Thoughts

- 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...

"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.

Sochi secures the 2014 Winter Games

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

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

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

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

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

Root for Sochi-2014 - Apparently it's close

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Moscow - World's Most Expensive City

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

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

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

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

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

Putin gives harsh opinion on Kosovo

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

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

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

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

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

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

Putin's press-conference making headlines

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.

US ABM shield - a part of something bigger

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

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

Lavrov took issue with that Wednesday.

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

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

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

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

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

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

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

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

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

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

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

Portugese Prime-Minister Goes for a Run on Red Square

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• Why Russia is so upset about the ABM in Europe?
• Compressing the Spring
• Update: The New York Times in US ABM in Europe
• ABM Update: Patriot Missiles Again?
• Russia threatening new cold war over missile defense
• A crucial debate on Russia's missile defenses
  

Russia Diversifies its Distribution Network: Beltransgaz

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

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

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

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

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

As If We Could Have Forgotten - From London with Polonium

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

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

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

Britain was forced by public opinion boosted by the ballooning of the issue in the worldwide media to bring the investigation to a close; this was a promise that British PM Tony Blair made in November of last year. Yet Britain must ask itself what benefit it wants to derive from the affair in the days to come, and how far it is willing to freeze up relations with Russia as a result of this case. As The Times reports today in a commentary piece:

Russian prosecutors left open the possibility that he could be tried in his homeland, a way of offering a compromise, should Russia want, although not one in which Britain might have much confidence.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Change in Command is Russia's Biggest Problem

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

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

• 250 billion for reforms of the housing system (the reform itself is set to spread over five years, and given the projections for a reduced budget surplus, this figure will be the bulk of the investment into housing)
• 300 billion for the fund whose aim will be to increase the well-being of the country's residents and sponsor economic initiatives to help current and future generations. As part of the project three new organizations (government-run) will be created: Bank of Development, Investment Fund, Russian Venture Company.
• 100 billion will head toward development of highways and transportation infrastructure, which has been Russia's incurable problem
• 180 billion (!) will be directed to the soon-to-be developed Russian Nanotechnological Corporation
• 56-89 billion will head to the sponsorship of Russian fundamental science development
• 20 billion (!) will be headed toward creation of a chain of libraries and academic information centers in the name of Boris Yeltsin, who recently passed away.

These projects by themselves envision the creation of six new governmental organizations at least, whose sole goal will be to attempt to ensure proper allocation of "Putin's trillion"; another giant leap to increase Russia's already ballooning bureaucratic titan. The Russian economist mentions that the funding for the housing reform (known in Russian as the Zh.K.Kh. (ЖКХ)) will come not from the current surplus but from tighter fiscal discipline, with its excesses and side-effects, as well as with the additional sale of government property or processes similar to the one pulled on YUKOS.

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

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

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

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

Russian Journalists Fight Censorship

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.

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

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?