Russia & India Report by Russia Beyond

Business Report

THE ECONOMIC TIMES IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA

WEDNESDAY, NOVEMBER 21, 2012

NEWS IN BRIEF

ENERGY: Argeement between Rosneft and BP to boost sector

Deal of the century creates splash

India approves $1.5 bn missiles contract The Indian government approved a $1.5-billion deal to buy 200 air-launched variants of the Russian-Indian BrahMos supersonic cruise missile and 10,000 Russian-made Invar anti-tank missiles. The Cabinet Committee on Security cleared a request from the Indian Air Force to buy the missiles which will be deployed on its Su-30MKI strike aircraft. The ﬁrst test of the air-launched missile is due in December. The 10,000 Invar missiles for India’s T-90 tanks will be procured from a Russian manufacturer, and 15,000 will be produced under license by India’s Bharat Technologies. The Moscow News

In a marriage of interests, UK oil major will get access to Russian oil wells while Rosneft will get latest technology RIBR

GETTY IMAGES/FOTOBANK

Igor Sechin, left, a close ally of President Putin, became CEO of the biggest oil corporation in the world.

GAS: Russian state monopoly to invest $38 bn

Gazprom turns to Asia-Paciﬁc markets Plans to enter the lucrative Asian region include an LNG plant in Vladivostok and Trans-Siberian pipeline VERA KOZUBOVA Vzglyad

ussian energy giant Gazprom is planning to invest more than $38 billion to build new production capacity to penetrate the fast-growing Asia-Pacific market. It also plans to build a liquefied natural gas (LNG) plant in Vladivostok. The state-owned gas monopoly is keen on this substantial investment to gain a share in the burgeoning premium market of the Asia-Pacific Region, Gazprom CEO Alexey Miller said during a recent meeting with President Vladimir Putin. According to Miller, about $24.6 billion will be spent on the construction of a 3,200-km pipeline running from Eastern Siberia to Vladivostok. Most of the gas will come from the Chayandinskoye deposit in Yakutia. The group will invest about $13.7 billion in the pipeline which is expected to become operational by 2017. Gazprom also seeks to create a new export corridor for Eastern Siberian gas and build a LNG plant in Vladivostok that will produce 10–15 million tonnes of gas per year. “Markets in the Asia-Pacific region are, above all, markets for LNG,” Miller said, adding that the 220-billion-rouble plant will be launched in 2018. The main market for the

plant will be Japan. The company also plans a gas production centre in Krasnoyarsk in Siberia. Recently, Putin instructed Gazprom to complete negotiations on all key issues as soon as possible and to start the construction a Trans-Siberian pipeline to Vladivostok. “Considering that the reserves are huge – we have 3.5 trillion cubic metres there – another export centre oriented towards the AsiaPacific Region can be set up,” said Putin. Gazprom is planning to implement its plan by building at least two pipelines. One will go west to the Tomsk Region, where it will link up with the Unified Gas Supply System. The other will go to Khabarovsk and then Vladivostok. Thus, we are planning to link Eastern and Western Siberia,” Miller said. Russia would then have a single nationwide gas supply system. Gazprom is to take a final investment decision before the year-end. The outlook for diversification is upbeat. “I would like to remind you that with China alone we have 68 billion cubic metres on the negotiating table; we are planning to export 10 billion cubic metres to Korea; and we have already delivered 18 billion cubic metres from Sakhalin. There is also the capacity we will create for deliveries to other countries, first of all Japan,” he said.

three fields are due to be sold in December. Russia needs to find new fields and almost certainly has large oil deposits in its unexplored Artic and Eastern Siberia territories that were largely ignored by the Soviets. Russia needs to spend 500 billion roubles a year on geological exploration in order to

BRICS poised to set up joint currency fund

The BRICS countries are poised to establish a joint currency fund. A formal decision has been made because this reserve is necessary in case of another economic crisis. Now Brazil, Russia, India, China and South Africa are discussing concrete parameters and conditions of accumulating currency reserves. The size of the fund has also been determined. It is to be $240 billion. But the establishment of the mechanism of mutual lending has an important political aspect as well, say experts. The concept of a BRICS anti-crisis fund sprang up in June this year at the G20 summit in Mexico. Voice of Russia

Russia hands over INS Tarkash to Indian Navy

Russia shores up banking sector hit by slowdown CBR hikes rate, increases retail deposit insurance limit; consumer lending on the rise BEN ARIS Special to RIBR

apital at Russian banks is shrinking fast, making the sector vulnerable to another crisis. Squeezed on the one side by white hot consumer lending and a slowing economy on the other, the Central Bank of Russia (CBR) has scrambled to shore up the sector with a slew of new rules and loans, but analysts are afraid that without some economic growth the sector’s problems may only worsen. Russia’s GDP growth had declined to 4%4.4% over the first six months of this year, but fears of a fresh financial storm blowing out of Europe caused managers to cancel investment projects, driving GDP growth down to 2.8% in October. Anything less than 4% growth could lead to stagnation. But on the ground, things look very different. For the first time ever the volume of consumer loans overtook those made to Russian corporates in October, reaching $57.4 billion versus $52.2 billion respectively as of October 1. What’s worrying is that over the last year Russian banks have seen their capital adequacy fall from over 18% in 2011 to 13.1% by October this year -- only a few percentage points over the CBR’s conservative minimum requirement of 10%. The CBR is well aware of the problems. It has restarted its lending programme to banks in the summer and extended the list of securities it will accept as collateral for short-term loans that allow banks to

Central Bank of Russia swings into action. borrow money to meet demands on their cash. The deputy governor of the CBR Alexei Ulyukaev followed up in September saying that the gross debt of Russia’s banking sector to the central bank is likely to double over the next three years to $192 billion-$224 billion to shore up the sector. The CBR surprised economists with a rate hike of 0.25% in September designed to cool the borrowing despite lacklustre economic growth. The CBR has set its own reserve requirements 25% higher than the Basel recommendations. The most effective step the CBR could take to bolster confidence in the banking sector was to announce an increase the retail deposit insurance limit.

Mansiisk autonomous district, the SeveroRogozhnikovskoye field in the Shpilman region and Lodochnoye field in East Siberia in 2012, we will thus draw the line under the era of the mineral reserve base on oil discovered in Soviet days,” Federal Agency for Subsoil Use head Igor Plesovskikh said . Two of the

GETTY IMAGES/FOTOBANK

t’s called the “deal of the century” that promises to transform the Russian oil landscape. In October, British oil major BP swapped its partners in Russia from the Anglo-Russian joint venture TNK-BP to the state-owned Rosneft in a $60 billion deal, spawning the biggest listed oil company in the world. BP sold its 50% in TNK-BP to Rosneft in a stock-and-cash deal that saw the British company become the biggest single shareholder in Rosneft after the government. At the same time Rosneft bought out the Russian AAR consortium that owned the other half of TNK-BP for a reported $28 billion. The merged entity will produce some 4 million barrels of oil a day, making Rosneft responsible for near half of Russia’s entire oil production. By and large, analysts have welcomed the deal despite the fact it will significantly boost the state’s role in the sector. Even President Vladimir Putin was slightly squeamish about increasing the government’s influence in Russia’s most important sector. “Both the government and I had mixed feelings when the idea of this project appeared,” Putin said at a meeting with the members of the international Valdai Discussion Club. “This, in general, is not in line with our trend to reduce the growth of the state sector.” However, the logic of the deal won: BP needs access to Russia’s oil reserves while Rosneft is in desperate need of BP’s management and technical expertise as Russia is running out of oil. Russia is currently the biggest exporter of oil in the world, but the fields that were developed for the most part in the Soviet-era are past their peak and production is beginning to decline in most of them. Moreover, before the end of the year the government intends to auction off its last three big unexploited oil fields. “If we complete the auctions on Imilor field in the Khanty-

maintain its current production levels, says Plesovskikh, but is currently spending only RUB180 billion. No new reserves will be discovered in the short to medium-term, according to the Federal Minerals agency. That’s why the deal with BP is so important to Rosneft. For most of the last two decades Russian oil companies have only had to upgrade Soviet facilities and improve efficiency. But as these wells run dry, analysts say that the Rosneft-BP deal is likely to catalyse a consolidation in the sector in much the same way as the dwindling access to oil international forced a consolidation between the constituent parts of the likes of TotalFinaElf (now Total again) and ExxonMobil. More global companies will also be invited into Russia’s traditionally closed hydrocarbon sector. “The Rosneft and BP deal will be followed by more deals in the Russian oil sector as it enters the next phase of development,” say Ildar Davletshin and oil and gas analysts at Renaissance Capital. “Russia urgently needs to replace depleting barrels from old legacy fields with new ones from much more challenging reservoirs in terms of their geology and geography… The most likely partners to cooperate with global majors will be state and state-backed companies.” At the same time it is anticipated that while the state has increased its hold on the oil and gas sector it will start to withdraw again in a few years time after Rosneft is added to the privatisation programme. The Russian government still plans to privatise Rosneft in 2013– 2014, depending on market conditions, First Deputy Prime Minister Igor Shuvalov said in October. “We have considered the sale of Rosneft’s shares, among others, for the coming year and 2014. We believe that it will be sold once the best time and opportunity arise. The management and the head of the government share this opinion,” Shuvalov stressed.

SHUTTERSTOCK/LEGION-MEDIA

BEN ARIS

The second of three stealth frigates that Russia built for India at the Yantar Shipyard in Baltic exclave of Kaliningrad was handed over to the Indian Navy on Nov 9. The handover ceremony of delivering the INS Tarkash warship was held in Kaliningrad and was attended by high-ranking military officers both from Russia and India. Russia and India signed a $1.6 billion contract on the construction of three modified Krivak III class (also known as Talwar class) guided missile frigates for India in 2006. The first frigate, INS Teg, joined the Indian Navy on April 27. The last in the series, the Trikand, will join the Indian Navy in mid-2013. RIA Novosti

ESPO to be quoted in oil price reports: WSJ According to the Wall Street Journal, Russia’s ESPO oil is to be quoted in oil price reports shortly along with Britain’s Brent and America’s WTI. Eastern Siberia and the Paciﬁc Ocean’s daily export is at 300,000 barrels. To win international quotation for its brand, it has to climb to at least 500,000 barrels. This threshold may be reached by 2015. “Everything will depend on how dynamically Russia enters the Asian-Paciﬁc markets, how Gazprom and other companies advance their eastern programmes,” says Alexander Yepishov, chief analyst of the Moscow International Energy Forum. RIBR

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IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA

Business Report WEDNESDAY NOVEMBER 21, 2012

Bonding over jewellery Russian buyers set for real deals, ask Indian companies to form marketing and distribution offices ALEXANDRA KATZ

$46 83% $16

RIBR

SHINING ADVANTAGES According to India’s Gem & Jewellery Export Promotion Council, India’s gems and jewellery exports grew to $46.36 billion in 2011. India’s jewellery exports to Russia increased to $8.2 million in 2011 while imports increased from $125.72 million in 2009 to $639.5 million last year. Clearly, there is a lot of potential, but price remains an important factor. “Indian companies offer very attractive prices. However, after paying import duties that account for more than 40% of the costs, the price becomes almost the same as products made in Russia,” says Irina Litvinova, project Director of Moscow Diamond Bourse. Viktor Tulupov, the owner of Tulupov Jewellery House, a jewellery manufacturer from Yekaterinburg, differs. “The cost of labour in India is at

bn is India’s gems and jewellery exports in 2011, says Gem & Jewellery Export Promotion Council.

is the increase in India’s gems and jewellery exports from 2009 to ‘11. REUTERS/VOSTOCK-PHOTO

ore jewels are set to glitter, and make India-Russia friendship brighter. Russian jewellers, known for a good eye for diamonds, are now catching up with global enthusiasm for Indian jewellery. The second Indo–Russian Jewellery Summit in Mumbai on October 29 brought together 15 jewellery manufacturers from India and 13 key Russian manufacturers, wholesalers and retailers who collectively have more than 5,000 outlets across Russia and CIS countries. The trade meet sought to push the envelope further than the first edition of the jewellery meet held a year ago and a ‘Diamond Summit’ held earlier in 2012. Unlike last time when a few deals had a lasting impact, as several Russian jewellers told RIBR, this time Russian buyers seemed ready for ‘real’ deals.

bn is Russian jewellery retail industry’s annual turnover.

Limited local manufacturing and heavy import duties are factors to consider in Russian diamond market. least three times less than in Russia. Indian price becomes competitive even after paying 40% taxes.”

JOURNEY TO THE EAST Considering heavy import duties and very limited local manufacturing in Russia, there is a lot of potential for Indian companies to establish themselves in Russia through distribution and marketing offices, say experts. “Custom duties for diamonds and diamond jewellery are a flat 20% on invoice value. On top of that, importers pay 1.2 inspection levy and 18% VAT. This raises the value of the imported jewellery to retailer by almost 42 %” says Alex Popov, Chairman of Indo Russian Jewellery Foundation and president of Moscow Diamond

Bourse. He adds that global jewellery brands like Cartier make substantial profits in Russia after establishing local distribution centres that import diamond jewellery at their own expense and sell them in the country at global retail prices. Popov suggests a similar model for Indian manufacturers. “There are few Indian companies, which have opened their offices in Russia and we suggest that all interested companies open their distribution centres in the country to promote their products. Bringing manufactured jewellery at their own expense, Indian companies can considerably reduce payable taxes,” he advises. “From the business size point of view, Indian companies are not that far from Cartier and others. However, it’s also a matter

of branding, business planning, mentality, and so on,” he says. According to the Moscow Diamond Bourse, there are some 4,500 manufacturers in Russia. The Russian retail industry’s annual turnover is estimated to reach around $16 billion. Getting Russian customers interested is a key challenge. “Most Russian consumers still consider Indian jewellery poor quality. This impression still dominates the Russian market,” says Andrey Yanchevskiy, general Manager of Goldex Ltd, a large Russian wholesaler already dealing with Indian suppliers. Kunal Vora, the director of Goldiam Jewellery, hopes that such a perception of Indian jewellery will change if there is greater interaction between Russian and Indian jewellers.

Alrosa closed deal with China’s giant It’s a wake-up call for Indian cutters who now process half of diamonds mined in Russia ELENA KISELYOVA Kommersant

ussian diamond monopoly Alrosa has embarked on a diversification drive, which is set to cause jitters to Indian diamond cutters who now process half of Russia’s mined diamonds. On November 13 the company signed a deal with Chow Tai Fook Jewellery Group Ltd, the largest jewellery brand in China, Hong Kong and Macao. The Hong Kong-registered company plans to buy at least $100 million worth of rough diamonds in Russia annually. “This will be a long-term commercial contract. By Chinese standards, the scope of cooperation that is being negotiated with Alrosa is quite modest. However, the very fact that cooperation with the largest Chinese diamond and jewellery maker has begun is extremely significant,” said a source close to Alrosa. The company has a slew of threeyear contracts with 24 long-term clients, half of which are due to expire in 2013. “One of Alrosa’s priorities when negotiating new long-term contracts will be the geographical diversification of its sales, as well as the practice of sales it developed during the ‘heavy market’ period,” the source said. Chow Tai Fook is capable of processing the quantum of rough diamonds comparable to what Alrosa currently supplies to its Indian customers. The new partner of Alrosa may eventually rival Indian diamond cutters. India accounts for the entire volume of the so-called “Indian goods” (smaller diamonds weighing from 0.1 to 0.15 carats), about one quarter of Alrosa’s production. Alrosa sold $500 million worth of rough diamonds to Indian

KOMMERSANT

TRADE: Mumbai summit ignites interest, opens new avenues for cooperation

Chow Tai Fook company has an eye on Russia’s rough diamond market . cutters – half of its export sales – in 2009. In March 2010, three-year contracts worth $490 million were signed with Indian diamond companies Rosy Blue, Diamond India Ltd and Ratilal Becharlal and Sons for rough diamonds. In 2011, Alrosa reported diamond output at 34.6 million carats worth about $4 billion. Sergey Goryainov, an expert with the diamond industry news agency Rough & Polished, attributes the anticipated contract with the Chinese to Alrosa’s attempts to build a stable sales policy. “Competition is quite strong now from Israeli and Indian diamond diamantaires. Indian companies are trying to monopolise the diamond-making market by exerting political leverage on diamond miners, including Alrosa,” he says. According to Goryainov, some large Israeli companies have been trying to set up production facilities in China to balance the expansion of the Indian diamond industry. Given this, a contract with China’s largest jewellery company will enable Alrosa to ensure the stability of its sales policy,” feels Goryainov.

POLITICS: Sergei Shoigu is a Putin ally and a four-star general with corruption-free record

New defence minister to focus on India issues DADAN UPADHYAY Specially for RIBR

he sudden dismissal of Defence Minister Anatoly Serdyukov by Russian President Vladimir Putin on November 6 on corruption allegations triggered off speculation about the revived power struggle at the Kremlin. Indeed the removal of Serdyukov, once a Putin loyalist, with its whiff of money and suspected adultery, is intriguing, but what’s more surprising is the appointment of serving Moscow Region governor and former Russian Emergency Situations Minister Sergei Shoigu, a four-star army general, as the new defence minister. President Valdimir Putin announced Shoigu’s appointment at a meeting with him at his

residence in Novo-Ogaryovo, outside Moscow. When Putin appointed Serdyukov as Defence Minister in 2007, he entrusted him with the job of carrying out reforms in the Armed Forces. In the past six years, he has radically changed the Armed Forces and terminated the old system of purchasing “obsolete weapons” from Russian military-industrial complex. In the process, Serdyukov created a strongly entrenched coterie of powerful enemies in the country’s defence establishment and among ambitious Kremlin figures, including Deputy Prime Minister Dmitry Rogozin, who oversees Russian defence industry, media reports said. The change of guard at the power-

ful defence ministry comes at a time when the Russian Armed Forces are in the midst of reforms which could also impact the future of the Indo-Russian military-technical cooperation. Shoigu is gearing up to face many challenges, including the modernisation of weapons for the army, improving the management system and controlling the widespread corruption in the defence establishment and defence industry. The new defence minister will also be urgently required to come to the grips of the issues which have marred the smooth functioning of the IndoRussian defence ties recently. He has taken charge at a time when India and Russia are currently engaged in finaliz-

It is hoped that Shoigu and Defence Minister A.K. Antony will forge personal chemistry to resolve irritants clouding bilateral defence ties

New defence minister Sergei Shoigu (left) and former minister Anatoly Serdyukov ing several major defence deals, which are expected to be signed during Putin’s visit to India on Dec 24. Shoigu will, therefore, have to acquaint himself and come to terms with the Indian side in order to resolve issues in the sphere of bilateral militarytechnical cooperation. Despite recent visits to New Delhi by Serdyukov and

Rogozin, India is not certain Russia would stick to the new delivery schedule of refurbished aircraft carrier Admiral Gorshkov (renamed INS Vikrmaditya) by 2013 fall or would not demand from India additional expenses on its renovation, leading Russian business daily Kommersant said. India is also concerned about the delays in other

is heading for polls in May and it is anybody’s guess as to when between now and early 2014 India too would have its general elections. If Dr. Singh’s visit is to take place, it has to be within the next few weeks and there is no attempt visible to prepare the public opinion. Delhi is piling onto Islamabad, assessing that Pakistan’s need of the high-level exchange at this juncture is greater than India’s. That brings up a volley of questions. To begin with, what is it that a visit at this juncture can hope to achieve for the Indian side? The plain answer is “very little”. The domestic politics in both India and Pakistan remain murky and there is an overall sense of drift. Meanwhile, the geopolitics of the region is also in great flux and a defining moment is coming up in 2014 when the

NATO troops in Afghanistan would have pulled out. India is, relatively speaking, better placed than ever before to cope with the emergent situation. There is excellent 3-way understanding between Washington, Delhi and Kabul. Delhi has successfully broken out of the regional isolation it faced. It took effort to dispel the impression that it is locked in a proxy war with Pakistan in the Hindu Kush and has jettisoned its visceral opposition to the Taliban. But looking ahead, it would hope for a genuine shift in Pakistan’s policy of projecting its power into Afghanistan through militant surrogates. This question is directly linked to the problem of transborder terrorism affecting India’s security and impacts on the trajectory of a predictable relationship with Pakistan. Pakistan is coming under enormous pressure from the international community. A Taliban takeover in Kabul can only happen through direct Pakistani invasion

projects such as the three Talwar Class follow on projects. There are also reportedly tensions between the two sides about the implementation of another showpiece project of the Fifth-Generation Fighter Aircraft (FGFA). India had also repeatedly expressed concern over the protected delays of the joint project to develop a multirole Military Transport Aircraft (MTA). Shoigu (57), a four-star army general, is best-known for his long tenure as Emergency Situations Minister and during two decades of his public life, he has never been tainted with any corruption scandal. Moreover, he has also remained a close and trusted Putin ally, but with little connection to the Russian military itself. On his part, Shoigu’s Indian counterpart Antony is also reputed for his integrity in the public life and is trying to put into place systems for indigenisation of defence research and development and production in India. It is hoped that the two defence ministers will develop “personal chemistry” and help resolve the irritants to scale up bilateral military-technical cooperation between India and Russia to new heights.

THE BIG PICTURE

Waiting for the Pakistani balm M.K. BHADRAKUMAR Foreign policy analyst

he birth anniversary of the great sage of the Sikh religion Guru Nanak falls on November 27. Suspense lingers whether the Indian Prime Minister Manmohan Singh would still schedule his long-pending visit to Pakistan coinciding with the anniversary. Pakistan thought up the brilliant ploy, estimating that Dr. Singh who is a devout Sikh, cannot possibly spurn the overture. Quite obviously, Pakistan overlooked that India also has another anniversary on its calendar in late November – the terrorist strikes on Mumbai on

November 26 four years ago. Pakistan has been manifestly keen for a visit by the Indian prime minister, while India kept parrying. Both sides linked the visit originally to some tangible results such as the signing of at least one of the “doable” agreements on the many contentious issues that set apart the two countries, especially an agreement on the Siachen dispute. However, the Indian military rejects withdrawal of troops from Saltoro Ridge and the political leadership cannot apparently overrule the military’s op-

position. Pakistan has since reconciled with the fact that there isn’t going to be a Siachen agreement. On the contrary, Delhi’s pre-conditions continue. The Indian officials did some kite-flying over the weekend. In sum, they suggested that Pakistan has been conveying some “interesting positive signals” but should go the extra league by fulfilling certain unspecified Indian expectations through “a small deliverable”, which would act as a “balm” on their sense of “hurt” and “bitterness”, presumably over the 26/11 terrorist strikes. They made it sound as if Delhi still has an open mind on scheduling the visit and there is a “very short window” still available. But the grandstanding seems more for record. The point is, one side has to give way – and give way pretty soon. Pakistan

of Afghanistan as in the mid-1990s. This can be ruled out in the present scenario. The alternative for Pakistan is to persuade the Taliban to settle for a power-sharing arrangement with other Afghan groups. But this is a decision that Pakistan has to take and it is by no means an easy decision. Suffice to say, if a genuine course correction indeed takes place in the Pakistani policies, an altogether new matrix could develop in the IndiaPakistan dialogue. It is one of those “all-or-nothing” moments. While the balm may do for the present to alleviate the “hurt” and enable Dr. Singh to amble across the border with Pakistan, the wound itself needs healing so that the two countries can walk the talk. THE VIEWS EXPRESSED ARE PERSONAL.

Read M.K.Bhadrakumar’s blog at indrus.in

IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA

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Business Report WEDNESDAY NOVEMBER 21, 2012

INNOVATION: New plane to replace ageing An-12 and An-26 ﬂeet; production starts in ‘19, plan for sales in third countries

MTA deal lifts up defence ties, maiden ﬂight set for 2017 EVGENY LITOVKIN

nical infrastructure for them to work together with their Russian counterparts. The work on the MTA is a much promising project, with engineers from both countries designing the new plane from scratch, starting from the drawing board to build a product that would have no direct rivals. Getting to the deal wasn’t easy, and involved many twists and turns. In fact, the project was hanging by a thread until the last moment. The Ilyushin Aircraft Design Bureau first started talks with the HAL over a new military transport plane back in 2000. The partners signed a memorandum of understanding on the start of joint development of the MTA in 2001, hoping that the new machine would be ready for its maiden flight three to five years later. The Indian Air Force was planning

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ndia and Russia have finally sealed a $600 million deal for the initial design phase for the joint development of the Multirole Transport Aircraft (MTA). This showpiece project of bilateral cooperation seeks to replace the ageing An-12 and An-26 fleet. It promises to be an alternative to the American-made C-130 Hercules recently purchased by the Indian Air Force. By entering into this contract, Russia is hoping to restore its seriously weakened positions in military and technical cooperation with India, while India is aiming to achieve transport independence from outside suppliers. The contract for MTA development and manufacture has been signed between the Russian-Indian joint venture MTAL, (the customer), the Indian corporation Hindustan Aeronautics Limited (HAL), and the Russian company UAC-Transport Aircraft (TS) as the contractors. The project is valued at $600 million, half of which is to be invested by the Indian government through the state-owned Hindustan Aeronautics and the other half by Russia through the state-owned corporation Rosoboronexport and the United Aircraft-Building Corporation (UAC). Officials of both countries’ defence ministries will monitor the aircraft’s compliance with the requirements at every stage. India holds a 50% interest in the JV, with the Russian state-owned companies holding 25% each. A large group of Indian engineers is coming to Moscow to start joint work on the project. The UAC-TS has already prepared all the requisite engineering and tech-

to replace its fleet of medium-lift military transport aircraft completely by 2013. In 2002, India and Russia agreed to set up a JV to produce the plane. Subsequently, however, the project stalled. Desperate to get new planes, the IAF eventually bought the American-made C-130 Hercules in what appeared to be a fatal blow to the MTA project. The technology transfer, however, proved to be a tricky business. The new partner, sources disclosed, has been reluctant to transfer the Hercules technology or manufacturing licence to India. Subsequently, the HAL was forced to rekindle moribund negotiations with the UAC. An intergovernmental intellectual property protection agreement has been signed, resolving many issues surrounding MTA development.

Russian and Indian engineers are designing the $600 million Multirole Transport Aircraft (MTA) from scratch.

All-weather plane with range of 4,700 km SERGEI IVANOV RIBR

he MTA will be a twin-engine, all-weather plane with a range of 4,700 km and a carrying capacity of a 12,000 kg payload or 2,000 km with a 20,000 kg payload, capable of flying in any geographical or climatic conditions, day or night. The plane would be able to take off and land at high-altitude aerodromes upto 3,300 metres above sea level, including on unpaved runways. The MTA will have to meet the global fuel efficiency standards. As a military transport aircraft, the MTA would be able to carry upto 140 troops or land upto 90 paratroopers or to haul and land military cargo and

equipment with or without parachutes. Russian and Indian Air Force will become anchor customers of the planes. The Russian Air Force has already said it would acquire at least 150 new machines. India is Russia’s top strategic partner in the field of military and technical cooperation. More than 80% of its weapons and military equipment is Soviet- or Russian-made. Moscow is planning to supply more than $14 bn worth of armaments and material to India by 2015 alone. Yet, for a number of political and technical reasons, in recent years, India has been increasingly opting for US- and EU-made aircraft. Just recently, Russia has lost a series of

AVIATION: State-controlled Aeroﬂot set to join the fray

Low-cost airlines eyeing growing Russian market In a potential bonanza for travellers, a slew of international carriers is set to intensify competition for a share of the pie in budget segment The Moscow News

PHOTOSHOT/VOSTOCK-PHOTO

Still a long way to go, obstacles on the way... No international company is allowed to operate domestic flights in Russia, as the airline business has been declared a national strategic industry. Local aviation companies, including the Russian national air carrier Aeroflot as well as smaller players in the market, have promised to launch their own budget routes, but haven’t done so yet.The aircraft import-duty regime is a key

ing to sacrifice its monopoly on more than 30 international routes, company head Vitaly Savelyov told President Vladimir Putin in late October. Savelyov laid out conditions to be met before Aeroflot can start setting up a national budget carrier, including permission for airlines to sell nonrefundable tickets and creation of “special airports” for low-cost carriers, says a

obstacle. “Today, Airbus 320 and Boeing 737-700, the only aircraft suitable for the low cost-model, are subject to 20 percent duty with the economy class [seating] configuration required for low-cost carriers but are free of duty with a business class [seating configuration],” says Dmitry Chernyak, a former managing director at A1, the majority shareholder in Avianova.

transcript on the Kremlin website. He added that Russian Air Code and federal aviation laws must be changed,for the airline to sell non-refundable tickets, and charge passengers for baggage and in-flight meals. “The low-cost airline should also have its own airport.There are airports around Moscow that could serve as a centre for low-cost airlines,” he says.

Design and capacities of the MTA plane.

key tenders to supply India with light fighter jets, military transport planes, assault and heavy-lift cargo helicopters and anti-submarine aircraft. The combined value of those deals runs into billions of dollars. A key reason for these setbacks is that New Delhi has all but exhausted the list of Russian weapons- and military equipment-related know-how and would rather move forward by receiving not just the equipment, but also the technology required to design and manufacture it. It is precisely along these lines that the super-sonic cruise missile BraMos is being jointly designed as part of the 5th generation fighter jet development project.

Flying high: Investors upbeat on regional airports upgrade Russian government backs private players to increase flights between smaller cities, which will reduce dependence on Moscow air cluster NADEZHDA MERESHKO Expert magazine

KRISTEN BLYTH lying to Moscow does not come cheap. Currently, a few international low-cost air carriers fly to Russia, including Germany’s Air Berlin and Germanwings, Spain’s Vueling Airlines, Norway’s Norwegian, Austria’s Niki, and the UAE-based companies Air Arabia and Flydubai. EasyJet, a British low-cost carrier, announced in late October that it will start direct flights between London’s Gatwick and Moscow’s Domodedovo airports. The UK regulator has allowed Easyjet to become the second national air carrier flying to Russia. Irish lowcost Ryanair is also eyeing the Russian market. The transport ministry of Russia has got a request from Ireland’s foreign ministry to allow Ryanair to operate flights between the two countries. Last month, Deputy Prime Minister Igor Shuvalov ordered the Transport Ministry to look into various options for opening Russian market for international lowcost airlines. “We are talking about allowing discounters to operate on some air-routes, where their technologies, investments and experience in management could strengthen competition and lower service prices for Russian customers,” says an aide in Shuvalov’s office. Citing concern over high domestic ticket prices, the Federal Anti-Monopoly Service announced mid-October that it is considering granting foreign budget operators access to domestic airspace: a not-so-subtle hint to Russia’s reigning airline giants. Russian state-controlled airline Aeroflot has woken up to the challenge – it plans to start a low-cost airline in less than a year and is also will-

Both parties are now upbeat about the project’s prospects. “It is important for us not only in terms of retaining India as a strategic partner and a promising market but also from the standpoint of obtaining a new, advanced aircraft for our own Air Force, with the added benefit of shared risks and funding,” says Prof. Vadim Kozlin of the Academy of Military Sciences. The UAC is hoping that, by 2015–2020, the new transport plane will become an alternative to the An-12, An-26 and the Americanmade C-130 Hercules. Sales in the third countries’ markets are expected to increase the number of the planes at least upto 250. The MTA is expected to make its maiden flight in 2017, with serial production to start in 2019.

PRESS PHOTO

Finally, Moscow and New Delhi have resolved their festering differences over the Multi-role Transport Aircraft, which is seen as a solid alternative to the US-made C-130 Hercules

op Russian investment companies have begun betting big time on regional airports, hoping that the future of Russian air travel lies in connecting flights. The government’s willingness to fund renovation of runways in these regional airports has acted as an added incentive. Russia already boasts three large airport holdings that control the regional airports with the highest passenger traffic. These include the airport division of Viktor Vekselberg’s Renova; Basel Aero, part of Oleg Deripaska’s Basic Element; and Novaport – a subsidiary of Roman Trotsenko’s AEON Corporation. They control 15 regional airports, some of which are expected to become fullfledged hub airports. These include: Koltsovo in Yekaterinburg, which is controlled by Renova; Tolmachevo in Novosibirsk (owned by Novaport); the Krasnodar airport (owned by Basel Aero); and Samara’s Kurumoch Airport, which has been taken over by Renova. The government is likely to invest in the restoration of runways at airports that have large private investors. Other airports rely completely on financing from federal and regional governments. Today the transport infrastructure that

connects Russia’s regions is tied to the Moscow Air Cluster (MAC), which is inefficient not only for the consumer, but also affects the economy. If a traveller needs to fly from Kazan to Samara, which is just 180 miles apart, he or she will have to travel via Moscow, which is over 600 miles away. Upgrading key regional airports will make it possible to use state grants to encourage airline carriers to increase connecting flights to neighbouring cities and to develop transport connection between regional centres, bypassing Moscow. This year, the government allocated $31 million for financing of inter-regional air transportation, a first step toward a hub network with a decreased dependence on the Moscow Air Cluster. About 200 out of Russia’s 300 operating airports are of no interest to private investors due to their low passenger traffic. Only several dozen Russia’s airports are considered good investments as they have passenger traffic of at least 500,000 people a year, or the potential to reach that level. Analysts are confident that the government will coordinate plans for runway upgrades more closely with those of private investors in airport development. “The government doesn’t want to invest in a high-level runway

Airports with highest passenger trafﬁc

$31

mn was allocated by the government for ﬁnancing of interregional air transportation in 2012.

$5.5

bn will be spent on airports in 2013-2015, 80% of the sum for regional airports.

0.5

mn people should be annual passenger traﬃc for an airport to be considered a good investment.

with poor airport infrastructure. It gives priority to the projects backed by private investors,” says Evgeny Chudnovsky, director general of the Koltsovo Airport.

IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA

I |N |T |E |R |N |E |T

Business Report WEDNESDAY NOVEMBER 21, 2012

Big 2 slug it out for social networks’ pie

Virtual World: Portals hosting porn or promoting drug use are in the ﬁring line

Net blacklist law sparks debate

Odnoklassniki, which reunites schoolmates online, gives tough fight to Vkontakte

A law targeting websites with content harmful to minors has revived fears of censorship in Russia ANNA ARUTUNYAN RIBR

ILAN GOREN

law that seeks to protect children from harmful internet content by allowing the government to block sites in Russia became operational on November 1. The so-called Internet blacklist law has sparked an impassioned debate across the Russian society on whether it is a ploy to suppress dissent by giving the authorities more power to censor content they don’t like or whether it’s a legitimate tool to shield children from mindless violence and pornography in cyber space. Debates have raged since Russia’s parliament passed the legislation in July. The law entails creating a register for websites hosting “illegal content” such as child pornography or the promotion of suicide or drug use. Many fear that the law is a ruse to crack down on opposition voices after the antiKremlin protests erupted in December last year. After President Vladimir took charge in May 2012, the parliament hiked fines for unauthorised rallies and passed a bill forcing NGOs with foreign funding to register as foreign agents. Many see the Internet blacklist as a third step to curb opposition. The Presidential Human Rights Commission has described the law as an attempt to introduce censorship, which is unconstitutional in Russia. The Russian sector of the Wikipedia website shut down for a day in protest. Media and Communications Minister Nikolai Nikoforov has vigorously tried to dispel fears. “This law has no objective to introduce censorship or any sort of influence on the media,” Russian news agencies quoted him as saying. He admitted that various Internet sites are often arbitrarily blocked, but assured that “the law would allow this process to be regulated somehow”. Artem Tolkachev, a lawyer at Tolkachev & Partners, argues that law enforcement agencies already have instruments to block extremist Internet sites. A case in point is the recent controversy over the “Innocence

Special to RIBR

Kids today have greater access to information via internet than before and therefore, allegedly, are more exposed to dangers of web.

Opinion poll

Political meddling or protection of children? The net blacklist law started hogging media limelight after blocking the content of many websites popular in the Russian internet subclulture, including 4chan and Lurkmor. But it’s early to say whether there is a political undercurrent behind the bans since these websites were blacklisted on the charge of promoting drug use of Muslims”, an American video trailer that sparked violent protests in the Arab world. The Russian law enforcement authorities admitted the video to be illegal, but even before the court ruling, reports had surfaced that the access to YouTube had been blocked in Omsk and Volgograd. Local Internet providers, however, had rejected these reports. Tolkachev argues that the law will make regulations more transpar-

and suicide, and no signs of political pressure were spotted. Besides, after the removal of the improper content, the websites resumed their activities. Most Russians believe the law will protect children from harmful information. In a survey by Levada Center, some 63% respondents backed the censorship of harmful content. ent. “Right now, a site can be shut down if there’s a court ruling that finds it extremist. There’s also a quasi-legal method. At least this law introduces specific rules.” Industry leaders don’t buy this argument. “This law does not limit the powers of various law enforcement agencies to block sites,” says Anton Nosik, an executive at blogging website LiveJournal. “It just offers new procedures.”

GETTY IMAGES/FOTOBANK

n times of plenty, people have the luxury to reminisce and connect with long-lost friends and memories of those good old days. Albert Popkov, a young Russian entrepreneur, was quick to see a big-ticket business idea in this universal urge to connect. In 2006, as Russia was in the throes of a decade-long economic boom, he got this bright idea to create Odnoklassniki (Russian for “Classmates”), a website, which combines reuniting old schoolmates with social networking. Within a year, one 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 former next door neighbour. The site won the country’s top web prizes. In 2008, Popkov was named GQ magazine’s “businessman of the year”. The portal flourished, notching up almost 30 million visitors from Russian-speaking countries by July 2008. Today, the site boasts the same number of visitors. It’s the second most popular social network in Russia, vying to overtake the leader, Vkontakte, which boasts 35 million visits a day. Odnoklassniki earned $103 million (3.2 billion rubles) in the first three quarters of 2011, making a net profit of $45 million (1.4 billion rubles). When Durov launched Vkontakte (meaning “in touch”) in late 2006, he was accused of brazenly cloning Facebook, ripping off even the colour scheme. Yet the English philology student who went to Saint Petersburg State University forged ahead with his brainchild, offering users free sharing of video and audio files. Accusations of intellectual property theft were quick to fly, but users just loved free content. They still do. Not surprisingly, Vkontakte revenue swelled in 2011 to $106 million (3.29 billion rubles) while net profit rose to $16.6 million (516 million rubles),

Pavel Durov, 27 year-old founder of a popular Russian social network Vkontakte. marking an upsurge of 41.7 percent and 13.9 percent respectively over the previous year. Facebook, which made its first serious foray into the Russian market two years ago, is now estimated to have 14 million registered users, and is popular among business owners who like to promote themselves on other media. Ten thousand advertisers are registered with the network, each paying in advance an average of $645. Analysts estimate Vkontakte to be worth over a billion dollars and Durov’s personal fortune at $260 million. Even better, not everything users seek is free. Paid services offered by Odnoklassniki include anything from social gaming, through the right to remain anonymous while peeking at another user’s page, and all the way to sending virtual gifts like songs, which can cost up to $2.50 each. Analysts say the Russian-language social media may be entering its most competitive period ever, particularly since Facebook has garnered a 20 percent market share. German Klimenko, editor of audience monitoring website liveinternet.ru, describes as “an impressive foothold”. He predicts that the two big local players will be “pitched in a battle for every subscriber.”

INTERNET: Getting started takes only 10 minutes; you can be a travel agent or an insurance seller and get new clients...

Nothing unofﬁcial, let your freelance dreams go online Welcome to workle.ru, a pioneering Russian start-up that seeks to redefine online employment by making freelance work official, rewarding and fun minus the tedium of regular 9-5 jobs RIBR

orget about a pension and decent salary and go freelance, or you put on a suit and toil in the office from dawn till dusk. But don’t worry: you may have better options. Welcome to Workle, the world’s first online employment and workforce planning company. Brainchild of a group of young Russian entrepreneurs, the portal not only makes freelance work official, but also provides opportunities to people who may not have the necessary experience to get on the employment ladder. According to the creators of the pioneering start-up, they are implementing a new e-work format that offers online jobs to anyone willing to work, and on favourable terms. “E-work is a very large sector, and freelance is just a part of it. We are creating jobs in finance, insurance and tourism, as well as jobs in sales. We are doing this because we want to give people without relevant experience a chance to work while they are studying for their degrees online,” says Workle’s mastermind Vladimir Gorbunov. “We want to

equip them with the same tools that employees of, say, insurance companies have when they work in an office. The only difference is it’s now online.” It turns out that getting started with Workle is very easy. It takes a mere 10 minutes to register, after which you can try your hand as a sales manager of insurance or banking products, or even a travel agent for one of 40 Workle clients. I chose to be a travel agent. The Workle system is no joke – every user has to sign an employment contract with the company, which essentially acts as a lawyer and tax agent, assuming the task of drawing up an employment record book, calculating and paying taxes and issuing employee earnings certificates. Workle applies individual commission fees, which is an average 15-20% of the total sales of each agent deducted from the amount due to the employer, a Workle client. Working conditions are so good that the number of Workle’s virtual consultants is increasing every day, with over 77,500 users registered on its website. Workle even offers free training to those new to the profession, with a

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valid Workle certificate confirming the person’s competencies issued upon completion. The training period largely depends on the employee’s diligence. For instance, a beginner’s course for travel agents may be completed in 10 days. Each travel agent has his own online office linked up to various online tools, including those for travel package search, booking and maintaining a client database. So how do you go about looking for clients? Workle does not only give the necessary tools, it also provides answers to such questions. New sales managers usually offer their services to their friends and family first. I sold my first travel package to Turkey to my parents and received my first commission of 5,000 roubles within three days. Encouraged, I tapped my contact list from the Vkontakte social network and sent my friends a notice that I was now employed as a travel agent. Quite soon, a client from Penza contacted me in the social network asking to find a trip to Spain. I got them a good deal. Off they went on a lovely holiday. And I got my well-earned fee.

All about online job match-maker... Workle.ru is a startup seeking to fill in the gap between companies looking for human resources offline and people seeking work-fromhome jobs online. Employers make up lists of their vacant positions and outsource the services. Acting as a link, or an intermediary, Workle earns its commission from the earnings of each outsourced employee (experts put its revenue at some $4 million a year). The jobs on offer include travel, insurance and banking sales agents. Workle was set up in 2009 by Vladimir Gorbunov, a specialist in financial investment. The project, with investment of over 100 million roubles, currently employs 65 people. Workle expects to reach the break-even point by the end of 2012.

PHOTOXPRESS

TATYANA SHCHENKOVA

Freelance in Russia

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