the amount of taxation is huge. According to the Financial Times, Citigroup analysts have calculated an internal rate of return of under 10 per cent on a typical new Russian greenfield (undeveloped) project – lower than the hurdle rates for most majors. This means that Russian companies (which constitute the bulk of companies in the Russian oil & gas sector) are forced to pursue projects, that no other Western company would pursue outside Russia.

Investors, meanwhile, are fearful of investing into efficient independent oil & gas companies in Russia, such as Lukoil, BP or Royal Dutch Shell, due to the continuing regulatory problems these companies encounter from the Russian government. This leaves Gazprom and Rosneft as the only choices for investors, both of which have been on a spending spree; but not on investing in new fields, rather on buying out the assets of bankrupt YUKOS and other companies forced to sell their stakes to the government. Gazprom and Rosneft's shopping bonanza has ensured their debt remains at an alarming level for quite some time.

Add the two problems together, and you are left to invest in inefficient state-run companies, with huge piles of debt and little incentive to invest in new projects in Russia due to "Kudrin's scissors" (outside Russia taxation is lower but competition is fierce), and the overall picture for the Russian oil & gas industry so far is not optimistic. Profits for the two most recent quarters have been falling, as global oil prices have not been rising and as local production has been stagnant.

But the troubles in the Russian oil & gas industry may not be all that bad for the Russian economy overall. Investors have been shifting their capital out of oil & gas and into utilities and the banking sector which are scheduled for a booming growth period. The utilities sector has seen a big boost after the launch of the Russian energy trading market; the banking sector has seen a rise as well due to the recent successful IPO of Vneshtorgbank and the additional offering of Sberbank. The growth of the Russian credit market has proceeded at lightning speed recently and will continue to do so.

Overall, the trouble in the oil & gas sector may play well for the goal of diversifying the economy away from oil & gas, but taxation may have to be eased to give companies the incentive to look for new oil & gas projects; otherwise, Russia's production in the sector may begin falling in the near future.

Monday, June 11, 2007

Surprise-surprise, Mr. Blair - Gazprom goes for Britain

In an apparent test of Britain's free-market intentions, Gazprom's deputy executive Alexander Medvedev (not to be confused with Dmitri Medvedev, Gazprom's Chairman and potential successor to Mr. Putin) announced at the St. Petersburg Economic Forum on Sunday that the Russian gas monopoly was close to a deal increasing its presence in the British energy market. As CNN Money reports Mr. Medvedev' announcement:

"In the near future, there will be a deal to further increase the customer base on the British market," Medvedev said, according to media reports.

The executive added that anyone in London for the Wimbledon tennis tournament, which starts at the end of June, would hear about the deal.

The announcement comes as a surprise and bears a slight degree of mockery (perhaps unrelated) at the statements made by the departing British prime-minister Blair. Over the past month, Mr. Blair has been voicing concerns about Russia flexing its energy muscle as well as giving warnings to European businesses actively involved or considering to enter the booming Russian economy.

As soon as the statement by Gazprom was made, speculations were made as to the target of the gas monopoly's acquisition: Centrica (the UK's largest gas retailer) and Scottish Southern Energy (a UK utility) immediately appeared on the radar screen of most analysts. Although, according to The Herald, one of Gazprom's UK executives stated that SSE was not an acquisition target, the market still was optimistic about a possible Centrica takeover.

Gazprom has been eying Centrica since January of 2006, when as today controversial statements about acquisitions of UK downstream (to customers) operators were floating in the media. To date Gazprom has already acquired British energy retailer Pennine Natural Gas, and has planned to expand its stake in the energy market to 10% by 2010.

The Russian behemoth already has a presence in several countries. In Belgium it has signed a memorandum of understanding to look at potential gas storage projects in the north of the country. It supplies around one quarter of France's gas needs under term contracts with Gaz de France and has a similar deal with Italy's Eni. In the Netherlands it's in talks with pipeline operator Gasunie on a pipeline stake swap. According to analysts cited by CNN Money, the primary motivations behind Gazprom's expansion into Europe's downstream energy business is the higher profitability, as well as the removal of the middleman by directly selling its energy resources from Russia to European retail customers.

Russian companies have significant political bargaining power in such situations. While western energy giants such as BP and Shell are actively involved in the energy sourcing business in Russia, the presence of Russian companies in the downstream markets of Britain is minuscule. With BP facing possible license suspension in the Kovykta Siberian energy project, there is plenty of bargaining options on the table if the British government chooses to intervene in the situation.

Unlike its European counterparts, Britain has been a strong supporter of free-market principles and the principles of nonintervention of the government into cross-border acquisitions. With significant fears in the West about the Kremlin's seeming use of Gazprom as its foreign policy tool, Britain faces a tough test. If it acts to block a possible Gazprom deal, it faces the potential to look embarrassingly hypocritical, and doing more harm than good to UK energy companies who are shadowed by the heavy hand of the Kremlin at this moment. British executives have already criticized Mr. Blair for his criticism of Russia's business practices.

It still is not clear if Centrica is the company Gazprom was talking about in its announcement, but it is likely that Gazprom is very serious this time around. Its goals of expanding into the British downstream market have been a priority for some time, and with the departure of Tony Blair, there is a possibility for warmer relations between the two countries, at least in the business sphere.

Sunday, June 10, 2007

Russia cements its status as an economic powerhouse

The St. Petersburg International Forum came to a close today with a bang. Initial reports, as summarized by the Russian Economic Development and Trade minister German Gref, give a $13.5 billion figure to the amount of investment and intent deals signed at the forum, overshooting the initial estimate by four times. The simple overview of the attendees confirms the forum's success: 8,966 delegates from 65 countries, 54 official foreign delegations, nine presidents, four premiers, 44 ministers, 40 ambassadors, and coverage by 1,400 journalists.

The overall mood was all but negative, as was expected by some and as was attempted to be made by UK prime-minister Blair when he said last week that "unless there were shared values people in Europe will want to minimise the business they do with Russia”. It is rather a paradox that the Russian authorities several months ago did a lot to refocus attention from the usually bigger London Economic Forum for Russian companies to the St. Petersburg forum. Apparently their initiatives were successful. As CNN reports via Reuters:

"Putin gave a very reassuring speech about Russia's economic development going forward and underlined that Russia was open for investment outside a few strategic sectors of the economy," one of the CEOs told Reuters.

The forum saw attendance by CEOs of Deutsche Bank, BP, Royal Dutch Shell, Nestlé, Chevron, Siemens and Coca-Cola, all eager to do even more business in Russia. Russia's recent policy of revising energy deals singed in the 1990s, despite wide-scale concerns in the West did little to discourage investment. The Financial Times reported of the Royal Dutch Shell CEO, whose company was forced to sell a controlling stake in the $22 billion Sakhalin-2 energy project last year to Gazprom, as having stood up and personally thanked Putin for such a "satisfactory deal", and for taking action to "get the project to go forward".

Shell's colleague at BP probably viewed such unilateral applause with a great degree of sorrow, as his subsidiary company TNK-BP is facing a possible (and many say very likely) license suspension from the massive Kovykta gas field in Eastern Siberia. With Russia accounting for a quarter of BP's production, its newly appointed CEO Tony Hayward is forced to make very optimistic forward-looking statements on his business in Russia. BP has already pocketed close to $7 billion in dividends from the Russian joint venture and is very fearful of losing out on its positions. Meanwhile the only savior of BP will be, as many have predicted, the Russian monopoly Gazprom, whose deputy chief confirmed ongoing talks to sell a part of TNK-BP to Gazprom. Such a sale would "legitimize" BP's operations in the eyes of the Russian authorities.

Vladimir Putin was again a headline maker by proposing to overhaul existing economic institutions to reflect the ever-greater role of emerging market economies. Mr. Putin proposed to create a new financial architecture, presumably a substitute for the WTO, which has in his words become "archaic, undemocratic, and unwieldy". The Russian president criticized the WTO for helping to sustain protectionist barriers against developing economies, and for being unable for six years to come to an agreement in the Doha round of global trade talks, where again developed and rich economies are still unable to come to terms with poorer countries over eliminating barriers to farm trade. To this day, Russia is the biggest economy outside the WTO. Its southern neighbor Georgia is preventing Russia's entry into the organization largely for political reasons.

Summing up the Economic Forum, CNBC's Global energy expert Daniel Yergin noted the tremendous achievements by Vladimir Putin's administration at fueling the economic boom. In the past seven years the Russian economy quintupled, which many optimists in 2000 thought to be impossible. Today 25-30% of the population are in the so-called "consumer class", which amounts to a lot spending power. As an example, last year 1 million cars were sold in India, whereas Russia saw similar sales in the range of 2 million. Outside of the government-defined strategic sectors, foreign businesses are having little problems from government intervention as long as all laws are followed. Mr. Yergin also noted that Russia has learned a lot from its mistakes of 1998, and has summed up $600 billion worth of currency reserves and stabilization fund money which would be able to sustain Russia for two-three years in the case of a downturn. CNBC' expert noted that:

The Russians worked hard to separate the political disagreements and political issues from the business of economics. The perspective was was summed up by one of the senior people in a meeting with non-Russian CEOs. "Come to Russia with your capital, your money, your technology," he said. ""We're delighted to see you here." This time -- in contrast to earlier years -- he was talking to a very interested and receptive audience. Perhaps the mood was captured by another senior figure when he, as almost an afterthought, told the same audience, "We're very business-oriented nowadays." There was a hint that perhaps he himself was even a little surprised to find himself in that position.

Cartoon of the week

A great cartoon by The Economist:

Saturday, June 09, 2007

Weekly Wrapup and Weekend Video

This week has seen a multitude of headline-making events out of Russia and out of the G8 summit. It is still too early though to talk objectively about Russia's proposal to cooperate with the US ABM system in Azerbaijan. Many contradicting opinions from credible experts in the West and in Russia have come out that do not really give a clear answer to the motivations and the viability of the plan. Perhaps next week will be a little less muddy. As for this week's review:

1) Disney's Successes in Russia and the Venture Capital Boom : How the US entertainment giant has found another great new market and how Russia's attempts to fuel a VC boom are working out.

2) Vladimir Putin's press-conference making headlines : "After Mahatma Gandhi dies, there is just no one left to talk to"

3) Russia-US relations: more room to maneuver than it seems : With the Russian president making it clear that his influence on Russian policy-making will remain strong after 2008, how badly can the West risk breaking relations with Russia?

4) Norilsk Nickel is left as winner in bid for LionOre : Russia's biggest corporate foreign acquisition looks to be steps from completion

5) Putin gives up salary for Jewish museum - Stavropol riots against the Chechens : ethnic problems in Russia

6) Vladimir and George talk about the missile shield : the "phony" Cold War draws to a close : What does the Putin's proposal mean : preliminary analysis

7) Putin gives harsh opinion on Kosovo : "No one can show us a single difference!" - Russia threatens to use the precedent on the post-Soviet territory

The honor for the weekend video today goes to the great Nautilus Pompilius, and their "Progulki po vode" (Strolls on the water), another very old classic.

Friday, June 08, 2007

Putin gives harsh opinion on Kosovo

Vladimir Putin at a press conference summarizing the G8 meeting in Germany made a very serious statement about the situation in Kosovo. He made it clear that if the Ahtisaari plan goes ahead with a recognition of Kosovo's independence without Serbia's approval, Russia will be ready to use such a precedent to solve the conflicts dimming on the post-Soviet landscape. These conflicts include the breakaway republics in Moldova and Georgia, where Russian peace-keepers are currently stationed to the great disdain of the local authorities but are highly approved of by the breakaway republics. The following is an excerpt from Vladimir Putin's press-conference on June 8th (the translation from Russian has been made by the blog's author):

It is necessary to abide by the current principles of international law, and to not impose one's will on other countries and other nations.

If we all come to a conclusion that in today's international situation the principle of a nation's right for self-determination is more important than the integrity of a country's borders, then we will have to use that principle in all regions of the world, and not where some of our partners like it. Thus, the national self-determination principle will have to be used by the peoples in the post-Soviet region, including smaller nations in the Caucasus, just as it will be used on the post-Yugoslav region.

We do not see any difference between the two situations whatsoever. Both situations have arisen as a result of a dissolution of Communist empires. Both saw an ethnic conflict. Such a conflict has very deep historic roots in both regions. Both regions saw violations of law and even crimes committed on both sides of the conflict. Both regions essentially have independently functioning state-like institutes.

No one can show us a single difference. This means that the applied principles in such situations must be universal.

Such statements although necessary to back the seriousness of the Russian position can backfire very dangerously for Russia itself, which has already fought two wars in the past thirteen years with the self-proclaimed Chechen republics. Despite the large amount of authority that has been brought back to the president in the past eight years away from the governors of Russia's 80+ regions, there are many regions within Russia who have eyed independence for quite some time. Stirring up that issue could be messy.

Thursday, June 07, 2007

Vladimir and George talk about the Missile Shield : The "phony" Cold War draws to a close

Significant progress was made yesterday at the G8 summit in Germany during the meeting between George Bush and Vladimir Putin on the issue of the US plans for the deployment of an ABM system in Europe. But despite the relief that the discussion has caused by taking any "Cold War" analogies off the table, the US ABM shield issue is far from over, and many questions still remain which have little hope for an answer at the moment.

But the most important development is the fact that Russia now accepts the need for close cooperation on the US ABM deployment by its borders; it thus acknowledges that the US and Russia have common threats in the Middle East, particularly Iran. A cooperation with the US on missile defense from Iran, amongst others, also suggests that Russia is making more steps toward the US position on Iran's nuclear weapons development. A direction rooting for faster UN Security Council action against Iran.

With regard to Russia's offer to host the radar part of the system at its leased base in Azerbaijan, many questions still remain unanswered. The ABM system that the US is planning to deploy in Europe, apart from Navy-based US cruisers consists of a radar-base in the Czech Republic and a missile interceptor system to be installed in Poland. Russia opposes both of these bases. The Azerbaijan proposal offers to relocate the radar to a Russian-based radar system already in place there since 1985 under a long-term lease, under supervision from both the US and Russia. With regard to the missile interceptors, Russia's position is not entirely clear.

The New York Times reports Putin suggesting the missile interceptors could be located in US Aegis cruisers (presumably in the North Sea, or event the Baltic Sea). The US Aegis cruisers have recently been reequipped to host systems with the capabilities to shoot down short to medium range ballistic missiles (such as those that the US European shield is aimed against) as part of the US Global ABM shield system. Another proposal initiated by the US, as the Financial Times reports would be for the UK to host the missile interceptors. The newspaper reports that Russia has also expressed potential support for the UK option.

If the US does agree with a radar in Azerbaijan and missile interceptors in the UK, it would be too clear of a diplomatic victory for Russia, and it is highly unlikely that the US will give up its ideas of shield stations in Eastern Europe for any reasons whatsoever. But Russia has already offered to put all the recent heated rhetoric on the back burner if its proposals are accepted. For the US and NATO this a a sign of relief, as Russia's decision to aim missiles on Poland and the Czech Republic began to cause headaches about additional arms needed in those countries to protect them from Russia. Russia's attempted withdrawal from the CFE treaty and the intermediate range missiles treaty could also be halted, depending on the US interest in the Azerbaijan option.

For the first time the world is seeing Russia's thought-through diplomatic game being played out. It started in Munich, and the goal since then was to cause rifts within the EU and NATO, and generate the biggest amount of concerns among all of Russia's Western partners. The message from Russia was clear: "our opinion is not being noticed; if the situation continues, Russia will have to take action to get its opinion visible". By no means was this a "three-month" cold war; in the first meeting of the leaders of the confronting sides, significant progress was made, and the two were more than happy to continue constructive discussion.

The next meeting between the two in Main in early July will serve to hopefully finalize the details of the Russian-US cooperation on the US ABM shield in Europe. The proposals have not yet been fully analyzed by the two sides to make any forward-looking remarks. For now the ball is in the US court, and within time senior military experts and national security advisers should make clear statements with regard to the viability of the Russian proposal. As of today, the US has, in the words of George Bush and his national security adviser Steve Hadley only expressed "its interest" with the proposal. But it still is too soon to say the confrontation between Russia and the US is over on the ABM shields; not to forget the "diametrically opposed" positions with regard to Kosovo, and democracy.

For the recent developments of the US ABM story see this blog's earlier posts

Tuesday, June 05, 2007

Putin gives up salary for Jewish museum - Stavropol riots against the Chechens : Ethnic Problems in Russia

Vladimir Putin during a meeting with the Russian Rabbi Ben Lazar, made a personal contribution of a month's salary to help build a Jewish museum to promote tolerance and respect between faiths. Paradoxically, the same day Russia's southern city of Stavropol saw a second day of ethnic clashes between members of Russian ethnicities and those of the Southern Caucasus ethnic backgrounds.

In the Russian president's residence of Novo-Ogarevo, Vladimir Putin and Ben Lazar discussed the growth of ethnic and racial tensions, which have spilled out into numerous clashes between nationalistically-minded Russians and members of different ethnic backgrounds, that still constitute a large minority of Russia's population. As the Guardian reports:

"I think many would want to help the project aimed at promoting peace and harmony among faiths. This illustrates the strength of our multi-ethnic and multi-faith country."

The Kremlin declined to confirm how much Mr Putin's monthly salary amounted to, but local media suggested it would be in the region of 70,000 roubles (£1,360).

Rabbi Lazar said discussions about a museum had been ongoing for a number of years and the time was now "ripe" for construction to start.

"The aim of this museum is to educate the younger generation [about] tolerance and respect for one another", he said, according to Russian news agency, Interfax.

Yet, despite the focus of the Russian president on the issue, Russia's Stavropol saw another alarming day of ethnic conflicts. On Monday a demonstration passed through the city's streets, and as reports, the mood of the demonstrators was very unwelcome to the ethnic minorities of the city. The demonstrators, organized together after a funeral (picutred - Reuters) of two Russia's thought be killed by local Chechens, demanded the resignation of the city administration, and the deportation of the Chechens living in Stavropol. The reason for the demonstration was the Sunday killing of two students, which many associate with a revenge for a killing of a Chechen in a fight on May 24th. Both of the incidents are thought to be racially motivated. Rumors are circulating throughout the city of more ethnic clashes, even shootings, but according to the Russian internet newspaper, the rumors have not been confirmed.

The city has initiated unprecedented measures of security as a result of these tensions, most of the city's parks have been closed, bars and restaurants have been shut down early in the evening on Monday. This is not the first of such heated situations in Russian cities. Last year, the northern Russian city of Kondopoga saw very severe clashes between the Chechen minority and the Russian ethnic majority of the city, which was followed by the burning of cafes owned by the Chechens, and major fights between the two ethnic groups and the OMON special police units.

The number of such incidents has escalated in the past few years in Russia, despite the disappearance of the main cause of such feelings, the war in Chechnya, and the terrorist acts in Russia's main cities. The escalation can be attributed in part to the revival of nationalistic feelings as a result of mixed messages sent by the Russian government. The "rise" of Russia's economy and power-status on the world arena has not been duly complemented by efforts to emphasize Russia as a country of a multitude of nationalities, ethnic backgrounds and religions. Though the Russian government cannot be blamed for stirring up the feelings of ethnic strife, it is clear that not enough effort has been made to suppress them.

Norilsk Nickel is left as winner in bid for LionOre

Norilsk Nickel is set to become the winner in the battle for Canadian mining group LionOre, after its rival bidder Xstrata said the price was too steep. As the Wall Street Journal reports in Tuesday's issue:

Xstrata PLC said it wouldn't exercise its right to match OAO Norilsk Nickel's 6.82 billion Canadian dollar (US$6.43 billion) takeover bid for Canadian gold and nickel producer LionOre Mining International Ltd. Norilsk, a Russian nickel and palladium producer, unveiled its enhanced bid last week, which topped Xstrata's latest offer of C$6.2 billion. LionOre found Norilsk's offer superior to Xstrata's. Under a support agreement, LionOre must pay Anglo-Swiss mining company Xstrata a C$305 million breakup fee if it takes an outside bid.

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.

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.

The battle for control of LionOre started in March with a bid from Xstrata of C$4.6bn, trumped last month by a bid of C$5.3bn from Norilsk. This blog has extensively covered the bidding war. Xstrata quickly increased its offer to C$6.2bn, but then Norilsk raised the stakes with a bid of C$6.8bn or C$27.50 a share, a price that led some in the industry to worry that prices were getting out of hand. The acquisition will be the biggest a Russian company has pursued externally so far and only looks to be the start with the pending battle of Russian government-owned Aeroflot airlines for Italy's Alitalia, and Basel's purchase of a controlling stake in Canadian parts maker Magna International.

Monday, June 04, 2007

Russian - US relations: more room to manouver than it seems

The upcoming summit of the G8 countries in Heiligendamm promises to be another in a line of "successful" summits such as the recent EU-Russia summit in Samara in May. Up until last week, the main cause for this was the radically contrasting view of the US and Germany on the issue of global warning and carbon emission reduction programs. But now, it is the Russian president (pictured) who has added to the headaches for Angela Merkel. And maybe even built up headaches for the other G8 members, who as the International Herald Tribune states are now looking for the answer to the billion dollar question: "What (if anything) to do with Putin?"

As Andrei Kolesnikov of Kommersant, the Russian representative to the conference that made the top headlines on Monday notes, by the end Vladimir Putin relaxed a little bit and "started to issue statements that were to be marked with an "extremely urgent" notation in the world's newsreels". Although none of the news was really that new and unexpected, the presence of it in a "package" of aggressive diplomatic rhetoric made every one issue by itself seem dramatic. See for yourself: Russian missiles will target Poland and the Czech Republic; the US is blamed for starting a new "cold war" and for continuing its "imperialist" intentions; Russia will withdraw in frustration from a number of European and global security arrangements; the presidential terms in Russia could be expanded to 5-7 years.

The Russian president is pursuing the only possible and effective strategy to maintain face and come dry out of the water, something resembling rhetoric bombardment of the opposing side. His advantage for now is that the opposing side has no clear idea on how to approach the issue. After the Russian missile launches, the Russian president was personally invited to the Bush family compound in Maine in July for a close round of talks with his US counterpart. If you contrast the sparks and threats (or warnings) coming form Russia to the confusing statements, mostly coming from unidentified sources in US and European administrations, it appears that the US sees Russia's goal - to negotiate on the multitude of issues that are stumbling blocks in the relations and for the US to affirm again and again that Russia's interests will be recognized. The International Herald Tribune reports Russia's top current critic as saying the following:

"I think there must have been peals of delirious laughter echoing around the ornate chambers of the Kremlin when the invitation to go to Kennebunkport arrived," said Zbigniew Brzezinski, who was national security adviser to President Jimmy Carter. "Putin has been spitting at the United States for the last year, and what is the reaction? An invitation to a family gathering."

Yet another very important event, which has largely stayed off the radar screens shadowed by the missile targeting warnings issued by Russia, concerns Putin's plans for the future.

Four years, of course, is a very short time period (for a president). I think, for today's Russia, five, six, or seven years is a very acceptable number. But the number of terms should be limited. I will certainly work after 2008. But where, and in what area I cannot yet tell. I have certain thoughts on this issue (the issue of Vladimir Putin's post-2008 career path). Even under current Russian law, I have not reached the retirement age; so sitting at home, doing nothing would be just absurd. We will see, much will depend on how the political process in Russia will evolve at the end of this and the beginning of the next year. There are many options

This should be a very affirmative signal to the West that Vladimir Putin's Russia and its current diplomatic stance on issues from Kosovo and Iran to the ABM shield should not be put on the backburner until Putin leaves in less than a year, when a new dialog can be established with the next president. Vladimir Putin confirmed that he will stick around, and with him his probable influence, if "the political process" goes not as planned. Russia's position will not change and will have to be dealt with. This is the main signal that President Putin sent at his press-conference and will probably communicate to his colleagues in Germany on Wednesday.

Although most Western publications admit the Russian's president's success in his aggressive diplomatic battles which have caused wide rifts in public opinion in Europe and US Congress itself, in particular over US ABM deployment, the Financial Times cites a number of difficulties:

Mr Putin should beware. His tactical mastery may help him outmanoeuvre the west on a day-to-day basis, but the enduring legacy of his cunning is likely to be a Europe and US that deeply distrust Russia.

Yet, it is Mr. Bush's administration which will leave the White House in 2009, and whose influence on US policy-making will be dwarfed by Mr. Putin's probable influence on Russian policy-making no matter what role he pursues. Many refer to Russia as only one of many factors influencing US foreign policy, and rid it of the ultimate superpower status with the ability to participate in all issues. Yet, as the US has much more important issues to think about, will not it then be forced to find quick compromises with the less "important" countries of the world (Russia), to mend the broken bridges with countries on the center of the US foreign policy screen - Iraq, Syria, and Iran? The array of possible deals reached between the current US administration engaged in last-ditch attempts to mend its world-wide image and the "barking" Russia may indeed be worth considering for the US in 2008 and 2009. This topic will dominate the Maine meeting between Mr. Bush and Mr. Putin.