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TOP LIQUID STOCKS

' The Russia story is like the tortoise

Sollers Bank St Petersburg MRSK Holding Rostelecom Transneft Pref

Sberbank Investment Research data

Ruble/Dollar

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and the hare - a static energy sector, but very fast-growing consumer and service industries.'

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CHRIS WEAFER, CHIEF STRATEGIST SBERBANK INVESTMENT RESEARCH

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GETTY IMAGES/FOTOBANK

Distributed with The Wall Street Journal

Saturday, October 20, 2012

IN THIS ISSUE

Markets Mobile firm Megafon gets Russia’s IPO pipeline rolling again

Appetite Grows for IPOs Russian IPOs are back on the menu after Russia’s biggest bank, Sberbank, broke a four-year lean spell with a secondary public offering in September that raised $5.3 billion.

POLITICS & BUSINESS

The Bear Looks East Shifting Trade to Asia

Grain Exports Suffer

' Buy low, but not at the bottom, and

Russian Drought Raises Bread Prices on American Storeshelves

sell high but not at the top, to leave some proﬁt to others' ALISHER USMANOV (IN AN INTERVIEW TO REUTERS)

BEN ARIS

PAGE 2

SPECIAL TO RUSSIAN BUSINESS INSIGHT

MONEY & MARKETS

New Wave of Privatizations Trains, Planes and Nanotech PAGE 6

REUTERS/VOSTOCK-PHOTO

As a slew of companies dust off plans for listings, investors will be keeping an eye out for the next big sale, from No. 2 mobile operator Megafon, to gauge the appetite for Russian risk. The roadshow for Megafon’s London listing hit a slight hiccup earlier this month after one of the banks involved in the sale, Goldman Sachs, pulled out over corporate governance concerns. The U.S. bank cited recent comments by Megafon’s majority shareholder, Alisher Usmanov, to Reuters that he intended to consolidate his assets into a single holding. Moscow-based analysts are confident, however, that the resilient consumer growth story underpinning the Megafon listing, currently underwritten by Morgan Stanley, Sberbank CIB, Citi, Credit Suisse and VTB, Russia’s second-biggest bank, means the IPO pipeline is still very much on track. “Megafon could be more attractive than its rivals MTS and Vimpelcom, as it leads in the promising mobile data segment and has the most clear geographic focus”of the Russian mobile firms, said Konstantin Chernyshev, a telecoms analyst at Moscow-based Uralsib. “Megafon’s solid cash flows should also make it a strong dividend play, which have proven to be popular stocks amongst investors this year.” The attempted flotation will be closely watched to see if there is enough demand to get more Russian company names listed internationally. Megafon aims to list in London and raise up to $3 billion

Alisher Usmanov, co-owner of Megafon (Russia’s 2nd largest cell phone provider) has an estimated fortune of $18.1 billion, according to Forbes.

IN FIGURES

10 62 Russian companies made initial public offerings in 2011.

million

subscribers used Megafon’s services as of June 2012.

from the sale of a 20 percent stake. Usmanov, who made his first fortune in metals and mining, is wellknown in Russia for his canny ability to think outside the box when it comes to investment opportunities. He became Russia’s richest man in 2011 after making well-timed investments in Internet stocks such as Facebook, and in April 2012 completed the purchase of a majority stake in Megafon. In his Reuters interview, Usmanov attributed his success to investing

place was taken by Usmanov on Forbes’ World Billionaires List.

smartly: “Buy low, but not at the bottom, and sell high but not at the top, to leave some profit to others.” Buying into Sberbank, a top Russian blue chip, was a no-brainer for many investors with exposure to emerging markets, but Megafon may only appeal to investors specifically interested in the Russian investment story and the risks that go with it. In a sign that investors’ appetite for Russian companies is there, MD Medical Group (MDMG), a leading

Russia private health clinics specializing in reproductive services and maternity care, went to market in London, raising $311 million as it priced its offering at $12 per global depositary receipt. Russian stocks have not been popular over the last four years, and trade at a significant discount to their emerging market peers. IPOs have been few and far between. There were only three listings in 2009 in the aftermath of the global meltdown, but things picked up in 2010 with 12 IPOs, including aluminum producer RusAl in Hong Kong and e-mail service Mail.ru in London. Hopes were higher in 2011 with some $30 billion worth of IPOs planned. However, as fears of a second global recession mounted, only 10 companies actually made it to market. Search engine Yandex led the way, raising $1.3 billion on the NASDAQ, followed by mid-sized

OPINION

ITAR-TASS

Russia’s Oil: Luck or Curse? Experts Debate What to Do with Petrodollars PAGE 7

FEATURE

Two Hours in Moscow Where to Stop and Shop

CONTINUED ON PAGE 3

LORI/LEGION MEDIA

E-Commerce Global players are eager to grab a bigger slice of Russia’s soaring online revenues

Facebook Targets Russia As Internet Rivalry Heats Up Russia’s Internet revenues, driven by burgeoning e-commerce and online payments systems, are rising by 30% a year. ALINA MAKSIMATKINA SPECIAL TO RUSSIAN BUSINESS INSIGHT

ITAR-TASS

When Mark Zuckerberg came to Moscow, he posed for goofy photos with Russia’s tech-savvy prime minister, Dmitry Medvedev, and posted smiley Facebook updates from Red Square. But his mission was deadly serious: to try to dent Facebook’s local rivalVKontakte’s four-to-one lead in the Russian market, and possibly to lure away Russia’s brightest and best software developers. Russia’s burgeoning Internet market – fueled by 50.8 million users at latest count – has quickly become a key target for international players, as online revenues are now rising at an impressive 30% a year. Russia’s overall retail turnover is growing at

Facebook’s billionaire CEO, Mark Zuckerberg, discussed a proposal from Prime Minister Dmitry Medvedev to set up a research center in Russia.

7.2% annually, but within that figure e-commerce is now growing at two or three times that pace, having seriously taken off in 2010. In 2011, Russia saw a total of $17.8 billion in Internet-related sales, ex-

penditures and payments, according to a new report by the Russian Association of Electronic Communications and Moscow’s Higher School of Economics. By far the largest revenues are in

online retail, with nearly $10 billion worth of goods bought online, excluding travel deals, and online payment systems and terminals, which garnered $5.4 billion last year. Also growing fast are the revenues for contextual and banner ads, and marketing on social media websites. “In 2007 online advertising was worth $420 million, but by 2011 that had grown to almost $1.4 billion up 287%,” says Svetlana Korobova, marketing director at I-media. With traditional bricks and mortar retail still a work in progress – particularly in the far flung regions that stretch over 11 time zones – Russia is ideally suited to e-commerce. “The potential for e-commerce in Russia is huge,”says Komil Ruzayev, CEO of KupiKupon, a discounting website.“We can go straight to online retail as the main point of sale in retail and avoid the cost of building stores in such a vast country.” Russia’s own Internet billionaires are eager to keep their Western rivals at bay, with users of local social networking site VKontakte and search engine Yandex outstripping Facebook and Google by four or five to one, respectively. SEE THE SPECIAL REPORT ON PAGES 4-5

Frontier Dining from the 19th Century Siberian Boar for the Hungry Traveler PAGE 8

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Gazprom Plans Two New Pipelines to Europe RBTH.RU/18997

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Politics & Business

NEWS IN BRIEF

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Trade A planned re-orientation in exports toward APEC spells many opportunities, and challenges

Russia Looks Eastward

• Russia’s nascent protest leaders are now better known, but increasingly disliked according to a recent poll by VTsIOM. Half of Russians now recognise anti-corruption campaigner Alexei Navalny, up from 29% in February. However, Navalny’s disapproval rating rose from 31% to 43%. • Over 80% of Russians support a draft law introducing harsher penalties for blasphemy and desecrating religious sites, pollster VTsIOM said. A Moscow court freed Yekaterina Samutsevich, one of three members of punk band Pussy Riot, after it was ruled that she did not fully take part in a protest in a city cathedral earlier this year.

ITAR-TASS

• Russia’s Federal Security Service has drafted a new treason bill that was approved in the first reading by the Duma. The treason bill broadens the definition and is seen by human rights groups as part of the continuing crackdown on foreign-funded organizations in Russia. VITALY RASKALOV

• Russia’s liberal cabinet scored a partial victory over the conservative ‘Siloviki” faction. On October 5, PM Medvedev ordered state holding Rosneftgaz to hand over all of its cash in dividends, a move which would scupper CEO Igor Sechin’s bid to buy stakes in several power companies. Arbitrated by President Putin, a compromise has been reached, with Rosneftgaz agreeing to part with RUB50.2bn ($1.6bn), or 38% of its cashpile, significantly above the 25% that the other state owned companies have agreed.

The longest cable-stayed bridge in the world opened in Vladivostok ahead of the APEC summit.

• Former Finance Minister Alexei Kudrin says Russia is on the brink of stagnation. He believes the country has limited time to brace for an impending global slump. He also added that “unprecedented” policy actions in the U.S. might delay a debt crisis by “maybe a year”.

ARTEM ZAGORODNOV RUSSIAN BUSINESS INSIGHT

ITAR-TASS

• President Vladimir Putin celebrated his 60th birthday this month to much acclaim from friends and colleagues. Pollsters report that the president’s popularity has recovered to 64%, and that one in five Russian women want to marry him. • Russian investigators bring hooliganism charges against billionaire Alexander Lebedev in a case that could see him face up to five years behind bars. Lebedev punched property developer Sergei Polonsky during the recording of a television program for the state-run television channel NTV earlier this year.

$13 billion is being invested into a Russo-Japanese liquefied natural gas plant and export terminal near Vladivostok.

$1 billion was the cost of Vladivostok’s new cable-stayed bridge, the world’s longest, which connects Russky Island with the city.

300 million is the number of people in APEC countries who live within a 2-hour flight of Vladivostok.

similar plant built by American and Japanese firms in 2009 transformed nearby Sakhalin Island into one of the few regional contributors to the federal budget. Japanese carmak-

Russia’s Climate Change Hits U.S. Consumers

• Gazprom gives in a little to EU pressure saying it plans to change the ownership structure of its European assets in order to comply with the Third Energy Package. Two holding companies will be set up to hold the assets – GMT Holding for gas trading assets and Gazprom Storages & Transport to manage the infrastructure, transport and gas storage assets.

their fields because of low prices. Before that, German farmers used grain as fuel to heat their homes because it was cheaper than oil. Back then, a ton of Class 3 wheat sold for about $125, which did not even cover production costs. Prices are now double that. Class 4 wheat (inferior in quality to Class 3) sold for more than $270 in early September, just short of the 2008 record. In the U.S., prices for No. 1 Hard Red Winter wheat soared from $270 per bushel in May to $340 in early September. Even these steep price increases, however, have not helped farmers much. Crop failures mean grain is more expensive but also that there is less of it to sell, said Pavel Skurikhin, chairman of Sakho, Siberia’s biggest agricultural holding company. On the contrary, shrinking crops have raised production costs significantly.

American shoppers will be hit hard if Russia’s grain harvest falls 20 million tons short this year, as the Agriculture Ministry predicts. ILYA DASHKOVSKY SPECIAL TO RUSSIAN BUSINESS INSIGHT

• Russia is likely to contest EU energy rules at the WTO in what would be its first trade dispute since it joined the global body this year. • Iraq signed off on a $4 billion arms deal with Russia during a visit to Moscow by Prime Minister Nuri al-Maliki. Russia will deliver attack helicopters and mobile air-defense systems to Iraq in a controversial deal that comes on top of arms sales to Syria.

Another food crisis is upon us: the U.N.’s Food and Agriculture Organization expects the worldwide grain harvest to fall 52 million tons short of target this year. As part of that trend, Russia will harvest 70 million to 75 million tons of grain this year, down from 94 million, according to the country’s Agriculture Ministry. Projections by the U.S. Department of Agriculture and the International Grains Council, which also keep tabs on Russia, one of the world’s biggest grain exporters, are in the same ballpark. The United States, an even larger supplier not only of wheat but also corn, has this year been suffering from its worst drought since 1988. The USDA expects a 12% drop in the U.S. corn crop to about 13 billion bushels. Just a few years ago, grain was so abundant that farmers did not know what to do with it. Most grain growers not only from Russian but also American breadbasket regions have seen drought destroy their crops. Left without the two key global suppliers of grain, the markets responded with price hikes that almost matched record highs set in 2008. Climate change has been forcing everybody to work in unusual weather conditions. Several times in the last few years, farmers’ fields in European Russia did not see the first snowfall until close to Christmas, even though it usually comes in the first half of November. It was only in 2009, that farmers in Russia’s Altai Territory, Siberia’s breadbasket, threatened to burn

“It’s clear, even now, that the crop will be much smaller than we had hoped for,”Skurikhin said.“At least we are not selling grain at a loss, as we have done on many occasions.” Russia’s lean years started with the food crisis of 2008 and are continuing into their fifth consecutive season. Agricultural producers are mired in debt. Many of them have multiple mortgages. It is not only the weather that is hurting the sector, either. Insufficient working capital, a direct result of the crisis, has forced many to cut the amount of productive land. The Altai Territory is among the hardest hit. According to the National Union of Grain Producers, Siberia will harvest around 10 million tons of grain this year, 4.6 million less than last season. Even with last year’s balance transfers and reserves, Siberia will, at best, bare-

Q&A

Targeting growth in Asian grain markets grain a year - more than Russia produces. We can’t miss this opportunity to [export] and attract technology from neighboring countries.

• Russia scores better than any of its BRIC peers in the global Economic Freedom index compiled by the Fraser Institute, coming in at 95 against Brazil (105), China (107), and India (111). And Russia was named as one of the five worst copyright abusers in the world by a U.S. congressional panel. The surprise was that Italy and Switzerland both joined it on the list.

• Russia’s pension reform is back at the top of the agenda after a pension reform roadmap was submitted to the President this week. The state needs to make this work as transfers to top up pension payments already cost the government 10% of the budget.

After centuries of focusing its trade policies on Europe, Russia is quickly shifting its attention to Asia. Fresh from hosting the Asia-Pacific Economic Cooperation summit in Vladivostok in September, Russia is strengthening its links with Asia-Pacific neighbors through trade deals and initiatives. The gathering of APEC political and business leaders in Vladivostok, the largest city in Russia’s Far East, was something of a coming out party. The federal government spent $20 billion sprucing upVladiovstok, which is geographically closer to Beijing and Tokyo than Moscow or St. Petersburg, and focused much of the summit’s agenda on trade issues with Asia. “We want to create a powerhouse of regional development and become the link connecting Europe and Asia,”PresidentVladimir Putin

IN FIGURES

Agriculture Russia’s weak harvest and lower grain exports are raising American store prices

• America’s NGO support arm, USAID, pulls out of Russia after spending over $2.7 billion on promoting democracy and other helpful things over 20 years. The Russian foreign ministry said the agency had been trying to undermine Russia’s sovereignty.

• Russia writes off 90% of North Korea’s debt. The remainder will be exchanged for rights to invest in education, healthcare and energy projects.

said during the summit. The EU currently accounts for about half of Russia’s foreign trade, about $320 billion. Trade with APEC countries is less than half but it has increased to 23% of Russia’s total from 15% in 2006, according to customs data from Bloomberg. “Within 10 years, we want our trade volume with APEC states to be greater than our trade volume with the EU,” said First Deputy Prime Minister Igor Shuvalov. Even while emphasizing that this rebalancing will not come at the expense of relations with the EU, Russian leaders have announced a raft of trade agreements with Asian countries in recent months. There are several economic integration projects underway with the Eurasian Economic Space that includes Belarus and Kazakhstan, free trade pacts are in the works with New Zealand and Vietnam and a series of investment projects. Japan plans to build a $7 billion liquefied natural gas plant near Vladivostok, which will feed an $6 billion export terminal nearby. A

While hosting the APEC summit in Vladivostok, Russia highlighted its newfound focus and expectations for greater trade with Asia.

er Mazda has launched its first plant in Russia. South Korea’s Hyundai also has a plant nearby. Global consultancy PwC predicts Russia’s exports to APEC will more than double to $206 billion by 2021. “Russia takes on more risks by not integrating with Asia than by doing so,” said Shuvalov. One of the most promising sources of increased trade with Asia may also be a significant hurdle. Much of Russian and European overland trade with Asia moves across the Trans-Siberian Railway, which could complement the Northern Sea Route. The railway is operating at full capacity but requires billions to upgrade the single rail line and build logistics facilities along the way to step up capacity. Upgrading this rail link would bring Russia significant economical, and possibly political, benefits. “The amount of trade between Europe and Asia exceeds $1 trillion and every percent of the cargo that is transported via Russian territory will bring our economy no less than $1 billion,” said Ziyavudin Magomedov, board chairman at Summa Group, a logisitics conglomerate. For now, less than 1% of that is transported via Russia. At the same time, Russia would like to increase traffic of cargo at Russian ports from 540 million tons annually to 900 million by 2020. About half of this increase would come from Pacific ports. Summa Group could emerge as a key beneficiary of rising trade links with Asia. The company has already invested in a raft of infrastructure projects in the region and negotiated a deal to buy 55.8% of the Far East Shipping Company. Asia also represents a huge export market for Russian energy resources and agricultural products. The eight largest APEC countries by population import more than 100 million tons of grain annually, more than Russia’s entire production. APEC countries account for some 37% of all grain imports worldwide, but Russia’s share of that is practically zero. In energy, tellingly, Asia will become the world’s largest natural gas market by 2015, according to PwC. Either way, according to Shuvalov, “Russia’s future rapid economic growth rests on two legs – Europe and Asia.”

What are the barriers currently preventing this?

VYACHESLAV NIKONOV MEMBER OF PARLIAMENT, BUDGET AND TAX COMMITTEE

Why is Russia interested in exporting grain to Asia? The eight largest APEC countries by population import 100 million tons of

The port infrastructure isn’t there. Also, the single-line Trans-Siberian Railway can’t handle that volume of cargo, as grain moves from European Russia to Asia but, inefficiently, only empty wagons go in the other direction.

Which Asian markets would be the first to import Russian grain? The ones with the biggest populations: China, Japan, South Korea, Vietnam, Thailand and the Philippines.

ly be self-sufficient. Russia’s southern regions are facing similar circumstances. And what happens in Russia affects farmers worldwide. “The general global situation affects prices. Even if [Russia and America] are not linked through supplies, major exporters’ problems affect everybody,” said Vladimir Petrichenko, general director of ProZerno, a consultancy. Russia’s drought may account for a 25% hike in U.S. wheat prices, said Dmitry Rylko, general director of the Institute of Agricultural Market Studies. Conversely, the U.S. drought may have caused a 50% rise in prices in Russia. The situation is not nearly as bad as it was during the 2008 food crisis. The United Nations’ Food and Agriculture Organization estimates that global grain reserves now stand at 522 million tons - 100 million tons more than in the 2007–08 marketing year. But the balance is delicate. “With demand and supply more or less balanced, the market is hypersensitive to any bad news. Demand is growing slowly but production is lagging behind. That’s why tension can be felt on the markets. Hence the rapid price growth,” said Boubaker Ben Belhassen, principal officer of the FAO’s Trade and Markets Division. Mikhail Orlov, president of the Ambika Group, a Russian agri-food company, said the grain in the marketplace is barely enough to cover supply, which makes traders hypersensitive to a bad harvest. “Memories of the Russian embargo on grain exports in 2008, after which U.S. wheat prices shot up from $200 to $300 per ton, are very much alive. That’s why traders are scrambling to get their hands on any available supplies and scooping up reserves,”he said. When Russian officials confirmed in August that they would not impose an export embargo, prices stabilized. That’s as well, Orlov said, as price hikes in Middle East countries such as Egypt, which tends to buy from Russia at the last moment, could cause political turmoil.

Business & Politics

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Purchasing Power Consumer and service industries are taking over as the fastest-growing sectors

NEWS IN BRIEF • Tech giant Mail.ru Group listed 12 million global depository receipts. At a price of $34 each, the company raised $408 million. The receipts were offered to a large circle of qualified investors through an accelerated bookbuild offering.

• Billionaire Oleg Deripaska’s Ural truck plant has cut production by 30% since last year. The plant is located in Russia’s Ural mountains and, as part of Deripaska’s Basel Group, produces trucks under the GAZ brandname. The cuts will lead to an estimated 500 layoffs.

• Russian steel and coking coal producer Mechel may sell up to 25% of its mining business to a strategic partner to pay off debt. • Russia’s State-owned Sberbank has signed a $1 billion loan deal with Belarusian potash producer Belaruskali. Some $800 million will be used to refinance the company’s long-term hardcurrency debts. Sberbank says it may invest into the company.

Russia’s oil-fueled consumer splurge has led it to become Europe’s largest consumer market in everything from cars to diapers. BEN ARIS SPECIAL TO RUSSIAN BUSINESS INSIGHT

Contrary to popular misconceptions, Russia is much more of a consumer story for investors than an oil and gas play - as the services and consumer goods sectors are now outstripping energy as the main drivers of growth. That’s the message coming from Russia’s top financial analysts, who see the consolidation of energy assets by the state being offset by greater investment opportunities elsewhere. Chris Weafer, chief strategist at Sberbank Investment Research, says the changing roles are clear: “The Russia story now is like the tortoise and the hare - a static energy sector, but very fast-growing consumer and service industries.” Steady growth in disposable income and investment capital, together with more government support and the advantages of WTO membership, will provide greater non-energy growth, Weafer says.

Russia became the biggest market in continental Europe for milk and children’s toys in 2011, worth a collective $22.7 billion in sales. Next year it’s on course to become the biggest market in Europe for clothes, footwear, accessories and advertising worth a collective of $76.8 billion in sales. Russia’s consumer market has reached critical mass and, thanks to steadily rising incomes, is poised to become the biggest consumer market for a wide range of products sometime between now and 2018 when it will simply become the biggest consumer market full stop. “Rising wealth levels over the last decade have turned Russia into a middle-class country for arguably the first time in its history,” says Citigroup’s chief Russian strategist, Kingsmill Bond. Russian incomes have risen an astonishing 16-fold over the last decade, from an average monthly income of about $50 under Boris Yeltsin to just under $800 under President Vladimir Putin. This figure puts the country into the middle income bracket, according to the last U.N. Development Agency

CORBIS/FOTO SA

Forget Oil, Russia’s a Consumer Play Now

• Russian farmers got more help last month after the Duma approved an extension to the zero income tax regime for agricultural producers for an unlimited period of time. The income tax rate was previously set to go up to 18% starting in 2016 and to 20% starting in 2020, but has been nixed after Russia joined the WTO. • Shoppers in Moscow ranked 41 in terms of global purchasing power out of about 180 countries in a survey published by Swiss bank UBS. Zurich is at the top of the list followed by Sydney and Luxembourg.

Shoppers in Moscow were ranked 41st globally in terms of purchasing power based on a survey by UBS.

ues to climb the rankings. GDP will expand by about 3.5% to 4% this year, according to the World Bank. The flood of petrodollars primed the pump and ironically the state’s big presence in the economy provides a very effective“trickle down” mechanism. Russia’s per capita income is the fastest growing of any major emerging market in the world over the last few years. It reached about $21,350 last year (on a purchasing power parity basis) according to the World Bank, well ahead of Brazil ($11,720), China ($8,440) and India ($3,650). With very little debt, the lion’s share of Russians’ income is disposable. And since the advent of consumer credit in 2001 shoppers can multiply the power of their income many times over by borrowing. Consumer loans have been running high this year and are up 43%, a level the Central Bank says may even overheat the economy.

report. If George W. Bush had delivered the same sort of increase during his eight years as president then U.S. average per capita income would have increased from $35,082 in 2000 to $561,312 by the start of this year. “In 2004 the government made the principle decision to hike taxes on energy and slash them on everything else. Today Russians enjoy some of the lowest income and corporate taxes in Europe,” says Clemens Grafe, managing director of new market economics for Goldman Sachs in Moscow. Focusing on the price of oil is a red herring, Grafe says. The state is using its oil and gas windfall to subsidize the real economy, which has fueled a decadelong shopping spree. Already the 11th largest consumer market in the world, according to Euromonitor International and in the top two or three for most sectors in Europe, Russia contin-

• Russia’s Energy Ministry wants to auction off the world’s three largest unalloted oil fields by year’s end. The three fields are called Shpilman, Imilorskaya and Lodochnaya. Bids for the three fields will begin at $1.05 billion (32.8 billion rubles). Experts predict total investments could ultimately amount to over $9.6 billion (300 billion rubles). • Russia’s economy continues to slow with corporate bank lending down 0.6% in September month-on-month and retail lending slowing to 2.5% growth the same month. The World Bank slashed its growth forecast from 3.9% to 3.5%. • Russians are getting wealthier as inflation slows and wages rise. Citibank and RBC’s Mass Affluent Wealth Index rose 2.75% in August after a very negative second quarter. • Russia’s manufacturing PMI for September advanced to 52.4 (from 51.0 in August) despite a general economic slowdown. Economists forecast lower growth for the second half of the year however, with wages rising faster than productivity gains.

Europe’s Biggest Market in... Sector Vodka

• The Russian government is introducing tax breaks on hard-to-recover oil. The new taxation regime would allow an additional 40m tons per year of production in the best-case scenario and increase annual federal budgetary revenues by $2 billion.

Year it Becomes the Largest in Europe Estimated Size ($ billions) 9th century

2004

Cell phones Children’s goods

2011

11.3

Clothes, footwear, accessories

2013 (est.)

72.3

Beer

2014 (est.)

30.3

Cars

2018 (est.)

80.3

E-commerce

2018 (est.)

103.2

Retail real estate

2020 (est.)

• The government is considering merging the Central Bank and Federal Financial Markets Service into a single mega-regulator. Experts warn the move could reduce competition in the banking sector. • Deputy Prime Minister Arkady Dvorkovich says a 3% stake in pipeline monopoly Transneft could be privatized in the near term. Meanwhile, shipping company Sovkomflot also said that it could IPO in Moscow and New York, without giving a timeframe.

SOURCE: BNE

As Megafon Plans $3 Billion Listing, Appetite Grows for Russian IPOs

CONTINUED FROM PAGE 1

commercial bank Nomos, which netted $718 million in London. This year had been even slower, with only one successful IPO before Sberbank’s listing: RusPetro, an oil explorer with assets in western Siberia, raised $250 million in London in January. Companies are hoping that Russia has turned the corner following

Sberbank’s placement; within weeks MD Medical Group (MDMG) and leading commercial bank Promsvyazbank (PSB) announced plans to raise some $1.5 billion between them in London by year’s end. Promsvyazbank specializes in corporate banking for mid-sized Russian companies, trade finance and factoring. After the 2008 crisis, the bank also got into retail banking and last year had the coun-

try’s fastest-growing consumer lending business. PSB hopes to raise just under $1 billion from the sale of a 25% stake. “We reached our current position in corporate banking before the crisis and were already in the top 10 in terms of deposits and loans,”PSB president Artem Konstandyan said in an interview.“The IPO money will be used to shore up the bank’s capital and give it

• Russia will set up an aerospace “superholding” company to develop hypersonic weapon technology, Deputy Prime Minister Dmitry Rogozin said. Russia’s defense industry supplier Rosoboronexport said it plans to export at least $11 billion worth of arms this year and has already exported $6.5 billion worth in January-March. Russia’s Military Industrial Commission added it may consider allowing privately owned military companies in Russia to promote the business internationally.

ITAR-TASS

Megafon is currently Russia’s second largest mobile operator.

some more firepower to continue our growth.” Following the announcement of MDMG’s London placement, the company said its market capitalization would be about $900 million after the IPO, with its free float expected to be at around 35 percent. Dr. Mark Kurtser, chairman of MDMG’s board and the driving force behind the group, said in a statement after the listing that the company was “delighted with the positive response to our IPO, which highlights strong investor appetite for industry-leading businesses in growing markets. “Supported by the London listing, we are well placed to capitalise on opportunities to develop our network of healthcare centres and selectively enhance our service offering in Moscow and other economically attractive regions of Russia.” MDMG operates 11 clinics and hospitals in Russia, including the country’s largest private hospital, and one in Ukraine. The company caters to growing middle-class demands for modern treatment, more comfort and service during childbirth. Ahead of the listing, Kurtser said that he expected the group to grow by 35%-45% a year.

• President Vladimir Putin supports a TNKBP sale to state-owned Rosneft, according to Rosneft President Igor Sechin. Some of the procceds would then be used to buy Rosneft shares in an apparent alliance between the global oil majors.

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VIEWPOINT

IT Startups How Russia’s most promising tech companies are changing the world

The Tao of Mark Zuckerberg

Homegrown Software Tackles Global Problems

Natalia Antonova RIA NOVOSTI

never thought that there would come a day when I would unabashedly cheer on Mark Zuckerberg. After all, even among hardcore Facebook users such as myself, it is much more fashionable to poke fun at the guy, gently or otherwise. Yet Zuckerberg’s Moscow visit has reminded me that there is at least one thing that the billionaire Facebook founder clearly has going for him – and it’s just the sort of quality the local jet-set crowd would be wise to pick up. I am talking, of course, about Zuckerberg’s ability to do regular things and hang out like a regular guy. Like being a tourist in Red Square, for example, or even popping into McDonald’s. In Russia, Facebook still trails behind the VKontakte social network in terms of popularity. And, depressingly enough, it was VKontakte founder Pavel Durov who recently caused a stir when he tossed money out of the window of the company’s St. Petersburg office, and then (with apparent delight) watched people fight over it on the sidewalk below. I wrote then that Durov was acting more like a regular weirdo than an evil, rich overlord – he genuinely didn’t seem to understand why what he did was in such poor taste, and appeared to have a poor grasp of the wider implications of his stunt. Yet Durov’s actions were also symbolic of a kind of culture, or lack thereof, among the young and wealthy in Russia. There is a special kind of cynicism that thrives within this milieu – cynicism that is only exacerbated by the polarized nature of Russian society. The “golden youth” know they’re hated. For them, rhetoric about “jealousy” among the lower classes is not something akin to an abstraction, like it is for many people in the United States. Instead, it’s a daily reality. Russia has been through too much in the last hundred years. Scar tissue has built up on top of the collective memories of wars and revolutions – memories passed down to each new generation. The rich are not to be trusted, we believe. But neither is anyone else. And into all of that strolls Zuckerberg, the geek who has inherited the Earth (in its present incarnation, at least). Normal to the point of being boring – as some would argue. Engrossed in first-world problems – such as what to do about Facebook’s performance on the stock market – he is a regular billionaire, not beholden to any political regime, and not worried about landing in prison. Of course, I am under no illusion that Zuckerberg represents the American dream. I remember what Facebook was like when it was only open to the students of several universities, including my alma mater. It was a virtual playground for the privileged – those are its roots – in a sense as privileged as Zuckerberg’s own roots. Still, the most shocking thing about Zuckerberg, in the Russian context, is how low-key he is. And it is this comparative serenity, above all, that Russian businesspeople, and regular people, must achieve in order for this country to truly prosper.

While Russia’s annual software exports currently total a meager $4 billion, a number of global giants including Apple - increasingly rely on them for their cutting-edge innovation.

Russian Software That Already Runs Your Life

ALEXANDER MALAKHOV SPECIAL TO RUSSIAN BUSINESS INSIGHT

For Russians like Georgy Pachikov who grew up in Soviet times, fixing broken-down machines was often a test of ingenuity and improvization - not to mention sheer determination. Back in 1989, when the whole country was literally grinding to a halt, he had a broken washing machine. As competent repairmen were then thin on the ground, Pachikov chose to fix it himself. Working with a friend, he took it apart and reassembled it with success. The machine worked fine but there were five spare parts still on the floor. “We had no idea what to do with them. The instructions were in French with no translation. Despite being trained engineers, we were at a loss,” Pachikov recalls. It was then that he had the idea of creating animated three-dimensional repair manuals with detailed illustrations of all stages of the process, translated into several languages. That same year, he founded a company called ParallelGraphics. By 2010, Parallel Graphics’ turnover hit $5 million and it employed more than 800 staff. Pachikov is by no means the only successful Russian software entrepreneur. His brother, Stepan Pachikov, developed Evernote, a popular note taking and archiving service in use around the world. Exporting algorithms Software development and Russia may be natural partners.“If we get an urge to solve a problem, we’ll get it done, come hell or high water,” says Artem Lyuftin of Moscowbased Mobile Research Group. Russian companies are now world famous as developers of complex software solutions employing sophisticated algorithms. No field illustrates this more clearly than anti-virus software. Russia’s Dr. Web and Kaspersky Lab are world leaders in the field. The latter was founded in 1997 by Eugene Kaspersky, a graduate of the KGB Institute of Cryptography. Kaspersky Lab produced revenues of over $600 million in 2011 and it employs more than 2,500 people. A different breed of algorithm is offered by ABBYY, a Russian company that developed the inimitable optical character recognition software FineReader. The first version of FineReader was released in late 1993. Today, the program supports about 190 languages and the company’s annual proceeds are estimated at over $100 million. Among the less well-known but no less noteworthy companies are

Natalia Antonova is acting editor-in-chief of The Moscow News.

IN FIGURES

$4 billion is the current volume of Russian software exports abroad; this is a paltry sum compared with other tech giants.

80% of Kaspersky Labs’ $600 million revenue in 2011 came from outside Russia; the company has offices all over the world.

CBOSS (automation systems for the telecommunications industry), Paragon Software (hard disk tools), PROMT (translation), DocsVision (document workflow software), and Spirit Dsp (software for voice, video and other data), all offering products and services in global use. One market where Russian IT firms have enjoyed particular success is computer games. It was Russian Alexei Pajitnov who first developed Tetris, one of the most popular computer games ever. The fifth installment of the popular“Heroes of Might and Magic” was developed by Russia’s Nival Interactive with French copyright owner Ubisoft. It sold more than 2 million licensed hard copies worldwide.

Another Russian game developer, ZepoLab, also tasted success with “Cut The Rope” in 2010. The concept was simple: feed a green creature by cutting ropes that hold sugar candy. If successful, the candy flies right into the creature’s jaws. The falling candies follow the laws of physics. The app became extremely popular with smartphone and tablet users, with the game being downloaded more than 100 million times and earning more than $85 million. It is now the world’s second most popular game for mobile devices after Finnish developer Rovio’s “Angry Birds.” The strength of Russian firms comes down to their ability to create imaginative algorithms. “Solving complex tasks, in-depth

analysis of large data volumes, designing algorithms — these are areas of the IT market where Russia can compete internationally,” says Alexander Galitsky, founder of the fund Almaz Capital Partners. “This is because the country provides world-class education in the field of mathematics and physics, which can be used to solve the most complex software development problems. Programmers in India and South Korea are also pretty nifty, but if you’ve got a task no one is willing to tackle, or you don’t yet have a clear concept of the finished article, then ‘Welcome to Russia!’”says Alexander Vovkula, technical director of Parallel Graphics.

Search Engines Russian behemoth avoids “one size fits all” approach amid expansion in emerging markets

Yandex Invades Google Territory After a successful initial public offering on NASDAQ, Russia’s leading search engine expands internationally from a saturated domestic market. ALINA UKOLOVA SPECIAL TO RUSSIAN BUSINESS INSIGHT

REUTERS/VOSTOCK-PHOTO

Arkady Volozh celebrated Yandex’s 2011 NASDAQ IPO in New York City.

In September, Yandex surpassed Google in Russia in terms of queries made on Google’s own Chrome web browser.

Yandex has become an internationally recognized brand name, thanks in large part to its public offering on NASDAQ last year. Not only was it the first Russian IPO on an American exchange in five years, but it was also the largest by an IT company in 2011. Yandex was valued at $8 billion. Investment banks bought 5,217,405 Class A shares at the placement price of $25, only to see the stock soar to $38.85 on the first day of trading. On launch day,Yandex coowner Ilya Segalovich, encouraged by investor support expressed in price rise and an oversubscribed book, said something he had not dared to say before: thatYandex, in his opinion, is better than Google. Objectively, Google’s relevance and search speed are in a different league. Where Yandex excels is not in the quality of its searches. Its key strength lies in its completely Rus-

sian interface and services Russian users find indispensable. Yandex. Market is an online catalog of consumer goods from all over RuNet (the Russian-language Internet), Yandex.Elektrichky serves up commuter train schedules customized to the city where you live, andYandex.Mail and Maps apps are used by nearly everyone with Internet access. Last month, Apple includedYandex’s map software in its iPad and iPhone as standard software. Yandex’s strategy has allowed it to stay well ahead of Google on Russian territory despite stiff competition. Audience monitoring website liveinternet.ru saysYandex has 60.5% of the market, Google 26.6%, and Mail.ru Group subsidiary Search.mail.ru, 8.1%. In September,Yandex surpassed Google in Russia in terms of queries made on Google’s own Chrome web browser. Yandex founder Arkady Volozh announced about a year ago that his company had outgrown the confines of Russia. A country’s web space is, basically, as big as its population. Sooner or later the number of users stops growing. Last year, the company had revenues of about $600 million and

grew by 60%. This year, it expects 45% growth, said Volozh. SoYandex has decided to expand in emerging web markets. Long active within the Commonwealth of Independent States (CIS), a regional grouping of former Soviet countries, Yandex has now turned to Turkey as the first step in its international expansion. It is a bold move as Google is Turkey’s most popular search engine. “This is an experiment so far, but we don’t rule out the possibility that, if it’s successful, we will explore other places too,”Volozh said. Yandex is interested in countries where a single player dominates the market.“It’s wrong when the whole world is reflected through a single window,”Volozh said.Experts believe the strategy has potential. “It’s too early to say whetherYandex’s technology will be able to defeat Google globally, but the company definitely has a shot at places like Turkey, where web search engines are underdeveloped,” said Vsevolod Topolyansky, managing partner at Aurora Venture Capital. Turkey may be the right place to choose to test the waters. First, it’s Europe’s largest and

fastest growing web market. Second, it’s a stand-alone, isolated language segment, which offers an opportunity to develop indexing approaches. Third, testing technology in an unassuming web market makes it possible to identify pitfalls. Yandex will review the results of its first year of international operations in December. The company hasn’t disclosed any numbers, but Volozh says new users have welcomed the company. “Of course we had to modify the services we offer in Russia, and add many things Turkish users find useful. For example, our Ramadan project offered the opportunity to observe the time of sunset in various regions,” adds Volozh. Some experts have been skeptical ofYandex’s policies in“foreign” markets. Operating in an uncharted territory is risky and expensive, whereas they argue that rival Google’s one-size-fits-all approach has already been tried and tested many times over. Yandex’s performance abroad may just depend on how fast it learns to “recognize” and “index” the mentality of other countries.

Special Report

RUSSIAN BUSINESS INSIGHT SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA WWW.RBTH.RU

Social Networks Russia is one of the few markets where locals are ahead of Facebook

Start-Ups to Look Out For In the Next Few Years Giants like Yandex have proven that Russian IT companies have what it takes to go global, but what comes next? Moscow’s leading tech entrepreneurship center offers investors six littleknown companies to watch. RealtimeBoard

GETTY IMAGES/FOTOBANK

VKontakte’s 27-year-old founder, Pavel Durov (left), told Jimmy Wales he would donate $1 million to Wikipedia

Facebook’s Friendly Eastern Competitors

Designed by a team from Russia’s industrial city of Perm, RealtimeBoard is a browser-based whiteboard that utilizes Massive Multiplayer Online (MMO) technology (similar to online games) to facilitate an easy exchange of ideas. It was created by Multivitamin, also responsible for the Art Multitouch project with artist Konstantin Khudyakov. › realtimeboard.com

Ecwid Ecwid enables users to set up an online store on their website or a social network within minutes. It currently supports 185,000 accounts in 174 countries and 43 languages. The founding team from Ulyanovsk was a finalist of the “Next Web 2010” contest in Amsterdam. Last year, the project received $1.5 million from Runa Capital. › www.ecwid.com

OneTwoTrip While the Facebook IPO grabbed the headlines, Russian social networks are quietly monetizing traffic to beat the American giant at its own game. ILAN GOREN SPECIAL TO RUSSIAN BUSINESS INSIGHT

In 2006, as Russia was in the throes of a decade-long economic boom, a young entrepreneur named Albert Popkov had a paradoxical idea: to capitalize on his countrymen’s nostalgic tendencies in order to build a 21st century venture. He founded Odnoklassniki (Russian for “Classmates”) a website which combined reuniting old schoolmates and social networking. Within a year a million Russians flocked to the site, where they could reconnect with anyone from the kid they shared a tent with at summer camp 30 years ago, to their next door neighbor.The site won the country’s top web prizes, and in 2008 Popkov was named GQ magazine’s “businessman of the year”. Odnoklassniki flourished, racking up almost 30 million visitors from Russian speaking countries by July 2008. Today the site boasts the same number of visitors – but each and every day. It’s the second most popular social network in Russia, vying to overtake the leader,Vkontakte, which boasts 35 million visits a day. As for Popkov, in early 2008 he was accused of pilfering crucial information from a British company he had worked for before founding Odnoklassniki. He denied the allegations but was let go after selling his pet project for an estimated 10 to 20 million euros to DST, a holdings company later renamed Mail. ru Group. Mail.ru now owns 100% of Odnoklassniki, controls Russia’s most popular mail service and has a 40% stake in the fierce competitorVkontakte. Meanwhile, Odnoklassniki continued to thrive. The company earned $103 million (3.2 billion rubles) in the first three quarters of 2011, securing a net profit of $45 million (1.4 billion rubles). German Klimenko, editor of audience monitoring website liveinternet.ru says Odnoklassniki’s current success is fueled by the integration with services offered by mail.ru, its parent company.

“Users’ accounts combine both the email address and the social profile and you can cross link between them. This is a significant incentive for advertisers.”Klimenko adds that “Moreover, Odnoklassniki offers video ads while competitors don’t. It’s a very strong selling point.” Integration and cooperation, it seems, are the buzzwords. Free Songs and Costly Smileys However, complete assimilation by external investors is a fate that Pavel Durov, the founder ofVkontakte, has been keen to avoid. When Durov launched Vkontakte (meaning“in touch”) in late 2006, he was accused of brazenly cloning Facebook, ripping off even the color scheme. Yet the English philology student who went to St Petersburg State University forged ahead with his brainchild, offering users free sharing of video and audio files. Accusations of intellectual property theft

The average visitor spent 490 minutes a month on Vkontakte, 340 minutes on Odnoklassniki and a half-hour on Facebook. were quick to fly, but users loved the free content. They still do. Vkontakte’s playlists are a hit, especially with teenagers and 20 something students. Not only because songs and clips entice users to check in, they may keep them in. According to data collected by comscore.com, in 2011 the average visitor spent 490 minutes a month on Vkontakte, compared with 340 minutes for Odnoklassniki and a mere half hour for Facebook, which made its first serious foray into the Russian market two years ago. Facebook is now estimated to have 14 million registered users, and is popular among business owners who like to promote themselves on other media – particularly TV – as having a Facebook account. A decision by a Russian appeal court earlier this year that free file sharing and downloading amounted to copyright infringement could have created problems forVkontakte, but the company adapted. It drew on YouTube’s experience, and allowed copyright owners to de-

The New Mobile Frontier Russian-language social media may be entering its most competitive

Size of Internet Advertising Market ($ millions)

period ever, particularly since Facebook has built a 20% market share – which Klimenko describes as“an impressive foothold.”He predicts that the two big local players will be “pitched in a battle for every subscriber in order to continue thriving.” Popkov, the man who brought Odnoklassniki to the world, now heads the price comparison site Sravni.ru which, he says, enjoys “only modest success.”He believes the Russian web “might remain a very good place for local players. Foreign projects rarely succeed here. It’s possible that in a few years there will be just one or two leaders and all the others will shrink and virtually disappear.” Another frontier to push into might be outside of Russia. Odnoklassniki and Vkontakte have both announced international expansion plans. In April Odnoklassniki let it be known it would offer localized versions to its Uzbek, Ar-

Odnoklassniki and Vkontakte have both announced international expansion plans; for now to ex-Soviet states.

Taking advantage of Russia’s online tourism market (which is apparently growing at 70% annually) and catering to a booming middle class that is increasingly connected to the Internet, OneTwoTrip has managed to raise $9 million from Phenomen Ventures only one year after launching its convenient website for booking cheap air tickets and comparing prices across carriers. Projected total bookings are projected to stand at $400 million by the end of this year, of which OneTwoTrip enjoys a 6-7% cut. › onetwotrip.com

LinguaLeo LinguaLeo offers online English instruction via popular TV series, books and dialogues. After a rough start and a break of several months during which it was inactive, the site now has 1.5 million registered users and enjoys 80 thousand daily visits, comparable with Western counterparts like LiveMocha and Busuu. In June 2012, LinguaLeo secured $3 million from the Runa Capital Venture Fund; it intends to use the money to go international and cash in on demand for English all over the world. “Our first target will be Brazil, then Germany and finally Southeast Asia,” founder Aynur Abdulnasyrov told East-West Digital News. › lingualeo.ru

menian, Georgian and Moldavian audiences and plans an English version to cater for its American based contingent, which it claims to be more than one-million strong. Vkontakte is already available in 70 languages, including English, and was recently rebranded as VK.com in a bid to become more appealing to audiences worldwide. However, Popkov says, opportunities still abound inside the Russian federation. The man, who was born in the Far Eastern island of Sakhalin before rising to entrepreneurial stardom, sees networks venturing into remote regions to capitalize on the growing popularity of mobile devices. “Broadband was the last main drive for social networking,”he reminisces.“The same might happen with mobile when access becomes faster. Whoever’s smart and fast enough to offer top quality mobile services is likely to win. If I knew how to do that I wouldn’t be speaking to you right now: I’d probably be writing the code.”

ResumUp ResumUp compiles the resumes and social network data of job candidates into an individualized portfolio that guides you through your professional career. The site can tell you what you need to know to achieve your career goals based on data from social networks. The service has attracted 7.2 million active Russian-speaking users. › resumup.com

SpeakToIt A digital assistant for your Smartphone, comparable to Siri, SpeakToIt was named among the Top 10 Android Apps of the Year by The New York Times. Since launching in May 2011, it has been downloaded over 2.5 million times and is currently available on iOS and Android. This year the company has received an undisclosed amount of funding from Intel Capital. › speaktoit.com

Anastasia Demina Digital October

Average Daily Number of Visits (millions)

LORI/LEGION MEDIA

Social Networks’ Share of Internet Ad Market (%)

lete pirated content while offering help promoting owners’pages. It also paid a fine of $6,780 (210,000 rubles).The fine was a punitive drop in a sea of revenue, which swelled in 2011 to $106 million (3.29 billion rubles) while net profit rose to $16.6 million (516 million rubles), increases of 41.7% and 13.9% respectively from the year before. The strong results can be partly explained by Russian marketers’ appreciation of the power of free, though pirated, content. Ten thousand advertisers are registered with the network, each paying in advance an average of $645 (20,000 rubles). Analysts estimate Vkontakte to be worth more than a billion dollars and Durov’s personal fortune at around $260 million. Last May he spent a weekend throwing a multitude of paper airplanes from his St Petersburg office window. They were made of folded 5,000 ruble notes. Durov’s company is not so generous with all its services, however. “Russian operators, and particularly Odnoklassniki, made clear to users from day one: ‘for some things, you have to pay’. You want to play online with your friends or share an emoticon? That game or that smiley will cost you,” says Ariel Weiss, a former executive with ICQ, an instant messaging program owned by mail.ru.“They understood they have to monetize and they know how to adapt western models to their audience’s needs.” Paid services offered by Odnoklassniki include anything from social gaming, through the right to remain anonymous while peaking at another user’s page, and all the way to sending virtual gifts like songs, which can cost up to $2.50 each. Odnoklassniki now wants to take paid virtual revenue to the next level of pair virtual financing. The company intends to offer its clients the opportunity to borrow virtual money. It promises not to enforce the collection of debts. According to J’son & Partners Consulting, fee-based services in Russia generated $514 million in 2011. Mail.ru Group reported that paid services helped it generate almost $128 million last year.

SOURCE: ACAR

SOURCE: BBDO AGENCY

SOURCE: LIVEINTERNET.RU, SOCIALBANKERS.COM

Digital October is based in the building of the former Red October chocolate factory.

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Money & Markets

RUSSIAN BUSINESS INSIGHT SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA WWW.RBTH.RU

AHEAD OF THE CURVE

Privatization While a smaller number of sales are to be fast-tracked, energy may have to wait

Uncertainty quadrupled

Kremlin Plans Twin Track Sell-Offs of State Stakes

lobal economic uncertainty affects Russia in two ways. First, export prices for gas, oil and other exchange commodities are jeopardized due to uncertainty in economic growth globally. This not only affects the largest Russian companies - Gazprom, Rosneft, Evraz and others - but also the government, because royalties from oil and gas are important for the budget. And second, financial markets remain highly volatile - with investors ready to flee at the faintest sign of trouble.While multinationals such as Siemens and General Electric with substantial investments cannot leave the country overnight, investors in financial markets can always retreat to their domestic markets. Making things worse for Russia is its lack of large national institutional investors. Since the collapse of communism, it has not had the time to establish major pension funds or insurance companies. The government is trying to fight the weaknesses of these institutions, but so far this task has proved too hard. A similar story is unfolding with the declared strategy to turn Moscow into an “international finance center.” Many initiatives have been launched, and some, such as the setting up of the joint MICEX-RTS exchange and the Central Securities Depository, have been completed. As a result, within five years Moscow may become a financial centre for the CIS - Ukraine, Kazakhstan and other ex-Soviet states. But talk of turning Moscow into another London or New York remains fanciful. Prospects look better for Russian banks. With loan portfolios growing on average 10-20% annually, asset growth is strong and yields are high. The banks have also been more cautious since the onset of the global financial crisis in 2008, which is good as they were too aggressive earlier. Their position, however, needs further strengthening, particularly in areas such as risk, finance and budget management, and capital planning. High yields for banks, however, mean that loans are expensive for companies as banks remain apprehensive about lending in today’s uncertain market conditions. Nonetheless, expanding corporate credit and diversifying lending to more large, small and private business will be crucial for long-term development. Two other challenges for banks are the dangers of currency risk for those that use dollar loans to lend in rubles and how best to lower the interest rates paid on deposits opened when inflation was high. Offsetting both these problems is the fast rate of ruble-deposit growth - 22-23% annually for the last three years. This has strengthened the banks’ ruble holdings, so lowering demand for dollars, and reduced the proportion of high-interest deposits in their portfolios. Geoffrey Nicholson is a partner at PricewaterhouseCoopers.

STATE MATTERS

Kicking off privatization Roman Tkachuk SPECIAL TO RUSSIAN BUSINESS INSIGHT

t happened almost overnight, but with a simple share placement the largest bank in Eastern Europe became the leader of Russia’s new privatization drive. A few weeks ago, 7.58% of Sberbank’s shares held by Russia’s Central Bank were privatized. The shares were sold at about $3 each and the offering was oversubscribed twice over. Western funds bought most of them. The deal went through in just two days. If the “positive investment climate” holds up a few more months, the Russian government could go ahead and privatize a bunch of other companies under a much-awaited plan announced several years ago. The list of companies up for privatization includes VTB Bank, Rosneft (Russia’s largest oil company), InterRAO (a power generator), RusHydro (a hydroelectric power generator), Alrosa (the world’s 2nd largest diamond miner), RZD (a railroad monopoly responsible for 3% of Russia’s GDP), Transneft (an oil shipper), Rosnano (a nanotechnology giant), Sovkomflot (a shipping company), Moscow’s Sheremetyevo airport, Zarubezhneft (an oil exporter), United Grain Company, Rosselkhozbank and Rosagroleasing (a farm credits company). The total value of all these stakes is estimated at almost $58 billion. A final list of companies up for privatization should come out on Nov. 1. One of the government’s goals is getting private investors involved in these companies, which it hopes will allow them to develop more dynamically. Another is to fill the current budget gap, a result of the significant social transfers after the last crisis. Relying on petrodollars can be precarious, and Russia’s leaders understand this. Putin’s pre-election promises alone could cost some $28 billion per year or 1.5% of GDP. Other ways of raising this money, like raising taxes on businesses, are seen as unacceptable as they will also slow down economic growth. At the same time, in today’s volatile global economy, the chances that the government will embark on a massive privatization drive aren’t that great. Only a tenth of the privatization program will be fulfilled this year. Different companies hold wildly different levels of attraction for investors. BP, for example, has announced its interest in 25% of Rosneft. VTB, which announced a possible $2 billion share placement in 2013, is another matter. The shares may go up for sale, but whether anyone will buy them is still an open question. Roman Tkachuk is an analyst at N Capital.

The $5.3 billion Sberbank offering, reducing the state’s share to 50% plus one share, has set the scene for a raft of privatizations planned for the next few years. TIM WALL RUSSIAN BUSINESS INSIGHT

President Vladimir Putin’s ambitious plans for selling stakes in state companies, set out in his pre-election program earlier this year, are now likely to be modified, experts say – with a smaller list of assets in banking and transportation infrastructure getting a quick green light, while sell-offs of energy stakes will likely end up being put on the back burner. “What has actually happened over the past two months is that the privatization plan appears to have been split into two categories – stocks in the fast-track program and a second program with a much longer and vague time line for sale,” said Chris Weafer, chief strategist at Sberbank Investment Research. The change comes after an extended discussion within government circles, as conservatives around Igor Sechin, the influential chairman of state energy giant Rosneft, appeared to win the argument that strategy energy assets should remain under strong state control. Liberals in the Cabinet of Prime Minister Dmitry Medvedev, led by Deputy Prime Minister Arkady Dvorkovich, had called for energy assets to also be put on a fast track to privatization. The Rosneftegaz holding, under Sechin’s leadership, currently controls the state’s stake in Rosneft, and 11% of the equity in Gazprom. It now seems increasingly likely that Rosneftegaz will extend its energy empire to include majority control over Gazprom, more than 75% of Rosneft and the Federal Grid Company, a majority interest in Rus Hydro, and more control over oil pipeline monopoly Transneft, among others. In the strategic energy sector, the government looks likely to take a step back toward“greater state control and some sector consolidation before then proceeding with privatization at a later date,” Weafer said. But the liberals could yet manage to turn the tables and speed up the program. “There remains a tension at the heart of government about the speed and nature of privatization, so the plans are always subject to change,”

GETTY IMAGES/FOTOBANK

SPECIAL TO RUSSIAN BUSINESS INSIGHT

Sberbank, whose history dates back to 1841, is the largest bank in Russia and Eastern Europe.

IN FIGURES

$3,700

$5.2 billion

46%

is what each shareholder who invested $100 into Sberbank 10 years ago would receive today, Vladimir Putin estimated

is the value of the Sberbank stake that was sold to domestic and international investors during last month’s SPO

of retail deposits in Russia are controlled by Sberbank. It benefits from being the inheritor of the main Soviet savings bank

said Kingsmill Bond, chief strategist for Citibank in Moscow. Next up after Sberbank is likely to be Russia’s second-biggest bank, VTB, which aims to raise $2 billion in the spring of 2013, according to bank chairman Andrei Kostin. Also in the fast-track program are likely to be stakes in the publicly listed companies Sovcomflot, the state shipping company, national airline Aeroflot, diamond monopoly Alrosa and Federal Grid Company, Weafer said. Initial public offerings in Apatit,

RosAgroLeasing, Russian Agriculture Bank, Russian Railways, Sheremetyevo Airport, United Grain Company, and the ports of Murmansk, Arkhangelsk and Vanino are also planned. Analysts said the non-extractive industries were the best privatization prospects, with VTB a proxy for the domestic economy, and Rusnano representing new technology. “The most attractive companies will be those which offer exposure to consumer or infrastructure growth in new sectors,” said Bond,

of Citi Bank.“Sovcomflot therefore is especially interesting.” The big question remaining is whether the Kremlin can find the right windows of opportunity to get good prices for its stakes. Speaking at VTB’s “Russia Calling” investment forum in Moscow earlier this month, Putin said that sell-offs would continue, “taking into account market prices and the market situation.” Analysts reinforced this view, emphasizing that the timing mainly depended on external factors. “The bottom line is that the government will only be able to sell when there is investor appetite for risk assets,” said Weafer, of Sberbank Investment Research. “It’s a case of waiting for likely short windows of opportunity in which to sell. But the handle to open or close those windows is in the hands of Europe’s politicians, the European Central Bank and the U.S. Fed, rather than with the Kremlin.”

Stocks For the first time, it’s possible to buy Russian bonds and shares from anywhere in the world

Clearing System Reform Opens Up Moscow Markets Russia’s settlement and clearing system will be hooked up to Euroclear next month, which the state hopes will spark a rally in the market. BEN ARIS SPECIAL TO RUSSIAN BUSINESS INSIGHT

Starting next month, Russia’s bank settlement and clearing system will be hooked up to Euroclear, the international settlement system, making it possible to buy Russian bonds and shares from anywhere in the world. Analysts expect demand for bonds and stocks to surge as large institutional investors, who previously balked at the paperwork associated with trading in Russia, gain unfettered access to the market. The creation of a Central Securities Depository (CSD), which is expected to go online at the same time, will also boost markets. The CSD collects together all trades for settling in one place. Many institutional investors, including U.S. pension funds, are precluded from investing in any market that doesn’t have such a system. The introduction of the CSD will also deepen the pool of capital available to Russian markets. This latest round of reforms follows the merging of Russia’s two biggest stock exchanges – MICEX and the RTS – in December of last year. Since February, traders in London and New York have been able to buy Russian sovereign bonds in over-the-counter trading. This November’s reforms, however, will have a far bigger impact. “Russia’s ruble bond market has traditionally been overlooked by

LORI/LEGION MEDIA

Geoffrey Nicholson

Joining Euroclear will bring Moscow closer to being a global finance center.

foreign investors but this autumn’s capital market reforms could spark a rally,” said Elena Kolchina, head of fixed income at Renaissance Asset Managers. Until now, with foreign funds barred from participating directly

in Russian bond auctions, they had to go through the costly and time consuming process of opening accounts with Russian brokers and clearing their trades in offshore havens such as Cyprus. Russia attracts some of the least

foreign investment into its bond and stock markets of any major emerging market. Non-residents hold just 5.5% of government treasury bills – known as OFZ – compared to an average of 20% in other BRIC countries. Analysts say November’s reforms could triple this share to 15% within a few months as traders readjust their portfolios to match Russia’s increased weight in the international indices. “This translates into potential additional demand of 500 to 800 billion rubles ($14.7 to $23.5 billion) from non-residents, which covers up to 70% of the total OFZ net issuance in 2010-11,” said Nikolay Podguzov, head of fixed income at VTB Capital. Russian bonds are currently very attractive. The economy is growing at about 4%, one of the fastest rates in Europe. Inflation fell to 20-year lows at the start of this year, and while a poor harvest is likely to cause prices to rise this autumn, long-term core inflation has been brought down to between 4.5% and 5.5% says Renaissance’s Kolchina, adding Russia’s debt to GDP ratio is a miniscule 8% against the most of Europe where debt is now closer to 100%. And finally Russia has about $620billion in its various reserve funds – enough to cover every dollar of debt with one in cash. Russia’s is one of the most robust economies in Europe, yet the health of the economy is not reflected in the bond prices: OFZs currently yield over 5%, while semi-government and corporate bond returns are in the teens; U.S. bonds in contrast are close to zero, while German bonds are offered at negative real interest rates. “Emerging market bonds have had a great year, but everything could change this autumn, turning Russia’s capital market into a global hot spot, as Russian ruble bonds come of age,” says Kolchina.

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RUSSIA’S OIL: LUCK OR CURSE?

NATALIA MIKHAYLENKO

IT’S ALL ABOUT THE INSTITUTIONS Sergei Guriev ECONOMIST

eliance on natural resources as the principal source of its wealth does not necessarily result in a country falling prey to the “resource curse”. For decades, Norway, Canada and Australia have all combined abundant commodity production with democracy and shared prosperity. More recently, Chile has also demonstrated how a developing economy with abundant natural resources can develop into a stable democracy. Of course, economies that rely on minerals also see their fortunes rise and fall with commodity prices. But the peaks and troughs can be smoothed through the accumulation of relief funds and developing sophisticated financial markets. The oil sector in particular is also a potential source of high-tech development, capable of pulling other industries along with it. But if this can happen in the West, why is it not also taking place in Russia? The essential reasons are ownership and competition. Russia’s privately owned Novatek is far more efficient than state-run Gazprom. R&D investments in the monopolized gas industry lag far behind those of the far more competitive oil industry. Moreover, Russia is not alone in being a country where an abundance of resources discourages market reform and democratization. There is no denying that Russia relies heavily on oil, and any strategy for change will have to bear this in mind. A 10% change in the price of oil results in a 1% fluctuation in GDP, more or less. And the state budget depends on oil prices. What can we do to reduce Russia’s dependence on oil and gas? Above all, we must think beyond this industry. We need to facilitate investment inflows in

non-resource sectors. And this can be done by complying with President Putin’s decree of May 7, 2012 on long-term state economic policy. This document envisions privatization of all non-resource industries by 2016 - which by itself will improve Russia’s business climate. Some analysts have suggested this could move Russia up to number 50 in the World Bank’s Doing Business rankings from its current standing of 120, and add two points to Russia’s GDP growth rate, all from expansion in the non-resource sector. What about the other approach to diversification - building a top-down non-oil and gas production? Reliance on such a method would be misplaced. In his book, Boulevard of Broken Dreams, leading venture business researcher and

The resource curse can’t be broken by a top-down approach of setting up a state corporation. Harvard Business School professor Joshua Lerner shows that even in America, with its professional and non-corrupt bureaucrats, such attempts failed. Of course, we shouldn’t think that the “resource curse”can be broken through a program of privatization alone. We must also take up the struggle against corruption and fight for the protection of property rights, demonopolization and economic deregulation. If we can break free from these traps, then one can expect growth and diversification, as well as transparency and accountability of the authorities. Sergei Guriev is Dean of the New Economic School in Moscow.

REINVESTING THE WEALTH INTO TECH Ivan Grachev MEMBER OF PARLIAMENT

lobal demand for Russia’s mineral resources is huge. Exports of oil and oil products have risen from 120 million to 240 million tonnes in the past ten years - from $50 billion to $390 billion. But at the same time, demand for manufactured products and other industries drawing on Russian know-how has weakened. To some extent this is nothing surprising: as exports of commodities have grown, their role in the economy has increased too. But accepting this as the natural way of things is dangerous. Russia’s federal budget is reliant on commodities revenues - according to official data, commodities contribute around 60% of the federal budget; in reality, that number is closer to 75–80% as much of the service sector depends on money from oil and gas. We must make better use of the wealth our commodities have brought us. The issue is that we are wasting the money - spending it on nonproductive services investments, for instance, rathert than invest it in the development of “real” economy sectors. This is because power in Russia is held by a commodity-based bureaucracy, totally reliant on oil and gas revenues. Some observers argue that developing the oil and gas industry will automatically lift other industry sectors. This is a gross exaggeration. Major companies such as Gazprom and Rosneft spend only sparingly on research and development – only around 1% of their annual revenues. This is not the kind of money that can spur the development of accompanying industries. What’s worse, we are often guilty of not trying to create something new ourselves. Instead, we prefer to buy from elsewhere.

A government that genuinely understands development would know that change cannot come unaided. If we want to reduce the dominant role commodities play in the Russian economy we must adopt new policies and direct investment to sectors with the highest potential. I believe Russia has four areas where we could be global leaders. The first is energy, but instead of simply sending oil abroad we need to sell products made out of it. Second is applied mathematics, where we have a long-established reputation. Third is aerospace, and fourth is biotechnology. The essential step needed to drive these sectors forward is the introduction of tax breaks for innovative companies. Companies in the Skolkovo Innovation Cen-

If we want to reduce the share of commodities in the economy, we need to redistribute money. ter area just outside Moscow already benefit from this. Every entrepreneur in Russia whose activities fall within the scope of the law on innovation should have the same support, then in five years a good number of small businesses would grow into medium-sized enterprises, and we would have a strong inflow of foreign investment. Today, small businesses account for just 10% of GDP. By taking the right steps now, in ten years’ time our knowledge-based economy could account for 50% of federal revenues.This doesn’t mean that the oil and gas sector will shrink – only that revenues from other sectors will rise. Ivan Grachev is chairman of the Energy Committee in the State Duma.

IS IT TIME TO STOP TAXING OIL COMPANIES? Pavel Fedorov DEPUTY MINISTER OF ENERGY

ne of the key tasks facing the Russian government is the creation of a single set of economic incentives to ensure the cost-effective development of oil and gas reserves. Tax revenues from the oil and gas industry, which together account for more than half of the country’s budget revenue, have grown by an order of magnitude over the past decade to $100 billion - a colossal figure. The trick now is how to figure out a way of keeping both both that money coming in while ensuring the oil and gas industry remain in robust health. So how can we balance the distribution of revenue from Russia’s natural wealth between resource companies and the state? There are a number of ways, such as granting investors an internal rate of return, on top of other guarantees.

However, I believe we should commit to allowing a healthy return on capital investments and provide an effective tax and fiscal framework for companies to operate in. Such an approach would both encourage economic development and allow the country to fulfill its technological potential. As Russia is the world’s leading oil producer and the largest supplier of gas, encouraging expansion of this sector should have a positive knock-on effect across the rest of the Russian economy. A decade ago, Russia introduced a new system for the oil and gas sector that facilitated tax administration and collection, and ensured a stability cushion for the country’s macroeconomic development. After that reform, the tax burden on companies in the oil sector rose from 25.1% of total revenues in 1999 to 41.5% in 2003, increasing state budget revenues by the equivalent of 2.7% of GDP. At the time, the tax hikes were entirely justified. But one of their consequences was that the oil industry decided not to follow up on a num-

THIS SUPPLEMENT IS PRODUCED AND PUBLISHED BY ROSSIYSKAYA GAZETA (RUSSIA) AND DID NOT INVOLVE THE NEWS OR EDITORIAL DEPARTMENTS OF THE WALL STREET JOURNAL WEB ADDRESS HTTP://RBTH.RU E-MAIL US@RBTH.RU TEL. +7 (495) 775 3114 FAX +7 (495) 988 9213 ADDRESS 24 PRAVDY STR., BLDG. 4, FLOOR 7, MOSCOW, RUSSIA, 125 993. EVGENY ABOV PUBLISHER ARTEM ZAGORODNOV EXECUTIVE EDITOR ELENA SHIPILOVA EDITOR TIM WALL, PETER PURTON, ALFRED ROMANN GUEST EDITORS TOMAS KASPARAITIS PROOFREADER OLGA GUITCHOUNTS REPRESENTATIVE (U.S.A.) ANDREY SHIMARSKIY ART DIRECTOR ANDREI ZAITSEV HEAD OF PHOTO DEPT MILLA DOMOGATSKAYA HEAD OF PRE-PRINT DEPT ILYA OVCHARENKO LAYOUT AN E-PAPER VERSION OF THIS SUPPLEMENT IS AVAILABLE AT WWW.RBTH.RU.

ber of promising potential production technology advances. In particular, plans were shelved for the development of hard-to-reach off-shore oil reserves because they were no longer economically viable. Now, aware as we are that the existing boun-

50 years ago there was no way of getting to the unexplored depths of Siberia; now anything is possible. Oil production from underneath salt deposits in deep water is no longer a dream. ty of Western Siberia is drying up, it makes sense to think about bringing on a stream of new sites, such as the East Prinovozemelsk field with its around 5 billion metric tons of oil and 10 trillion cubic meters of gas.

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We know that other relatively unexplored parts of Western Siberia contain at least 2 billion metric tons of oil, and that there is a real possibility that the true figure could be yet ten times higher. Whereas 50 years ago there was no way of getting to such reserves, nowadays almost anything is possible. Oil production from underneath salt deposits in deep water is no longer a dream. Since operations in deep water or under ice require radically new hi-tech equipment, the cost of developing remote fields runs to tens of billions of dollars. The cost of a single offshore platform, for example, can be as high as $15 billion. Such costs cannot be tackled alone. That is why in summer 2011, Rosneft signed an agreement with the world’s largest private oil company, ExxonMobil, to work together on the Arctic shelf. (Investments in the project are slated at around $500 billion — RBI). To be able to carry on negotiating such deals, and to keep state revenues flowing in strongly, let’s hope that we continue to be blessed with a favorable market climate.

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Travel What you can’t miss even if your time in Russia’s capital is limited to a few brief stops

A Stroll Around the Kremlin If you have some free time during your trip to Moscow, a picturesque walk around the Kremlin is a great way to soak up Russian history and culture while enjoying the capital’s vibrant downtown scene.

Churches, Courtyards and Composers in Historic Moscow

SPECIAL TO RUSSIAN BUSINESS INSIGHT

St. Basil’s Cathedral

PRESS PHOTO

The starting point of this walk is the Zamoskvorechye district (literally,“beyond the Moscow River”) [1], one of the city’s loveliest central sights and viewpoints. This area, once the headquarters of the invading Golden Horde, is packed with churches, cafes, restaurants and galleries. The Tretyakov Gallery [2] is Moscow’s naNikolai Gogol Monument tional collection of pre-20th century Russian art. Not only is it a fabulous museum, but it provides a crash-course in Russian history and culture. Note in particular how the gold-backed icons and stiff portraits of tsars gave way to landscapes and historical epics as the country’s art flowered in the 18th and 19th centuries. From the gallery, walk to the end of the lane and cross a little footbridge whose iron trees are adorned with padlocks put there by romantic couples. On the far side is a statue of the painter Ilya Repin and the gardens Chemodan (see Review below) known as Bolotnaya Ploschad (Marshy Square) [3]. Turn left past the fountain and then right to cross a huge road bridge over the river. The traffic is noisy, but the views toward the Kremlin [4] - with its red brick walls and gold-domed cathedrals - are stunning. On the other side of the bridge, go on through the Alexandrovsky Gardens [5], beneath the Kremlin walls. Red Square [6] and the Bolshoi Theater [7] are beyond the gates at the far end. To get a little off the beaten track, turn left through the tunnel behind the statue of Peter the Great Monument galloping horses. This popular bronze fountain is a reminder of the horse guards who used to ride in the huge Manezh [8] building nearby, once an imperial parade ground, now an exhibition hall. The elegant, neoclassical mansions across the road are part of Moscow State University [9], founded in 1755. Cross under the road and walk up Bolshaya Nikitskaya Ulitsa to reach the Conservatory [10], heart of many of the city’s musical traditions; concert tickets are often available for sale inside. The statue outside is composer Pyotr Tchaikovsky, who taught at the new conAlso nearby are the Museum of Eastern Arts servatoire from 1866 and wrote Swan Lake while [12], packed with lilac silk and turquoise ceramhe worked here; notes from six of his works are ics, the popular John Donne pub [13] and the wrought into the fence around the monument. Confael chocolate shop [14], where you can buy Turn left at the big crossroads to stroll along an edible postcard of St. Basil’s Cathedral. one of the green alleyways of the busy bouleThe following section of the boulevard starts vard ring, a chain of narrow parks along the line with a statue of 19th century satirist Nikolai of the old city walls. On the left side of this short Gogol [15], who lived nearby, and ends at the stretch, you will find the wonderful “Theater at white and gold Christ the Savior Cathedral [16], Nikitsky Gate”[11], where you can listen to Rusthe tallest Orthodox church in the world. Built sian songs and drink vodka in the courtyard on to commemorate the 1812 victory over Naposummer evenings. leon, the cathedral was demolished by Josef StaLORI/LEGION MEDIA (4)

Kremlin

Tretyakov Gallery

lin in the 1930s, but reconstructed 60 years later. The elegant Akademia restaurant [17], whose plate glass windows overlook the cathedral, serves up classic Russian dishes such as home-made borsch or sorrel soup with quails’ eggs. For an old-fashioned dining alternative, the 19th-century style Chemodan restaurant, along Gogolevsky Boulevard (see Review, below) offers a great range of Siberian game, fish and traditional herb and spice “yerofeich” vodkas. Going around the back of the Christ the Savior Cathedral, there are more great views from

Restaurant Review A film star’s place offers diners a journey to 19th century frontier cuisine

the wide pedestrian bridge over the Moscow River. Just across the bridgr, the trendy Strelka Bar [18] is just the place for sunset waterside cocktails and watching the sun set. Going over the bridge, into Zamoskvorechye again, you can see Zurab Tsereteli’s statue of a nautical Peter the Great [19]. You can stroll through the garden on the left and on into refurbished Gorky Park [20], now a riverside Wi-Fi paradise of outdoor art and yoga classes, frequented by everyone from grannies and hipsters to young families with strollers.

Bear, Boar and Some Vodka: A Taste of Old Siberia Dining out in Moscow is a lot swankier than before, but looking for an authentic Russian restaurant with great food, ambience and service can still feel like a trip across the taiga. TIM WALL RUSSIAN BUSINESS INSIGHT

Chemodan (Suitcase), a restaurant literally transported from the wilds of Siberia, goes beyond the stereotypes and delivers something that you won’t find at Moscow’s showier Russian-style eateries, Cafe Pushkin and Turandot: a taste of the real 19th century frontier Russia, replete with generous portions of venison, boar and whitefish – not to mention bear cutlets, dumplings and old-style Siberian vodka. Chemodan is a short walk from Moscow’s Christ the Savior Cathedral, where the Pussy Riot girls’ controversial “punk prayer” landed them a jail term (most probably in Siberia). But walking into the wooden-floored, quaintly furnished restaurant, you can take a culinary trip to Siberia without leaving Moscow. The ‘gastronomic theater’ came into being through a trip to Krasnoyarsk in eastern Siberia by actor Oleg Menshikov, one of only a handful of Russian film stars who are also famous in the West. Menshikov, best known for his bravura performances in Nikita Mikhalkov’s Os-

car-winning “Burnt by the Sun” and the U.S.Russian hit “The Barber of Siberia,” found the original Chemodan there, and proposed to its owner to recreate it in Moscow. In Russia, chemodan (derived from the ancient Tatar for ‘clothes store’) is an evocative word, associated with long journeys – both wished-for and involuntary. Even today,“sitting on your suitcase” is a favorite Russian saying, bringing to mind both the wait for Jewish emigration in the 1970s and the more sinister night-time knock on the door from Stalin’s secret police in the 1930s purges. It can also signify a“suitcase mood,” of wishing oneself far, far away. A meal in Chemodan starts with Russian staples such as cabbage soup (“shchi”) with mushrooms and Olivier salad, but Siberian game, sourced directly from Siberian huntsmen, is the star attraction. From rabbit pate and venison carpaccio, graduate to Siberian whitefish and the ubiquitous venison (also delicious in Siberian “pelmeni” or dumplings), while the more adventurous can try the gamey boar with mushroom cream sauce and bear cutlets. The best accompaniment to the wild things that could be stuffed on your wall is the cleantasting“yerofeich,”a traditional Russian vodka with cumin, aniseed and other herbs and spices. It comes in several fruity varieties, and is

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WHERE TO GO

Chemodan

see map

ADDRESS: 25 GOGOLEVSKY BOULEVARD (M. KROPOTKINSKAYA) OPEN: DAILY, 12:00-24:00 AVERAGE DINNER: $75-$100/HEAD WEB: WWW.CHEMODAN-MSK.RU

the genuine way to recreate the Siberian merchant experience. Desserts, too, come in a pure Siberian form: varieties of jams and specialty teas, such as the “Siberian honeysuckle.” Chemodan’s service, like the nostalgic black-and-white photos on the wall, and the attentive, plaindressed staff, speaks to a serious, understated attitude to fine dining. The menu comes in Russian and English, and prices are in the upper medium range for Moscow, with starters, mains and vodka coming Oleg Menshikov co-starred in Oscar-winning Burnt by the Sun. to $75-$100 per head.

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