News iN Brief

On July 1, customs checks dissappeared on the borders between Russia, Belarus and Kazakhstan as the three countries took another step toward an E.U.-style free trade bloc due to become fully operational by 2013. While businesses have been jubilant at the prospect of the world’s geograph-ically largest economic space, with 170 million consumers and free labor and capital flows, some citizens have been angered by price hikes on cer-tain goods caused by higher import duties.

Following two major boat catastrophes and sev-eral aviation disasters during the summer, Rus-sia’s president, Dmitry Medvedev, has called for an overhaul of the country’s aging civil air fleet and additional checks on waterway safety.The plans have already run into trouble amid concerns by regional airlines that they lack the funds to upgrade aircraft. Additionally, Russian-made planes are simply not avaible for sale in the quantities required. “The financial situation of local airlines is so complicated that without sub-sidies they cannot build a business plan on the basis of [local] aircraft,” airline industry analyst Oleg Panteleyev told The Moscow News.

Customs Union Clears Another Hurdle

efforts to improve Transport safety Hit snags

OPiNiON

Can Russia learn from China’s booming economy, or should it focus on relations with de-veloped markets?

Tandem economicsHow upcoming presidential and parliamentary elections will affect business

In July, Russia’s Federal Space Agency launched the Spektr-R radio telescope from Kazakhstan’s Baikonur Cosmodrome. The telescope will com-municate with ground-based observatories to form a “dish” spanning an area 30 times the Earth’s di-ameter, reported the Christian Science Monitor. It will have the capability to deliver images at 10,000 times the resolution of the United States’ Hubble Space Telescope.The launch comes after the grounding of the last American shuttle, making Russia the only nation capable of carrying humans into space. A non-manned mission to Mars expected to bring soil samples back to Earth is scheduled for Novem-ber, while Glonass — Russia’s equivalent of G.P.S. — is to become operational by year’s end.

New Telescope Heralds return to space

Urban Planning Can a hub-and-spoke expansion save the city from itself?

On the eve of the third anniver-sary of Russia’s conflict with Geor-gia, Russian President Dmitry Medvedev sat down with repre-sentatives from Ekho Moskvy radio, RT television and First Cau-casus television to discuss the con-sequences of the conflict and the future of Russian-Georgian rela-tions. During the discussion, Med-vedev expressed his desire to im-prove the relationship between the two countries.

“I would be very happy if the Georgian, Abkhaz and South Os-setian authorities went to the ne-gotiating table to discuss how they would continue living side by side,” said Medvedev, indicating that Russia would strongly support such a process.

Medvedev also took full respon-sibility for his 2008 decision to send troops into South Ossetia and Ab-

Beyond the Georgian Warinternational relations Russian president separates sovereignty of breakaway republics from W.T.O. entry

would’ve tried to get him to come to Russia, or some third country...simply talk him out of this,” he said.

As a W.T.O. member, Georgia has leveraged its ability to block Rus-sian entry into the organization to demand its own customs check-points be installed on the break-away republics’ borders with Rus-sia. Medvedev commented that giving in to such pressure would be “immoral” on his part.

However, the president ex-pressed hope for a peaceful future. “Сonflicts are no good for anyone, ever. Those who say you can re-solve something through violence are liars. Conflicts have never re-sulted in anything good,” he said.

“It is important for us to move on from this sad chapter of our relations,” said Medvedev. “We should remember what happened, but be focused on the future. We should restore the strong bonds that existed.”

City planners are considering an ambitious plan to turn a large swath of the Moscow suburbs into a federal center with relo-cated ministries and government buildings. Officials said the pre-ferred location for the federal center is a 356,000-acre chunk

NiNA VAzHdAyeVA, dmiTry sUriNITOgI MagazIne

ArTem zAgOrOdNOV RussIa beyOnd The headlInes

in the face of traffic gridlock and astronomical real estate prices, President dmitry medvedev made a surprise proposal to expand the size of russia’s capital.

in a major interview, President medvedev expressed regret over how the events of August 2008 transpired and denounced the use of force in foreign policy.

east or west?

PAge 6

ters with residential development and social infrastructure will re-quire careful planning.

“The plan has to be imple-mented over 25 to 50 years; oth-erwise the new city will outgrow whatever we build,” said Pavel Andreyev, an architect and the head of Workshop 14 at the Mosproject-2 design institute. A key goal of the project would be the creation of a transporta-tion network to prevent it from becoming a burden on the re-gion’s already overburdened roads.

A new plan calls for ex-panding rus-sia’s capital to the southwest, nearly dou-bling the area of the 10-mil-lion-strong megalopolis.

of land southwest of the city. Ex-perts said more than one trillion square feet of real estate could be built in the area, which could ultimately be home to two mil-lion people. Officials said they are uncertain if the area will be a municipality, a district or a city neighborhood.

“Building the satellite city will be a shot in the arm for devel-oping nearby districts in the Moscow region,” said Vladimir Avdeyev, a general partner at commercial property firm S.A. Ricci. “While business activity

is likely to be concentrated in the administrative center, the city’s residents will spend their leisure time in the neighboring villages, where there will be con-dominiums for government of-ficials.”

Real estate experts said the new development, tentatively called “Moscow-2,” will also fea-ture high-end boutiques and res-taurants. Architects said such a large-scale development presents significant challenges, adding that the need to blend adminis-trative offices and business cen-

Wednesday, aUGUsT 10, 2011

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khazia, and indicated that over a day had transpired before he con-sulted with Prime Minister Vladi-mir Putin over the matter.

“[August 2008] was a moment of truth for Medvedev,” comment-ed political scientist Vyacheslav Nikonov in the leading business daily Kommersant. “He had to make a conscious decision that was supported domestically, but received a very harsh reaction abroad and set Russia on a con-frontational course with Western governments.”

Medvedev lamented that a po-l it ical solution was n o t found. “If we had man-aged to prevent this war, it would have been to everyone’s benefit, and Georgia’s in the first place. The fact that it didn’t happen is a real tragedy,” said Med-vedev.

“Had I realized back in July 2008 that Mr. Saakashvi-li was nurturing such plans…I

Medvedev on the W.T.O., Middle east and saakashvili atwww.rbth.ru/13225

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September 14

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Medvedev: South Ossetia Cannot Merge with Russia Yet politics & society

Five years ago, Evgenia Chiri­kova, a resident of the Moscow Region town of Khimki, had no fan base outside her own friends a n d f a m i ly. S h e w a s a typical 30­something Russian woman, focused on her children and her career. She had no inter­est in politics. “I didn’t think it was possible to change anything,” she said, “so politics seemed a senseless endeavor.”

Chirikova, 34, could pass for a student in her jeans and T­shirt. She doesn’t look like a person known for her criticism of Prime Minister Vladimir Putin and the ruling United Russia party, a per­son who commands the attention of a broad spectrum of opposi­tion parties and movements.

Her metamorphosis from sub­urban working mother to one of Russia’s best­known activists oc­curred after the Moscow city government decided to bulldoze the forest next to her house to

grassroots Russian politics is enlivened by local activism rooted in environmental awareness and a disdain for corruption

build a highway to St. Peters­burg.

Chirikova gathered local resi­dents and spoke out in favor of re­routing the highway. Bureaucrats reacted to this initiative with be­

wilderment, while many local res­idents were suspicious: In Russia, an international multibillion­dol­lar project had never been stopped by a forest before. Said Chirikova, “The Khimki administration didn’t understand what we wanted. ‘If you want to live in the woods,’ they said, ‘go to Siberia.’”

“if we’re afraid, we’ve lost”Evgenia Chirikova found a new

identity for herself — and mil­lions like her — by giving voice to a local grievance.

Chirikova didn’t realize what she was getting into. “I was so naïve at first. I thought this high­way must be some mistake. I also thought that I lived a law­based state.” During the Khimki Forest conflict, 10 activists were maimed by unknown assailants.

Chirikova, too, received anon­ymous threats. But she refused to give up. Some thought she must be crazy; others thought that she was an aspiring politician trying to make a name for herself; still others believed that she had a commercial interest in the deal. “It’s the bureaucrats who turned me into an opposition leader,” said Chirikova. “I became a citizen very late, at 30.”

“Every time [someone else was beaten up], I said to myself: one more time and I’ll run away,” Chirikova said. “But you can’t spend your life running away. If we’re afraid, then we’ve lost.”

Her many exchanges with bu­reaucrats who told her that the highway was a federal project and therefore not subject to change did nothing to increase her con­fidence in the powers that be. “I

grew up fast,” said Chirikova. The wide range of beliefs

among Chirikova’s supporters shows that there is a demand in Russian society for specific prob­lems to be solved, said Alexei Mukhin, head of the Center for Political Information. “That’s why traditional opposition movements afraid to switch from slogans to actions are losing popularity,” said Mukhin.

The fight for the Khimki For­

evgenia chirikova unintentionally entered politics to protect a forest near her home from a major highway project.

environmental and anti-corruption crusaders like evgenia chirikova and alexei navalny may become russia’s first formidable homegrown political opposition.

Vladimir ruVinskyRussia beyond the headlines

navalny became famous defending the rights of minority shareholders in large Russian state companies.

“i was so naive at first. i thought the highway was a mistake. i thought i lived in a law-based state,” said Chirikova.

alexeinavalny

evgeniachirikova

Alexei Navalny earned a degree in law from the People’s Friend-ship University in Moscow in 2003. He made his name by buying small amounts of shares in major Rus-sian companies and then request-ing financial information from the corporations under laws governing shareholder rights. When he found evidence of corruption, Navalny would post the information on his blog, http://navalny.ru.

Evgenia Chirikova holds degrees in engineering and finance from the Moscow Aviation Institute and an M.B.A. from the Academy of the National Economy of the Govern-ment of the Russian Federation. In the late 1990s, she moved to Khimki in search of a “green” area in which to raise her daughters. With her husband, Mikhail Matveev, Chirikova runs two small businesses specializ-ing in electromagnetic equipment.

their story

right cause Can money boost the prospects of liberals?

Mikhail Prokhorov Boosts Business Agenda

The Kremlin’s ambitious privatization program received a boost with the election in July of billionaire Mikhail Prokhorov to lead the Right Cause pro­ business party.

After his election, Prokhorov said he plans to make Right Cause the “second party of power” after Prime Minister Vladimir Putin’s United Russia party. Prokhorov, who had previously called for a 60­hour work week, shied away from targeting a purely business­oriented constituency. It wouldn’t be right, he was quoted by com­merce­oriented paper Kommer­sant as saying, “to be a party of business and the intelligentsia.”

And Right Cause’s previous slo­gan, “Capitalism for all,” would have to go, Prokhorov said. “It’s not true; it doesn’t happen that way,” Prokhorov was quoted as saying. “Capitalism is for people who like risk, and a fair govern­ment must offer people social guarantees and support.”

Instead, Prokhorov said the party has a clear and ambitious agenda: “To get into the State Duma with the highest possible number of votes.”

As such, its constituency is “heads of families — men and women who make important de­cisions every day.”

That agenda, some analysts

said, makes the party well posi­tioned to carry out some of the less­popular market reforms that key liberals in the government, such as Deputy Prime Minister and Finance Minister Alexei Kudrin and presidential econom­ic advisor Arkady Dvorkovich, are calling for.

“It is possible that if and when

Right Cause gets into the Duma, then the less­popular social and economic steps that are being dis­cussed as part of the revised 2020 program should be realized by someone,” said Nikolai Petrov, a political expert with the Carne­gie Moscow Center. “I think the Kremlin’s logic is that a liberal force should play the role of a

mikhail prokhorov hopes to pull right cause onto the national scene.

mikhail prokhorov hopes to put his business acumen to use as the new leader of right cause, which marks the return of big business to national politics.

anna arutunyanthe MosCow news

his story

mikhail prokhorovaging the reform of Norilsk Nickel and the creation of Polyrus Gold. A well-known playboy, Prokhorov is the third-richest man in Russia ac-cording to Forbes, and the only non-American to own an NBA fran-chise — the New Jersey Nets.

corruption if you can’t beat them, join them

Companies Try to Provide the Perfect Bribe

The latest survey by Canadian public opinion research compa­ny GlobeScan indicated that 67 percent of Russians consider cor­ruption to be the country’s most serious problem. But Andrei Sharkov, the owner of online confectionary Chocobox, saw these numbers as an opportu­nity. In April, Sharkov designed a new kind of chocolate gift box called “A sweet piece of the bud­get.” The box contains 30 bars with wrappers featuring gov­ernment officials and logos of

state­owned companies that have been exposed as corrupt. Sharkov borrowed the charac­ters for his chocolates from an­ti­corruption blogger Alexei Na­valny, who also provided online P.R. Chocobox was careful to change the colors in the logos. Said lawyer Igor Trunov, “This should protect the company from liability for harming business reputations.”

A box of chocolates called Not a Bribe, however, introduced by chocolate manufacturer Konfa­el at the beginning of 2009, did not take with consumers, and for good reason. Two years ago, GlobeScan found that only 23 percent of Russians thought cor­ruption was a serious prob­lem.

some russian businesses have decided that the best way to deal with the problem of corruption is to take a creative approach.

ksenia leonoVakoMMeRsant

kamikaze — heading a govern­ment that will carry out unpop­ular measures—and then it can be replaced. What Prokhorov has been saying could play a role in this context.”

not the oppositionBut what was clearly emerg­

ing from Prokhorov’s comments was that, while a renewal of the political system was necessary, he had no intention of opposing the status quo.

“We need to remove the word ‘opposition’ from our lexicon,” he said, Kommersant reported. “Be­cause for our citizens, opposition is associated not so much with political parties, but with mar­ginal groups that have long lost touch with reality.”

And in a clear break from the more opposition­minded rheto­ric of previous Right Cause lead­ers — which included members of the Union of Right Forces — Prokhorov said there was noth­ing wrong with forming a coali­tion with United Russia if both parties have similar views on some issues.

Analysts said this falls in line with the government’s role in closely monitoring the party’s for­mation.

“Things like this are always ap­proved and agreed on in advance,” said Olga Kryshtanovskaya, a so­ciologist and a coordinator of United Russia’s liberal wing.

Key officials from Putin’s gov­ernment — such as Alexei Kudrin and First Deputy Prime Minister Igor Shuvalov — had previously been mentioned as possible can­didates to lead Right Cause.

Prokhorov’s announcement that he was interested in the post was reportedly preceded by meetings with Medvedev and Putin. His election marks the first time that big business has openly entered the political arena since Yukos chief Mikhail Khodorkovsky’s failed attempts in 2003.

changing attitudes toward corruption

Mikhail Prokhorov made his money in the precious metals sector, man-

defending Minorities is importantMost Russians (55 percent) feel that defending the rights of political, ethnic, religious and sexual minori-ties is an important priority. Accord-ing to Gayrussia.eu, most Russians who disagree with allowing gay-rights activists to demonstrate cite the importance of the majority’s position.However, the same poll found that 66 percent of Russians don’t believe in the universal application of West-ern standards to their own society.

polls

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out of the woods, a new opposition

est ended in a decision to narrow the highway from 600 meters (2,000 feet) to 100 meters (330 feet) and prohibit commercial construction either side of the highway.

navalny: “it was senseless to get involved”

One of the people who doubted Chirikova’s chances for success was lawyer Alexei Navalny, an ac­tivist and blogger who has made his name fighting corruption in state companies. Several years ago, he was a member of the liberal party Yabloko and worked on a committee to protect Muscovites. “People came to me complaining about the construction of a high­way in Khimki,” he said. “My an­swer then was that it was sense­less to get involved. You wouldn’t put together an initiative group and anyway all be beaten up.” Chirikova was one of the people who came to Navalny. “Now I see how wrong I was,” said Navalny. Today, Navalny is an active sup­porter of the Khimki movement and is helping members make sense of the competitions to build the highway, in which, according to Elena Panfilova, head of the Russian branch of Transparency International, “corruption is a large component.”

Like Chirikova, Navalny be­came famous thanks to actions rather than words, defending the rights of minority shareholders in large Russian state companies. They are a new kind of opposi­tion in Russia, oriented toward solving real problems, said Niko­lai Petrov of the Moscow Carn­egie Center. “If with Evgenia it’s the transformation of a civil po­sition from a private protest, then Alexei targets political activity at the outset,” Petrov said.

Chirikova “didn’t plan to go into politics; she was pushed into it by the local authorities,” said Mukhin, adding that both Naval­ny and Chirikova “have the image of a popular leader responding to public despair.”

was raised by Alexei Navalny through his blog to support an anti-corruption crusade that has taken on major state-owned corporations.

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Gorbachev, a Leader Who Changed the Worldhttp://rbth.ru/12398 Special Report

20th Anniversary of the Coup The fall of the Soviet Union altered economic habits as much as the political system they were based on

A Time of Fear and Expectation

Like many Russian children in August 1991, Ilya Poliveev expe-rienced the drama of the failed coup against Soviet Leader Mikhail Gorbachev in his moth-er’s shocked expression as the family watched television news and his parents anxiously ex-changed whispers.

“I can still recall lots of imag-es from the news: the Russian White House with black burn marks and the look on Gor-bachev’s face, which essentially was the same as my mother’s,” recalled Poliveev, 26, who lived in Magadan in Russia’s Far North in 1991 and now works as a styl-ist in Moscow.

Twenty years ago this month, between Aug. 19-21, Communist

Different generations of Russians remember the turbulent events of August 1991 with a range of emotions dominated by uncertainty mixed with hope.

VLADIMIR RUVINSKY, ANASTASIA GOROKHOVARUSSIA BEYOND THE HEADLINES

hardliners attempted to topple Gorbachev and thereby halt his reform program known as pere-stroika and a proposed rework-ing of the documents governing the Soviet Union. But the at-tempted putsch failed and Mus-covites rallied around Boris Yeltsin, the president of the Rus-sian republic, who famously stood on a tank outside the White House, the seat of the Russian government. Gorbachev, who had been placed under house arrest in the Crimea, returned to Mos-cow after Yeltsin’s successful stand, but he was fatally weak-ened as a leader and the dissolu-tion of the Soviet Union began almost immediately.

“The thing I most remember is fear,” said Svetlana Prudnikova, who was a teacher in her 40s when the coup occurred. But “it was also a very active and prom-ising time. Everything felt very real—and energetic.”

Vera Grant remembers digging for potatoes at her grandparents’ dacha near Moscow, and the

In February 1990, Quentin Peel, Moscow bureau chief for the Fi-nancial Times, took part in a tele-vision program on the impact of the transition to a market econ-omy on people’s lives.

“At � rst it would be painful indeed,” Peel said on the program. “But afterwards it would be bet-ter. And better. And better.”

Two decades have passed since the Soviet Union ceased to exist, and many Russians would argue that Peel’s predictions have yet to come true.

A few facts and � gures show that by choosing the American-style free-market economy over European-style socialism during the transition in 1991, Russia’s ruling elite created a difficult new way of life for the average Russian while paving the way for the oligarchy and an econo-my dependent on the export of natural resources.

The new economy began with shock therapy, resulting in sky-rocketing living costs, loss of sav-ings and cuts in social bene� ts, and the sale of lucrative state assets in the notorious loans-for-shares program that created to-day’s billionaires.

Russia’s economy is still affected by decisions made in 1991.

Twenty years later, these ef-fects are still felt. According to income-gap research by the Le-vada Center, the wealthiest 10 percent of Russians earn 17 times more on average than the poorest 10 percent, while in Moscow they earn 40 times more — an outrageous level of ineq-uity.

Additionally, the economy has become primarily an exporter of raw materials. Despite claims

from the Kremlin, the Soviet Union was not dependent on commodities exports. Data on G.D.P. and exports from 1990 show that � nished products ac-counted for 77 percent of all Rus-sian sales abroad.

According to the recent World Bank Russian Economic Report, “Oil and gas composed less than half of total exports in 2000. In 10 years, this � gure had grown to two-thirds of total exports, with an additional 15 percent of exports coming from other ex-tractive commodities and only 9 percent from high-tech exports,

Economic Difficulties of Transition Still Felt

FELIX GORYUNOV SPECIAL TO RBTH

mainly in the defense indus-try.”

Stanislav Menshikov’s 1997 analysis, “The Anatomy of Rus-sian Capitalism,” explains that commodities dominate because extracting industries ensure high pro� t margins. Between 1995 and 2001, the pro� tability in fuel in-dustries rose from 20.8 percent to 35 percent. The pretax pro� ts from oil exports increased still more — from 18.2 billion rubles in 1995 to 720.3 billion rubles in 2003 — and taxes and duties from oil exports now account for more than half of federal bud-get revenues.

Russia’s transition to market strategies that integrated Rus-sia into the global economy as a raw material supplier has made the country vulnerable to the whims of the international com-modities markets.

A former Communist party functionary who was an archi-tect of political reforms in early 1980s told me: “The reforms were a deadly necessity. It was pain-ful to see a great nation with a developed economy and well-educated people lagging behind capitalist countries in living standards. Social democracy was our best option. But when I see what has become of this coun-try now, my only feeling is shame.”

By deciding against European-style socialism, Russia’s ruling elite created difficulties for the average citizen.

adults intently listening to the radio, even in the � elds. “The ten-sion was thick,” said Grant, a 26-year-old concert promoter.

But two decades after the founding of a new state, one that began with great hopes for de-mocracy and prosperity, Russians are deeply ambivalent about what has been achieved in the inter-vening years and the current tra-jectory of their country. And that now colors their view of what happened in 1991, and whether it is worth celebrating.

A mere eight percent of Rus-sians look back on the events of August 1991, and the subsequent collapse of the Soviet Union, as a democratic revolution, accord-ing to the Levada Center, an in-dependent polling agency. Thir-ty-six percent of Russians, echoing the sentiment of Russian Prime Minister Vladimir Putin, describe the fall of the Soviet Union as a tragedy and 43 per-cent dismissed what many see as a seminal moment in Russian his-tory, the failure of the August

coup, as nothing more than a power struggle among bureau-crats.

“It was the illusion of freedom and the illusion of change,” said Philip Bochkov, now an art di-rector. He recalled that his fam-ily crawled around their Moscow apartment during the coup be-cause it was near the White House and his neighborhood was alive with rumors that snipers were on the roofs and randomly tar-geting people.

“Today, no one � ghts for any-thing, but rather everyone is just always ‘against’ something,” said Grant. “The main thing is that things do not become like they once were.”

Natalia Moshkina recalls a sense of jubilation in the crowds when her grandmother and moth-er took her to the White House for a rally after it was clear the coup had failed.

“There was a sense of excite-ment, democracy, of social fo-ment,” said Moshkina, a 34-year-old advertising executive in

Moscow. But as she looks back, 20 years after the events, Mosh-kina says she remembers that time with a sense of desponden-cy. “I have a feeling that the coun-try missed a great opportunity,” she said. “As for me personally, I have become more pragmatic and more cynical.”

According to Boris Dubin, head of the Social and Political Stud-ies Department at Levada, “most Russians now see the 1990s in a negative light associating this de-cade with economic collapse, chaos, cultural degradation…while a miniscule number of the most socially active talk about receiving basic freedoms.”

He also noted that public hos-tility to the 1990s has been stoked by the Russian media, which has consistently described the decade as a period of unremitting chaos. “People became increasingly more disillusioned,” he said.

But Dubin also noted that “democratic rhetoric has seeped into people’s pores” and the idea that democracy is a good thing

has persisted as the principal leg-acy of the collapse of Commu-nism. And Russians continue to aspire to the promises of twenty years ago, even if they are un-sure how or if they can be achieved.

For Irina Potapova, a 51-year-old masseuse who lives near Mos-cow, Russians still need to devel-op a civic awareness. Too often, she said, public service is seen as a cash cow, not a calling. “In pol-itics,” she said, “corruption should be rooted out.”

In the months after the fall of the Soviet Union, western goods long banned by the Communist Party began to � ood into the country. Street vendors stocked their ki-osks with soft toilet paper, Levi’s jeans, good shoes and foreign-made cigarettes. But what is the point of quality products if you can’t afford them? The irony of the free market is that most things are actually expensive.

“Many people yearn for a by-gone era, the symbols of which were vodka for 3.62 rubles, sau-sage for 2.20 rubles and bread for 13 kopecks. Today, you can-not get anything for a ruble. But has our existence worsened be-cause of this?” asked Margarita Vodyanova in a piece in the news-paper Obshchaya Gazeta.

The minimum salary for a Rus-

While some yearn for a return to the times of cheap foodstuffs and fixed wages, a new study shows Russians are much better off materially now than 20 years ago.

Then and Now: Purchasing Power

BEN ARIS BUSINESS NEW EUROPE

sian just after the fall of the So-viet Union in 1991 was 548 ru-bles a month — 72 U.S. cents, at real rates of exchange — accord-ing to Yevgeny Gavrilenkov, chief economist at Troika Dialog. But this was still enough to have a decent life, as the state provided housing, education, utlities, health and child care, vacations and re-

tirement homes. None of this was of particularly good quality, but it was universally available, and it was all free.

Money went a long way in 1991 Russia. The basic minimum sal-ary could buy 74 loaves of bread or a choice of: 6.2 kg of meat; 6.5 kg of sausage; 13.5 liters of veg-etable oil; 163 liters of milk; 6 kg of cheese; 160 eggs; 28 kg of sugar; or 3.5 liters of vodka.

A recent survey conducted by the Higher School of Econom-ics and the magazine Ekspert on changes in Russian living stan-dards between 1990 and 2009 found that per capita income has increased by 45 percent, while the volume of consumption per capita has more than doubled according to G.D.P.-based con-sumption � gures.

If you measure quality of life in terms of possessions, Russians are living much better now than they were 20 years ago. In 2008, a consumer could buy 70 per-cent more durable goods, 25 per-cent more food, and two to three times more cigarettes, vodka, cars and clothing than he could dur-ing the Soviet era.

At the same time, however, household spending on childcare and education has increased sub-stantially, along with spending on health care. The survey notes that the World Health Organi-zation (W.H.O.) found that Rus-sian spending on private health care is now 40 percent of total health care spending — a level well above the E.U. average.

The average amount of living space for Russians has risen about 40 percent over the past two decades, to a current level of about 237 square feet per cap-ita, although this is still behind a country such as Finland, where the number in 2009 was 420 square feet per capita.

A 45 percent increase in in-come is actually not very much over 20 years, especially consid-ering that incomes plummeted for most of the 1990s and only began to rise after the 1998 � -nancial crisis. And although most Russians enjoy higher incomes now than they did 20 years ago, a recent survey showed that one in � ve Russians today lives below the poverty line and is worse off than he was under the Commu-nists.

Dynamics of Consumption

of Russians consid-er the revolutionary events of 1991 simply a struggle for power among the elites of their country at the time.

consider the coup to have been a tragedy that lead to thecollapse of thecountry, echoing the words of Vladimir Pu-tin in 2005.

think that it was atriumph of democra-cy over the reaction-ary forces of Com-munism. This figure is down from 13 percent in 2006.

43% 36% 8%IN FIGURES

Per capita income has increased by 45 percent, while consumption per capita has more than doubled since 1991.

" It was clear that if anyone wanted to reverse the situa-tion, there would be a great

number of victims. In the beginning, that was all we knew for certain. Then the coup ended and its orga-nizers dispersed.”

IN HIS OWN WORDS

VladimirPutinIN 1991, HEAD OF ST. PETERSBURG’S FOREIGN

ECONOMIC RELATIONS COMMITTEE

REU

TER

S

GETTY IMAGES/FOTOBANK

August 24, 1991: a crowd holds the Russian tricolor at a public funeral in Moscow for the three persons killed during the coup.

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economy in brief

Favorable weather conditions have led to a higher-than-ex-pected harvest of 92 million tons this year, 20 million of which are likely to be exported, accord-ing to Agriculture Minister Elena Skynnik.The news comes after the lift-ing of a yearlong ban on exports on July 1, which was imposed to fight price hikes following di-sastrous wildfires in 2010, and hurt Russia’s position as the world’s third-largest grain ex-porter. The key buyers of Rus-sian grain are Turkey, Egypt, Azerbaijan and Israel. Russia will supply grain to Nicaragua and North Korea as part of hu-manitarian aid.

russia to regain positions in grain market

Embattled media mogul Ru-pert Murdoch has sold his Rus-sian advertising company News Outdoor to the state-owned in-vestment bank VTB Capital.

News Outdoor is a big player in the billboard business. The massive ads that dominate the streets of Moscow each cost be-tween $400 and $4,000 a month. Former Moscow Mayor Yury Lu-zhkov, who was ousted last year, was criticized for his inability to control the explosion of bill-boards, and efforts to limit their numbers have only been par-tially successful. In its statement announcing the deal, VTB Cap-ital said that the new manage-ment will, “interact with author-ities to implement programs aimed at improving the appear-ance of cities.”

rupert murdoch sells russian asset

gLobaL russia business caLendar 3rd annuaL interra internationaL youth innovation forum in siberiaseptember 22–24,45 oktyabrskaya st.novosibirsk, russiaSiberia’s largest event of the sea-son offers government officials, international businesspeople, sci-entists and artists from various fields the opportunity to unlock their creative potential.

www.interra-forum.ru/ ›

2011 yarosLavL gLobaL poLicy forumseptember 7–8yaroslavl, russiaThis year’s event will explore the role of “The Modern State in the Age of Social Diversity.” Guests include Immanuel Wallerstein of Yale University, Parag Khan-na of the New America Founda-tion and Craig Calhoun of N.Y.U. Previous guests have included Russian President Dmitry Med-vedev, Italian Prime Minister Sil-vio Berlusconi and CNN’s Fareed Zakaria. The forum will include discussions on global income in-equality, security issues and the role of democracy in multi-eth-nic societies and will take place in one of Russia’s oldest cities, which turned 1,000 last year.

www.gpf-yaroslavl.ru/ ›

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There’s a hiss, a rush of bubbles. Golden liquid fills up the glass, and a good head of foam forms.

“This was made just two days ago. It’s fresh,” said Masaru Hemmi, chief brewer of Japan’s Kirin Ichiban, pouring at the Moscow Beer Company’s factory in Mytishchi. The occasion was last month’s start of licensed local production of Ichiban.

Both sides feel justified in pour-ing a few well-earned drinks. The Moscow Beer Company reckons it can sell Ichiban, which is one of the most popular beers in its home country, to Japanese res-taurants and food enthusiasts. Ichiban is confident it has secured its foothold in the $20 billion Rus-sian beer market.

Despite the optimism, these are not easy times for Russian brew-ers. Over the past decade, the beer market surged by 40 percent, but then the global economic crisis, increased taxes on alcohol and saturation depressed the market by as much as 15 percent, caus-ing the country to slip from third to fourth place worldwide for total consumption.

“Russia has lost 12 [million] to 15 million hectoliters [roughly 10.26 million to 12.78 million U.S. beer barrels],” said Igor Demen-tyev, general director of The Mos-cow Beer Company, a midsized brewer. “That means that approx-imately five or six breweries like us should be closed. And it is hap-pening; a lot of breweries have been closed and will be closed.”

foreign brandingDomestically produced beers,

like cars, carry a certain amount of stigma. Even foreign brands

alcohol a rapidly growing market for beer has attracted foreigners despite medvedev’s anti-alcohol campaign

Local brewers compete with foreign brands for a market already stretched thin by increased taxes and lack of availability.

vodka has long been associated with russia, but beer has become increasingly popular in the country, which is one of the world’s largest markets.

international brewers have taken note, buying up lo-cal producers and opening production facilities in the country. the industry faces new challenges, however,

after the state duma passed a law allowing the state to regulate beer as it does hard liquor. meanwhile, vodka distillers innovate to remain competitive.

produced under license are wide-ly considered to be inferior to gen-uine imports. Specifically, this is linked to an alleged propensity to cause headaches.

“Abroad, drinking a six-pack of Heineken is no problem. Here, two bottles will give me a head-ache,” complained one beer afi-cionado.

One urban legend links the mysterious headaches to extra al-cohol — or more sinister chemi-cals — added to popular brands to keep the population docile.

However, there’s not much choice but to buy Russian. High import tariffs mean that import-ed beers make up just 0.5 percent of the market — compared with about 15 percent in the United States.

In Russia, that segment is large-ly replaced by licensed domestic production. There are more than 40 foreign brands now produced

locally — ranging from classic Czech lagers such as Pilsner Urquell (produced by SABMill-erin Kaluga) to iconic Irish stout Guinness (produced by Heinek-en in St. Petersburg).

The Moscow Beer Company has seven licenses on the books, including a 40-year contract to produce German Oettinger and a 25-year contract with Den-mark’s Faxe, as well as its new

deal with Kirin. The local beer market is a battlefield of giants, with little room for small inde-pendent breweries. Carlsberg Group, AB InBev, Efes Brewer-ies International, Heineken and SABMiller together control more than 85 percent of the mar-ket.

Baltika, which is the biggest brand and part of the Carlsberg Group, has a total brewing ca-pacity of 5.2 million hectoliters [approximately 4.4 million U.S. beer barrels] per month.

By comparison, The Moscow Beer Company, which started out as an importer of beers and soft drinks in 1994 and only began producing its own brews in 2008, turns out just 2.5 million hecto-liters [approximately 2.1 million U.S. beer barrels] per year.

Market analysts now say Bra-zil has displaced Russia from its place as the world’s third-larg-est beer maker, and Germany is snapping at Russia’s heels to move into fourth. So what went wrong?

For a start, Russia is not really among the great beer-drinking nations. Even after the rapid growth in consumption over the past decade, Russians consume just 66 liters (about 139 U.S. pints) of beer annually per capita, ac-cording to estimates by Baltika.

Czechs get through a stagger-ing 151 liters (about 319 U.S. pints), while Germans drink 108 liters (about 228 U.S. pints) an-nually, according to a 2010 re-port by Carlsberg.

Experts put the drop down to three factors: The market was probably saturated anyway; the financial crisis of 2008 ate into disposable incomes; and the gov-ernment has drastically ratch-eted up taxes on beer.

The beer excise went up 200 percent, from three rubles per liter to 9 rubles per liter, in Jan-uary 2010. This year the tax is up to 11 rubles, and plans exist for further hikes.

The real heavy hitters are the Russian brands — which account for the remaining 85 percent of the market. The biggest selling local brand (and the jewel in Carlsberg’s Russian crown) is the Baltika product line, which ac-counts for 40 percent of all beer sales in Russia.

influx of brands Comes to russia despite new law on beer

beer takes on vodka

more than 40 brands of foreign beer are produced locally in russia.

roLand oLiphantthe mosCow times

size of russian beer market

The State Duma recently ap-proved additional restrictions on alcohol sales in the country that will end sales of beer at night and from kiosks.

The law is expected to fully enter into force by January 2013, but it is already causing shock waves in the industry. Danish brewer Carlsberg, which owns local market leader Baltika, saw its stock fall to a near four-month low in July.

Under the new law, stores will be banned from selling drinks that contain more than 0.5 per-cent alcohol between 11 p.m. and 8 a.m. Experts said it is unlikely that the restrictions will have an impact on alcohol consumption because people will simply buy the products earlier or illegally.

“This bill won’t reduce alco-

consumers new law restricts beer sales

it has become harder to obtain adult beverages now that the duma has finalized a ban on nighttime sales of drinks with more than 0.5 percent alcohol.

holism in the average citizen, but it won’t harm the consumer and the producer either,” said Vadim Drobiz, director of the Research Center for Federal and Regional Alcohol Markets. “Nighttime crime will be reduced as well as nighttime hooliganism.”

Train stations and kiosks will be banned from selling any alco-hol under the new law. These semi-permanent outlets now ac-count for one-third of Russia’s beer sales — or about $6 billion, Reuters reported.

Some industry representatives welcomed the restrictions.

“Kiosks are a humiliating pres-ence for a large city such as Mos-cow,” said Alexander Romanov, general director of the Alcohol Manufacturers Committee. “Ki-osks that sell alcohol should not exist.”

But other industry representa-tives fear that the ban on alcohol sales will make kiosks unprofit-able and will force them to close. Alcohol sales account for almost half of the profits for kiosks, SAB-Miller’s Kirill Bolmatov told Ve-

domosti. Vyacheslav Kuzmin from the Union of Russian Brewers warned about the disappearance of kiosks from rural areas. “They are often the only source where people can buy food products,” Kuzmin said. “It will hit people hard.”

beer ban to hit kiosks and train stations

kiosks will be banned from sell-ing beer under new legislation.

Lena smirnovathe mosCow times

The Organic Vodka Group, a sub-sidiary of Finland’s Saimaa Bev-erages, will make its local debut in September with Drova, a low premium Russian-made vodka, and the premium Finnish-made Suomi vodka.

Oleg Kraizmer, Saimaa Bev-erages’ acting director, said that the vodkas are made with or-ganic grains and water from the bottom of Lake Saimaa, and rest in special reservoirs for a month before being bottled.

Despite the challenging mar-ket, the company is counting on its clean label and curious cus-tomers to achieve its sales goal.

“The number of customers who are ready to try something new if it is interesting to them is

vodka new product targets premium buyers

a new entrant plans to take 20 percent of the russian premium vodka market by the end of 2013 via self-promotion as an exclusively organic brand.

greater,” said Sergei Kleshukov, the company’s general director.

Alcohol industry analyst Vadim Drobiz said the organic produc-tion idea will be useful for the company’s advertising campaigns, but added that experienced buy-ers will pay more attention to the popularity of the premium brand and the status it confers.

“Nobody will be looking into it as an organic project,” Drobiz said. “People will see the mar-keting behind it, see the lake as a story.”

Premium vodka makes up 1.7 percent of the vodka market. Russian Standart leads the mar-ket with 30 percent of sales; Be-laya Beryozka follows with 20 percent.

new organic vodka wants to Capture twenty percent of market

Lena smirnovathe mosCow times

“the number of customers who are ready to try something new if it is interesting...is greater,” said kleshukov.

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How much state in an economy is good for an emerging market? While most agree that the pri-

vate sector is the most efficient manager, academics say that at the start of transition, the state has to be heavily involved.

“All emerging markets follow a similar pattern,” said the Na-tional University of Singapore’s Bernard Yeung during a presen-tation at the annual meeting of

the E.B.R.D. (European Bank for Reconstruction and Devel-opment) in Kazakhstan last May. “At the start of the process, the state has to engage in a ‘Big Push’ to get the wheels of com-merce turning, simply because it is the only entity with the money or resources to do any-thing. However, once the econ-omy is up and running, at some point it must change to a ‘nur-ture’ strategy and step back.”

Yeung was joined on his panel by Sergei Guriev, the director of the New Economic School in Moscow. The two men argued that state involvement in the economy is necessary, but will eventually strangle it unless the government can let go.

Guriev said that once the economy is working, the key is for the state to disengage and hand over the job of driving eco-nomic growth to the entrepre-neurs and small- and medium-sized enterprises. Yeung added that once the economy starts to function, it also starts to use up its resources, so a key element of nurturing is “creative destruc-tion” — companies that are not efficient must go bust to allow their resources to be put to bet-ter use elsewhere. A lack of cre-ative destruction is the short road to stagnation, but this is where it starts to get tricky. Dur-ing the Big Push, governments set up powerful lobbies and vested interests that don’t want to see their companies down-graded or sold off.

It can be argued that Russia has already reached the point where it needs to transition to a more-caring, less-involved kind of government. But while Russia has made a lot of prog-ress, the needs of its economy are very mixed. A joint survey conducted in May by the Mos-cow Higher School of Econom-ics and the Russian economic magazine Expert found that

since 1991, both incomes and consumption per household have soared.

Sectors connected to the boom in retail spending power have been the clear winners, and the state is already in the position where it need do little more than nurture growth in these areas. On the other hand, the manu-facturing sectors are still strug-gling. The state’s involvement in the power and automotive sec-tors has been highly successful, but the national champions in sectors such as shipping, avia-tion and metallurgy have yet to really get going.

Still, the Kremlin seems to have gotten the message. The state has relaunched the priva-tization process, which is plan-ning to raise up to 1 trillion ru-bles ($33 billion) in the next three years. But the stakes are high. Russia used up a lot of its spare capacity in the crisis, and slower growth of about 4 per-cent is not fast enough to pre-vent things like infrastructure slowly crumbling away. Even as-suming the government stays on course, it still has to get the speed of transition from its Big Push to nurturing the economy right, and that will not be easy.

moscow bLog

ben arisSpecial to RBtH

Governments Must learn When to let Go

Government involvement in the economy is a necessary stage, but the state must eventually let go.

Russia is at the point it when needs to transition to a more-caring, less-involved, kind of government.

President Dmitry Medvedev has launched a drive to improve Rus-sia’s investment climate and is putting $10 billion of the state’s money where his mouth is: the Russian Direct Investment Fund (R.D.I.F.).

This new sovereign wealth ve-hicle aims to attract the world’s leading funds to co-invest in major projects. The hope is that it will dramatically increase pri-vate equity investment by reduc-ing the perceived risk of doing business in Russia.

The appointment of Kirill Dmi-triev to run the fund is a testa-ment to the commercial nature of the project. One of Russia’s new generation of rising business lead-ers, Dmitriev cut his teeth work-ing as a manager at Delta Pri-vate Equi ty Partners , a U.S.-government backed invest-ment fund designed to promote capitalism by financing the growth of independent business in Russia.

He then set up the highly suc-cessful Icon Private Equity — a $1 billion fund that invested in projects across the C.I.S. At the same time, he founded the Rus-sian Association for Venture Cap-italists and advised the govern-ment on the creation of the Russian Venture Company, a state-backed fund promoted by Prime Minister Vladimir Putin to kick-start the country’s venture capi-tal sector.

“I am not a politician. I am a fund manager, and the primary goal of the R.D.I.F. is to earn re-turns for the investors,” said Dmi-triev, sitting in a café on Red

kirill dmitriev, the c.e.o. of the russian direct investment Fund, discussed how russia can improve its image as an investment destination.

Square in June. “We thought long and hard about the best form for the fund, to make it as attractive as possible to investors. The state finance will be limited to a mi-nority role of no more than 50 percent minus one share in any project. It means the co-investor doesn’t have to invest into any-thing they don’t believe will earn returns. I don’t see the R.D.I.F. as a political initiative; however, the political goals of the government will be achieved from these in-vestments — but as a by-prod-uct.”

Dmitriev is currently hiring staff, mostly Russian profession-als, and the first $2 billion will be released by the state in Sep-tember. The first investment is an-ticipated by the end of the year, said Dmitriev. After that, the state-owned debt agency and de facto development bank Vneshe-

conombank (V.E.B.) will release another $2 billion each year over the next four years. The Kremlin hopes that the fund will also at-tract $90 billion from private co-investors.

“Russia is a very attractive in-vestment destination and people have to some extent lost sight of what the country has to offer,” said Dmitriev. “It is the sixth-larg-est economy in the world — even Russians forget this fact — and the number of people earning more than $10,000 a year has tri-pled in the last six years. I am not saying that everything is good, but the rising incomes have led to an incredible amount of change in a remarkably short time.”

The structure of the R.D.I.F. is designed to allay the fears for-eign investors have about invest-ing into Russia. Such worries are illustrated by the Russian stock market, which has been the best-performing significant market in the world over the last decade, but is still stuck with an average price-to-earnings ratio below seven — a stark contrast to the early teens enjoyed by other major emerging markets. Russia also

performs far below emerging market peers in terms of both in-coming portfolio and direct in-vestment volumes.

A major focus for the fund, then, is to offer investment firms some reassurance. With the state limited to a minority stake, in-vestors will not only have the se-curity of a controlling stake but, more importantly, the state will share the risks and be subject to the same rule of law and corpo-rate governance practices as its co-investors.

The structure of the fund is also designed to allow it to tap into the expertise of the type of in-vestor it hopes to attract — name-ly, the best in the world. An in-

vestment committee, which will meet as needed, can approve deals up to $250 million and will fea-ture professional investors from Russia and around the world.

The supervisory board, which will meet four times a year, will determine the strategy and also approve deals up to the $500 mil-lion maximum. Government of-ficials will join that board, but international institutional inves-tors and professionals will make up the majority. The final level of supervision will be an interna-tional advisory committee com-posed of representatives from the leading global funds and getting together once a year.

“There will be some ‘no-brain-er’ investments, as the primary goal of the fund is to produce re-turns, but we also want to lever-age the expertise of our partners,” said Dmitriev.

Among the international inves-tors that have already expressed an interest — and will probably end up on the international ad-visory board — are Goldman Sachs, Blackstone, the Abu Dhabi Investment Authority, Kuwait In-vestment Authority, China Invest-ment Authority, Permira and Caisses des Depots.

The point of roping in all these big names is to create the same sort of creative discussion found at events like the annual Davos forum, with the difference that the fund can actually act on their insights.

ben aris BuSineSS neW euRope

easing returns for investors

is the size of the newly created fund. It will offer foreign business-people, who have largely perceived Russia as a risky market, reassur-ance by co-investing into major projects and thereby sharing the risk.

is Russia’s rank among the world’s largest economies, with the num-ber of people earning over $10,000 annually having tripled in the last six years. Contrary to common per-ceptions, Russia has the wealthiest middle class of the BRICS countries.

of foreign direct investment flowed into Russia in 2010, the second-highest level among all emerg-ing markets. PepsiCo’s $3.8 billion purchase of juice-and-dairy king Wimm-Bill-Dann marked its largest investment outside the U.S.

$10billion

6th place

$40billion

in Figures

“i am not a politician...and the primary goal of the R.D.i.F. is to earn returns for investors,” said Dmitriev.

a major focus for the fund is to offer investment firms some reassurance. the state will share the risks.

Like most Europeans, Russians are used to finding the Ikea brand stamped on their tables, chairs and packages of meatballs, but they could soon find the ubiqui-tous blue-and-yellow logo on their credit cards, as well.

The Swedish retailer is report-edly considering creating its own retail bank in the country, join-ing a host of other shops and car manufacturers looking to take advantage of expanding consumer credit. While retailers obviously enjoy the sales boost that credit schemes offer, the costs can add up if they leave the running and risk to a con-tracted bank.

Credit Europe Bank current-ly provides the loans at Ikea’s stores across Russia, but ana-lysts told The Moscow News the company could cut its total costs by up to 2 percent by setting up its own operation.

Russian daily Kommersant re-ported that Ikea will now set up its own bank in partnership with Ikano Finance, part of a group spun off from the retailer in 1988, but still controlled by Ikea owner Ingvar Kamprad and family.

However, while retailers world-wide run their own credit oper-ations, in Russia only licensed banks can offer such services. And after going through all the time and trouble to get a banking li-cense, it doesn’t make much sense to stop at offering loans to your own customers.

Finance Global furniture giant wants to appeal to Russia’s burgeoning middle class with easy credit

the furniture giant wants to expand point-of-sale lending through it’s own credit operation, following the example of other russian retailers.

For the moment, Henrik Jens-en, Managing Director of Ikano Finance Russia, says that a final decision has yet to be made: “Ikano has been considering dif-ferent opportunities, including setting up a local bank, but, so far we have not applied for bank registration.”

Other retailers, however, have jumped right in, joining a trend pioneered by a range of inter-national car manufacturers in-cluding General Motors, Volk-swagon and Toyota. French food retailer Auchan is expected to import its Banque Accord Group in the near future, while elec-tronics retailer Svyaznoi teamed up with Promtorgbank to launch Svyaznoi Bank last year. The company has said it hopes to de-velop Svyaznoi Bank into one of the leading financial institu-tions in the country. It has al-

ready issued 500,000 credit cards with a loyalty bonus program attached.

chasing the under-leveraged consumer

The prize at the end of these metamorphoses is the huge po-tential of Russia’s under-lever-

aged consumer. Consumer cred-it — particularly at the point of sale and via credit card — is ex-panding again as consumers re-gain their confidence and turn to upgrading their homes and cars. But income and wage

growth remains somewhat slug-gish, which means that growth in retail sales numbers is in-creasingly driven by consumer loans.

“Retail sales increased 5.5 per-cent year-on-year in May, almost unchanged from 5.6 percent in April, despite the continuing de-cline in disposable income [down 7.7 year-on-year in May] and subdued real wages growth [up 2.6 percent year-on-year],” said Alexandra Evtifyeva, an econ-omist at VTB Capital. “The ro-bust consumption growth is sup-ported by the acceleration in retail lending [up 22.8 year-on-year in May] and a tightening labor market.”

In particular, point-of-sale lending is a niche that offers se-rious opportunities for both re-tailers and traditional banks, as the small, unsecured loans offer

a high yield. Even Russia’s over-whelmingly dominant retail bank Sberbank is now keen to get a hold on customers as their aspi-rations peak at the point of sale; Sberbank has agreed to a joint venture to develop BNP Paribas subsidiary Celetem — currently the country’s seventh-largest point-of-sale lender. On Jun. 22, Sberbank raised its forecast for its overall retail loan book growth to 25 percent this year.

“This is good news for Sber-bank in our view, as Cetelem is a strong partner that will bring important know-how, technol-ogy and risk-management sys-tems to develop Sberbank’s con-sumer loan business” said Simon Nellis, a banking analyst at Citi Group. “[It] will allow Sberbank to capitalize on expected strong growth in point-of-sale lending in Russia.”

Ikea Bank to Furnish Credit

ikea currently operates 12 stores in russia.

tim gosLingBuSineSS neW euRope

russia’s consumer Lending market

First person KiRill DMitRiev

c.e.o.RuSSian DiRectinveStMent FunD

kirill dmitriev gained experi-ence at delta private equity partners, a u.s.-government backed investment fund.

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point-of-sale lending is a niche that offers serious opportunities for both retailers and traditional banks.

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ian prydeSpecial to

RBtH

deiter wermuthtHe MoScow tiMeS

opening the proceedings at the St. Petersbug Inter-national Economic Forum in June, Russia’s Minister

of Economic Development and Trade Elvira Nabiullina spoke of global leadership passing to emerg-ing markets because of their high growth rates and the anaemic econ-omies and huge debt of the devel-oped countries in the West. Many Western investors buy into this logic, too. For instance, Jim O’Neill, the Goldman Sachs economist who coined the BRIC acronym in 2001, has said that the term “emerging markets” was now outdated due to their current and potential growth and the shift in economic power from West to East.

In the last few years, and es-pecially since the global econom-ic and financial crisis, “the Rest” have therefore not only asserted their economic, but also their moral, superiority over “the West.” And yet, despite China’s success of the last 30 years, it remains far from matching Western levels of development, living standards and technology.

However fast they might be de-veloping, emerging markets re-main decades or even centuries behind advanced nations. By def-inition, they are not developed and remain weak on democracy, the rule of law and corporate gov-ernance, and very strong on cor-ruption and environmental deg-radation.

Measured by per capita income, many remain poor or desperate-ly poor, and all face huge devel-opmental challenges. So while there is certainly a strong invest-ment and business case for the emerging markets, reaching West-ern standards will not be easy for the BRICS, the Next 11, the CIV-ETS or any other investment banker’s pet acronym.

Russia is a case in point. The country’s hubris and economic il-literacy during the go-go years between 2000 and 2008 led to major policy mistakes from which the country still suffers. When the first signs of the global econom-ic crisis appeared, Putin made ex-actly the same mistake as Ger-many’s finance minister Peter Steinbrück. Full of schadenfreude, both politicians gloated that the crisis was a distant and purely Anglo-Saxon problem that wouldn’t affect their countries. Both utterly failed to understand that a downturn in the United States would hit European ex-

the old theory perpetuated by developed economies that free trade and free capital flows are always

good is increasingly under attack. Even at the International Mone-tary Fund, the old orthodoxy is on the way out.

Markets usually produce desir-able results, but not all the time. In some situations, it may pay to control them. No one believes anymore that the financial sec-tor should regulate itself, that fi-nancial innovation will necessar-ily boost productivity or that globalization benefits everybody. If left to themselves, market forc-es often lead to monopolistic structures, an unfair income dis-tribution, corruption, a destruc-tion of the environment and, most important, suboptimal economic growth.

In the case of Russia, I have in-creasingly begun to wonder whether some trade restrictions and capital controls are actually desirable for the country. Could it be that the vast difference in medium-term growth rates in gross domestic product of China and Russia has something to do with the fact that China tightly controls its exchange rate as well as capital flows in general? Chi-na’s economy expands rather steadily at a rate of almost 10

Looking west or east?it’s time to take the brakes off the economy

how russia can copy china’s success

ports, which in turn would hit Russia’s energy and metal sec-tors, not to mention the financial sector worldwide.

As a result, Russia was very slow to react to the crisis and lost valuable time. Putin and Russia now claim credit for avoiding the street unrest in countries such as Greece and Spain, but their so-lution, like that of China, was purely Western — namely, deficit spending.

Long before the crisis, Russia totally ignored numerous warn-ings about its high-risk economy, continued with its state capital-

ism and failed to reign in the bal-looning bureaucracy and corrup-tion. Moscow thus missed its best chance in decades to diversify the economy during the good years up to 2008 and now faces the much bigger challenge of growth and development in a far harsh-er environment full of risks.

Medvedev is now getting some praise from investors for his re-form efforts, but in fact many of his initiatives, such as greater privatization or removing gov-ernment ministers from the

percent, while Russia chugs along at less than 5 percent.

China’s success story is mainly the result of its high investment ratio. At about 45 percent of gross domestic product, China’s invest-ment ratio is twice as high as Rus-sia’s.

This means that the capital stock rises much faster and that there are almost no bottlenecks in production. This, in turn, keeps down inflation, permits easy mon-etary policies and boosts growth. Based on present trends of 9 per-cent real growth, 4 percent infla-tion and a 5 percent annual ap-

preciation of the renminbi against the dollar, China’s G.D.P. will ex-ceed that of the United States in just seven or eight years, at which point it will be 10 times larger than Russia’s.

So the question I have is wheth-er China’s record-high saving and investment ratios are a direct or indirect result of making it dif-ficult for the private sector to ex-port capital, as well as a policy that discourages investment abroad while giving the Chinese large incentives to invest at home.

boards of state companies, just reverse earlier policies which should never have been made in the first place.

The outside world generally thinks that the Russian state is very strong, but in fact it often cannot get things done at all. Bu-reaucratic resistance, apathy and sheer incompetence undermine many government policies and hinder growth.

Medvedev’s policy of high-tech modernization is also problem-atic. Again, history sheds light on the problem. For all its military capability and educational lev-els, the Soviet Union was largely incapable of mass production, one reason among many being that it concentrated on churning out great specialists, but not on great generalists capable of handling complex problems involving dif-ferent areas of knowledge. Now, Russia is striving for high tech, and the country is the world’s sec-ond-largest producer of business school graduates. But many Rus-sian employers do not want or need whiz kids from top business schools because in this strange economy they are simply super-fluous to requirements.

The West is obviously ham-strung by its current economic problems, but advanced countries can still call on the best science, research, technology, design and products in the world. And their companies would jump at the chance of decent investment op-portunities in emerging markets for the huge piles of cash on their balance sheets.

Moscow would do well to de-clare Russia totally “open for business” and get on with it rath-er than continuing to put the brakes on its own economic de-velopment.

Ian Pryde is founder and C.E.O. of Eurasia Strategy & Communi-cations in Moscow.

Net capital exports are, by defi-nition, equivalent to the surplus in a country’s current account.

In 2011, both the Chinese and the Russian surpluses will be about 5 percent of G.D.P. The dif-ference is that the People’s Bank does the capital exporting in the form of an accumulation of for-eign currency reserves, mostly dollar-denominated, whereas Russia’s Central Bank largely re-frains from intervening in foreign-exchange markets. Its reserves are more or less constant at about $500 billion.

The implication is that Russia’s private sector will be a net capi-tal exporter of more than $70 bil-lion this year. Given the poor state of the country’s capital stock, wouldn’t it be better to keep some of the money at home? If I can-not buy foreign assets — because it is forbidden or tightly con-trolled — I have no choice but to to invest the money domestically. In this way the supply of mone-tary capital rises and real inter-est rates fall. The capital stock and potential G.D.P. will thus grow at a faster rate than before. Just as the doctor ordered.

It is obviously easier to restrain capital inflows than outflows. China successfully keeps out un-desirable inflows, while Russia has the opposite problem: It must work to attract foreign investment while also acting against capital flight. There are many ways in which peo-ple and firms can circumvent cap-ital export controls. One method is to export goods at below-mar-ket prices. Another is to import at above-market prices. The differ-ences can then be parked in for-eign accounts. The administrative effort to follow the flow of money is considerable and will work only partially. Longer term, it is clear-ly a better strategy to improve the domestic business climate.

A stabilization of the ruble ex-change rate would also help. Since large ups and downs are confus-ing to market participants, inves-tors will hesitate to invest in Rus-sia, or, at the very least, they will demand higher risk premiums. Both effects reduce economic growth.

Since the external value of the ruble has often changed dramat-ically in response to equally dra-matic changes in commodity pric-es, the administration should consider adopting the Chinese model of a structurally underval-ued and fairly stable exchange rate against the euro.

A large appreciation of the ruble in the wake of the new com-modity boom would inevitably lead to a big increase in imports and thus destroy a part of Rus-sia’s domestic production base. This is what is sometimes called Dutch disease. When the inevi-table happens and the ruble de-clines again, the companies that might benefit from the improved international competitiveness will simply not exist anymore.

Dieter Wermuth is a partner at Wermuth Asset Management.

Russia’s hubris during the go-go years led to major policy mistakes from which the country still suffers.

china successfully keeps out undesirable inflows, while Russia has the opposite problem: it must fight capital flight.

Letters from readers, guest coLumns and cartoons LabeLed “comments,” “Viewpoint” or appearing on the “opinion” and

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represent those of the editors of russia beyond the headLines or rossiyskaya gazeta.

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Russia ... is a collection of souls, hidden in the eye of a needle, shelled safely within an egg, stowed in the warm belly of a duck, which slumbers inside a hare’s heart, its legs cocked and ready to sprint, and locked safe-ly in an iron chest buried be-neath an ancient oak, as if it were the very seed of life itself.

matthew miller (winner)Verona, pa.

Though classics of Russian liter-ature have given us insight into the Russian soul, are Fyodor Dos-toyevsky’s analytics ingrained in the Russian mind and Alexander Pushkin’s feeling in the Russian heart? And while a Russian may never smile, does that mean he does not welcome us with open arms?

tomas kasparaitis (runner-up)columbus, ohio

tandem economics

Russian business has always been highly dependent on the government and good relations with authorities.

This interrelationship between business and the state is nothing new. It even existed in imperial Russia, when private business grew not so much as the result of personal initiative and skill as it did by permission of the tsar.

Russian business is just as scared of the state and govern-ment officials as it is dependent on them. Businesspeople in most countries are careful to avoid doing anything that would bring harm to the state, but in those countries with an effective legal system, they at least feel protect-ed from abuses by government officials.

But these protections do not exist in Russia. If a businessper-son tries to take a mayor or gov-ernor to court, he knows he might lose his business and even end up behind bars himself. In Rus-sia, any sizable business has tra-ditionally sought protection not with the courts or the state, but by following direct instructions from the chief executives of the country.

Under the tandem, however, Russia has two “chief executives”

— President Dmitry Medvedev and Prime Minister Vladimir Putin. Which of them would busi-ness owners prefer as the next president, and which could they rely on to protect their inter-ests?

It would seem that Medvedev is the obvious answer. After all, he is the one who said: “Freedom is better than a lack of freedom,” that the authorities should stop “nightmarizing” businesses by ha-rassing them with onerous, un-necessary inspections. It was Med-vedev who suggested that criminal punishments for eco-nomic crimes be mitigated and who has made the battle against corruption one of his top objec-tives.

Recently, though, the presiden-tial administration has disagreed with the decision made by Pu-tin’s government to raise the so-cial tax from 26 percent to 34 percent. The Kremlin believes this move will suffocate business and has demanded that the govern-ment find a way to lower the tax. The government has all but ig-nored the demand. At the same time, the two sides can’t agree on a compromise proposal to raise the tax on profit by 4 percent in exchange for lowering the social tax to 26 percent.

Meanwhile, Putin has been quite active in the past few months meeting with small- and

medium-sized business groups and attending business forums. Judging by his remarks at these meetings, Putin sounds very much like a liberal who supports the market economy. What’s more, Putin has commissioned a team of prominent liberal economists headed by Vladimir Mau and Higher School of Economics pres-ident Yaroslav Kuzminov. Ironi-cally, the country’s economy is

being entrusted to people whom the authorities not long ago la-beled as “modern-day Yegor Gai-dars.”

It looks like both tandem mem-bers are campaigning and trying to position themselves as “busi-ness-friendly” candidates. So, which of the two is better for busi-ness?

Probably the best answer is nei-ther. The main reason is that nei-ther Putin, as president and prime minister, nor Medvedev has suc-ceeded in curbing corruption. Both have proven powerless to defeat — or even tame — a cor-rupt bureaucratic leviathan that,

more often than not, simply ig-nores instructions from above, in-cluding direct orders from the president and prime minister.

Neither Medvedev nor Putin is able to break the existing system without radically reforming and restructuring the entire system of governance by introducing more competition and establish-ing an independent judiciary.

Because neither Putin nor Med-vedev is better than the other for business, the private sector would probably benefit most if the cur-rent tandem continued intact in one form or another because com-petition between the president and prime minister gives busi-ness a taste of freedom that nei-ther partner could provide sepa-rately. Even when the competition is staged, competition still moti-vates each tandem member to outdo each other.

In reality, however, the tandem will not survive past the State Duma elections in December, much less the presidential elec-tion in March. Soon we will find out who will drop out of the tan-dem and who will remain as the presidential candidate. Unfortu-nately, the business community will play only a minor role at best in determining who that candi-date will be.

Georgy Bovt is Moscow-based political commentator.

competition between the president and prime minister gives business a taste of freedom that it wouldn’t have otherwise.

georgy bovttHe MoScow tiMeS

the finalistsin our first issue of rbth, we chaLLenged readers to interpret winston churchiLL’s famous quote about russia being “a riddLe wrapped in a mystery inside an enigma.” here, we offer excerpts from the two finaLists’ essays. the winner wiLL enJoy a trip to moscow and st. petersburg.

russia through our window

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SponSoRed By tHe RuSSian aMeRican conSulting coRp

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John Freedman

THE MOSCOW TIMES

PhoebeTaplin

SPECIAL TO RBTH

The event, directed by Varvara Faer and hosted by Mikhail Ka-luzhsky, was organized by Georg Genoux, the German-born found-er of the Joseph Beuys Theater in Moscow. Genoux has repeatedly organized or staged politically-oriented productions in recent years. And while he has been an important force in bringing poli-tics and theater into the same sphere, he is hardly alone.

Playwright Mikhail Durnenk-ov wrote recently that belonging to the opposition is now “fashion-able,” whereas it used to be fash-ionable to not care.

Writing on Facebook, Durnen-kov declared that to his “amaze-ment” he realized he had a posi-tive attitude about it. “We have always thought it was ‘terrible to be in opposition.’ I think the shift of the paradigm from ‘terrible’ to ‘fashionable’ is a genuine step to-wards democracy.”

I am reminded of a comment I

heard playwright Maksym Kuro-chkin make in January during a public discussion of contempo-rary Russian theater at a festival in Austin, Tex. Kurochkin stood up and said that the time has come to embrace socially engaged plays. He pointed out that plays that ad-dressed social issues directly in the late 1980s are now so outdat-ed that they are “impossible” to read. “However,” he added, “I have the feeling that the time has come when we must begin writing those plays that no one will be able to read in 20 years.”

The reading of the Khodork-ovsky-Ulitskaya correspondance at the Joseph Beuys Theater was not a “play,” per se. But it was a theatrical and a political event. That is an innovation, but it is one that Moscow theater artists are increasingly trying on for size.

there is no longer space for the individualism that urges Peter out into the stormy nights. In order to produce a marketable video, they must wait for a sunny day.

From the opening line, the nar-rator uses the summer heat of a provincial Russian city as a met-aphor for the conformism of the “urbanites” around him; the abil-ity to be “normal” is “to smile in the orange air of July.” This rejec-tion of social conventions appeals particularly to the booming young adult market. For older readers, there is an intriguing freshness in the raw innocence of a writer still � nding his voice.

There is something of the farce of Bulgakov in the novel’s surre-al midnight episodes, an ironic echo of the rooftop perspective that the devil achieves above Mos-cow. It’s playful, postmodern sty-listic montage is also vaguely rem-iniscent of Venedict Eforeev’s iconic prose poem, “Moscow Pe-tushki,” the rambling 1969 mono-logue of an alcoholic intellectual on a train. Both novels share the savage underlying message that ultimately the only sane reaction to life in an insane world is to at-tempt escape by any means.

The English translation of “Rooftop Anethesia” is published in one volume, together with An-drei Kuzechkin’s “Mendeleev Rock,” another serving of youth-ful alienation and group dynam-ics in the city, with side orders of violence, incest and rock ’n’ roll. Andrew Brom� eld, famous as the translator of Boris Akunin’s his-torical whodunnits, has provided serviceable renditions of both au-thors’ use of street slang and streams of consciousness.

“Rooftop Anesthesia” is available in the volume “Mendeleev Rock,”

published by GLAS New Russian Writing,

http://www.glas.msk.su/order.html

Jailed businessman Mikhail Khodorkovsy and writer Lyudmila Ulitskaya came together rather like Plato

and Socrates last week to dis-cuss the state of the State of Rus-sia.

No, this was not an unexpect-ed event involving the actual in-dividuals; it was an unexpected event involving actors who played them on a stage. And, yes, it was unexpected.

There are few things Russian theater avoids with more dex-terity and conviction than pol-itics. It has almost always been this way.

In the 19th century, plays that pushed too far into political or social commentary were rou-tinely banned. Even after the revolution there was just a short window of time during which directors and writers used the-ater as a mouthpiece for socio-political topics. Those efforts quickly fell by the wayside or turned into propaganda.

Maybe that is why in the high-ly political 1980s and 1990s, there were only scattered at-tempts to engage in political theater in Russia. There is a sen-sation among Russians that pol-itics are dirty and that theater is called, in some way at least, to remain “clean” by not involv-ing itself in politics.

Over the last 15 years, you could approach almost any the-ater artist and hear a variant of phrases like: “Oh, I pay no attention! That doesn’t concern me! I just do my work.”

That is changing, however. As the politicization of daily life continues to grow, and as the next presidential election on March 11, 2012, draws ever nearer, the notion of political neutrality is losing respect in the theater community.

The staged reading of a se-ries of letters exchanged by Khodorkovsky and Ulitskaya in 2008 and 2009 is a case in point.

Young Russian novelists are rede� ning the world around them. Their fresh perspective gives a mod-

ern dimension to the country’s celebrated literary tradition. Un-burdened by the Soviet baggage of their forbears, but uncertain about Russia’s future, younger writers are forced to look hon-estly at their surroundings.

Immediacy and a character-istic focus on the loneliness of young adulthood are keynotes of Pavel Kostin’s short novel, “Rooftop Anesthesia.” Set in a decaying urban landscape of skyscrapers and streetlamps, it follows the introspective Peter in his attempts to escape the pressures of modern life by scal-ing the tallest buildings in his hometown by night. Peter ad-vertises online for assistants. He quickly finds that his hobby, which he has nicknamed “urban extreme,” is turning into a cult and a commercial enterprise.

This trajectory forms a pow-erful exploration of the corpo-rate branding of the modern world. In a key passage, the nar-rator expounds — via e-mail — an intensely personal concept he calls “blithe fury.” He de-scribes battling through rainy streets to “tear the dense wet day apart”; he defines blithe fury as overcoming resistance, “pushing back the wind.” By the time the Internet-savvy Nemo and the business-minded Ser-gei have � nished with his hobby,

THEATER PLUS

BIBLIOPHILE

So, Do Theater and Politics Mix in Russia?

Scaling the Skyscrapers to Escape Modern Realities

Politics are dirty, and theater is called, in some way at least, to remain “clean” by not involving itself in politics.

Since Sergei Dovlatov’s death in New York in 1990, the American audience for the exiled Russian dissident writer has dissipated. But efforts are underway by wealthy friends and fans to con-vert one of his last homes in Rus-sia — a simple log cabin on the family estate of Alexander Push-kin — into a museum.

At the same time, his devotees hope to revive interest in his work, especially his � ction, which 25 years ago graced the pages of The New Yorker.

Before he left the Soviet Union in 1979, Dovlatov worked as a tour guide at the estate of the 19th century Russian writer, and rented a room in a log cabin on the Mikhaylovskoye preserve, but this was no voluntary immersion in Pushkin’s world.

At the time, Dovlatov was deep-ly frustrated by his inability to get his work published, was liv-ing in poverty, and was torment-ed by debt. His reminiscences formed the basis of the story “Zapovednik” (“The Preserve”), acclaimed by critics as one of his best works.

Much has changed since Dov-latov lived on the estate. Gone are the “squadrons of tourists” who got on the writer’s nerves. They vanished together with the Soviet Union, said Svetlana Kovshirko, a local woman and manager of the literary hotel Arina R.

Almost all the houses in the area have been bought by strang-ers and renovated; the log hut in which Dovlatov lived is one of the few exceptions. It survived in its most basic shape because its owners were too poor to repair the cabin. It was owned by a wood-cutter called Ivan Fyodo-rovich and his wife Yelizaveta. Dovlatov rented a room from them when he came to the vil-lage, and he immortalized Ivan Fyodorovich in “The Preserve”

Literature Writer’s home gets a makeover on the 70th anniversary of his birth

through the character of Mikhail Ivanich.

The house is associated not only with his fiction, but with his thoughts about emigration. A year after arriving at Mikhayalovskoye, Dovlatov followed his wife to the United States where, at last, he earned a living from his literary work.

Through the 1980s he published a succession of books — sad, iron-ic and imbued with compassion for his fellow human beings — and his stories were published in The New Yorker magazine. Dov-latov was lauded by the Nobel Prize winning Russian poet Jo-seph Brodsky who valued “the muted music of common sense” in his work.

A dissident discovered at home

Dovlatov later enjoyed a burst of popularity in his native land, and the expression “a Dovlatov

story” would come to denote a paradoxical event that de� es ste-reotypes. Dovlatov’s writing only reached Russian readers in the 1990s, after his death. But the sense of freedom in his � ction res-onated with the times.

Now a group of businessmen want to rekindle some of that in-terest by renovating the house at Mikhaylovskoye where Dovlatov rented a room and turn it into a museum.

Dovlatov once wrote of the house where “stray dogs got in through holes in the � oor.” And he wasn’t exaggerating.

In the 1990s Ivan Fyodorovich died from alcoholism and his wife Yelizaveta sold the house to Vera Khalizeva, a retired woman from Moscow. She patched up the holes in the � oor with ply-wood but otherwise little changed. The wooden house was crumbling when it was bought about 12 months ago by a group

of Dovlatov fans who prefer to remain anonymous.

The house remains in a decrep-it state. The � oor sags underfoot and the ceiling is more or less supported by poles. Some of the items used by the writer remain: an iron bed, a wooden stool, and a fragment of a mirror. The walls are covered with wallpaper from the 1970s.

Repair work has just begun. “Our task is to preserve every-thing while replacing the rotten parts,” said one worker on the project.

Igor Gavryushkin, a represen-tative of the new owners, ex-plained that the preservation of the house is not a commercial project: “The investors are suc-cessful people who have no lust for gain,” he said, adding that they are motivated by their “love and respect for Dovlatov.”

Gavryushkin said he hopes to have the house at least partly re-paired by Sept. 3 to mark Dov-latov’s birth 70 years ago in Ufa, Russia. In September, an exhibi-tion by the local artist Igor Shaim-ardanov, which is devoted to Pushkin and Dovlatov, is sched-uled to open.

Dovlatov had no interest in of-� cial celebrations or memorials. “It is always like this: First, they do a person in and then start look-ing for his personal belongings,” he wrote about Pushkin. But something similar is happening to Dovlatov today; the new own-ers of the house are hoping to ob-tain personal belongings from the writer’s friends and relatives.

The Dovlatov Story: Émigré Writer Defied Stereotypes

Sergei Dovlatov in Tallinn, 1974.

A group of devotees is hoping to revive interest in Russian dissident writer and émigré Sergei Dovlatov by reconstructing his last home on Pushkin’s estate.

VLADIMIR RUVINSKYRUSSIA BEYOND THE HEADLINES

A Home at the End of the WorldThe house in which Sergei Dovla-tov spent the summer of 1978, a year before his emmigration to New York, is located in the Pskov region village of Berezino and is more than 100 years old. There are still a few Berezino residents who remember Dovlatov’s stay, sometimes not very fondly. A neighbor who made it into Dovlatov’s tales as a drunkard was not happy with the way the author portrayed his lifestyle.

A year ago, the house was bought by Dovlatov’s fans in order to turn it into a museum in his honor. The devotees hope to begin restoration work soon, but at the moment it re-mains in bad shape — although full of many of the great author’s per-sonal belongings.

Art New York–based artist has exhibit at Russian Museum

getic style and laconic compo-sition. In the tradition of naïve artists, Tsarev explores the mag-ni� cent diversity of � ora in far-� ung places.

“Ana Tsarev has developed a powerful, sweeping style that echoes the energy of the Post-

Impressionists,” said the cura-tor of the exhibition, Alexander Borovsky, referring to French art after Manet. “Her method relies on moulding, superimposition of layers and tactile contact with paint and canvas.”

The large portraits of � owers seem to be replicas of one an-other, but they are transformed through color and mood. The bright and exotic strelitzias, el-egant orchids and regal lotuses are the real heroes of Ana’s works.

After spending many years as a professional gardener, land-scaping gardens in many coun-tries, she is now giving a new lease on life to short-lived buds.

“Orchids are my favorite � ow-ers,” she said. “What I like most is the opening buds, but in gen-eral I like all � owers. They are like children to me. And they never let you down.”

This is Tsarev’s � rst exhibi-tion in Russia. The 74-year-old artist received an invitation from Vladimir Gusev, director of the Russian Museum, who visited her gallery in New York. Prep-arations took about a year, and now about 50 of her paintings are on display at the palace. The “World of Flowers” exhibition opened July 14 and runs through Sept. 5.

Tsarev was born in Croatia, but has Russian ancestry. Her trip to St. Petersburg for the opening was her first visit to Russia in 60 years.

Echoes of Post-Impressionist Painters

Ana Tsarev said that her experience landscaping gardens in different countries influenced her art.

MARIA GOLUBKOVASPECIAL TO RBTH

A contemporary artist, based in New York but with Russian roots, finds her voice in the lush eloquence of flowers and brings her vision to St. Petersburg.

HIS STORY

Sergei Dovlatov

In his youth, Sergei Dovlatov flunked out of what was then Len-ingrad State University, and so was drafted by the Soviet Internal Troops to work as a prison guard in high-security prisons.His larger life began when he emi-grated to the United States in 1979 and was accepted into an elite inner circle of writers, editors and critics.He was an absurdist unknown to his fellow Russians until 1989, a year before his death. Today, he is nearly forgotten in the U.S., where he first succeeded, but is becoming increas-ingly known at home. By 2009, his books were so rare in the U.S. they were selling for more than $100. He might well have been amused.

BORN: SEPTEMBER 3, 1941 UFA,

U.S.S.R.

DIED: AUGUST 24, 1990, N.Y.C.

An exhibition of paintings by Ana Tsarev called “The Life of Flowers” opened at St. Michael’s Castle, an annex of the Russian Museum in St. Petersburg, in July. Tsarev, who has a gallery in New York, has a penchant for vivid and rich colors, an ener-

See the slide show atwww.rbth.ru/13171

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TITLE: ROOFTOP ANESTHESIA

AUTHOR: PAVEL KOSTIN

PUBLISHER: GLAS NEW

RUSSIAN WRITING 2011

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On a recent visit to the Riki Pro-duction Center in St. Petersburg, a list of requirements for Chinese translators of “Smeshariki” was hanging on the wall—the hugely popular Russian cartoon is being adapted for China, where the se-ries has been in promotion since March. China is only the latest market for “Smeshariki,” which began selling foreign distribution rights to overseas distributors in 2008; it was the � rst Russian car-toon bought by foreign TV broad-casters. In August, “Smeshariki” will begin broadcasting through one of the biggest international children’s channels – Nickelode-on – in the C.I.S., Central Europe and Africa. The expansion into these markets will require the Riki studio to increase its anima-tion production from 35 minutes to 245 minutes per month in 2012.

“Smeshariki” was interesting to foreign distributors because the series promotes popular ideas like tolerance and peace. The orig-inal subtexts of the series, how-ever, are beyond the understand-ing of foreign audiences.

“It is useless to explain to for-eign channels that the series is targeted at an audience of chil-dren four to 16 and adults. They do not believe that producers can employ such complexity and depth in a children’s product. Therefore, we are positioning “Smeshariki” overseas as a prod-uct for younger schoolchildren,” said Ilya Popov, the general pro-ducer of the Riki Group.

Additionally, much of the un-

derlying humor is exclusive to Russia, which is why the adap-tation for China took more than three months. In order to decrease the turnaround time in the fu-ture, Riki must decide if it should remove the multi-layered subtexts and leave only the main themes of tolerance and peace, or keep the storylines unchanged.

“Parents say: ‘Children do not understand the subtext of this cartoon,’” said Nadezhda Kuz-netsova, the head of Petersburg computer animation studio, which is the part of the Riki group that produces “Smeshariki.” “The se-ries is full of allegories, back-ground intimations.”

According to the instruction guide for “Smeshariki” script cre-ators, “the cartoon should be in-teresting to an adult and under-standable to a child.” This approach, typical of all Soviet an-imation, allows the cartoons to appeal to a very broad audience. The average annual rating of the cartoon on the STS channel shows that the number of viewers be-tween 16-54 exceeds the number of six-to-15 year-olds by 100,000.

This philosophy works in the Russian market, but as “Sme-shariki” expands, it faces com-

petition not only from local prod-ucts, but also from Disney, whose stories have universal accessibil-ity.

Even locally, “Smeshariki” is beginning to feel the heat from the competition. For all anima-tion, some 80 percent of revenue comes from licenses — the right to put the images of the charac-ters on products for children. Over the past three years, this market grew by 25-30 percent year on year. For “Smeshariki,” which began when there was almost no competition, the period of rapid growth is over, and its sales of product licenses is increasing by only 15 percent a year. In order to maintain its position in the market, “Smeshariki” must in-crease sales of licensed products 2.5 times by 2015, from the cur-rent $200 million to $500 mil-lion.

Smeshariki multiplication“Reaching a wider audience is

both our strength and weakness,” said Ilya Popov. “We can hold the attention of all girls and boys aged four to 15 for maybe two or three more years. Then communication channels will develop.”

In response to this segmenta-tion, Riki decided to appeal to different segments of their view-ing audience through sub-brands. The “Malyshariki” project was launched for kids under three: It involves the same characters but in their early childhood. The “Malyshariki” � rst appeared in books, but soon the will have their own television series. In late 2011, a full-length Smeshariki movie will be released, aimed at 14 to 25 year-olds — the age of most moviegoers.

“Smeshariki” Seeks Global Audience

In order to expand their reach, the protagonists of “Smeshariki” may have to lose their Russian-ness.

“Parents say: ‘Children do not understand the subtext of this cartoon,’” said Nadezhda Kuznetsova.

As “Smeshariki” expands, it faces com-petition not only from local products, but also from Disney.

Animation in RussiaThe domestic animation industry in Russia has faced challenges be-cause it is difficult to make money from cartoons in the country. Ac-cording to Russian law, children’s programs cannot be interrupted by commercials, so the only way ani-mation makes its way to the screen is through another law that requires channels to allocate 10 percent of their airtime for children’s shows. But since these timeslots do not generate income, it is easier and cheaper to fill them up with foreign animated series. A Russian animat-ed movie costs around $100-150 per minute, while a Western movie typically costs $7 per minute, even including the additional expense of translation. According to the indus-try analysis group Movie Research, live-action series are even cheaper.Russian cartoons have only one way to a wide television audience: the top-ranked children’s program Spokoinoi Nochi, Malyshi! (Good night, kids!) which airs every eve-ning from 8:50 to 9:00 pm, has a captive audience of 5 million view-

ers. Because this show has a very specific timeslot of six-and-a-half minutes, domestic animation cre-ates episodes specifically for this format, and in this instance has a competitive advantage over for-eign cartoons, which are generally longer. However, the competition among brands of animation both domestic and foreign is increasing because of the potential of the Russian li-censing market. According to the Licensing Industry Merchandisers Association (LIMA), licensed prod-ucts account for 60 percent of sales of children’s products in the United States, 40 percent in Europe and only 15 percent in Russia.Half of the $1.5–2 billion market be-longs to Disney, which is consistent with its marketshare worldwide. Eleven Disney cartoons are in the top 23 brands represented in retail chains: two of them — Disney Prin-cesses and Winnie the Pooh — are ranked No. 1 and No. 3, respective-ly. “Smeshariki” takes second place, with 10 percent of the market.

Licensed Merchandise

Spending On

Growth in Russia

Once upon a time there was the paper kingdom of Cheburashka and Gena. It was called Soyuz-mult� lm, and the characters that have populated this kingdom since 1936 are the icons of Sovi-et animation. Today, this magic kingdom celebrates its 75th an-niversary in the midst of a seri-ous economic crisis. The compa-ny is suffocating under large loans and is being crushed by the com-petition.

During the Soviet era, Soyuz-mult� lm was a monopoly, a car-toon empire that produced its own animation and also reinvent-ed many Western classics. From 1936 to 1991, the animation stu-dio made nearly 1,500 � lms. Dur-ing the height of production in the 1970s, the 200 artists em-ployed by the studio created al-most 30 � lms a year. Today, how-ever, the studio releases no more than � ve.

“Financing is the real problem,” said Vasily Shilnikov, director of the company, now known as the United State Film Collection. “We must understand that there are other production studios, and that the same artists also work for them. Therefore you need to roll

Animation Classic cartoons face an uphill battle to survive in a glutted marketplace

up your sleeves and look for new and original ideas.”

Over the course of its long his-tory, Soyuzmultfilm produced many animated classics, taking their themes from Russian fairy tales or the stories of famous Western writers such as A.A. Milne and Rudyard Kipling — scrupulously adapted to � t the Soviet agenda. Indeed, many well-known Western characters have a clandestine Russian alter-ego.

The American Winnie-the-Pooh is a cheery, gormless, upbeat fel-low who likes to keep his head perpetually buried in a pot of honey. However the Russian ver-sion of Pooh (Vinni Pukh) is a chubby, dark bear who drinks from a Russian samovar and is up to no good. His adventures take place in a miniature world that recalls characters from tradition-al Russian tales.

Similarly, the cat-and-mouse

Fading Cartoon Empire’s Lasting Legacy

Gena (left) and Cheburashka are icons of Soviet animation

LUCIA BELLINELLISPECIAL TO RBTH

An iconic Russian studio, birthplace of Russia’s most-beloved cartoon characters, celebrates its 75th birthday despite a gloomy financial forecast.

adventures of Tom and Jerry pro-vide the inspiration for the car-toon “Nu, Pogodi!” which features a battered wolf that hunts a chub-by bunny with disastrous results. The cartoon’s name comes from an expression that all Russian children know, and which is roughly translated as “Well, just you wait!”

But even as the artists of the 1970s looked to the West for in-spiration, the studio’s real mas-terpieces arose from Russian folk-lore, such as animation master Yury Norstein’s “Hedgehog in the Fog” (1975). The story features the adventures of a hedgehog who heads out into the forest to visit his friend the bear and encoun-ters a surreal and sometimes frightening world.

Today, the studio is looking to its past successes in search of a way to achieve pro� tability in to-day’s crowded marketplace. The studio’s current project is again a story that is inspired by the West, but given a Russian twist.

“We are currently working on Gofmaniada, a new � lm that, if all goes according to plan, should be ready by 2014,” said Shilnik-ov.

The � lm is based on the stories of German writer E.T.A. Hoffman, who wrote a number of well-known stories, including “The Nutcracker” and “The Sandman.” The movie will be produced en-tirely in stop-gap rather than computer animation, which is widely used in the West.

Cherished Cartoon Characters Nu, pogodi!The cartoon re-sembles the ad-ventures of Tom and Jerry, but this hard-living wolf’s bravado is somehow en-dearing.

Cheburashka Not quite a mouse but cuter than Mickey,

Cheburash-ka became an Olympic mascot in 2004.

Vinni PukhThe Russian Pooh is less na-ive and more mischievous. He eschews hon-ey and instead drinks out of a samovar.

The Hedgehog Internationally known anima-tion master Yuri Norstein con-jured up one of the most be-loved characters of all time.

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ANASTASIYA NAPALKOVA EXPERT MAGAZINE

As the Russian cartoon series expands its reach, its creators are concerned about maintaining the series’s high-quality animation and sophisticated storylines.

Watch Smeshariki cartoons atwww.rbth.ru/13051

Animators work inside the Soyuzmultfilm studio.