Russia Beyond the Headlines #9 EV

BUILDING BRIDGES EAST APEC summit gets high marks for real road maps as Russia drives eastward

CUSTOMS UNION RAINMAKERS Experts claim integration can bring member states $1 trln in two decades

BRICS IS NOT ALL BUSINESS Moscow sees BRICS as a catalyst for global governance reform

A EURO BY ANY OTHER NAME? Euro crisis may reshuffle the deck for currency reserves

KEEPING THE LID ON IRAN Russia is convinced more than ever to keep negotiating

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27 SEPTEMBER 2012Top agenda

ARTEM ZAGORODNOVRBTH

The Asia-Pacific region is

becoming as important to

Russia as the EU, but the

first challenge ahead will

be building the

infrastructure.

Reminiscent of pre-game commentators discussing London's Summer Olym-

pics, the naysayers were out in force before the 24th APEC CEO summit opened in Vladivostok last month, A few shabby roads and the fi ring of one local transpor-tation officials aside, Vlad-ivostok’s reconstruction for the APEC summit went off on time and without a hitch. Equally important, the sum-mit was a platform for sig-

convince our bosses in Lon-don, New York or wherever about the benefi ts of long-term investment in Russia’s regions. Now they’ve seen it with their own eyes,” said Gray. The positive effects of Vladivostok’s $20 billion upgrade did not go unno-ticed by foreign business emissaries there.

EU vs. APECA key purpose of the sum-mit was summarized by First Deputy Prime Minis-ter Igor Shuvalov at one of the opening sessions: “All of the infrastructure is in place around Vladivostok now – a new airport, roads, rail-roads, educational and medical facilities. Within fi ve years, our foreign trade should balance in favor of Asia and guarantee high growth rates in the Far East. Within 10 years, we want our trade volume with APEC states to be greater than with the EU.”The European Union cur-rently accounts for around half of Russia’s foreign trade at approximately $320 billion. Well over half of this fi gure accounts for Russia’s exports to the EU. Oil accounts for 63%S of the EU’s total imports from Russia while gas accounted

nifi cant discussion on the risks and opportunities of free trade, resulting in a number of important in-vestment deals for Russia’s Far East. "A few months ago people were saying the summit would be a disaster," said David Gray, managing part-ner at PriceWaterhouse-Coopers Russia. Gray spoke

on the fi nal day of the event. "The said we'd be living in tents, the bridge wouldn't be ready and we'd be tak-ing the ferry to Russky Is-land," he recalled."Now all that has been quickly forgotten."“Costs aside, the develop-ment they did here in Vlad-ivostok will allow Moscow-based expats like me to

for about 9% of imports. Manufactured goods, in-cluding machinery and transportation equipment, accounted for a mere 9% (according to the European Commission's Eurostat website). On the fl ip side, machinery and transportation equip-ment accounted for a whop-ping 45% of EU exports to Russia, with other manu-factured goods accounting for an additional 24%. As Russia’s APEC trade currently stands at less than half its EU trade (though it has increased to 23% from 15% of the total since 2006, (according to customs data compiled by Bloomb-erg media), the purported increase in trade with Asia will likely come from ad-ditional Russian energy and agriculture exports. Russia’s leaders have been careful to emphasize that this re-balancing of trade toward Asia will not come at the expense of relations or trade with European Union mem-ber states. At the same time, a free-trade incentives with Asian countries have been announced in recent months, in order to facili-tate the rapid growth need-ed. “For us, joining the WTO

IRINA DROBYSHEVA RBTH

Russia plans to develop its

transportation systems,

both the Tran-Siberian

Railway and Northern Sea

Route, into Asia.

development department of the Far Eastern Marine Re-search, Design and Technol-ogy Institute explained the potential for expanding ex-isting Russian transporta-tion infrastructure in the region: “Speaking about the

Global trade forecasts pre-dict that trade within the Asian region will grow faster than trade between Asia and either the EU or the Americas due to inten-sive regional integration. Asia leads the world in terms of simplifying inter-regional customs proce-dures and cutting the costs of doing business. While Russia was preoccupied with accession to the WTO, many APEC countries opted for regional free-trade agreements. Since the mid-1990s, more than 70 free-trade zone agree-ments have been conclud-ed in Asia. Mikhail Kho-losha, head of the transport

Far East, the best place to start is in the south of the Primorye Territory. Japan, South Korea and China pe-riodically test the possibil-ities of freight carriage via the Trans-Siberian Railway and in regional directions,

Expanding Asian corridors for growth region in the year 2030 is 90–100 million metric tons. This means that the sea-port in Troitsa Harbour in Russia’s Primorye Territo-ry should be radically de-veloped. It could become the biggest port not only in Russia, but in all of Northeast Asia. This cargo transit route alone could earn Russia billions of dol-

such as the Multi-Modal Transport Corridors Primo-rye-1 and Primorye-2. These three corridors form a com-mon, mutually complemen-tary transport space,” Kho-losha said. Several years ago, the

Greater Tumen Initiative, acting under the auspice of the United Nations Devel-opment Program, conduct-ed a survey of experts, gov-ernment officials and businessmen in Northeast Asia on the possibilities of cargo flowing to China’s Jilin Province. A rough es-timate of the amount of freight passing through this

"I am not sure if it makes sense to industrialise Rus-sia’s Far East, in terms of heavy industry and manu-facturing. You have to pick your target. A multi-pronged approach to development is key. In Asia you’re already seeing many countries move their economies away from

simple manufacturing to higher value-added prod-ucts, and that’s where Russia needs to be. We can have a certain amount of manufac-turing in the region based on natural resources (like tim-ber), but the real value will be in the knowledge-type economy areas. Biotech and nanotechnology are areas where Russia could have a great future and Vladivostok be a part of that."

NOTES FROM THE EXPERTS

Vladivostok should aim for a knowledge-based economy

David GrayPWC MOSCOW

FOR RUSSIA, A SUN RISES IN THE EAST

ACCORDING TO IGOR SHUVALOV, RUSSIA’S FUTURE RAPID

ECONOMIC GROWTH RESTS ON TWO LEGS – EUROPE AND ASIA

APEC DISCOVERING THE EASTERN FRONTIER

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was a stepping stone to be-coming an OECD member,” said Shuvalov. “We’re also engaged in several impor-tant integration projects – the Eurasian Economic Space with Belarus and Ka-zakhstan, free trade agree-ments with New Zealand and Vietnam. Russia takes on more risks by not inte-grating with Asia than by doing so.”

Transportation's Double-EdgeIn a recent report, PwC pre-dicted that Russia’s exports to APEC countries would more than double to $206 billion by 2021. One of the most promising sources for this increase is also its greatest impediment. The Trans-Siberian railway is arguably the most impor-tant component of Presi-dent Vladimir Putin’s plan to turn Russia into a major transportation corridor be-tween Europe and Asia (along with the Northern Sea Route). Already oper-ating at full capacity, it also requires billions of dollars of investment for upgrad-ing the single rail line and building logistics facilities along the way.Russian sea ports also have a large role to play in the

country’s eastward expan-sion. "The amount of trade between Europe and Asia exceeds $1 trillion, and every percent of the cargo that is transported via Rus-sian territory will bring our economy no less than $1 bil-lion," Ziyavudin Magome-dov, chairman of the board of Summa Group, said at a panel session. Currently less than 1 percent of the cargo is transported via Russia. A recently announced federal plan calls for increasing the traffic cargo at all of Rus-sia’s ports from the current rate of 540 million tons an-nually to 900 million by 2020. About half of this in-crease is to come from ports on the Pacifi c Ocean.

Agriculture PushCurrently, the eight largest APEC countries by popu-lation import over 100 mil-lion tons of grain annually (a more than $50 billion market at current prices). This is more than Russia currently produces. “APEC countries account for about 37-38% of all imports worldwide. Our percentage of that is currently zero,” ex-plained Vyacheslav Nikonov, a member of the Russian Duma’s Budget and Taxa-tion Committee.

Currently Russia has nei-ther the roads, railways nor the ports in place to direct its grain exports toward Asia (the grain now leaves ports on Russia’s European coastlines, destined for mar-kets in the Middle East and elsewhere). But Putin’s promise to increase grain production from the current 80-plus million tons a year to around 120 million tons has already convinced in-dustrial holding company Summa Group to invest in logistics in the region.

Natural ResourcesPwC predicts that Asia will become the world’s largest natural gas market by 2015, and the $7 billion deal Putin signed with Japan's Prime Minister Yoshihiko Noda confirms that Russia is planning to take full advan-tage of this trend. It is ex-pected that most of the liq-

uefi ed gas coming from the plant will be exported to Japan, as the island coun-try ups imports and shuts down nuclear reactors in the wake of the Fukushima disaster.Recently completed oil pipelines to China, as well as plans for expanding their capacity, suggest natural re-sources will play a critical role in expanding Russia’s exports to APEC as it seeks to diversify away from Eu-ropean consumers. Howev-er, haggling over the price of oil with Chinese officials has thus far been an obsta-cle.

Increased Exports to AsiaPutin and recently appoint-ed Minister of Far Eastern Development Victor Ishaev have placed much faith in “re-industrialising” all of Russia and, in particular,

Russia's Far East has long been a remote, rambling realm on

Russia’s rim. It's a place where economic and social development is felt fi tfully. Neither reform nor revolu-tion has merged the isolat-ed Far East with European Russia, and an insurmount-able 6000 kilometres be-tween Moscow and Vladiv-ostok. Both the Russian Empire and the Soviet Union maintained a hybrid outpost to process raw ma-terials behind the trappings of a military bastion. But the Asiatic boom of the late 20th century, resulting in an economic boom on Russia's doorstep, forces us to view the Far East anew. Russia must either up her stakes in the Far East enormously – or admit that this theatre remains a foreign land. There’s no alternative reac-tion to Asia’s huge growth. Holding the Asia-Pacific Economic Cooperation (APEC) summit in Vladiv-ostok in early September held a special resonance for Moscow – and confirmed Moscow's commitment to up the stakes in the Far East. Whether Russia car-ried the summit off will be judged by foreign observ-ers. For now, once can say that preparation for the summit was the largest-scale effort in the post-So-viet period to boost the Far East with concrete invest-ment: roads and bridges; the Sakhalin-Vladivostok gas pipeline; the rebuilding of the port terminals; and the upgrading of the airport. The infrastructure was built with the intention to make the region no longer "Far" - either from Moscow, or from Europe. Now that the summit is history, we have to embark on the real jour-ney ahead.

New logistics network can speed freight to key markets

lars a year, and there are several such growth points in the region.Last year, the fi rst batch of containers arrived at the Troitsa Harbour marine port by truck from the Chi-nese city of Hunchun, near the Russian border. From Troitsa Harbour, they were dispatched to Japan on board a container ship. The

Chinese province of Jilin, which borders Primorye, had been working towards that possibility for almost 10 years. Now, it takes two days to deliver cargo from Northeastern China to Japan, and there are plans to use the new transporta-tion line not only for tran-sit carriage between China and Japan, but also to carry

freight from those countries to Europe via the Trans-Si-berian Railway. However, to optimise the project, it is necessary to increase the ca-pacity of the border cross-ing at the Russian town of Kraskino. So far, it process-es 30 vehicles a day, but there is a demand for 200 vehicles with containers. The construction of a mod-

ern border crossing point at Kraskino is slated for completion in the fall, but increasing capacity alone will not solve all the prob-lems at the crossing. Cus-toms procedures still need to be simplifi ed and the port capacity at Troitsa Harbour expanded. The idea of im-proving combined land and sea cargo shipments be-

tween Russia, China and Japan was recently backed by all the members of a con-sultative meeting within the framework of the Greater Tumen Initiative. However Russia is still lagging be-hind, and other members have been more active in the scheme, despite the fact that it was intended to assist Russia's Far East.

"Despite a traditionally po-litical connotation, the word 'innovation' came up in prac-tically every discussion that took place at the APEC CEO summit. This applies to busi-ness, social and cultural themes. The word 'innova-tion' is a new approach, a new vision of life in the 21st

century. Today our relations with Western Europe and the United States are of a high-er caliber than our relations with our APEC partners. We hope that the meetings we held during the summit and the presentations we made will help us to make inroads with our Asian partners and exchange experiences in the education and innovation spheres, among others."

NOTES FROM THE EXPERTS

Making inroads with our Asian partners

Viktor

Vekselberg SKOLKOVO

the Far East. During my last trip to the Far East, officials and experts alike remained sceptical that the region could ever manufacture ex-portable goods cheaper or of better quality than neigh-bouring countries. Howev-er, Sergei Kryukov of the Russian Small and Medi-um-sized Business Devel-opment Bank said: “All of the problems impeding competitive products from being manufactured in the Far East are solvable through proper policies.”The question remains whether Russia will be able to increase exports to Asia via higher value-added goods, versus a continued dependency on raw mate-rials. “Russia’s future rapid economic growth rests on two legs – Europe and Asia,” said Shuvalov. This year’s APEC summit was an ac-knowledgement of that fact.

EDITORIAL

Now a hard journey begins



27 SEPTEMBER 2012Policymakers

A catalyst for global reform

BRICS WITH SERGEY RYABKOV

CREATING A CONSTRUCTIVE CONVERSATION

FIVE BRICS AT A TIME

KATERINA LABETSKATAVIP PREMIER MAGAZINE

Has BRICS developed a com-

mon philosophy?

Defi nitely. Its philosophy is to not rush the process of transforming BRICS into an international organisa-tion.

What centrifugal and cen-

tripetal forces are at work

within BRICS?

It would be more correct to speak about varying-speed of development and the changing geometry. BRICS countries have dif-ferent views regarding the priorities and the pace of progress on some issues. One such major political issue is the reform of the United Nations Security Council. Perhaps there are also topics like human rights, their role in the sys-tem of international rela-tions and approaches to ad-dressing problems in that area. But it is always the case that the glass is half full or half empty. Within BRICS, Russia always takes the side of those who fa-vour concrete decisions and want to see the language of declarations translated into practical deeds.

The year 2011 was unique for

BRICS. All its participants

were working in the UN Se-

curity Council: Russia and

China as permanent mem-

and submit it to the leaders at the South African sum-mit. Our goal is to ensure that the fi nancial resources of the future new develop-ment instrument be used to address problems on the ter-ritory of BRICS countries themselves, and not just to ad-dress problems in other regions of the world.

Has BRICS become an instru-

ment of global governance?

No, BRICS is not a mech-anism of global govern-ance. It is not for me to judge whether it is or will ever be such a mechanism, but at this stage BRICS is a catalyst for global gov-ernance reform. Although three billion out of seven billion people in the world are citizens of BRICS countries and although BRICS accounts for 25% of the global GDP, I can-not describe that structure as a mechanism for global governance. BRICS is still to a large extent an asso-ciation based on interests. This is what makes it strong and viable. Right now, in BRICS countries, 80% of the issues pertain to the economic agenda and only 20% to foreign policy. The main global forum for coordinating approaches to economics is the G20, while BRICS works within that group. Unlike in BRICS, the ratio in the G8 today is the reverse: 80% of the issues on its agenda relate to politics and 20% to eco-nomics. I don’t think we will ever come to see BRICS in “utilitarian” terms.

bers and the others on a ro-

tational basis. Is cooperation

in the sphere of internation-

al security still on the BRICS

agenda?

It is not only still on the agenda, it is growing stronger. BRICS represent-atives in New York, Gene-va and Vienna have estab-lished an ongoing dialogue and have been holding working meetings. They ex-change messages and phone calls. It all takes place as part of the normal diplomatic and political routine. This is one of the major recent achievements. That is how interaction should be built if BRICS is not to remain an event involving heads of state meeting once or twice a year, as happened in 2011 when an informal BRICS summit took place in Cannes on the fringes of the G20, while the main event took place in Sanya, China. Interaction must proceed at all levels. If we have good coordination on pressing international is-sues concerning regional security, that already marks a step forward. Usually a group of states, especially large, signifi cant ones with global interests, needs decades in order to grow from “the toddler stage” into a global play-er, a factor not of global

governance, but of global dialogue and practical co-operation. The fi rst meet-ing of BRICS foreign min-isters took place in 2008 and the first summit in 2009. BRICS has achieved a great deal during the past three years. I’m very opti-mistic about the future.

Have criteria been devel-

oped to select future candi-

dates to join BRICS?

Common interests and a readiness to work accord-ing to the scheme of inter-action that exists and is being followed by BRICS [are the criteria]. I think that at this stage the BRICS countries fully meet these requirements. It will take some time before BRICS expansion will again be-come part of the agenda.You do not want to admit new members, but you can create an institution of ob-servers, like in the Shang-

hai Corporation Organisa-tion.That will be our priority. The Russian side has pro-posed thinking about schemes for promoting BRICS dialogue with part-ners that are not members of that structure, but are interested in discussing specific aspects of the BRICS agenda.

BRICS is creating its own de-

velopment bank. Will it be

involved in the development

of Siberia and Russia’s Far

East?

We are working towards that end and we will seek it. The language in the fi nal communique of the BRICS summit in Delhi makes it possible to work in that di-rection. So far, a BRICS de-velopment bank is only an idea. We have been given a year to develop, jointly with our colleagues from the Fi-nance Ministry, the concept

Sergey Ryabkov entered

the Foreign Service in 1982,

serving in several positions

both in Moscow at the For-

eign Ministry headquar-

ters and abroad, including

the Department of Euro-

pean Cooperation and Rus-

sian Embassy to the United

States. He has been deputy

minister of foreign affairs

since 2008, with a special

focus on BRICS coopera-

tion.

SERGEY RYABKOV

NATIONALITY: RUSSIAN

AGE: 62

OCCUPATION: DIPLOMAT

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ALEXANDER YAKOVENKOSPECIAL TO RBTH

Without Russia’s

participation, missile

defence development in

Europe may cause a

rollback to a time of deep

divisions.

Security Concerns To Be Taken Seriously

Missile defence There is still time to reach a mutual understanding on ABM in Europe

Recently, the media has been describing Russia’s military-political policy as “aggressive” and threaten-ing to the countries that are planning to deploy el-ements of the American anti-ballistic missile (ABM) defence system in their countries. This dem-onstrates a one-sided view of the complicated issue and misleads the public about the Russian position on the Euro ABM. I would like to clarify the situation concerning Russia’s posi-tion on the defence system. The inseparable connec-tion between strategic of-fensive and defensive weapons has for many dec-ades been an axiom for Russia and the United States. Military experts and politicians in the two countries have assumed that an imbalance in this area was fraught with de-structive consequences for international security and strategic stability.Russia welcomed President Barack Obama’s 2009 de-cision to revise the plans for missile defence in Eu-rope that would radically upset the strategic balance by giving the US substan-tial unilateral advantages. The decision helped to conclude the Strategic Arms Reduction Treaty (Start) on April 8, 2010,

close to Russian borders and on waters adjacent to Russia.Russia has never denied the possibility of risks and threats arising from mis-sile proliferation. The Rus-sian initiative to create a joint European missile de-fence system based on a sectoral principle put for-ward at the Russia-NATO Council summit in Lisbon involved the formation in Europe of a common se-curity perimeter with equal Russian participa-tion. The NATO partners were invited to develop an architecture for a Euro ABM that would be joint-ly controlled and propor-tional to potential threats without undermining stra-tegic stability.

Russia sticks to the idea of a collective ABM system featuring Russia, the EU and the US.

Russia was prepared to de-velop its proposal on the joint Euro ABM taking into account the opinion of NATO partners, but on the condition that the equality of the parties is legally enshrined. Such an approach opened up unique opportunities for Russia and NATO to build a genuinely strategic part-nership based on the prin-ciples of indivisible secu-r i t y, m u t u a l t r u s t , transparency and predict-ability.Unfortunately, the United States and other NATO partners did not show a se-rious commitment to mov-ing in that direction. They do not intend, at least for now, to take into account Russian concerns about the

architecture of NATO’s Euro ABM. They refuse to give Russia a say in deter-mining the parameters of the future European mis-sile defence system.The main stumbling block is guarantees for the non-targeting of missile defence deployed in Europe against Russia and our strategic nuclear forces. We are being assured at all levels that the future missile de-fence system is not intend-ed to weaken the Russian nuclear deterrent. But our proposals to make these assurances legally binding are rejected. We are ready to discuss the status and content of such obligations, but they must be formulated in such a way as to enable Russia to judge on the basis of ob-jective military-technical criteria how the US and NATO actions relate to their declarations. During the conference on missile defence issues held in Mos-cow on May 3-4, Russian experts presented compre-hensive assessments of these criteria. But we did not hear an articulate statement on NATO’s po-sition.We continue to assume that the creation of missile de-fence in Europe without Russia’s participation will inevitably confl ict with the Euro-Atlantic’s ongoing search for common prin-ciples of regional security. There will be the risk of a rollback to the times of confrontation and divid-ing lines. The formation of new security architecture in Europe will be called

which clearly states the in-extricable link between strategic weapons and mis-sile defence.However, while formally renouncing plans to deploy ABM, the US embarked on

a new missile defence pro-ject in Europe as part of the “phased adaptive ap-proach.” Russia fi nds this initiative equally worrying because it envisages the deployment of a capacity of interceptor missiles and other anti-missile facilities

VLADIMIR CHIZHOVSPECIAL TO RBTH

The Eurasian integration

effort does not contradict

WTO standards or the

integration parameters

acceptable to Western

Europe.

Post-Soviet Integration Is Good for Relations with Europe

Eurasia Nations of the post-Soviet space can learn from the EU experience of integration

any form of confrontation with Russia’s neighbours but rather to pursue peace-ful coexistence and coop-eration with other blocs of nations, including the Eu-ropean Union.The idea that some former

Increasing integration of the countries of the former Soviet Union is among Russia’s chief foreign pol-icy priorities. The main ob-jective is not only to pre-serve and consolidate unity in the political, social, cul-tural and historical con-texts, but also to reinvig-orate trade and economic cooperation and encourage healthy competition. Nei-ther the Commonwealth of Independent States nor the Customs Union of Russia, Belarus and Kazakhstan was established to increase

Soviet nations will have to make a strategic choice be-tween integrating within the former Soviet space or being part of other groups is far-fetched. Eurasian in-tegration, which is focused on economic integration,

and the integration pur-sued by the European Union, are parallel process-es. Furthermore, they are complementary. Most im-portant, all these process-es are founded on a com-p a r a b l e , s i m i l a r international legal frame-work built upon WTO rules and regulations. Nothing done within the framework of Eurasian integration runs counter to WTO standards or contradicts the integration parameters accepted in Western Eu-rope. The increased inte-gration of Eurasian nations should borrow from EU ex-perience as far as regula-tory mechanisms and tech-n ica l s tandards are concerned. This matter was thoroughly discussed back in 2005, when a package of road maps was adopted

for four EU-Russia com-mon spaces (economic space; space for freedom, security and justice; space for external security; and space for education, re-search and culture). The road map for external se-curity space stipulated that integration processes in various parts of Europe were complementary, so to present the former Soviet Union nations with an “ei-ther us or them” choice is inappropriate and unequiv-ocally unfair to them. When scrutinizing specif-ic issues, such as Customs Union parameters, Russia has a competent pragmat-ic dialogue with its part-ners in Brussels because the European Union itself is a sort of customs union. These issues do not need to be artifi cially politicized by experts and politicians. At the same time, at the official level, the EU shows a natural interest in inte-gration processes within the former Soviet Union, specifi cally efforts to estab-lish the Eurasian Econom-

Moscow needs guarantees that the NATO ABM Shield is not directed against Russia.

into question. There is still time to reach a mutual un-derstanding. Russia has the political will to do so. But if this is to become reality, our partners must ap-proach the task of taking into account Russia’s le-gitimate security interests in an honest and respon-sible manner.Failing that, Russia will have to act in accordance with the way events devel-op. Russia reserves the right to renounce further moves in the fi eld of dis-armament and arms con-trol, although this would be a highly undesirable de-velopment. In addition, considering the insepara-ble link between offensive and defensive weapons, there may be grounds for our country’s withdrawal from Start.Russia is not shutting the door on dialogue with the United States and NATO on issues of missile defence or on practical cooperation in this sphere. But the road to such work lies in the creation of a clear legal framework for cooperation that would ensure that our legitimate interests are taken into account.

ic Area. Brussels already perceives it as an objective reality. Obviously, the deep-er the integration goes, the more adjustments will be called for in working with the EU. The emergence of supranational institutions within the scope of Eura-sian integration haas added a new aspect to negotia-tions with the EU over the New Basic Agreement. This does not make the mission of negotiators any simpler, but I see no insur-mountable obstacles and I am certain that my coun-terparts from the EU ne-gotiating team will share our vision. At least, I hope they will.

Alexander Yakovenko is

Ambassador of the Russian

Federation to the United

Kingdom

Vladimir Chizhov is perma-

nent representative of Rus-

sia to the EU.

Attempts at economic integration in the post-soviet space (involving Russia)

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27 SEPTEMBER 2012Case study

A SMOOTH RIDE ON THE TROIKA OF ECONOMIES

THE MOVEMENT TO REINTEGRATE HAS BECOME INCREASINGLY POPULAR

NOT ONLY IN THE COMMERCIAL SECTOR, BUT ALSO IN PRODUCTION,

INDUSTRIAL COOPERATION AND INVESTMENTS

INTEGRATION CUSTOMS UNION

EUGENE VINOKUOVEXPERT MAGAZINE

Customs union integration

could bring about $1

trillion in benefits over the

next two decades, but

benefits are conditional.

ements of economic inte-gration within the troika – from the coordination of their macroeconomic poli-cies to labour migration. The fi rst accords were im-plemented with Krygyzstan, Tajikistan and Ukraine al-ready being considered for membership. The latter is a desirable addition to the Customs Union as it has great economic technolog-ical and social potential. Furthermore, the combina-tion of Ukraine and the ex-isting member states al-ready accounts for 95% of exports and 86% of imports within the CIS between 2005 and 2010. Kyrgyzstan and Tajikistan are interested in joining in the economic integration, but not at any cost. How-ever, the countries making up the core of the integra-tion insist that new mem-bers should adopt the en-tire package of Customs Union and CES regulations and agreements, because members of an integrated union are supposed to share the same rights and commitments. Ukraine is a totally different case, though. Given its econom-ic, social and technological potential, its membership in a post-Soviet integration initiative in any format would seriously strengthen this union’s positions. The CES troika and Ukraine traditionally account for more than 90% of com-bined GDP of CIS states.

In the two decades since the Soviet Union collapsed and the center did not hold, cen-trifugal trends developed in the national economies of newly formed nations within the Commonwealth of Independent States (CIS). However, since the inauguration of the Cus-toms Union in 2010, the tendency has changed, as leaders and economists have pushed for varying de-grees of reintegration. This has been particularly evi-dent in the commercial sec-tor, as well as in produc-tion, industrial cooperation and the investment sphere. At this stage, this Common Economic Space (CES) en-compasses Russia, Belarus and Kazakhstan, who are held to agreements govern-ing key elements of eco-nomic integration within the troika – from the coor-dination of their macroe-conomic policies to labour migration.This trend is best exempli-fi ed by the Customs Union, inaugurated in 2010, which incorporates Russia, Bela-rus and Kazakhstan. The fi rst 17 accords shaping the framework came into effect on January 1, 2012 – these agreements govern key el-

The four countries in ques-tion accounted for 95% of exports and 87% of imports within the CIS in 2005–2010.At the same time, the Ukrainian administration does not seem willing to meet its eastern neighbours halfway, instead favoring – at least verbally – closer ties with the European Union, including in trade and eco-nomic sectors.

Recent studies have project-ed that Ukraine’s integra-tion into CES could bring benefi ts of $1.1 trillion to the member states in the period 2011 – 2030. How-ever, the Ukrainian admin-istration itself remains un-decided, verbally favouring trade and economic ties with the European Union.It's easy to forget that in-tegration is not a ‘magic bullet’ which automatical-ly ensures success. The im-mediate effects caused by the liquidation of tariff ob-stacles are relatively insig-nifi cant. Most of the bene-fi ts will be available in the longer run, within the scope of specifi c projects in man-ufacturing, food-processing and science-intensive sec-tors.

A Troika with BenefitsThe results of predictive fi -nancial equations have shown that the creation of the CES by Russia, Kazakh-stan and Belarus will have a positive effect on the three member-states. The benefi ts of integration will be most tangible in Belarus because of its economic structure, foreign trade priorities and the scale of the national economy. It is likely that Be-larus’s exports to the CES will double from the $18–19 billion expected in 2012 to $36–38 billion in 2030. Belarus’s GDP is predicted to be at least 15% above the level envisaged without integration. The success of the integra-tion in the post-Soviet space will be of critical impor-tance to the Belarusian economy in the longer term. Belarus’s production pat-tern will undergo changes, as mechanical engineering and food processing are ex-pected to contribute more signifi cantly to overall in-dustrial output. Belarus should prioritise ef-forts to reduce the country’s electricity and general en-ergy consumption. Due to its economy’s heavy de-pendence on imported en-ergy, it is unlikely Belarus will manage to address is-sues of competitiveness without boosting its energy efficiency. An increase in the efficiency of using primary resources will enable the country to curb growing en-

ergy imports, especially nat-ural gas.Kazakhstan’s economy still largely depends on the dy-namics of hydrocarbons output. This is largely due to Kazakhstan’s relatively high potential for building up its oil and natural gas production. Exports to the CES continue to grow, al-beit quite insignifi cantly in relation to Kazakhstan’s GDP. At the same time, the integration scenario will provide a 4-point increase in GDP growth, due to up-grades in technology stand-ards and reductions in en-e rg y a n d m a t e r i a l s consumption.Due to its size, Russia’s economy shows less of an impact from the process of integration. However, it will still experience an addition-al 2 points in GDP growth by the end of the projected period. Overall, a deeper integra-tion within the CES of Rus-sia, Kazakhstan and Bela-rus - through more intense commercial relations, in-dustrial cooperation and the sharing of technologies - will eventually result in an estimated 2.5% of com-bined GDP being added to these countries’ baselines. The CES member-states could see additional growth in GDP resulting from in-creased capital formation and mutual investments. In-creased competitiveness of national economies could also foster a rise in produc-

tivity and larger trade turn-over both within the CES and with trade partners be-yond it.

Ukraine and the Customs UnionEconomically, there are many possible scenarios for the relationship between Ukraine and the CES mem-ber-states, including the status quo; ratifi cation and implementation of the Free Trade Area agreement within the CIS; an agree-ment on the “deep and comprehensive” free trade area of Ukraine and the EU; and accession to the Common Economic Space. The resulting technologi-cal convergence could equalize energy and mate-rials consumption and en-sure that there is no gap between member states

A close bond for Russia, Belarus and Kazakhstan A Common Marketplace

Is Ukraine unsure about the Customs Union, favouring trade with Western neighbours?

Car exports from Russia to fellow members of the Cus-toms Union increased sharp-ly this year, benefitting some of the foreign carmakers that set up production in Rus-sia, according to top offi-cials. The surge took place a half-year after Belarus and Kazakhstan abolished cus-toms clearance in trade with Russia. The value of Rus-sian car exports to Kazakh-stan expanded fourfold in the first quarter of this year compared to the same peri-od last year, said Andrei Sie-pnev, trade minister of the Eurasain Economic Commis-sion. (The Moscow Times)

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27 SEPTEMBER 2012 Case study

with regard to the efficient use of primary resources. In terms of exports, full CES-based integration offers Ukraine the op-portunity to substan-tially diversify its economy, with the growth expected in the mechanical engineer-ing sector being bal-anced by a smaller con-tribution from agribusiness and the metals indus-try. Favourable trade and economic rela-tions between Rus-sia and Ukraine will encourage the devel-opment of Ukrainian engineering companies – analysts believe that building on its current en-gineering potential will en-able Ukraine to eventually increase the share of ma-chines and equipment in its export structure to 20% by 2030.In addition to engineering, the ferrous metal industry appears to be a promising sector for economic en-gagement. Russian metals producers have made more progress in renovating their production facilities, management and strate-gies than their Ukrainian peers over the last 15 years. The Russian metals sector is steadier when it comes to the structure of supplies; the ratio of domestic de-liveries to foreign supplies is 50-50 in Russia com-pared to 20-80 in Ukraine. The Severstal, Magnito-gorsk and Novolipetsk smelters offer steel of high-er-value ranges, including light-gauge steel. They oc-cupy a niche in the ex-

panding domestic market and have achieved remark-able progress in the pro-duction of electric furnace steel. Russian makers have built up a more competi-tive distribution network abroad compared to the Zaporizhstal and Mariupol smelters. Ukraine’s export supplies are facilitated by sea communications with consumers from China, India and the Middle East, but these outlets are in danger of being lost if Ukraine upgrades its pro-duction facilities slower than its competitors.

The chief sector in which Russia crucially depends on Ukrainian producers is aviation engine building. After the Soviet Union col-lapsed, all the helicopter assembly units remained in Russia, but the largest supplier of engines became a Ukrainian company. The majority of helicopters op-erated in Russia, as well as

exported machines, are powered by engines pr-duced by Ukraine’s Motor Sich. Also of critical impor-tance is technology co-

operation in the mili-tary-industrial complex. The Centre for Analysis of World Arms Trade esti-mates that the annual sup-plies of Ukrainian-made components as part of Rus-sian defense companies’ export contracts amount-ed to $250 million in 2008 – 2010, with sub-contracts worth a similar amount. Approximately half of Ukraine’s military exports are destined for Russia, which makes cooperation with Russian enterprises vital ly important to Ukraine’s defence indus-try. In the technology sphere, state borders have a negative effect on the ef-fi ciency of trade and coop-eration between manufac-turers located in different countries. Before compo-nents turn into an end product, they have to cross the state border several times, which results in sig-nificant losses of time, money and effort. It would be more efficient to create a single holding bound by the rules of the CES and incorporating sev-

eral dozen Ukrainian and Russian enterprises. Such regional cooperation would enhance the global compet-itiveness of local producers and is a potentially signifi -cant effect of integration.

Integration Fuels TechnologyIntegration effects are con-ventionally divided into im-mediate effects, resulting in fast one-off improvements in terms of trade, and per-manent effects, which are connected with the upgrade of less developed economies to the level demonstrated by the most advanced. One important effect is the upgrade of weaker inte-grating economies towards the technological level of

integration leaders. The smaller the gaps, the fast-er the integration – this is the case with the former Soviet Union. Moreover, this enables the member-states to maintain their na-tional industrial potential.Integration does not mean automatic improvements, rather it offers opportuni-ties that need to be taken advantage of over many years. Since unfulfilled promises or incomplete pro-jects do not have an eco-nomic impact, member states must be proactive; boosting mutual trade in high-value areas such as en-gineering.

Currently, the CES coun-tries and Ukraine import from 70% to 90% of engi-neering products from countries outside the Cus-toms Union. In 2010, Rus-sia imported 92% of its en-gineering products from outside countries, and for Ukraine, Belarus and Ka-zakhstan the fi gures were at 83%, 75% and 72%, re-spectively. The driving fac-tor behind these fi gures is

the technology gap and the inefficiency of the engineer-ing sector.The technology sphere stands to gain the most benefi ts from integration. Production cooperation in aviation construction and shipbuilding, engine build-ing, aerospace, nuclear power and power engineer-ing is founded on both So-viet and newly emerging ties within the Customs Union and the CES. A re-cent trend is the broader and more significant en-gagement of partners from third-party countries in CES technology coopera-tion projects, including in

transport engineering. Ex-amples includes Siemens and Alstom in Russia and GE in Kazakhstan. When analyzing the poten-tial of trade in engineering products, we should assume that mutual trade will be able to replace import sup-plies from many countries. The closer the CES mem-bers get to the technology level of leading nations, the less they will import engi-neering products from these countries, preferring to import from countries within the CES. The per-centage rises of such im-ports are predicted to be between 9% and 18% and are dependent on a narrow-ing of the technology gap.Economic integration pro-vides a critical moderniza-tion tool for former Soviet Union nations and its ben-efi ts can be felt across mul-tiple sectors. Provided that the political will remains, the trend for reintegration is likely to continue and will shape regional development for a number of years.

Eugene Vinokurov, doctor of economics, is director of the Center for Integration Studies with the Eurasian Development Bank.

" Ukraine must defend a new model of rela-tions with the Cus-

toms Union, one which would presume a special attitude in the spheres of mutual inter-est. And this model should follow the three-plus-one formula."

" On the bilateral level none of the parties forces the other to

enter any of the unions. Neither Russian nor Ukrain-ian political leaders use such arguments as "enter this and get that."

" You either accept all the liabilities and be-come a rightful mem-

ber of the union, or don’t accept and get no benefits. There is no middle ground. The three-plus-one combina-tion is unrealistic."

" Entering the Custom Union was a brave decision for Belarus

and Kazakhstan. And I sup-pose the EU will take this fact into account and support both countries in entering the WTO."

DIFFERENT VOICES

Viktor Yanukovych

Nikolay Azarov

Tatyana Valovaya

Vladimir Putin

PRESIDENT OF UKRAINE

PRIME MINISTER OF UKRAINE

MINISTER FOR INTEGRATION OF THE EURASIAN ECONOMIC COMMUNITY

PRESIDENT OF RUSSIA

Kazakhstan

Belarus

60%

Russia

72%

Customs Union approval rating

According to EABR data, citizens of Russia, Belarus and Kazakhstan approve of the idea of integration. In Ukraine, supporters are also in the majority - 55%.

80%

State Borders have a negative effect on the efficiency of trade in the technology sphere.

The services sector, transport and telecoms are expected to grow at a faster rate.

Originally published in

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SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIACounterpoints 27 SEPTEMBER 2012

BALANCE CAN CHANGEBUT LEADERS WILL SURVIVE

The world currencies are working against a backdrop of dramatic

events, following the eco-nomic crisis of 2008. the malaise of the eurozone and the geopolitical changes in the Arab world.The balance of currencies has not changed for sever-al decades. The principle share of the market belongs to the US dollar, with the euro (which inherited the shares of the German Deutsche mark and French franc) in second place and the Japanese yen in third place. The Swiss franc and the British pound trail at fourth and fi fth place, re-spectively.However, over the past dec-ade a few of the world lead-ers have taken some hard blows. Confidence in the stability of the dollar was heavily eroded in 2008, which saw the mortgage in-dustry crisis and the bank-ruptcy of two of the world's most prominent corpora-tions: the now-defunct Lehman Brothers and AIG, the insurance corporation that was "too big to fail." The euro, which was launched with such high hopes, can hardly be con-

sidered a safe haven now: the economies of Greece, Portugal and Spain have already proved unable to support such a weighty cur-rency. Meanwhile, several hitherto relatively minor currencies have staked their claim to a share of world markets. The most serious overtures have come from the Chinese yuan, but ac-counts in the currencies of the other BRICS countries cannot be disregarded – particularly the Indian rupee, the Russian ruble and the Brazilian real.Foreign exchange investors, for the past several years, have talked incessantly about what the confi gura-tion of the world's curren-cies may look like in the midterm (in the next five years). Nonetheless, despite stern and constant predic-tions of the death of the dol-lar or the hopelessness of the euro, the actual balance rates remain unaltered. That is to say – beyond mere chatter – investors are not rushing to switch their dol-lar portfolios into another currency. Turbulent times, such as those at present, give rise to much specula-tion about the reliability of

Stanislav Mashagin SPECIAL TO RBTH

one currency over another; but the overriding strategy remains the calculated and cautious approach of keep-ing funds in trusted curren-cies such as the dollar, the euro and the yen.Market players assess cur-rencies on the basis of three main criteria: influence, stability and future outlook. The most infl uential, as we have mentioned earlier, are the US dollar, the euro and the Japanese yen, as well as the Swiss franc, and the British pound. Currently, the most stable currencies (in descending order) are the Japanese yen, the Hong Kong dollar, the Chinese yuan, the U.S. dollar, the Singapore dollar, the Swiss franc, the Russian ruble, the South Korean won, the In-dian rupee, and the Israeli New Shekel. Regarding the future out-look, the “small” currencies of countries that are less dependent upon global trends and determine their own monetary policy with-out looking over their shoulders at others rank fi rst and foremost. These in-clude currencies such as the Swedish krona, the Swiss franc, the Canadian dollar, the Hong Kong dollar, Aus-tralian and New Zealand dollars, among others.The fi rst two categories – influence and stability - provide a list of the most liquid and trusted curren-cies: the yen, the yuan, the dollar and the franc. These are favored currencies in which investors would place funds over the mid-

term. However, if all three categories are combined, the only currency to meet all of these criteria is the franc. Even so, this is hard-ly a shining substitute for the dollar. Dealing in Swiss francs is extremely limit-ed by the quantities the Swiss economy make avail-able; moreover, the current exchange rate of the franc is now artifi cially pegged to the euro. The Swiss gov-ernment claims that this is a temporary measure, but the franc makes an ex-cellent replacement for any investment portfolio in euros.The Russian ruble deserves separate consideration, since it is surrounded by much controversy and opinions on it vary exten-sively. Several investment institutions and banks (par-ticularly in the state sec-tor) recommend buying the ruble, yet it does not seem that the ruble is capable of generating exceptional re-sults without being linked to the markets. The ruble

is fi rmly tied to global mar-kets, as a result of raw ma-terials trade, to the US dol-lar. The ruble can win in two scenarios: if world markets grow, or if the dol-lar, euro or other global cur-rencies drop. No one be-lieves in the fi rst scenario. As for the second, experi-ence shows that the Rus-sian government would not allow the ruble to devalue to mirror the US dollar or the euro.The most crucial thing for the Russian government today – in view of the weak-ness of fi nancial markets and the inability to insti-tute a fully fl edged program of federal borrowing – is to reduce the actual value of the ruble. This is the gov-ernment’s trump card for addressing the federal budget defi cits and the pen-sion fund shortages. What should be done with the ruble? It should be sold, spent and used for borrow-ing.The fact that the greatest weight in global fi nancial

systems is commanded by the US dollar should not be ignored; American in-vestments are found in al-most every country across the globe, and the United States is the world's larg-est purchaser of goods and services. Whatever happens, this is a currency that will be boasting its dominance in the balance of world cur-rencies for many years to come. Similarly, due to Chi-na's enormous infl uence on the world economy, China's currency will remain strong in relation to the market and alongside the US dol-lar.In uncertain times, inves-tors will favor the strong-est and most solvent cur-rencies. This means that, these days, a good curren-cy portfolio must include (in order of yield) the Swiss franc, the US dollar, and the Chinese yuan.

Stanislav Mashagin is a partner at Personal Strate-gies asset management company

GLOBAL FINANCE EURO CRISIS TO CHANGE BALANCE OF FORCES

The crisis in the eurozone may lead to more shakeups, bringing new players to the foreground. Yet the dollar will retain its position.

THE NUMBERS

Of foreign exchange opera-tions take place in London

Of Forex transactions are USD\Euro or Euro\USD

Is relative weight of USD in the IMF SDR basket

36% 40% 42%

SPECIAL SUPPLEMENTS AND SECTIONS ABOUT RUSSIA ARE PRODUCED AND PUBLISHED BY RUSSIA BEYOND THE HEADLINES, A DIVISION OF ROSSIYSKAYA GAZETA (RUSSIA), IN THE FOLLOWING NEWSPAPERS: THE DAILY TELEGRAPH, UNITED KINGDOM ● THE WASHINGTON POST, THE NEW YORK TIMES, UNITED STATES ● LE FIGARO, FRANCE ● SÜDDEUTSCHE ZEITUNG, GERMANY ● EL PAÍS, SPAIN ● LA REPUBBLICA, ITALY ● LE SOIR, BELGIUM ● DUMA, BULGARIA ● GEOPOLITICA, SERBIA ● AKROPOLIS, GREECE ● ECONOMIC TIMES, INDIA ● MAINICHI SHIMBUN, JAPAN ● CHINA BUSINESS NEWS, CHINA ● SOUTH CHINA MORNING POST, CHINA (HONG KONG) ● LA NACION, ARGENTINA ● FOLHA DE SÃO PAULO, BRAZIL ● EL OBSERVADOR, URUGUAY. EMAIL [email protected]. MORE DETAILS AT HTTP://RBTH.RU/ABOUT

World foreign exchange reserves(%)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US dollar 70.5 70.7 66.5 65.8 66.0 66.4 65.7 64.1 64.1 62.1 61.8 62.2

Euro 18.8 19.8 24.2 25.3 24.9 24.3 25.2 26.3 26.4 27.6 26.0 25.0

British pound 2.8 2.7 2.9 2.6 3.2 3.6 4.2 4.7 4.0 4.3 3.9 3.8

Japanese yen 6.3 5.2 4.5 4.1 3.8 3.7 3.2 2.9 3.1 2.9 3.7 3.5

Swiss franc 0.3 0.3 0.4 0.2 0.2 0.1 0.2 0.2 0.1 0.1 0.1 0.1

Other 1.4 1.2 1.4 1.9 1.9 1.9 1.5 1.8 2.2 3.1 4.4 5.3

SOURCE: IMF AND ECB OFFICIAL REPORTS


SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA Counterpoints27 SEPTEMBER 2012

NEW CHALLENGES AHEADFOR THE OLD CURRENCIES

The most recent IMF data shows that the composition of world

foreign exchange reserves has changed only gradual-ly. At the moment, the US dollar retains its place as the leading reserve curren-cy, at around 62% of total reserves. The US dollar, however, is on a gradual trend of decline. The euro-zone crisis has slightly de-creased the amount allocat-ed to the euro, though not by much — euro reserves still stand at just below 25%. However, uncertainty sur-rounding the future of mon-etary union resulted in a loss of confi dence that is re-

fl ected in the periodic pres-sure put on the euro.This loss of confidence is also evident in the fl ight of deposits from banks in the “south” to safe havens in the “north.” In going forward, much depends on the abil-ity of Eurozone policymak-ers to resolve the debt and banking crisis, as far as fu-ture developments in world currency reserves are con-cerned. However, sovereign debt problems are not con-fi ned to the Eurozone. The United States faces a major challenge in its unsustain-able fi scal position, which fi nds the country’s federal debt to GDP ratio at its highest level since 1950. In

Nikolay Podguzov SPECIAL TO RBTH

the aftermath of the US Presidential election in No-vember, economic failure could result in credit rating downgrades for the United States, as well as adverse interest rate volatility and weakness in the U.S. dollar.In the event of a break up of the monetary union in the eurozone, the immedi-ate risk facing investors is the introduction of new cur-rencies or, more accurately, the return of national cur-rencies that existed prior to the euro. The situation would hinge on how frag-mented the monetary union becomes. If only Greece exits, then the euro contin-ues and Greece re-introduc-es the drachma, which would likely see a signifi -cant depreciation. However, if Spain and Italy were to exit as well, this would put a question mark over the viability of the euro and lead to it becoming the currency for a northern bloc dominated by Germany. An-other scenario involves a German exit, but Germany

might not want to be seen as being responsible for de-stroying the euro “project,” for historical reasons. In ad-dition, it is possible that a new Deutsche mark might appreciate rapidly, damag-ing German export compet-itiveness and denting eco-nomic growth prospects. In any case, the internation-al monetary system is evolv-ing toward a multipolar currency system that re-fl ects changes in the global economy over the last 15-20 years. The center of gravity has shifted from West to East, and now the so-called “emerging” economies are making a signifi cant con-tribution to global econom-ic growth and world trade. The importance of their currencies will grow as these economies continue to expand. But reserve cur-rency status is a function of not only economic size but also liquidity and trans-parency in money markets and capital markets. Ac-cording to this scenario, Asian currencies such as the Chinese yuan could easily become important invest-ment and trading curren-cies in the East.The Ruble's Positive Prog-nosisThe role of the Russian ruble in the global econo-my may increase as well. There are strong pre-con-ditions in place for the ruble to become a regional reserve currency within the next several years. The Rus-sian economy has main-

tained a moderate but sus-tainable positive growth rate of 3% to 5% since the 2008 economic crisis. Fur-thermore, Russia’s debt burden is the most conserv-ative amongst G20 coun-tries: only 10% debt to GDP ratio. Russian budget policy has also been pru-dent enough during recent years, with the absence of a budget defi cit. So the fu-ture prognosis for the ruble is one of continued and even improved health.Russia’s balance of pay-ments remains in positive territory, primarily due to a current account surplus. Consequently, Russian re-serves have been on a sus-tainable recovery trend since 2008, and, currently, the Central Bank of Russia (CBR) has the third largest reserves in the world. Rus-sia abandoned capital con-trols in 2007, and, even dur-ing the 2008 economic fi nancial crash, authorities had no intention of bring-ing them back. Russian monetary policy has been recently been moving to-ward inflation targeting and, currently, the CBR op-erates under a nearly fl oat-ing exchange rate regime. As a result, interest rate volatility has been reduced and the CBR is better po-sitioned to keep infl ation under control. Infl ation in Russia has been brought down from double digits fi gures to 6.3% in 2011 and is forecasted to stay around 7% this year.

Russian regulators have also been working to im-prove the local bond mar-ket infrastructure. Russia’s local bond market cap amounts to almost $300 bil-lion. By the end of the year, the Central Depositary in Russia will be launched and non-residents will be al-lowed to open nominal holder accounts for the fi rst time. This improvement cre-ates the necessary pre-con-ditions for the largest in-ternational clearing houses in the world to begin set-tling Russian local bonds. Hence, the process for ru-ble-denominated local bonds will be brought in line with best internation-al practice over the next few months. The rise in the ruble’s stand-ing is a refl ection of the gen-eral strength of Russia’s in-v e s t m e n t p o s i t i o n , particularly when contrast-ed with the current chal-lenges facing the Eurozone. VTB Capital’s Russia Call-ing Investment Forum, at which the world’s business leaders, investors and poli-ticians come together to ex-plore investment opportu-nities, is a great example of Moscow’s growing impor-tance as an international fi -nancial center. World busi-ness leaders expect we'll be seeing more of these invest-ment summits in the near future,

Nikolay Podguzov is head of fi xed income research at VTB Capital

The international monetary system is evolving towards a multipolar currency system.

About 60% of Russians keep their savings in rubles and do not trust dollars or euros.

The US dollar and the euro retain their roles as reserve currencies, but the world currency balance is leaning toward emerging countries.

Russia's foreign exchange reserves

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27 SEPTEMBER 2012News Analysis

FALL 2012 BUSINESSPOLITICS CALENDAR

RUSSIA CALLING

OCTOBER 2-4, MOSCOW, WORLD TRADE CENTER

RUSSIA CALLING! is a flag-ship event aimed at attract-ing investment to the Rus-sian market. Among the main topics for discussion are the creation of the Common Eco-nomic Space, Russia's acces-sion to the WTO and other significant financial and infra-structural issues. › www.vtbcapital.com

EDUTECH 2012

OCTOBER 9-10, MOSCOW, CROCUS EXPO

EduTech is one of the lead-ing conferences in Russia dedicated to educational technologies. Participants have a unique chance to demonstrate the latest plat-forms, methods and tools to a wide audience of profes-sionals as well as share ideas and experience.www.edu-tech.ru

ATOMECO

OCTOBER 16-17, MOSCOW, RADISSON SLAVYANSKAYAThe sixth annual AtomEco conference is dedicated to a wide range of of impor-tant nuclear safety issues in-cluding spent nuclear fuel management, rehabilitation of contaminated territories and decommissioning nu-clear and radiation-hazard-ous sites. › www.atomeco.org

OPEN INNOVATIONS

OCTOBER 31 – NOVEMBER 3 MOSCOW, EXPOCENTRE

Open Innovations Forum is aimed at creating new tools and methods for interna-tional cooperation in inno-vation. The event brings to-gether representatives from business, government and sciences to share experienc-es and analyse fundamental global trends. › www.forinnovations.org

BROADBAND RUSSIA

NOVEMBER 20-21,MOSCOW, RENAISSANCE MONARCH CENTER HOTELBroadband Russia is the largest platform to unite the top players of the wire-less and fixed broadband ac-cess markets. Participants of the event will get a chance to share the best practices and business models, dis-cuss market prospects and network. › www.comnews-conferences.ru

FIND MORE

IN THE GLOBAL CALENDAR at www.rbth.ru

ANDREI KISLYAKOVRBTH

Peaceful discussions are

the sane solution to the

Iranian problem, Russian

officials and independent

experts claim.

da is the situation around the Iranian nuclear pro-gram and the nuclear issue of the Korean Peninsula. We don’t see any alternative to negotiations in the current formats as a way to resolve these issues. It is the only way to make Tehran and Pyongyang address the con-cerns of the international community.”The day before Lavrov made this statement, Israe-li authorities, yielding to pressure from the West, es-pecially from the United Kingdom, revised their plans to deliver a military strike on Iran. According to Israeli media, a special

little military sense, the psy-chological and political ef-fect on the countries of the region could be considera-ble. “Having control of the Strait of Hormuz, Iran is also ca-pable of infl uencing global trade. Damage to the oil infrastruc-ture of any Persian Gulf country could bring about not only economic, but also environmental disaster. Bombardments of nuclear facilities in Iran itself, for in-stance, the nuclear power plant in Bushehr, could “pro-duce a Fukushima-type ac-cident, albeit at a smaller scale,” according to former French Ambassador to Iran François Nicoullaud.Considering the huge rami-fi cations of any kind of at-tack, Russia is determined to keep the lines open for discussion and diplomacy.

Russia's foreign ministry urgently wants Europe and the United States to under-stand that there is no rea-sonable alternative to talks with Iran when it comes to the nuclear program. At a recent ministerial meeting held in Astana, Kaszakh-stan, Russian Foreign Min-ister Sergey Lavrov spoke clearly: “At the top of the current international agen-

envoy of the British gov-ernment delivered a mes-sage to the Israeli admin-istration from Prime Minister David Cameron, who quite harshly called on Tel-Aviv to refrain from using military force against Iran.Israeli analysts said that the categorical message of the British side, along with tel-ephone conversations be-tween Prime Minister Ben-jamin Netanyahu and German Chancellor Ange-la Merkel, have cooled Is-rael’s mood towards Iran.Despite the obvious weak-nesses of Iran's military, a ground campaign in high-

ly mountainous terrain with 70 million citizens is not feasible. “What is left is an air cam-paign against Iran’s con-ventional troops,” accord-ing to Russian military expert Aleksandr Kostin. Iran has many retaliation options. “As of today, the Army and Navy of Iran have tactical missiles that can effectively strike the marine and land forces of the United States in the re-gion. Most of the U.S. mil-itary facilities are within the range of Shahab-3 short-range missiles with a range of 2,000 kilome-tres,” Kostin said.

Russia paves the way for positive negotiations with Iran

International Sergey Lavrov insists that talks are the only rational way forward

Russia has doubts about any

new sanctions against Iran.

Furthermore, Iran may tar-get key dual-purpose infra-structure facilities, such as ports, desalination plants and other facilities used by U.S. forces. Although strikes on Persian Gulf cities make

MAURICE LEMAIRE RBTH

Russia’s Rosatom increased

its claim against Bulgaria

to 1 billion euros for work

on a canceled nuclear

power plant project on the

Danube.

Nuclear fears may prove costly for Bulgaria

Business Rosatom wants compensation from, and maybe a stake in NEC

Russia's state nuclear com-pany Rosatom wants to ac-quire a stake in Bulgaria's National Electric Company (NEC). The acquisition would be a response to NEC's failure to pay a bil-lion-dollar debt on the can-celled Belene power plant. NEC may not be able to pay its debt if the Internation-al Court of Arbitration in Paris rules in favor of Ro-satom, according to Kom-mersant.Nuclear power technology cooperation between the uranium mining group AREVA and the country of Bulgaria, which includes the creation of new power

As for Rosatom, the agency is convinced it is within its rights to seek settlement.Assurances that the site will be used to build a modern natural gas-fired power plant is also questionable, according to analysts. Ex-perts have called the idea “a technical adventure,” since it is uncertain how natural gas could be deliv-ered to a power plant lo-cated in a region with no gas infrastructure. The price of electricity has risen 13%, causing Bulgarians to worry about the coming winter, when utility bills may turn out to be beyond the means of struggling families.

construction. After almost fi ve years of aggressive ne-gotiations, Russia finally lost the 6.2 billion euro pro-ject in March 2012. Prime Minister Boyko Borisov blamed the closure on ex-ceedingly high costs and the lack of an investor.“AREVA and Siemens, to-gether with Atomstroiex-port, were the main foreign subcontractors for the Be-lene NPP. The project’s shut-down has effectively de-prived AREVA of an important source of reve-nue and prevented it from establishing itself on Bul-garia’s nuclear market. The project was also of interest

to the French nuclear in-dustry, from the standpoint of maintaining and devel-oping their nuclear power technology competencies,” said Leonid Bolshov of the Russian Academy of Sci-ences.The former prime minister of Bulgaria, Simeon II Bo-risov, said he believes that politicians are capitalizing on this problem to the det-riment of national interests. “Over recent months, we have witnessed an extreme politicization of an issue that is of strategic impor-tance for our country — one related to our ability to cre-ate a vision for our devel-

opment in the years to come. Personally, I am one of those who believe that, in 20 years, we will regret having missed the chance to become energy self-suf-fi cient,” Borisov said.The project could have be-come a catalyst for Bulgar-ia’s economic development, as Rosatom was set to lo-calize up to 70% of the NPP construction work. Poten-tially thousands of jobs could have been created, re-ducing unemployment in this EU economy. Europe, as a whole, is currently in need of large-scale projects for creating jobs and at-tracting foreign investment.

Bulgaria's failure to pay a nuclear debt could haunt it in more ways than one

units for the Kozlodui nu-clear power plant (NPP), now looks unlikely. Bulgar-ia risks losing at least 1 bil-lion euro - as well as inves-tors’ trust - in the legal battle with Rosatom, which drastically increased the amount that it is seeking under a lawsuit fi led against Bulgaria’s NEC.The decision to build the 2 gigawatt Belene nuclear power plant was made back in 1981, though the project was put on hold in 1990. In 2002, construction was re-sumed and, in 2006, Rus-sia’s closed joint-stock com-pany Atomstroiexport ZAO, a unit of Rosatom, signed a construction contract with NEC on the basis of an in-ternational tender. Howev-er, after Boyko Borisov’s right-wing GERB party came to power in Bulgaria, the project stalled, both sides arguing at length about the cost and terms of

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R B T H . R U H O T T O P I C S :

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MAXIM IVANOVKOMMERSANT

While Russians are divided

in their opinions on the

Church role in public life,

commentators ask if the

church should be involved

in politics.

Russian society is split on church role

Society Pussy Riot case revealed divisions that run through the country today

At least half of Russians be-lieve that the Orthodox Church infl uences politics in Russia, while a quarter of respondents want the church to be more active in addressing issues consid-ered important to the state. Surveys from the All-Rus-sia Center for the Study of Public Opinion (VTsIOM) show that the number of Russians who believe the Russian Orthodox Church infl uences domestic poli-tics has been growing over the past two years. The most recent studies from the center show that 50 percent of respondents con-sider the church to have an infl uence over Russian pol-itics, compared with 44 percent in 2010. Moreover, 12 percent of respondents believe the church has a "signifi cant" infl uence on state policy. The church has found itself in the unhappy middle of a variety of political events, the most notorious being the case of Pussy Riot, the punk group that took over

the altar of Moscow’s Christ the Saviour Cathedral on Feb. 21 and sang a “punk prayer” called “Holy Moth-er, Chase Putin Away.” The members of Pussy Riot re-ceived a two-year sentence last month, leading to in-ternational condemnation of the court's harsh treat-

ment and a lack of mercy from the church.Still, the church continued its forays into politics. On Feb. 26, Russian Orthodox Patriarch Kirill took part in the congress of the All-Russia People’s Front, a body created by President Vladimir Putin in the run-

up to last December’s State Duma Elections. And, on June 16, Russian Prime Minister Dmitry Medvedev told the general council of the ruling United Russia party that the state needed to draw on “values that are traditional in our state and society – supported by pub-

lic morals, supported by the church.”According to VTsIOM Gen-eral Director Valery Fyodor-ov, those who are against increased involvement of the church in politics are, for the most part, those who “do not approve of the work of the president and the

Young believers are increasing in today's Russia.

PAVEL NIKULINRBTH

The Pussy Riot sentencing,

arrests during street

protests and utility rate

hikes top the opposition's

agenda.

Mukhin believes that pro-tests will become especial-ly relevant this autumn, as Russians returning from summer holidays begin to feel the recent increase in utility fees. The new rates came into effect on July 1, but have remained virtual-ly unnoticed as the Russian press was full of discussion over the law on foreign agents and the Pussy Riot case.Slogans demanding chang-es in social services are tra-ditionally popular in Rus-sia, but Mukhin said that the opposition will not over-use them this time. Instead, they will focus on criticis-ing those actions interpret-ed as repression. ”These in-clude the Pussy Riot trial

The opposition drew tens of thousands on September 15, marking the start of a new season of dissent in Russia. More protests, mon-itoring of regional elections in October and the release of arrested protesters top of the agenda, according to ac-tivists. Observers said they expect to see a change in the tactics and strategy of the opposition, including more specific social de-mands. Political expert Alexei

and the arrests of protest-ers during the rally on May 6, whom the opposition re-gards as political prisoners,” said Mukhin. In the wake of the Pussy Riot trial, the relationship between church and soci-ety has become one of the hottest topics in the press and the blogosphere. But Political expert Vladimir Pribylovsky said he has doubts that the anti-church slogans will be successful. “Opposition leaders have a problem with the church, they are dissatisfi ed with the degree of its involve-ment in the life of the coun-try, but anti-clericalism will hardly make it into the top ten slogans,” Pribylovsky said.

But the most important mission for the opposition this political season is to create legitimate organiza-tions. To this end, the op-position will hold elections at the end of October to create a coordinating coun-cil to bring together pro-test-minded politicians. There have been many at-tempts to create such an association, but so far none have had the needed re-solve. The coordinating council has a far better chance of becoming legit-imate, however, because opposition activists will be chosen in a real election which will occur after Oc-tober 14, when Russia's local and regional elections will take place.

Now is the autumn of our discontent Politics The Russian opposition has adjusted its slogans and objectives for the new political season

Russia's attitude towards religion

What religion do you prac-

tise?

Do the actions of the Rus-

sian Church upset you?

government,” but he cate-gorizes them mostly as sup-porters of traditional oppo-sition parties, including the Communist Party of the Russian Federation (KPRF) and the Just Russia party, rather than those who took to the streets this winter. Fyodorov noted that there is another group that calls for a strengthening the role of the church – they believe that the state must be “Or-thodox.” “These are the peo-ple who believe that mor-als should be promoted, as should harmony of the state and society,” Fyodorov said. Even those who are not sup-porters of the church be-lieve that there should be institutions that serve to unite and consolidate soci-ety, according to Valery So-lovey, a professor at the Moscow State Institute of Foreign Relations. This may be so, but Mikhail Vinogradov, president of the St. Petersburg Politics Fund, said that support for the church is unlikely to in-crease in the near future. Dmitry Orlov, a political ex-pert and member of the Public Chamber agreed. Ac-cording to Orlov, the en-gagement between the church and the state peaked during the election cam-paign and is unlikely to keep growing.

Do you support protesters?ACCORDING TO POLLS BY THE LEVADA CENTER, RUSSIA IS DEEPLY

CONFLICTED OVER THE PROTEST MOVEMENT.

OPPOSITION PROTESTS

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27 SEPTEMBER 2012Regions

ALEXANDER KILYAKOVRBTH

Widely known as an arena

of endless conflict, the

Caucasus region is also one

of the most naturally

majestic and culturally rich

areas on earth.

Ancient land of war and hospitality

Caucasus Once the favourite resort of Soviet leaders, the region attracts tourists from all over the world

If you ask an average Rus-sian to name things associ-ated with the Caucasus, the list would probably look something like this: moun-tains, snow, war, highland-ers, Islam, hospitality and vacation. This sequence is fairly accurate, but for those living in the Caucasus each of these elements is larger than life.

MountainsAlthough most people refer to a geographic region when they say “the Caucasus,” it is actually a mountain range stretching from the Black Sea to the Caspian Sea, separating Russia from the Middle East. The high-

est peaks are Mount Elbrus (18,300 feet) and Mount Ka-zbek (16,400 feet). These mountains cannot be called young – time has smoothed them, earthquakes are ex-ceptionally rare, and there are no volcanoes. Many peaks are covered with snow year-round; winter, however, is the best time for mountain skiing and snow-boarding.

WarThe Caucasus has been a battlefi eld in virtually every century. It is a strategically crucial region occupying a narrow neck of land be-tween two bodies of water and is one of only two ways to reach the Middle East from Europe by land. At dif-ferent times, this region has been part of the Russian Empire, the Crimean Khan-ate, the Ottoman Empire and Persia, as well as the home of a multitude of in-dependent states. Through-

out the 19th century, the Caucasus was a battle-ground for various players fighting for access to the Caspian Sea. The Soviet era was the only time when there were no wars in the region. Some scholars at-tribute this to the Soviet Union’s reasonable ethnic policy, whereas others argue that the socialist regime used extreme tactics to keep the locals in line resulting severe escalation of confl ict in the region just after the fall of the Soviet Union.

HighlandersThere are only two regions in Russia where hill people live – the Caucasus and Altai. Combined with Islam, it creates a unique Cauca-sian society. Religious be-lief has played a signifi cant role in the confl icts in the region. A key word for local highlanders is ‘Dzhigit’ de-noting the most skillful equestrians in the Cauca-

The Caucasus, a region of remote and untrammeled beauty for tourists.

For centuries, the Caucasus has been Russia's frontier. Highlanders in costume. Dombai is the popular ski resorts in the Causcasus.

sus. There art of dzhigitov-ka - the display of riding techniques and trick riding - was imported into Europe and the United States in the early 20th century, forming the basis for the hot-shot “western” riding style and Cossack vaulting. HospitalityIf a highlander has a guest, he will treat him to the best food he has, even if he has to slaughter his last lamb or use the last kilo of fl our. “Hospitality here in Chechnya is specifi cally re-spected. Anyone in Russia knows that, its some kind of legend in our country. I know that if you acciden-tally enter someone’s house, they won't ask you anything

and will grant you the most hearty welcome,” said Val-entina Matvienko, chairper-son of the Federal Assem-bly, during her recent visit to Chechenya. VacationWhen the Caucasus, south-erly and warm, became part of Russia, it was the resort of the aristocracy. These days it is a popular vaca-tion spot for young Russians as well, but there is a short-age of tourist infrastructure. Local authorities, along with the company Resorts of the North Caucasus, as wells as the Corporation for Development of the North Caucasus, are working to improve the local infra-structure.

A welcome guest from Georgia

Classic Russian cuisine is hardly known for spic-es and exotic flavors, but over centuries, Russians have successfully incorpo-rated the traditions of their near neighbours. One of the brightest examples is khar-cho, a hearty and savoury meat and tomato soup that almost qualifies as a stew. There isn’t much agree-ment on the basic ingredi-ents: some say lamb, others insist on beef; some favour rice while other prefer more traditional millet. One thing is certain, however: Khar-cho gets its signature tangy sweet and sour layer of fla-vour from dried fruits. Fresh coriander, parsley, mint and dill offer a generous gar-nish.

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