russia's true tales of terra

"Damn"

2008-12-03T23:03:00.005-06:00

Oil (Brent) on Intercontinental Exchange at around 12am EST - 44$. My comment is the picture below. For those who do not understand Russian verbiage - пиздец in Russian means "deep shit" very lightly translated. So combine the first and last letter of the word and you get this symbol. On second thoughts, the Russian ruble could acquire this as its official sign. For anyone who thinks I am biased, this letter should have been printed on USD years ago based on the debt level.

From Platinum to Wood

2008-12-01T21:28:00.003-06:00

The ruble last year was considered by some foreign analysts and by the majority of Russian economists as a symbol of the revival of multi-currency domination and a rise of emerging market economies. The $600+ billion of foreign exchange reserves backing it made it seem invincible to many.

Yet the bleeding continues. With the major world economies slipping into official recession, Russia's once vast currency reserves continue to dwindle at a weekly pace. As Bloomberg reported today, the Russian Central Bank has reportedly sold around $7.5 billion in foreign currency reserves to prop up, or rather prepare a spiraling down of the ruble. It is now become the norm for the ruble's trading corridor to be expanded by around one percent each day.

The ruble is not technically kept as a free-floating currency, rather it is pegged to a euro-dollar basket, at almost 50/50, meaning the central bank intervenes to prop up the ruble only if the ruble is trading above or below determined range to the basket. Now, the expansion of the corridor for the past month has meant that the ruble has been deflating toward the euro-dollar basket at around 1% each day, and many analyst expect the total currency fall to be around 20-30% by year-end. The Central Bank could let the currency slide, but this may spiral out of control requiring the bank to intervene at a later date with a commitment to purchase rubles in the tens of billions of dollars/euros over the course of a few hours. This is why the weekly slide in reserves now totals over $5billion. Over a week this seems marginal, but multiply that by 50, and you see the reserves shrinking from over $449 billion last week to less than $200 by end of next year.

Russia has suffered an investment outflow from the economy of around $190 billion since August, a staggering amount which has resulted in the stock market fall by over 75%. The future does not look any brighter. The Russian government now positions itself as the sole provider of liquidity to Russian corporations which are being shunned by foreign creditors or at best are facing borrowing rates in excess of 12-15% in dollars (couple that with the ruble's deflation - the companies earn money predominantly in rubles and you face interest and repayment rates at close to 25%+). Over the past months the Russian government has already provided multi-billion dollar loans to Rosneft via its Vnesheconombank of $4.5 billion. It has also committed similar amounts to Sberbank and most other financial and industrial institutions.

Unfortunately there is a sour link in the equation of the Russian state funding Russian companies, it is the former. While it is true that many investors wonder why Russian companies are costing pennies right now, even if you price in a fall in commodity prices and weak import expectations from developed economies and India and China, it still does not on paper necessitate a 75% drop in value. The reason is that questions abound on the companies' funding source - the Russian government. With oil closing today at less than $50 (Brent) and Urals trading as usual below that, the Russian government will dip into its rainy-day fund next year to maintain a balanced budget. If this continues so rapidly, and unexpectedly (none of these assumptions seem to have been priced into Kudrin's planning models, which have been revised last week by a factor of two - down) Russia's reserves will run out by early or mid-2010 and it will have to actively borrow from creditors. As of now, Russia has the ability but not the need to borrow. It is a question if Russia decides to begin the process in 2009.

The Central Bank must be praying the world economy will turnaround. What the majority of analysts believed was an "island of stability" when the year 2008 began is now drawing the most pessimistic conclusions. As Putin said today commenting on the market downfall and noting the inability of the government's measures to overcome the nervousness and panic on global exchanges he called it an "ugly" and "unfair" measure. The Kremlin unusually finds itself dealing not with governments but with investors - major investors who are shorting Russia. It is a truly invisible front, and one which has taken major banks and a few economies into bankruptcy. The economy is Russia's concern for 2009, and the ruling elite better prioritize.

New Format

2008-11-30T01:43:00.003-06:00

After much thought, and after careful consideration of the manpower available and its experience (mine mostly) it is best to focus the blog on the understanding of Russian evolution in this time of crisis, which to many has invaded the circumstances unexpectedly. Why then is it unexpected? Is the Russian economy prepared? Are the Russian people today calmer than they were exactly ten years ago when the severity of the government's default shattered all hopes toward a recovery? RTTT will provide an explanation of this and put it into a perspective...

The Curious Case of the Markets

2008-11-15T10:57:00.003-06:00

As reported by the Guardian, the world leaders gathering in Washington today are completely overwhelmed by debt, with one particular exception - Russia. Refer to the listing below:

- United States ($8,400bln)
- Japan ($7,450bln)
- Italy ($2,190bln)
- Germany ($2,070bln)
- France ($1,630bln)
- United Kingdom ($1,200bln)
- India ($630bln)
- China ($580bln)
....
- Russia ($76bln)

Russia's reserves are enough to cover its debt burden five times over and still have leftovers for a corporate party where Pink Floyd can fly in and perform in President Medvedev's office. Why is it then that its economy is being battered, its major companies have seen share prices fall by 75%+ since May? Look for answers in the wild-ride the oligarchs had on the global leverage train on the back of commodity prices shooting through the roof along with the sudden choking of financial inflows from abroad in August, not due to Georgia, but due to a general liquidity problem in foreign markets. Who would hold money in Emerging markets, when you could feel safe in US Treasuries at a time of recession? Russia's ruble has faced significant pressure after strange decisions by its Central Bank to raise the base borrowing rate to offset the currency's fall while ignoring any pressures on the credit market within the country.

All in all, Russia has for three months been on the short-list of investors worldwide. And you better believe it when people tell you that a 20% chance of default is now priced in on Russia's debt. Investors speculate that the riddle wrapped in an enigma will not be able to pay-off $80 billion with $400 billion...very crudely speaking. It may happen within a year if the same slope is followed.

Thoughts

2008-11-14T20:10:00.002-06:00

- President to be elected for six years
- Vladimir Putin may step in for 2010 onwards
- Russia unbelievably for some rattled by financial crisis, losing 20% of its reserves in a mere three months
- Saakashvili being threatened to be "hung" be his balls (doubtful he has any left)
- Iskander in Kaliningrad and Belarus

Maybe this blog should revive at some point after a year of being shut down. At least a brief version of it.

Final note...

2007-10-30T20:15:00.001-06:00

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

-Niccolo Machiavelli - "The Prince"

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

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

All the best!

-nikolay i.

What will remain of Fradkov...

2007-09-16T11:49:00.000-05:00

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

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

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

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

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

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

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

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

"We have already exited from our short pants"

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

Putin and Zubkov - Less complex than it seems

2007-09-16T09:24:00.001-05:00

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

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

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

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

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

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

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

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

Blog is on Break!

2007-08-05T20:28:00.000-05:00

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

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

2007-07-26T11:50:00.000-05:00

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

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

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

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

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

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

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

Cartoon of the Week

2007-07-20T09:11:00.001-05:00

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

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

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

2007-07-19T22:55:00.000-05:00

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

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

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

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

Carlyle, the US firm, closed its Moscow office in 2005 and ditched plans for a $300m Russian fund. TPG sold off an investment it made in Russia’s PIT brewery, which was bought by Heineken in 2005.
The Russian investment market is dependent on insiders, such as Baring Vostok Capital Partners, which announced a $1bn fund in March for mid-sized investments. Alfa Capital Partners, Sputnik Group and Sun Group are also active.

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

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

The child sent to murder Berezovsky

2007-07-19T14:19:00.000-05:00

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

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

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

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

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

Russia's response: Bombers intercepted in British airspace

2007-07-18T10:22:00.001-05:00

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

Two Tu95 “Bear” bombers were dispatched from their base on the Kola Peninsula in the Arctic Circle and headed towards British airspace.
Russian military aircraft based near the northern port city of Murmansk fly patrols off the Norwegian coast regularly, but the RAF said that it was highly unusual for them to stray as far south as Scotland.
Two Tornado fighters, part of the RAF’s Quick Reaction Alert, took off from RAF Leeming, in Yorkshire, to confront the Russian aircraft, after they were shadowed by two F16s from the Royal Norwegian Air Force, The Times has learnt.
“The Russians turned back before they reached British airspace,” an RAF spokesman said.

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

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

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

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

Patriot Games : the end of the Litvinenko scandal is near

2007-07-16T23:46:00.000-05:00

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

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

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

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

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

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

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

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

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

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

2007-07-16T13:19:00.001-05:00

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

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

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

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

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

Test yourself in "new" Russian history

2007-07-15T22:15:00.000-05:00

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

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

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

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

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

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

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

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

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

(No surprise here)

4) Multiple choice: A sovereign state requires:

Answer: the ability to independently produce military armament

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

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

Russian military throws a giant open-air party for draftees

2007-07-14T18:32:00.000-05:00

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

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

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

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

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

2007-07-12T09:37:00.001-05:00

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

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

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

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

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

Britain and Russia drift further apart over Lugovoi

2007-07-11T22:54:00.000-05:00

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

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

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

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

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

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

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

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

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

Finding holes in the US Missile Defense Shield

2007-07-10T18:54:00.000-05:00

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

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

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

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

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

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

Can the US take Gabala alone?

2007-07-10T14:56:00.000-05:00

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

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

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

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

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

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

Sochi secures the 2014 Winter Games

2007-07-04T20:45:00.000-05:00

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

Despite previous comments about Korea's advantages as another route to the booming economies of Asia, Russia's figuring in Ernst & Young's report as the #5 most attractive destination for investment if not beat out Korea's advantage, at least tied it.

The Russians put an impressive show of strength in Guatemala, by flying in their huge jumbo cargo airplane carrying the equipment needed to sustain an artifical ice rink. Not to mention the multitude of past Russian olympic champions and the "captain" of the team flying on the presidential jet Vladimir Putin himself (the Austrian chancellor took a regional flight to Guatemala). At least the Guatemelis were impressed by Russia's bidding.

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

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

Blog Break - Russian Media Blog Carnival Wrapup

2007-07-02T16:55:00.000-05:00

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

Weblog	Location	Lang.	Article	Published
Frankfurter Rundschau, Monika Porrmann	Germany	D	"Russische Blogger schreiben wie die Saporoger Kosaken"	May
Russia's true tales of terra, Nikolay I.	USA	E	"He writes about Putin, and it’s interesting! Andrei Kolesnikov’s Real-Life Putin"	01 June
diVERse, Kalle Kniivilä	Sweden	S	"Är det spegeln det är fel på eller…"	02 June
Russia Blog, Nicolai N. Petro, Professor of political science at the University of Rhode Island	USA	E	"Needed: Better Western Coverage of Russia"	03 June
UPLOAD, das PDF-Magazin	Germany	D	"Die russische Blogosphäre ist ein Who’s Who der Intelligenzija"	04 June
Roger Blum, Director of the Institute of mass communication studies IMW at the University of Berne	Swiss	D	"Medien in Russland und in der Schweiz - ein Vergleich"	05 June
Krusenstern, Jürg Vollmer	Swiss	E	"The Russian newspaper 'Novaya Gazeta' is a paradox!"	06 June
diVERse, Kalle Kniivilä	Sweden	E	"Is something wrong with the mirror?"	07 June
Krusenstern, Jürg Vollmer	Swiss	D	"Die russische Zeitung 'Nowaja Gaseta' ist ein Paradox!"	08 June
Mark MacKinnon, two-time winner of Canada’s top reporting prize and former Moscow bureau chief for "The Globe and Mail"	Russia and Canada	E	"The missing ingredient"	08 June
Sean Guillory, historian from Los Angeles	USA	E	"Old Russian Newspapers"	10 June
Krusenstern, Jürg Vollmer	Swiss	D	"Die 5000. Ausgabe von Ogonjok, der ersten Illustrierten Russlands"	11 June
Gedankenjournal, Andreas Solf	Ukraine and Germany	D	"Erwartungshaltungen russischer Rezipienten gegenüber Medien"	12 June
Ulrich M. Schmid, Professor of Russian Culture and Society at the University of St. Gallen	Swiss	D	"Elena Tregubova: Einblicke in die Gängelung der russischen Medien"	13 June
Joachim Dethlefs, Freelance Journalist and Blogger	Germany	D	"Englischsprachige Russland-Blogs"	14 June
Alexander Günther, Historian and "Readers Edition"-Editor	Germany	D	"Der russische Nationalbolschewismus und seine Medien"	15 June
Eduard Steiner, Russian correspondent of Austrian national daily newspaper “Der Standard”	Russia and Austria	D	"Die Journalistin Jewgenija Albaz: Was soll ich fürchten?"	18 June
Eduard Steiner, Russian correspondent of Austrian national daily newspaper “Der Standard”	Russia and Austria	E	"Yevgenia Albats: What should I be afraid of?"	19 June
Heribert Prantl, head of the national desk of the "Süddeutsche Zeitung" and most cited author of editorial commentaries in German press	Germany	D	"Putin denkt und lenkt"	20 June
Krusenstern, Jürg Vollmer	Swiss	D	"Der Kreml droht Journalisten mit Berufsverbot"	21 June
Simon Sturm, Student of Journalism at the University of Dortmund	Germany	D	"Rheinskaja Gazeta - die erste russischsprachige Tageszeitung Deutschlands"	22 June
Gedankenbörsen-Blog, Rafael Wiedenmeier	Swiss	D	"Die Medienlandschaft von Kasachstan"	25 June
Krusenstern, Jürg Vollmer	Swiss	D	"Ein Jahrhundert Journalismus in Russland an einem Tisch"	25 June
Sarmite Elerte, Editor-in-chief of Latvia’s leading newspaper "Diena"	Latvia	E	"The role of the media in new democracies"	26 June
Russia Blog, Nicolai N. Petro, Professor of political science at the University of Rhode Island	USA	E	"Russia's New Cyberwarriors"	27 June
Nina Schneider, Swiss video-editor and language instructor at the Russian State University for the Humanities RGGU in Moscow	Russia and Swiss	D	"Ausser den Vorzeichen hat sich seit der Sowjetunion nichts verändert"	27 June
Max Schmid, Russian correspondent of Swiss Public broadcasting Radio SR DRS and winner of Swiss-Russian Journalist Award	Russia and Swiss	D	"Mückenstiche oder das Hündchen, das den Elefanten anbellt"	28 June
Nurija Fatychowa from Tscheljabinsk for "fluter.de" - Das Jugendmagazin der Bundeszentrale für politische Bildung	Russia and Germany	D	"Seelen-Striptease oder Netz-Demokratie?"	28 June
Sergej Guk, commentator of "Voice of Russia" * "Голос России"	Russia	D	"Russische Journalisten sind in der Nacht mutiger"	29 June
Krusenstern, Jürg Vollmer	Swiss	D	"Russischer TV-Sender NTW gehört nun zu 100 Prozent Gazprom"	29 June
Natalja Lipowa, journalism student at the Saint Petersburg State University	Russia	D	"Existiert die Pressefreiheit in Russland?"	30 June

Root for Sochi-2014 - Apparently it's close

2007-06-28T19:29:00.000-05:00

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.

Photo of the Day

2007-06-27T06:47:00.000-05:00

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

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

2007-06-26T07:32:00.000-05:00

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.

Muesum of Soviet Occupation of Ukraine

2007-06-25T09:39:00.000-05:00

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.

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

2007-06-24T16:54:00.000-05:00

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.

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

2007-06-20T23:06:00.000-05:00

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.

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

2007-06-19T19:58:00.000-05:00

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)

2007-06-19T16:38:00.000-05:00

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.

Moscow - World's Most Expensive City

2007-06-18T01:09:00.000-05:00

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.

Weekly wrapup

2007-06-15T00:29:00.000-05:00

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)

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

2007-06-14T23:46:00.000-05:00

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

2007-06-14T19:59:00.000-05:00

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.

Scissors are cutting up the Russian oil & gas industry

2007-06-13T18:37:00.000-05:00

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.

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

2007-06-11T21:08:00.000-05:00

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.

Russia cements its status as an economic powerhouse

2007-06-10T16:49:00.000-05:00

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

2007-06-10T10:11:00.002-05:00

A great cartoon by The Economist:

Weekly Wrapup and Weekend Video

2007-06-09T16:34:00.000-05:00

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.

Putin gives harsh opinion on Kosovo

2007-06-08T17:22:00.000-05:00

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.

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

2007-06-07T22:43:00.000-05:00

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

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

2007-06-05T19:38:00.000-05:00

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 Gazeta.ru 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

2007-06-05T00:14:00.001-05:00

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.

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

2007-06-04T23:07:00.001-05:00

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.

Putin's press-conference making headlines

2007-06-04T00:42:00.000-05:00

Vladimir Putin's quote of the month came during a press-conference he gave to journalists representing the G-8 countries at the eve of the summit on Friday, that has now been published or referred to in all of the top Western publications (Financial Times, The Times; The Guardian; The Wall Street Journal ). A full commentary will be published by this blog later on Monday. For now enjoy:

Q: Do you consider yourself a "dyed-in-the-wool democrat," as Gerhardt Schroeder once called you?

A: Of course I am. I am an absolutely pure democrat. The real tragedy is that I am the only one. Elsewhere in the world there just aren't any others. Let's look at what is happening in North America -- nothing but horror. Torture, homeless people, Guantanamo and the detention of people without trial. Let's look at what is happening in Europe. Look at how they deal with demonstrators. The use of tear gas in one capital or another, the murder of demonstrators in the street. Then look at the post-Soviet space. Ukraine, all our hopes were on the guys in Ukraine, but now they are drifting towards tyranny and a complete breach of the constitution.

Since Mahatma Gandhi died, there's just no one left to talk to.

Disney's Successes in Russia and the Venture Capital Boom

2007-06-03T12:22:00.000-05:00

Businessweek has published an array of materials focusing on the booming Russian consumer economy. In the "Mouse Ears Over Moscow" article, BW talks about the rapidly growing Russian entertainment industry and the entry of big Hollywood studios onto the Russian movie scene. Disney, in particular has made big "bucks" in Russia most recently with the release of the new "Pirates of the Caribbean" (its star actress Keira Knightley pictured) a few weeks ago. After a barrage of publicity for the movie including billboards four-stories high, the movie generated $14 million in ticket sales and 2.3 million viewers in its first weekend, a new record for Russia, where 1999 movie sales only managed to scrape in a modest $18 million. This is why the creators of Mickey Mouse are planning a massive expansion in Russia:

The entertainment giant opened its Moscow office just over a year ago and now employs more than 50 people. A new Russian-language Disney TV channel is due to be launched this autumn. In January the company teamed up with Sony Pictures Entertainment (SNE ) to create a joint venture for distributing Disney films in Russia. And Disney on Ice, a skating show featuring the likes of Snow White and Sleeping Beauty, came to Russia for the first time in May, selling out shows in Moscow and St. Petersburg. "Russia is a priority country," says Andy Bird, president of Walt Disney International. "We see the potential for growth for several years down the line."

With total box office sales estimated to approach $600 million in 2007, most of the big Hollywood studios have already begun local movie production in Russia and are in for a very competitive market, with Russian TV channels already churning out multi-billion dollar movies and mini-series.

Another article "Russia's Venture Capital Boom", as the name suggests, explores Russia's growing venture capital industry which has gathered much attention from foreign investors who have switched their radar screens from China and India to Central and Eastern Europe, and, most importantly, to the large opportunities available in Russia.

Though the population of Russia is far smaller than China's, it offers investors some of the same advantages. For one thing, connectivity is exploding. Russia is now home to more than 140 million mobile-phone users, and Internet usage and broadband penetration is reaching critical mass. Also like China, local players have had the chance to gain traction in the domestic market, meaning that giants such as Amazon, Yahoo! (YHOO), and Google (GOOG) don't dominate.

Google's competitor in Russia Yandex, has been seen to pursue the same aggressive tactics of internet expansion, and has thus become a prime target for the venture capitalists, along with Russia's Ozon.ru, a version of the popular Amazon.com. While being a full portal with its own mail service, news clustering and aggregation service, blog search, free Web hosting, research, shopping, and many other services, including its own payment system, it also runs one of the largest networks of free Wi-Fi hotspots in Russia. And like Google, it's branching out into mobile search. Its search engine was one of two recently incorporated into the Russian version of one of Nokia's (NOK) new smartphones.

The Russian government has been quick to respond, by setting up a trust to match investments from private venture capitalists. Already, it has agreed to dispense nearly $100 million to three groups of investors. Yet Russian government officials have still been fairly disappointed with the amount of venture capitalist investors entering Russia and applying for funding from the government. Despite the overall stability in the economy relative to a few years ago, the general risky nature of the venture capitalist industry is magnified by the inherent risks of an emerging market economy like Russia, and without very generous government attention it will take longer than necessary for it to grow.

Weekly Roundup

2007-06-02T22:59:00.000-05:00

Here is a snapshot of the week's blog posts as well as the usual video of the week:

1) Polish meat arrested in Germany - Is Russia finally right? As the Russian expression goes "What we fought for is what we stumbled on"

2) You build Shields - We will build Rockets Is Russia restoring the balance of power of distorting it? At close look at the reasons behind Russia's firm military and diplomatic actions

3) Portuguese prime-minister goes for a run in Red Square - How Russia's main attraction has changed over the years

4) US ABM shield - a part of something bigger - a close look at the analysis of Russian military observers on the US global anti ballistic missile shield

5) "He writes about Putin, and it's interesting!" : Andrei Kolesnikov's Real-Life Putin - part of the Russian Media : Blog Carnival hosted by Krusenstern

Finally the honor for video of the week goes to "Leningrad"; the only word to describe them is perhaps "crazy" or "deranged", their concerts have been banned in Moscow due to explicit lyrics; yet this video is one of their calmer songs, more suitable for a soothing Monday morning.

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

2007-05-31T09:41:00.000-05:00

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: russiastruetales@gmail.com

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.

US ABM shield - a part of something bigger

2007-05-30T23:11:00.000-05:00

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.

Portugese Prime-Minister Goes for a Run on Red Square

2007-05-29T23:18:00.001-05:00

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?

2007-05-29T20:32:00.000-05:00

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):

Polish meat arrested in Germany - Is Russia finally right?

2007-05-27T20:15:00.000-05:00

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.

Weekly Roundup

2007-05-25T21:36:00.000-05:00

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.

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

2007-05-24T20:01:00.000-05:00

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.

Business Update: Norilsk Nickel - Xstrata

2007-05-23T18:08:00.000-05:00

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.

Russia Diversifies its Distribution Network: Beltransgaz

2007-05-22T21:16:00.000-05:00

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

2007-05-22T18:14:00.001-05:00

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

2007-05-22T08:53:00.000-05:00

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.

Slowly But Surely

2007-05-20T23:10:00.000-05:00

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).

The Change in Command is Russia's Biggest Problem

2007-05-19T22:40:00.000-05:00

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.

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

2007-05-18T19:05:00.000-05:00

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.

Russian Journalists Fight Censorship

2007-05-18T18:10:00.001-05:00

In the past days several journalists have left the Russian News Service (RSN - Русская Служба Новостей) protesting what they call very harsh censure coming from the new company executives, appointed in April from the state-run Channel One (Первый Канал). As Kommersant reported today, a former employee of RSN Artem Khan, has told the paper of key journalists leaving the radio service amid the developing scandal.

The RSN is part of a radio-holding Russian Media Group which owns a variety of radio stations, including the popular Russkoe Radio, Xit-FM, Maximum, and the Russian News Service radio station. The audience of Russkoe Radio is in the range of 7.5 million listeners. Adding the entire auditorium of all the radio stations of the Russian Media Group gives a substantial share of the entire Russian radio audience, at least in and around the Central-Russian area. Russian News Service provides news broadcasts for all the radio stations of the Russian Media Group, and used to operated live broadcasting for its news services.

The scandal began in mid-April, when the head of RSN, Mikhail Baklanov was fired from his post which he occupied since the company's inception twelve years ago. A team from the state-run Channel One replaced him and was quick to initiate its own rules regarding the news content of the radio station. According to Gazeta.ru, most of the political stories had to be devoted to the state-party United Russia and the Public Chamber. If human rights activists were to be mentioned in the commentaries, they had to be involved with the state (Vladimir Lukin, Ella Pamfilova). At least 50% of the news content had to be positive, and all the news broadcasts had to end on a positive note (this by itself is not that strict and gives leeway, but). The likes of opposition members such as Kasyanov, Ryzhkov, or Kasparov were to be mentioned only in extraordinary circumstances and referred to as "liberal-radicals".

Apart from the content censure, radio listeners noticed that all live broadcasts had vanished in late April from the radio waves of Russian Media Group stations, and according to employees of RSN all reports were being rigorously reviewed by the new radio executives. Soon after the change in command at RSN, the coverage of "Nashi" protests outside the Estonian embassy in Moscow was formatted due to the journalists seeking to "sympathize" with the Estonians. The journalists themselves claimed that they simply referred to the protests as "provocative". It is hard to find fault in the defense of the journalists, as the actual protests turned a bit violent when the "Nashi" members attacked the car of a Swedish ambassador coming out of the Estonian embassy.

Not much commentary has appeared from both sides of the conflict, even less has appeared in the Russian press (Kommersant, Gazeta.ru and Novaya Gazeta are the exceptions). The new head of RSN made a statement that the events are a natural occurrence when a change in the executive structure occurs, and that replacements for the journalists will be found. Some of the journalists who have departed from RSN referred to a previous agreement with the station itself rather than a sign of protest.

Such censure attempts on a scale as big as the Russian Media Group, which owns over 50 Russian radio stations has not happened for a long time. Most analysts suggest that the state or state-backed forces are trying to turn around the station's news team to provide news friendly to the United Russia party, especially given that the audience of the radio stations often includes listeners who get their news either from TV (essentially loyal to the state) or morning or evening radio shows while driving to work. The bulk of the audience lives in Moscow. The state essentially block any remaining opportunity for dissent in the case of an extraordinary scenario; the Ukrainian orange revolution is probably what the radio heads have in mind. Of course this may be an act of loyalty by mid-level administrators in the Russian Media and the Government who are doing this to prove their worthiness to the current and maybe future Russian state heads. This factor, which can be attributed to the side-effects of President Putin's newly constructed "vertical of power"; but given the size of the audience involved, this factor is most likely secondary.

The story adds another unflattering page to the book of the Russian state's fears of a Ukrainian-style scenario. It is unfortunate given the fact that the opposition in Russia fails to unite any credible personalities, aims to include a broad spectrum of parties, ranging from hard-core liberals of the 1990-s to the National Bolshevik Party. Similarly, whenever opposition leaders do appear on TV, or float around in internet blogs, they inspire little support, instead generating satirical commentary. Limiting the exposure of the so-called opposition in the face of the "Other Russia" will work to their advantage and will continue fueling anti-Russian feelings abroad.

Blog is Taking a Break

2007-05-15T19:45:00.000-05:00

This blog is taking it easy this week. Thanks to those readers who have been subscribing to the posts in this blog and those who visit the blog occasionally or even accidentally. Next week will see posts concerning Russian-American relationships relating to Ms. Rice's visit to Moscow, Russian economy outlook, posts on Russian Journalism, as well as the summary of the EU-Russia summit in Samara (which does not look good).

Here is the video of the week. Basement Jaxx gives us their version of Russian culture: dancing bears, balalaikas so big they have their own balalaikas, and a Stalin-looking general on a tank.

Blog-Carnival Russian media

2007-05-15T12:29:00.000-05:00

The below announcement has appeared in the comments to a previous post of mine. I am publicizing it to help increase the awareness in the blogosphere and the internet. This blog will make its contribution (at least one) in the days to come.

Today is the launch of the world's first ever dual-language "Blog-Carnival Russian media". All English-speaking and German-speaking bloggers are invited to publish contributions on the Russian media on their weblogs between 1 and 30 June 2007 (see more www.krusenstern.ch/p716.html).

The launch date for the "Blog-Carnival Russian Media" has not been chosen by chance for today, 11 May 2007 , the "Novaya Gazeta", one of the last independent newspapers in the Russian Federation , is to be awarded the renowned "Henri Nannen Prize" 2007 in Hamburg for its services to press freedom.

The aim of the Blog-Carnival is to gather together as many different viewpoints and pieces of information as possible on the subject of the Russian media. Behind this initiative is the notion that the closer we get to the Russian parliamentary elections in October 2007 and the presidential elections in March 2008, the more the Putin government is clamping down on the media in Russia.

This Blog-Carnival is an opportunity for bloggers of both East and West to learn about the media that appear in the Russian Federation or report on it from abroad. The Blog Carnival will therefore bring the contributing bloggers new information, new contacts and a stronger network transcending national borders and language barriers (see more www.krusenstern.ch/p716.html)

Poka, poka!

Russia and the EU - Too Far Apart

2007-05-14T19:18:00.000-05:00

The upcoming summit between the EU and Russia, scheduled to happen at the end of this week in the Southern city of Samara, will most likely be an unprecedented failure on a scale bigger than the last summit which was blocked by Poland over a meat export dispute with Russia.

Today, German Foreign minister Frank-Walter Steinmeier will fly to Moscow for an unscheduled meeting with his Russian colleague, the Financial Times reports. The reason for the visit - a last attempt to save the EU-Russia summit; the most likely result, however, will be Russia shifting the blame on its Eastern European counterparts, and vice versa (something that has already happened at the EU gathering of foreign ministers). The German foreign minister is facing a very tough situation, one so complex that the blame now falls on all bargaining sides. Poland still has not given the "all-clear" to start a full-fledged dialog between the Old Continent and Russia on a new long-term partnership agreement because of Russia's ban on Polish meat. Lithuania threatens to put down its veto for Russia's shutdown of the oil pipeline to its country which Russia claims is in poor condition. And finally, Estonia is deeply distressed with Russia's reaction over the movement of the Bronze soldier, the riots in Tallinn, and the "siege" of the Estonian embassy that have recently been put to rest in Moscow.

As Russian Kommersant reports, several weeks ago the only question in dispute was the ban on Polish meat, which Poland and Russia were willing to settle for the sake of the EU-Russia summit. Yet the tension over Russia's aggressive response to Estonia's actions followed by ear-drilling propaganda on Russian television set to further increase tensions amongst the Russian people, revitalized the Soviet-era fears for its Eastern neighbor.

The issue is further complicated by the fact that Germany must mend the dent in EU-Russia relationships before its rotating EU presidency expires this Summer. Being the leading proponent of warm Russian relations, Germany faces tough questioning from the new EU members over the appropriateness of such a policy after Russia's continued attempts to solidify its position as the monopoly supplier of energy to Europe, and the failed diplomatic actions to solidify its positions in Ukraine, Belarus, and the Baltic states which sent a very negatively sounding echo across the whole of Europe.

Add to this problem Russia's stance on Kosovo, inter-European disagreements over the US ABM system in Poland and the Czech Republic, the entry of new players into the EU in the face of Nicolas Sarkozy and Gordon Brown, whose policy toward Russia is as clear as mud, and any reasons to expect a "breakthrough" in EU-Russian relations vanish. Yet, given the die-hard stance of Eastern Europe toward Russia, the only chance of success if it is actually desired by both sides will come from the position of the new EU players - the heads of the UK and France. Germany alone has no power to fight off vetoes from Poland, and maybe even Lithuania and Estonia. The balance of power right now is in free float, the direction in which the scales will tip will be decided in the next months by the foreign policy makers in London and Paris.

Central Asia - Energy DIversification for Europe or Transportation Monopoly for Russia?

2007-05-13T12:44:00.001-05:00

This week Russia struck a landmark deal that is set to be one of the few but badly needed diplomatic and political victories of Russia in the ex-Soviet Republics. The foundation for success was the usual – energy interests. Despite numerous attempts by Europe, and even the US to reduce energy independence of the Old Continent on its Eastern neighbor, Russia has managed yet again to avert its loss of influence in being the dominant supplier of oil and gas into Europe by managing to interest its Central Asian partners. This of course has come at a cost of opening its own projects and transit routes, a long-fought for national treasure, to its energy partners, in the face of Kazakhstan and Uzbekistan.

Over the past years, several projects have been undertaken to stem Russia’s power in energy supplies into Europe; the pace of change in this area of relations between Europe and Russia has accelerated, fuelling interest from the US, after the two supply wars involving Ukraine in late 2005, and Belarus in late 2006. Europe became deeply concerned that at a point in time, Russia might use its vast pipeline network to influence first of all the Eastern European countries, and maybe even promote its own policy by threatening cut-offs to the whole of Europe.

The BTC pipeline (Baku-Tbilisi-Ceyhan), offering a large supply of oil out of Azerbaijan into Europe without any Russian territorial or economic participation was the first in a series of such deals. Next, Europe was eyeing the ever-increasing growth in supplies from Central Asia. With Kazakhstan’s Kashagan oilfield, one of the biggest discovered in years, Turkmenistan’s enormous quantities of natural gas, and the new “democratic” allies of the West in the Caucuses region, the potential for a vast network of pipelines to be built out of Central Asia into Europe, without going through Russian territory became open. Russia had much to lose; not only the control over the pipeline network (which as we saw in the Ukrainian crisis proved to be more important than control over actual supplies); Russia’s underinvestment into its own oil and gas fields and a growing internal market, meant that an ever larger share of its supplies internally and into Europe would have to come out of Central Asia.

BTC Pipeline

Earlier this year Russia further expanded its pipeline network into Europe by signing a deal with Bulgaria and Greece for the construction of the Burgas-Alexandroupolis pipeline, set to bypass Turkey, a key energy ally and the host of the BTC pipeline. But the question of Central Asian resources remained open. In April of this year Kazakhstan and Turkmenistan began signaling their willingness to discuss energy transportation with the West, rather than Russia.

As of now two potential projects are in planning stage, both linking Central Asian energy supplies to European customers. The first, the Trans-Caspian pipeline network is set to go under the Caspian sea and possibly into the BTC pipeline (in the case of oil); the other, the Near-Caspian pipeline is set to go around the Caspian sea (into Russian territory, where it would be linked to Russia’s pipeline network or would be shipped from Novorossiysk to the Burgas-Alexandroupolis pipeline, also under Russian control.

Burgas - Alexandroupolis Pipeline

On May 9^th, right after the Victory Day celebrations in Russia came to an end; President Putin took off for his tour of Central Asia, the main points of which would be negotiations with his Kazakh and Turkmen colleagues. The agreements that have been reached (without the finalized technical details) is that the Trans-Caspian pipeline network would essentially be put on hold with Kazakhstan and Turkmenistan agreeing to build with Russia the Near-Caspian pipeline, whose capacity would be over 10 billion cubic tones of gas by 2010, and could be expanded to at least 30 billion by 2012, a very significant number.

However, Russia’s deal came at a heavy cost. Kazakhstan, which has with every passing year been claiming title of one of the world’s key energy suppliers has been promoting its own interests and will most likely win, as a result of the deal to build the Near-Caspian pipeline, concessions from Russia. As Kommersant reports:

Kazakhstan, which owns a 19-percent share in the Caspian Pipeline Consortium, is most interested in oil issues. It is lobbying in Russia (owner of 24 percent of the CPC) for the approval of a project to expand the pipeline's capacity in exchange for a guaranteed supply to another pipeline, the Burgas-Alexandroupolis line, of 17 million tons of oil annually. That is the only figure that Nazarbaev cited accurately in relation to the CPC, when he said that the pipeline's capacity had to be raised from 23 million to 40 million tons per year. The pipeline already pumps 31 million tons per year, and the expansion project foresees increasing that to 67 million tons annually by 2012.
Caspian Pipeline Consortium

Seventeen million tons, that is, half of the planned increase in transport through the CPC, is being offered to the Burgas-Alexandroupolis line, in which Russia has a 51-percent share. Technologically, the project to expand the CPC implies no less growth in volume. In essence, Kazakhstan is suggesting that Russia exchange the expansion for a guarantee of participation in Burgas-Alexandroupolis. The rest of the oil will be transported by different routes, including the Odessa-Brody pipeline, a competitor of Transneft.

The bottom line of these concessions is that Kazakhstan and Turkmenistan will be sharing profits with Russia from part of the energy flows into Europe, something that has been unprecedented in the past. The alternative for Russia would be to completely lose the alliance with its Central Asian partners, who would ship their energy via Turkey into Europe.

A high-level source within the Russian delegation, cited by Kommersant stated that the idea “to build another pipeline (the Trans-Caspian – Blog author’s note), one that is very technologically difficult and risky does not make much sense. When the pipelines (Near-Caspian pipelines going to Russia (North), and to Uzbekistan and China (South) – Blog author’s note) will be built, it would make no difference for Turkmenistan where to sell its energy supplies, as Russian internal energy prices will approach those of Europe and the US”. However, the Turkmenistan president has confirmed that the idea of the Trans-Caspian pipeline has not been taken off the table and it is an option the country is considering, according to the New York Times. Some analysts, cited by Gazeta.ru take the stance that it is a bargaining option for Turkmenistan which wants to have as much energy interests in Russia and potentially in some projects in Eastern Europe as Kazakhstan will, considering the fact that natural gas from its country is being transported into Europe.

At the time of the meetings of the Central Asian presidents and the Russian leader, the so-called “Anti-Russian energy summit” was being held with the participation of Poland, Ukraine, Lithuania, Georgia and Azerbaijan. The goal of the summit, which at the last moment the Kazakhstan president (the key link in the then active “anti-Russian chain” declined to participate in) was the construction of the pipeline from Odessa (which would see energy supplies from the BTC pipeline and the potential Trans-Caspian pipeline) to Gdansk on the Baltic Sea. Despite the fact that the pipeline is de-facto agreed to be built, the capacity fulfillment will have to come from Central Asia (Kazakhstan and Turkmenistan). Turkmenistan’s neutral position on the issue will mean that in the future it may sign a deal to ship its supplies to Europe outside Russia. Turkmenistan’s highly autocratic regime and the virtual expulsion of all Russian citizens means that it will not listen to any concerns outside of its territories about its actions, unless it is offered economic incentives to do so.

The recent deal between Russia and Central Asia has finally made it clear that the story of friendly relationships on the post-Soviet landscape is only a myth. To capture the ability to negotiate and participate in the energy development projects in those regions means giving up large concessions. The Central Asian republics have an unheard of degree of bargaining power. First, Russian supply constraints to fulfill Europe’s energy contracts require heavy use of Central Asian energy. Second, Europe’s urgent need to diversify means that Central Asia is the likely stable source of future supplies. Third, the fact that Russian and European energy interests collide make Central Asia a virtual golden solution to energy problems for Russia and Europe. The main question that remains is, can the conflict of interests in Central Asia create a win-win solution for Europe and Russia or will the Central Asian map be only solved to appease one side versus the other creating a “bidder’s curse” where the winning side will have to give up too much to become a dominant energy supplier?

UK Retailer Accidentally Promoted Ethnic Cleansing in Russia

2007-05-11T22:44:00.000-05:00

The Guardian reported that British retailer Burton was selling t-shirts for 12GBP with a logo stating "We Will Cleanse Russia of all Non-Russians (Очистим Русь от всех нерусских!). The t-shirt (pictured) was quickly removed from the shelves, when the apparent mistake was discovered by a Burton customer.

When Bristol university student Paddy Shuttleworth spotted an unassuming grey cotton T-shirt in his local Burton menswear shop, he was, to say the least, surprised; not by the price (a modest £12) but by the Cyrillic writing surrounding the doubleheaded eagle motif which, as a Russian language student, he was able to translate. Rather unfortunately, it read: "We will cleanse Russia of non-Russians!"
"I did mention to the girl as I bought one of the shirts, that it was politically probably quite dangerous," says Mr Shuttleworth. The shirt's overall design is an odd jumble of ersatz French logo and Russian iconography, but there is no mistaking the nature of the sentiment, which uses the old word for Russia, "Rus" as a way of distinguishing between ethnic Russians and those with Russian citizenship. "I've spoken to a Russian friend," says Mr Shuttleworth, "and she said you would be arrested if you wore it in Russia."

The UK Times reports that the original intention of the t-shirt, aimed to appeal to the ever0increasing Russian diaspora in London and other parts of the UK, was to say "Be Proud of Russia!". The British newspaper also reports of such translation mishaps in the past:

Prominent corporations have been caught out on numerous occasions by botched translations. In an embarrassing blunder, the brewer Coors was forced to pull its advertisement and change its slogan when the company discovered that “Turn it Loose” translated into Spanish as “Suffer from Diarrhoea”.
Even Coca-Cola was not exempt from humiliation when its slogan “Coke Adds Life” was reportedly translated into Thai as “Coke Brings Your Ancestors Back from the Dead”.

Russian Business Tries US Autombiles : Oleg Deripaka's Venture

2007-05-11T07:22:00.000-05:00

Last week's buyout attempts in Canada by Norilsk Nickel have not had the chance to cool down, when another Russian conglomerate Basic Element (BasEl), owned by number two Russian oligarch Oleg Deripaska, has announced its decision to take a stake in Canadian Magna International. Magna International is an automobile parts maker, but what makes this deal interesting, are Magna's plans for the future. It is considered to be the principal bidder for Chrysler, which is in the process of being spun-off by parent company Daimler-Chrysler, after having a disappointing past three years. Chrysler already accounts for 12% of Magna's sales, and a tie-up of the companies in the future would make great sense from the point of synergies. Similarly, other companies in the running for Chrysler include buyout funs such as Cerberus Capital Management, Kirk Kerkorian, and a combination of Blackstone and Centerbridge Capital.

Although the deal is valued at just $1.54 billion, it is set to give Mr. Deripaska the right to nominate six out of fourteen members on the company's 14-member board, as much as the Stronach family that controls the company. The reasons behind Mr. Deripaska's interest in Magna lies in BasEl's ownership of OAO GAZ, one of the leading Russian automobile manufacturers, and probably the most prospective one. The Wall Street Journal writes that:

Siegfried Wolf, Magna's co-chief executive, who has worked in Russia, said he was able to see how Mr. Deripaska worked with his employees, which was a huge motivating factor in the deal. Mr. Wolf said he then asked Mr. Stronach about his thoughts on Mr. Deripaska and his potential for becoming Magna's partner. The two sides began talks in November 2006.

Mr. Stronach said he spoke to a lot of European companies Mr. Deripaska worked with and they had "the highest regard for him as a businessman." He said Magna did research on who would be a credible partner, and who would be accepted by the international markets, and Mr. Deripaska fit that criteria.

Whether Magna's deal with Chrysler goes through or not, "Russian Machines would certainly have heavy involvement", the Financial Times cites Don Walker, Manga's co-CEO. Magna has serious plans for the Russian automobile market if a deal with Chrysler succeeds. The market is expected to grow by 50% by 2010, which is what Magna analysts have cited according to the New York Times. With Chrysler's principal automobile lines including minivans and the famous Jeep, synergies between GAZ and Chrysler could be created to offer a range of cheaper-Chrysler type cars offered in Russia, built in GAZ factories.

Although the executives at Magna have stated that Mr. Deripaska's acquisition will not have an effect on the negotiating of the deal to buy Chrysler, where Magna' partner is a Canadian buyout group Onex, BasEl's entry into North America and future involvement with Chrysler could alarm US regulators and investigators. Mr. Deripaska is rumored to have been heavily engaged in the aluminum wars in Russia's 1990-s where smelters were bought out in the country under rather violent circumstances. Although Mr. Deripaska's involvement in criminal activity was never proven in Russian court, the US State Department revoked Mr. Deripaska's multi-purpose entry visa into the US on the basis of his having connections to organized crime.

Similarly, Chrysler continued involvement in supplying the Pentagon with several types of vehicles, could potentially raise the issue of US national security as a pretext to remove either Mr. Deripaska or Magna from the bidding if there is opposition to the Chrysler buyout. Chrysler's status as a US household name could also make the regulators uneasy about seeing a Russian oligarch in de-facto co-onwership of the company; fears of US job cuts and export of production to Russia could also be hurdles.

Putin's Riddles

2007-05-09T17:33:00.000-05:00

President Putin's speech at Wedensday's Victory Parade on Moscow's Red Square caused quite a stir in the foreign press. The New York Times interpreted the speech as having "obliquely compared the foreign policy of the United States to the Third Reich". The Financial Times found "renewed attacks on what he (Putin - Blog Author's note) calls US unilateralism, saying there were “new threats” based on “the same disregard for human life and the same pretensions to international exclusivity and diktat as in the Third Reich”.

The speech taken word-for-word from the Kremlin press-service, more specifically the excerpt that caused such an uproar, goes as following:

Victory Day not only unites the people of Russia but also unites our neighbours in the countries of the Commonwealth of Independent States. We are deeply grateful to the generation of people whose difficult fate it was to face this war. They have passed on to us their traditions of fraternity and solidarity and their truly hard-won experience of unity and mutual aid. We will preserve this sacred memory and historical legacy.

Those who attempt today to belittle this invaluable experience and defile the monuments to the heroes of this war are insulting their own people and spreading enmity and new distrust between countries and peoples.

We have a duty to remember that the causes of any war lie above all in the mistakes and miscalculations of peacetime, and that these causes have their roots in an ideology of confrontation and extremism.

It is all the more important that we remember this today, because these threats are not becoming fewer but are only transforming and changing their appearance. These new threats, just as under the Third Reich, show the same contempt for human life and the same aspiration to establish an exclusive dictate over the world.

It is my conviction that only common responsibility and equal partnership can counter these challenges and enable us to join forces in resisting any attempts to unleash new armed conflicts and undermine global security.

What is certain is the indirect reference to Estonia whose people "defile the monuments to the heroes of this war". That reference was very anticipated, since President Putin never made any public statements on the diplomatic conflict between Estonia and Russia, unlike the members of his "vertical of power", rooting for the escalation of a conflict that has hurt Russia more than Estonia.

It is far-fetched, however, to say that the phrase about some force or country out there that shows "contempt for human life and an aspiration to establish and exclusive dictate", the roots of which lie in an ideology of "confrontation" and "extremism", can be attributed to the US. Yet, what it actually refers to is unclear; if the speech were two or three years old, it would be most likely attributed to the extremism stemming from the Middle East. It is very unlikely that this topic could be brought up again, but the range of other meanings of this statement is very narrow (the US is not within the list).

With regard to misinterpretations, there is an euphemism in the Russian language, "The hat is always on fire on the thief's head" (referring to a guilty conscience speaking). The only way a link between Putin's speech and the United States foreign policy can be established is if there is inner belief in the minds of the journalists and political analysts that the US does resemble the mystery country President Putin mentioned.

Interpreting President Putin' speeches has been as easy as interpreting the Sphinx's riddles. Russian journalists and political analysts have for at least three years now been trying to discern who will lead the country after President Putin steps down, and whether he will step down after all. As a result there are at least five candidates for the Russian presidency, two of which most people think will be on the ballot, but not one of them has affirmed the start of the presidential campaign, neither has Putin given the green flag for the race for the presidency.

Sixty Two Years Ago - Victory Day in Europe

2007-05-08T14:56:00.000-05:00

“Your name is unknown; your feat is immortal”; these words are inscribed on the Tomb of the Unknown Soldier in Moscow’s Alexander Park. On May 8^th, 1945 shortly before midnight the German High Command in the presence of Soviet Union Marshal Georgi Zhukov signed a treaty of unconditional surrender to the Soviet Union.

Sixty two years ago the deadliest conflict in Europe came to an end; the worldwide destruction of militaristic fascism would be finalized in September of 1945. Historical consequences resulted in the Soviet Union taking on the biggest blow of the fascist machine, and for four years battling more than three quarters of the combined Nazi forces to their ultimate defeat in Berlin. The Soviet Union was not alone in its struggle. Almost all countries in Europe, defeated by the German Nazis, witnessed atrocities previously unknown both in their cruelty and their scale. Japanese militarism committed crimes in Asia almost mirroring the devastation done to the European continent. In the summer of 1942, the world saw the full extent of Fascist and Imperialist domination. Territories from Calais to Stalingrad, and from Manchuria to the Dutch East Indies lay in the hands of the enemy.

For Russia, May 9^th has inherited the status as one of the few days in the year when the entire nation is united in their celebrations, remembrances, and, most importantly, in their views on the significance of those four years in Russian history. May 9^th can almost be considered the Russian Day of Independence. To this date historians in Russia, and even worldwide engage in hostile debates about the events in the 1930s and 40s; many question the achievements claimed by the Soviet side; some attempt to rewrite history to shift or spread the blame for the war away from the Nazi regime onto the wrongdoings committed in the Soviet Union. These debates will continue for years to come; perhaps in one or two generations they will take a calmer route, as the eyewitnesses of the war-time and post-war events will no longer be with us.

But May 9^th is not about the political backgrounds and the secret treaties that dominated the minds of those that decided the fate of the world back then; it is a day celebrating the defeat of fascism, defeat of imperialism, and defeat of all those values that permitted the idea of slavery, slaughter, and destruction. It is a day to remember those millions who gave their life to this cause without second thoughts; a day when we give our thanks to those who gave us a peaceful world.

Take a closer listen to history; the files below include Molotov's speech on June 22, 1941 announcing the Nazi attack on the Soviet Union, and Stalin's speech on May 9th 1945 to announce the capitulation of the Nazi army.