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(MICEX-RTS, Nov. 19, 2012-Jan. 18, 2013)

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NORILSK NICKEL AVTOVAZ MAGNIT SBERBANK AEROFLOT

Sberbank Investment Research

' There’s something to celebrate

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31.5

in the rapid improvement we see in institutional quality in countries like Russia.'

31 30.5

NIALL FERGUSON, PROFESSOR OF HISTORY HARVARD UNIVERSITY

30 Nov 5 Nov 19 Dec 3 Dec 17 Dec 31 Jan 14 Jan 23 GETTY IMAGES/FOTOBANK

Saturday, February 9, 2013

IN THIS ISSUE

Globalization Economic thinkers call for Russia’s full integration into the world economy

A Call for Reform

BUSINESS & POLITICS

Business Champion Ombudsman Boris Titov Stands Up for Judicial Rights PAGE 2

POLITICS & BUSINESS

Russians Sobering Up New Alcohol Laws Could Help To Boost Russia’s Economy PAGE 3

SPECIAL REPORT

New Rating for Russia’s Top 50 Start-Ups © EKATERINA CHESNOKOVA/RIA NOVOSTI

Expanding Tech Horizons

Sberbank CEO German Gref: ‘In our heads, we are still not in the WTO.’ In Davos and Moscow, Mr. Gref stressed the urgency of Mr. Putin’s reform plan.

Global economic thinkers and business leaders in Davos and Moscow nudged Russia forward in its reform of economic institutions globally and at home. ELENA SHIPILOVA RUSSIAN BUSINESS INSIGHT

After assuming the G20 presidency for 2013, Russia has been grabbing international headlines with differing scenarios over its development, and with some exuberant parties at the World Economic Forum in Davos. In his introductory remarks, Sberbank CEO German Gref referred to three pessimistic scenarios for

Russia through 2030 developed by the Davos forum’s experts. The scenarios are possible only“when nothing is done in the country, when it is developing as it is developing,” Mr. Gref said. The Davos scenarios are not in line with a fourth, optimistic scenario of institutional reform presented by Russia’s prime minister, Dmitry Medvedev, who was speaking at Davos for the third time in five years. Medvedev stressed that Russia’s growing integration into the global economy, including through its accession to the WTO, “requires a considerable increase in the competitive power of Rus-

sian companies,” in labor productivity and energy costs. Several top Russian business leaders at Davos also made strong calls for reform, underpinning President Vladimir Putin’s ambitious agenda to jump 100 places in the World Bank’s Ease of Doing Business index and to diversify its economy. Ruben Vardanian, co-head of Sberbank-CIB, the bank’s investment banking arm, lamented: “[Foreigners still] can’t understand the rules of the game [in Russia].” Meanwhile, billionaire Oleg Deripaska lamented Russia’s high lending rates, which he said undermined investment and value-

added economic growth. The strong message from the Russians in Davos reinforced similar calls a week earlier by foreign and Russian experts at an economic forum in Moscow. “You have the institutions, people and capital,” Pascal Lamy, Director-General of the World Trade Organization, told delegates at the Gaidar Economic Forum, named for the late Yegor Gaidar, a leading economic reformer in the 1990s. “You just have to combine these three elements into an effective economic model.”

KOMMERSANT

PAGES 4-5

MONEY & MARKETS

The Truth About Capital Flight Why Figures Are Too High On Funds Leaving Russia PAGE 6

CONTINUED ON PAGE 6

FEATURE

Start-ups Angel investors and venture capitalists are showing great interest in Russian innovation

Getting a Piece of the Next Big E-Commerce Idea There is no shortage of great new business ideas coming out of Russia, offering good ground-level opportunities for savvy investors. BEN ARIS SPECIAL TO RUSSIAN BUSINESS INSIGHT

PHOTOXPRESS

Oskar Hartmann was born in Kazakhstan, a vast land of steppes in Central Asia, but raised in Germany, where he had his first experience of e-commerce – selling health foods to bodybuilders. It was when he came to Moscow in 2007 that he spotted a huge market opportunity: no one was selling designer-label-clothes online to fashion-conscious Russian women. “I wanted to go into business and I was looking for something that could become big, that could be developed over the next 20 years,” he says.“I was looking for something I could get emotional about, not something connected to official bureaucracy. I wanted something that would lift the public.” Raising just €100,000 ($133,000) from his friends and family members he launched KupiVIP, which

KupiVIP’s Oskar Hartmann is bringing designer labels to online customers.

quickly became Russia’s premier online fashion retailer. The company flourished and, ironically, the economic crisis that hit in its first year of operation was a boon: Mr. Hartmann says high-end retailers who saw sales plummet in the depths of the crisis were desperate for new distribution channels. For all of 2009 KupiVIP was signing up a brand a day. And sales soared. The company

clocked up turnover of $50 million last year and expects to be selling hundreds of millions of dollars of goods within a few years, as Russia’s nascent e-commerce business reaches maturity. Russia’s Internet is on fire, but raising money to launch a company remains a hurdle. In December 2012, 67% of Russians aged 12-54 were online, or some 95 million people,

according to research firm TNS Gallup, just short of the 70%-80% Mr. Hartmann estimates is the saturation point for all markets. This is well up from the 24% online in 2006, according to pollster VTsIOM. This fast growth has piqued the curiosity of Russian angel investors, or wealthy individuals, and raising the first $100,000 to $1 million for start-ups is relatively easy, as Moscow has the highest concentration of billionaires in the world. KupiVIP’s rival KupiKupon is also a daily discounter and its four Uzbek founders, all in their 20s, raised $1 million from an Uzbek billionaire after only a few weeks of hunting for financing. However, getting the next round of investment, between $5 million and $50 million, is the tricky bit. Today there are only a handful of private equity or venture capital funds operating on the Russian market. By far the biggest is Baring Vostok Capital Partners, which raised a new $1.5 billion fund at the end of 2012 and stands behind some of Russia’s best-known Internet companies, such asYandex, Russia’s answer to Google. Russia Partners is another domestic fund that has been active in the e-commerce space. These two funds together account for the lion’s share of domestic investments by professional funds into e-commerce. CONTINUED ON PAGE 5

An Island of Innovation Cool Ideas at Red October

PRESS PHOTO

A Weekend in Kazan Tatarstan’s Capital Offers a Fusion of Europe and Asia PAGE 8

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Medvedev in Davos: Making Russia’s Investment Case RBTH.RU/BUSINESS

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Politics & Business

NEWS IN BRIEF

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Corruption A series of arrests and firings may have less to do with politics than economics

Putin’s Anti-Graft Campaign Begins to Bite

• Russians are split over the efficacy of the Kremlin’s anti-corruption campaign. Around 45% said it would not amount to anything, while a similar percentage said it would make a difference. • Russian gay activists were beaten up by Russian Orthodox protesters during a rally against a proposed federal law banning gay propaganda outside the State Duma, the country’s lower house of parliament. The vote on the bill was subsequently delayed.

A wave of firings at state firms is prompting investors to believe that the crackdown may be for real.

• One in three economically active Russians works in the shadow economy, the Federal State Statistics Service said this week. The crisis has seen the size of the shadow economy increase from a low of 20%-25% through the boom years.

BEN ARIS

• The number of Russians willing to keep their savings in banks is up to two-thirds from onequarter a decade ago, according to the Central Bank of Russia. However, investment in securities or mutual funds remains extremely low, it says. Only 28% of the population have any savings.

• Credit cards have taken off in Russia with the number of loans issued using plastic cards up 74.8% in 2012, the National Credit History Bureau reports. The growth of auto and consumer loans was half as rapid (37%). • Four miners died in a coal mine in Siberia when it was filled with smoke. The authorities have opened a criminal investigation for negligence at the Kemerovo Region mine. The accident follows a broader campaign to improve safety in the country’s mines following the deadly Ulyanovskaya accident of 2007 which gained national attention and resulted in over 100 deaths. • Russian billionaire Alexander Lebedev’s National Reserve Bank has nixed a plan to issue Alexei Navalny plastic cards, named for a leading opposition activist. Mr. Lebedev, the owner of the London Evening Standard newspaper, has been divesting from his Russian assets, claiming official pressure. He also faces a possible jail sentence after punching a fellow guest on live TV last year.

PHOTOSHOT/VOSTOCK-PHOTO

• Russia refused to register the Pirate Party because it has nothing to do with water. The party is a local version of the Swedish group that promotes e-democracy and freedom of information. The ministry said that “pirates” only exist on seas and rivers and refused the registration on the grounds that these pirates are landlubbers.

a utilities analyst with Moscow investment bank Renaissance Capital. The same week, ex-Agricultural MinisterYelena Skrynnik was called in by the Interior Ministry for questioning after she was linked in a state TV documentary to a $1.3 billion fraud while running RosAgroLeasing, where she worked before becoming a minister in 2009. Mrs. Skrynnik has denied the charges and threatened to sue the TV station. Then in November, Yury Urlichich, the designer of satellite navigation system Glonass, Russia’s answer to GPS, was fired amid allegations that $200 million had been embezzled. Two weeks later he stepped down as CEO of Russian Space Systems, a key Glonass contractor. The same month, the head of Rosavtodor, the state agency in charge of Russia’s road system, was sacked over the alleged misuse of state funds, while the home of Alexander Provotorov, the CEO of the state fixed-line telecoms operator Rostelecom, was raided by police in a graft investigation. And finally that month, the first arrests were made over the misuse of funds allocated for the Asia-Pacific Economic Cooperation summit, which Russia hosted in Vladi-

IN HIS OWN WORDS

Vladimir Putin PRESIDENT RUSSIAN FEDERATION

Don’t cheer so soon, you might not like what I am going to say next... The law must regulate the activities of government members, presidential administration officials and also the deputies of the upper and lower houses of parliament.”

to company insiders. The investigation was ordered by Deputy Prime Minister Arkady Dvorkovich. “Dvorkovich ordered that the facts be checked and – if they were confirmed – asked the company to ‘make staffing decisions at the corporate level,’”saysVladimir Skylar,

vostok in September.The government invested over $20 billion into fancy new infrastructure for the Pacific port, including a state-of-the-art $1 billion suspension bridge. Officials are suspected of creaming off millions in backhanders and other scams. One senior Moscow banker says the anticorruption crackdown could well be for real.“I know that all of this could be mainly noise from the local press, but firings and arrests

The Kremlin has stepped up its anti-graft efforts, with a series of laws to increase the transparency of government. have taken place, so it’s not purely noise,” he says, speaking on condition of anonymity. The state has also begun to institutionalize its antigraft measures. A year ago, Putin forbade stateowned companies in the power sector to subcontract companies where the ultimate beneficial ownership was not known.The government has also passed laws forcing members of parliament and state officials to declare their incomes and assets. And similar laws have been passed for state enterprises.

• A crack has appeared in the Ukraine’s stonewall against Russian pressure to join the Customs Union. With its economy looking increasingly wobbly, Kyiv said that it was studying conditions under which it could join Eastern Europe’s new trade bloc. The government also suggested it may accept a Russian deal to cut gas prices as part of its negotiation with the IMF to restart a $15.2 billion stand-by loan program.

Boris Titov, Russia’s foremost producer of sparkling wines, knows all too well what it’s like to face pressure from officials. But now, as presidential commissioner for entrepreneurs’ rights, he is helping businessmen successfully fight such cases through the courts. TIM WALL RUSSIAN BUSINESS INSIGHT

• Russia has delivered the first tanker of European LNG to Japan via the ‘northern route’ – crossing the Arctic north of Russia instead of sailing around Africa. The ice-encrusted route significantly cuts the time, and cost, of shipping energy to East Asia.

Mr. Titov, whose SVL Group produces Abrau-Durso sparkling wines in Krasnodar, on Russia’s Black Sea coast, says he was once the victim of an unjustified “raider attack” by people trying to take his business away from him. “I had some problems in my life, I was attacked,”Mr. Titov says, talking to Russia Business Insight in the modest offices of Delovaya Rossiya, a business association, at Moscow’s World Trade Center. “I was questioned by prosecutors and even had to stay out of the country for some time.” At that time Mr. Titov was helped out by his friends, he says. “Not all businessmen have friends that can help, so [for them the commissioner’s office] will be a friend.” The problems Mr. Titov is trying to solve – when businessmen face problems created by corrupt officials – are very real, according to a recent survey by Opora, another business association. Some 13% of Russian businessmen admit to paying kickbacks to officials, while 29% refuse to even

speak about the issue, the survey showed. One-third of respondents complained that it was the police who “created problems” for their business – higher even than the 21% who said so about the mafia. Last summer Mr. Titov, the head of Delovaya Rossiya, was tapped by President Vladimir Putin to become Russia’s first presidential commissioner for entrepreneurs’ rights. “The business climate is the main requisite for increasing the flow of investment,”Mr. Putin stated last October. “Without that, we’ll be unable to develop our economy and secure the main thing – maintain the pace of economic growth.” The relevance of the commissioner’s office can’t be overestimated, Mr. Titov says. “Russian businessmen are attacked by raiders, who sometimes use the power of officials, or the raiders are officials. They try to start criminal investigations and use this as an instrument to make businesses [pay] big bribes [to stop an investigation] or even to sell their businesses to them for a cheap price.” According to Mr. Titov’s office, at the end of last year some 13,600 Russian businessmen were serving sentences in jail on economic charges, and about 5,000 were being held in pre-trial detention. The total number of owners of small and medium-size businesses stood at some three million in

VASILY SHAPOSHNIKOV/KOMMERSANT

A Champion for Entrepreneurs’ Rights

• An ex-EBRD official has been charged with bribery for the first time by the Russian authorities. Yelena Kotova is accused of trying to extract a $1.4 million bribe to facilitate a $95 million loan to a Canadian oil and gas company. The EBRD pulled Ms. Kotova’s diplomatic immunity after the Russian authorities presented their evidence.

• Russia’s economy may overtake Germany’s by 2020 to become the world’s fifth largest, says PricewaterhouseCoopers, adding that it will fall to sixth place in 2050 due to demographic problems.

Dismissed Defense Minister Anatoly Serdyukov (second right) came under scrutiny over questionable contracts.

Judicial Reform Using influence against raiders

• Russia’s response to the ‘Magnitsky Act’ has led to a ban on Americans adopting Russian children, prompting thousands to demonstrate in Moscow. The Magnitsky Act bars Russian officials connected with the death of hedge fund lawyer Sergei Magnitsky from travel to, or economic activity in, the U.S.

• Russian agricultural land is the cheapest in the world due to low demand. The most expensive land in Russia is in Krasnodar, at $1,700 per hectare, well below the $4,500 average per hectare in Argentina and $11,300 in Germany.

REUTERS

SPECIAL TO RUSSIAN BUSINESS INSIGHT

In November, the Kremlin’s anticorruption drive went up a gear when Defense Minister Anatoly Serdyukov was fired amid an investigation into the misappropriation of $97 million worth of state assets. Serdyukov’s dismissal was a serious escalation in the Kremlin’s efforts to tackle the endemic graft that has been getting worse in recent years. In November alone, the authorities initiated several high profile anticorruption actions, including arrests, investigations and sackings of senior officials and bosses of state-owned enterprises. Corruption costs the Russian state hundreds of billions of dollars a year, by some estimates – money it can no longer afford to lose. A tidal wave of petrodollars has meant the government could previously turn a blind eye to much of the stealing, but since the 2008 crisis economic growth has slowed, to an estimated 2.2% in the fourth quarter of 2012. The country’s twin trade and budget surpluses are also expected to evaporate in the coming years, despite the fact that oil remains at over $100 a barrel. Boris Titov, the presidential commissioner for entrepreneurs’ rights, argues that the torrent of cash flowing into the state’s coffers is actually responsible for the growth of corruption. Russia went from a mid80s ranking on Transparency International’s Corruption Perception Index to a peak of 154 in 2010, out of 182 countries. During his 2008-12 term in office, then-President Dmitry Medvedev launched the first concerted crackdown on graft. The tide was apparently turned, as Russia fell to 143 in the Transparency ranking in 2011 and again to 133 in November 2012 (but a change in methodology means the last result can’t be directly compared). After Putin’s reinauguration last May, the Kremlin stepped up its anticorruption efforts, with a series of laws to increase the transparency of government. In late October, Dmitry Gudzhoyan, the CEO of MRSK, a state electricity firm, was sacked after an investigation into its procurement deals revealed suspected kickbacks

ITAR-TASS

HIS STORY

Boris Titov PRESIDENTIAL COMMISSIONER FOR ENTREPRENEURS’ RIGHTS

In 2004, Mr. Titov was elected chairman of Delovaya Rossiya. Two years later, his SVL Group bought a majority stake in Abrau-Durso, a famous Russian-French vineyard commissioned by Tsar Alexander II in 1870, and he invested more than $20 million to modernize production there.

2010, according to Russia’s Federal Statistics Service. So far, about 300 businessmen have turned to the commissioner’s office for help, Mr. Titov says. Seven appeals came from non-Russians. “For foreigners, our raiders are still warier of attacking them than Russian companies,” Mr. Titov says. His office, consisting of 20 ex-

perts who work on a pro bono basis, examines a case to find out if a business has been unfairly persecuted.“We are here to help, but we can help only those who we 100% know are right. If we understand we can help, we do our own work on each case to understand what to do, with whom to work,” Mr. Titov says. “If it’s a criminal case, we need to work with the police or the prosecution office or with the courts.” The commissioner’s office has considered more than half the appeals it has received to date. Experts have ruled in favor of businessmen in 30 cases so far, and after the commissioner intervened, seven prosecutions were dropped. It is planned to have local ombudsmen in each of Russia’s 83 regions, with their offices to be funded from regional budgets. “Of course, we will not be able to fight 100% of corruption,” Mr. Titov admits. “But we will be able to help individual businessmen – and that alone will be a success.”

Business & Politics

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Health The Kremlin is targeting high alcohol consumption to avert a possible demographic disaster

NEWS IN BRIEF

Why Russians Are Sobering Up (One Drink at a Time)

• A corporate dispute between the major shareholders of Norilsk Nickel has ended, after Oleg Deripaska’s aluminum producer, Rusal, and Vladimir Potanin’s Interros agreed to allow Roman Abramovich’s Millhouse Capital to buy a minority stake and join the board of directors. The deal is seen by some observers as part of a wider Kremlin campaign to improve Russia’s investment climate and sort out some big corporate disputes.

Russians’ legendary capacity for hard drinking is finally being challenged – by a changing work ethic and a Kremlin crackdown. BEN ARIS SPECIAL TO RUSSIAN BUSINESS INSIGHT

PHOTOSHOT/VOSTOCK-PHOTO

• McDonald’s is set to open its first outlets in Siberia, with five restaurants in Novosibirsk. The company plans to open a total of 10 restaurants in the region this year before continuing its expansion on into Russia’s Far East. • President Putin wants to revive the prestigious Soviet-era ‘Hero of Labor’ title to promote improved productivity. This would go down well with his core, blue-collar constituents, who would be the main candidates for the medal. • The government has floated a plan to make mobile-phone frequencies tradable as part of ongoing attempts to diversify the Russian economy. A secondary market for trading in frequencies, set up this spring, would let operators share frequencies, contributing them to joint ventures.

ITAR-TASS

Faced with Russia’s alarming demographic decline, the government is getting serious about tackling the country’s legendary love of strong liquor. This January, stiff new taxes saw the cost of vodka soar, while harsh restrictions on retailers banned over-the-counter alcohol sales after 10pm. Vodka consumption has been falling in recent years, although contradictory forces mean the fall has not been even. Over the past four years, Russians’ consumption of vodka has officially fallen by 7%, to 417 million gallons in 2012 from 449 million gallons in 2009. That still leaves the average at 3.2 gallons per person annually – putting Russians among the hardest drinkers in the world. However, consumption is forecast to fall faster this year, to some 365 million gallons (2.6 gallons per person). Alcohol and smoking are the two biggest killers in Russia, accounting for about half of all deaths according to the World Health Organization. The government, increasingly worried about the impact on economic development, is stepping up its campaign. Not that you would necessarily notice. There has been no public awareness campaign: reducing drinking has been a risky political issue ever since Soviet leader Mikhail Gorbachev’s 1980s antialcohol campaign was widely derided, following draconian rules that limited sales to between 2pm and 7pm. (It briefly led to a fall in alcohol-related deaths, but later this rose after people turned to bootleg vodka and even worse homemade alternatives. To this day, Mr. Gorbachev is perhaps most hated by ordinary Russians because of his dry laws.) The government’s most effective measure so far has been to shut down many moonshine factories, which accounted for an estimated third of vodka production, according to Vadim Drobiz, director of Russia’s Research Center for Alcohol Markets. “The [authorities] have gotten serious about illegal production of alcohol, and a lot of illegal plants have been closed by the regulator recently,” agrees Daria Khaltourina, co-chair of the Russian Coalition for Alcohol Control, who estimates that the consumption of hard liquor began to fall in 2005. “Also, there is a ban on selling alcohol at night, so there are fewer opportunities to buy it whenever you want. All in

Young professionals in Moscow and St. Petersburg are increasingly switching from vodka to wine and beer.

IN FIGURES

3.2 gallons

was the average consumption of vodka per person in Russia in 2012. The government predicts this will fall to about 2.6 gallons this year.

52%

of deaths of Russians aged between 15 and 54 were alcohol-related between 1990 and 2001, a survey found, compared to 4% worldwide.

$400

is the average amount spent by Russians on alcohol during the New Year holidays, according to the Research Center for Alcohol Markets.

all, the government’s alcohol policies may be more spontaneous than well thought-out, but they’re working.” But while Russia’s middle class is becoming increasingly health conscious and switching to lower-alcohol drinks, such as wine

and beer, rising incomes have led some Russians to drink more. “The emerging middle class indeed drinks less, but the richest and the poorest drink more as their incomes rise,” says Mr. Drobiz. “The government has become increasingly concerned about the public’s health, as it has realized that population decline is a serious threat to the long-term development of the economy.” Many Russians’ incomes have continued to rise since the 2008 economic crisis, due to high energy revenues and increased government spending, and while overall vodka consumption has been falling, the change is not smooth: consumption rose again between 2010 and 2012 by 6%, which is part of the reason why the government has decided to act so forcefully. However, some underlying changes in society could help. The changing work ethic has already had a big impact on drinking habits: in Soviet times, a regional manager who needed extra resources from the state would simply turn up in Moscow to meet with officials, armed with a bottle of vodka and some sausage. “There is an emerging class of young professionals who are changing the work ethic,”says Ms. Khaltourina, a 34-year-old sociologist who is a strong advocate of healthy lifestyles and education as a way of improving eco-

nomic development. “In the past it was a common thing to drink at the workplace, to discuss business over a drink. Now it’s banned in most offices.” There is also a big difference between the sophisticated urban populations of Moscow and St. Petersburg, which lead the way in lifestyle changes, and the rest of the country, where Soviet-era habits have persisted. “People in big cities are richer and better educated and overall have a different lifestyle,” says Ms. Khaltourina.“In Moscow the level of alcohol intake, health problems and deaths caused by alcohol are very close to the European average. But provinces still have the horrible drinking habits typically found in northern countries: bingeing on huge amounts of alcohol.” While an overt anti-alcohol campaign may be unpopular, the government has to stick to its guns if it wants to avert a demographic disaster. Since 1991, Russia’s population has shrunk by 5 million people to 143 million, and last year was the first time in two decades that the number of births exceeded the number of deaths, if only by a small amount. The government has for several years been trying to address this by investing more into pre-natal and maternity healthcare, and the new rules on vodka represent the next phase in a campaign to improve public health.

• Russian unemployment has hit an all-time low of 5.2% of the total workforce of around 75 million people. • The Russian economy hit a soft patch in last quarter of 2012, slowing to 2.2% annualized growth, and is expected to score only 1.9% in the first three months of this year. However, the consensus forecast predicts that growth will pick up in the spring and the economy is expected to grow by about 3.5% overall in 2013. • Meter-high snow dumps have seen power consumption in Russia reaching new record levels. Demand for electricity hit 156.3 gigawatts at the start of December, more than the previous record set in February 2012. Temperatures were running 10 degrees below the long-run level for the period. • The Kremlin’s efforts to improve Russia’s investment climate continue to gather momentum. The number of independent seats on Russian state companies’ boards is to be boosted by 45% in 2013, to 123. • Russia may cut the upper limit of the Reserve Fund, from 7% to 5% of GDP. The threshold is important, as any extra oil revenues over the limit can now be used for government spending. • Gazprom tops the list of ‘dream’ employers, according to pollster VTsIOM. Around 44% of Russians would like a job with the state gas giant. State-owned oil major Rosneft came in second, with 29% wishing to work there. Lukoil was the only private company to feature in the top five. • The Russian government plans to double its support for the agriculture sector in 2013 with an extra $6.6 billion a year of spending. Russia took in about 73 million tonnes of grain this past year – enough to cover domestic consumption, plus about 10 million for export. The Agriculture Ministry predicts 100 million tonnes for next year, if the weather is good. Russia is already the third-largest grain exporter in the world.

Regulation A draft law banning smoking in public places could help to cut smoking-related deaths

Smoking Ban Divides Health, Tobacco Lobbies A new law is set to send Russian smokers out into the cold, while leaving big tobacco players and retailers largely unscathed. SPECIAL TO RUSSIAN BUSINESS INSIGHT

Business travelers and tourists visiting Russia are often struck at the impunity of the country’s 40 million smokers – they can be seen lighting up in practically any restaurant, government building or office. Even hospitals offer designated smoking areas. That may well change with new legislation, backed by Russia’s parliament in January by 442 votes to 1 in a crucial second reading, which seeks to reduce the harmful effects of smoking on Russians’ health by banning smoking in many public areas. The other plank of the government’s strategy is to ramp up taxes on cigarettes. The government is urgently seeking to cut the number of smokingrelated deaths, which stands at 400,000, or 0.3% of the population, annually, according to Prime Minister Dmitry Medvedev. Smoking also costs Russia, the world’s second-largest tobacco market after

• Russia needs immigrants to avoid labor shortages, Federal Migration Service Head Konstantin Romodanovsky announced in a recent interview. The official said he had been ordered to keep the number of legal immigrants coming into Russia at 300,000 a year, with a focus on ethnic Russians and highly-qualified foreign specialists. Millions are estimated to work in the country illegally each year.

ITAR-TASS

DENIS PUZIREV

China, an estimated $50 billion annually in health care and lost work days. The country’s tobacco industry, more than 90% of which is controlled by international players Phillip Morris, British American Tobacco, Japan Tobacco and Imperial Tobacco, has been successful in watering down the bill in a “multi-million dollar campaign,” according to one lawmaker, resulting in Russia’s parliament dropping restrictions on cigarette sales. The law aims to phase in a ban on smoking in public places, starting with hospitals, workplaces, commuter trains and government buildings in June 2013; and hotels, restaurants, bars, long-distance trains and ships a year later. Not only will smokers be unable to light up in the standing sections between compartments, but also during stops along the way, since smoking at train stations (and airports) will also be off-limits. Under the government’s original proposals, small retailers would be hit by bans on the sale of cigarettes at outlets less than 50 square meters in area and on the open display of tobacco products. But after

PHOTOXPRESS

Under the law, smoking in Russian restaurants will be banned from 2014.

“If small business lives off beer and cigarettes, Russia does not need it,” says Health Minister Veronika Skortsova. claims that many small stores and kiosks would be forced out of business, these restrictions were dropped. The government has previously been reluctant to adopt drastic measures, but Health and Social Development Minister Veronika Skortsova says that the overall health benefits took priority over retail profits. “If small business lives off beer and cigarettes, Russia does not need it,” she says. But doubts remain about how

strictly the new rules will be enforced. “If the fine is 100 rubles [just over $3], smoking in bars will continue as usual,” Ivan Kotov, director of A. T. Kearney in Russia, told Kommersant-Dengi, a business magazine. “But if it’s a few thousand [rubles], we’ll see a faster turnaround.” The restaurant and bar trade also gave a mixed reception to the bill, with the Russian Federation of Restaurateurs and Hotel Owners saying that requiring restaurants to provide special isolated smokers’ corners would be prohibitively expensive. But some restaurant owners are welcoming the move, saying that they will be able to shoo customers outdoors and save money on expensive ventilation systems.

• Consolidation in Russia’s rail business continues with yet another deal. Last month, leading freight operator Globaltrans bought control of MMKtrans for $335 million. Russia has thousands of tiny rail freight operators, but thanks to reforms a few commercial operators are now emerging. • Russia’s Federal Space Agency says it will send an unmanned spacecraft to the moon in 2015, from the new Vostochny Cosmodrome in the Amur region in Russia’s Far East. Vladimir Putin promised to invest $1 billion in the replacement for the Baikonur Cosmodrome in Kazakhstan, which Russia currently uses for space missions. Russia’s last unmanned moon mission was in 1976. AFP/EASTNEWS

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THE NEW HORIZON IN TECH

Dmitry Repin POSITION: CEO COMPANY: DIGITAL OCTOBER

What is Digital October, and how does it help Russian start-ups? Since its inception just two years ago, Digital October has become de facto at the center of Russia’s start-ups ecosystem. Our center, in the former Red October chocolate factory, is a place for globally minded technology entrepreneurs: where great content meets great people. We host international conferences devoted to new technologies and entrepreneurship, host presentations of new technology products, and present a weekly show on Business FM, a Moscow radio station. Our flagship event is TechCrunch Moscow, which we hosted in December, and our next big event is Demo Europe in June. We check out start-ups to make sure there’s no compromise on quality and content, and aim for them to be the best of the best by world standards. We are trying to create a meritocracy in the technology community. Start-ups should be supported by foreign investors. We seek to bring entrepreneurs together with angel investors and venture capitalists. These foreign investors often become our evangelists around the world. What should foreign investors look for when choosing a Russian start-up to get involved with? Several years ago, it was much riskier for foreign investors. But traditional businesses, such as purified water or dry cleaners, were profitable because the market was wide open. Now it’s less risky, but the simple opportunities have gone. The obstacles are different from those in a country like the United States. There’s no single sector investors should focus on – it’s better to look case by case. For example, Russia is the No. 1 Internet market in Europe now, bigger than Germany. E-commerce is a big growth area, but it’s a huge challenge to deliver goods bought online. It’s interesting: if you look at the leading e-commerce firms here, they all have U.S. investors. There are basically two kinds of companies to invest in: efficient companies going after the local market and doing something different; and good companies serving the global market. Russian startups have done well in computer gaming, for example, with such success stories as Zeptolab (the maker of the game “Cut the Rope”). What are Russia’s competitive advantages when it comes to technology start-ups? Russia still has incredible brain power in its software engineers. In the outsourcing world, Russia still has the edge over India and China when it comes to things like financial services and travel websites, because they require complex mathematical algorithms, something at which Russian specialists are very skilled. What are the biggest problems facing start-ups in Russia? They face the same universal problems facing Russian companies in general: poor enforcement of laws, an uneven legal environment. They are often overloaded with paperwork. Also, start-ups here often need to structure their financing outside Russian jurisdiction. Other hurdles are that the large companies B2B start-ups serve here often don’t respond to innovations very well. And it’s hard to find a good product manager here. Is the brain drain going one way - out of Russia? Technologically, yes, the brain drain is still outbound. But managerially, there is a reverse trend – more managers are coming back. I’m an example of this, as I worked in Boston for eight years as a senior researcher at MIT. Later I came back and taught at Skolkovo, and then I came to Digital October. Is it important for Digital October to have a trendy location? Yes – Red October is a cool, trendy place. The Strelka Institute for Media, Architecture and Design next door contributes to this image. Many of us geeks are kind of boring, but if you add in design, art and business, it becomes a cooler place, a better mix.

Russia’s high-tech investment field looks much more like its foreign counterparts as Western funds have flocked to reap its benefits. ADRIEN HENNI SPECIAL TO RUSSIAN BUSINESS INSIGHT

The Russian start-up scene is looking more and more like its American, European and Asian counterparts. The stereotype of innovative Russian boffins disconnected from market realities, working in Soviet-style research centers, has been replaced by globally connected and modern-minded entrepreneurs and engineers. They follow Facebook’s latest moves, dream of getting training sessions in Californian start-up accelerators, and are busy preparing pitches to Russian or Western investors. “The fundamental criteria for investing are the same in Russia [as elsewhere],”says Igor Taber, of Intel Capital, a pioneer in Western venture investment in Russia. “An excellent management team, a large market, high barriers to entry, disruption potential, in particular, are just as valid here as anywhere else in the world.” But there are things that are different. Ironically, these issues are not always what many foreign investors imagine they are.

2. Should I work with incubators and technoparks? Technoparks, incubators and accelerators have sprung up in the past few years, with dozens of such structures now competing in Moscow alone. Many of them seek to attract foreign investors, solving the sourcing issue and offering co-investment opportunities. Among internationally connected accelerators are Farminers, which brings its start-ups to San Francisco’s RocketSpace; the Moscow Plug and Play Tech Center, which operates jointly with the famous Californian accelerator of the same name; and TexDrive, co-founded by U.K. start-up accelerator veteran Jon Bradford. Russia’s technoparks are also an option. With its massive subsidies and tax cuts for innovative projects, Skolkovo, the giant tech hub nearing completion in southwest Moscow, has already attracted dozens of global venture funds and high tech firms. There is also innovation potential to tap outside Moscow. Ingria, a prominent St. Petersburg technopark, includes 70 resident companies, employing more than 500 people in various technological fields. In Kazan, the capital of the autonomous Republic of Tatarstan, IT Park stands as one of the larg-

est technoparks in Eastern Europe. IT Park opened a business incubator last year, while a delegation of 25 leading European venture capitalists visited the city. 3. Should I co-invest with a Russian fund? The Russian venture scene looked

“It is critical to invest in segment leaders, as exit options for #2 players are even more difficult,” says Intel Capital’s Mr. Taber. like a desert only a couple of years ago, but at least 60 Russian funds have been involved in at least one IT sector deal in the past year. And there is now more money in Moscow than in many other innovation spots on the global map –“the biggest pile of money I have ever seen,”

says U.S. tech veteran Steve Blank, who visited Moscow last year. Most of these funds operate to international standards, presenting no particular risk for partnering foreign funds.“With their serial approach and strong exposure to international markets, local business angels and venture funds care about their reputation,”says Arkady Moreynis, general manager of the Moscow Plug & Play Tech Center. 4. How to deal with Russian teams? Even though Russian entrepreneurs are Westernizing at a fast pace, there are some things that are different. One issue is their relative lack of experience.“While most U.S. start-up entrepreneurs have an existing start-up background, most Russians are doing this for the first time,” Mr. Moreynis says. “In Russia, I tend to trust founders that are a bit older, say 30, and more experienced, versus 25-year-

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1. How to identify investment targets? A number of tech-oriented contests, media and databases have emerged in recent years to navigate the Russian start-up ecosystem. Some of them use the English language, providing foreign investors with efficient sourcing instruments.

Another option is to work or coinvest with local funds. Fast Lane Ventures, a Western-style serial Internet start-up developer, is one of these, cooperating with a range of Western funds that do not have a permanent team in Moscow. ALEXANDER SHCHERBAK/KOMMERSANT

Winners of the Start-Up of the Year Award at Digital October, Moscow’s leading high-tech events center.

Forest Watch: A Smart Idea Spreads Like Wildfire Wildfires crippled Russia’s crops and destroyed billions of dollars of property in 2010. An innovative entrepreneur is helping to prevent this from happening again. SERGEI TITOV SPECIAL TO RUSSIAN BUSINESS INSIGHT

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The technology is based on traffic monitoring.

“There are video surveillance systems for security, but [for wildfire detection] we are the best,” says Mr. Shishalov.

It was in 2009 that Ivan Shishalov - a graduate of the Radiophysics Faculty of Nizhny Novgorod State University and now CEO of DiSiCon (DSC) - was working on a system for monitoring traffic jams in a Nizhny Novgorod accelerator and was approached by officials from the local Forestry Ministry asking for help in setting up a system to detect wildfires. Mr. Shishalov and his fellow student, Yaroslav Solovyov, thought they could make it work and came up with a system similar to trafficjam monitoring. The idea was to locate video cameras at cell sites and towers to track outbreaks of fire, using software developed by Messrs. Shishalov and Solovyov. Officials approved of the idea. It became clear to Mr. Shishalov and Mr. Solovyov that fire-detection systems could become a profitable business and so they set up

DSC, a company for remote surveillance systems, and branded the project Lesnoi Dozor (Forest Watch). Even though the disastrous summer of 2010 made the project’s relevance obvious, Lesnoi Dozor was not swamped with orders. Officials delayed in responding to their proposals, and mobile-communications providers, whose towers were to be used to deploy cameras and sensors, were reluctant to cooperate. DSC then decided they would take part in all tenders and bids for innovative companies and start-ups to make their brand known.“When your project is getting expert assessments from everywhere, selling it to both investors and customers becomes easier,”Mr. Shishalov says. After then-President Dmitry Medvedev took a personal interest in the company in 2011, its portfolio of government contracts expanded significantly, as did its brand. Lesnoi Dozor coverage expanded from five to 20 regions of Russia.The company even received calls from customers in Belarus, Kazakhstan and Ukraine, where potential customers had found them online. With revenues of $290,000 in 2011, the company expects to take

in up to $2.3 million in 2013. “We are effectively selling access to the system,” Mr. Shishalov says. The company’s customers are mostly government agencies responsible for wildfire protection, including forestry departments in various parts of Russia. The company now aims to tap foreign markets. Potential customers in the CIS, Eastern Europe, Spain and Latin America have shown interest. According to Lesnoi Dozor’s founder, no significant competition has been identified. “Obviously, there are video surveillance systems for safety and security purposes on the market but, as far as accurate detection of wildfires goes, we are among the world’s best providers,”Mr. Shishalov says. The solution is unique in many respects and has no high-tech rivals, says Elena Alexeyeva, head of Softline Venture Partners. In addition to fire prevention, DSC is also considering other development options. “Our patents could be used for other video surveillance projects,” DSC says. The company currently owns two patents and four copyrighted software solutions.

To go ahead with its foreign expansion while maintaining control of the market it has already won, the company needs finance. Lesnoi Dozor recently moved into Russia’s own SiliconValley, the Skolkovo Innovation Center near Moscow. This could translate into tax relief and government grants, but the project still needs more investment. Dmitry Chikhachev, managing partner of the venture fund Runa Capital, says potential investors will focus above all on the risks involved in the business model. While the government is certainly a generous client, a wave of government spending cuts could hurt the order books. It remains to be seen whether the company will be able to find more customers on the market to take the government’s place, Mr. Chikhachev says. Kirill Veselov, investment director at Mint Capital, agrees that there are government contract-related risks. It would be unreasonable to “expect 100% consistency and economic logic from such a customer,” he says. But if we look at the technology “without the constraints of the existing business, the idea could have a great future,”Mr.Veselov says.

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Skolkovo, the tech hub in southwest Moscow, has signed up dozens of global venture funds and high-tech firms.

olds with just college degrees in the U.S.,” says Fabrice Grinda, a Western business angel who has invested in Wikimart.ru, Oktogo.ru, Mallstreet.ru and Hipclub.ru. And labor costs are less than in many other high-tech areas. A typical software engineer in Moscow makes $40,000-$60,000 a year, compared with $180,000 in Silicon Valley. In a city like Tomsk, in Siberia – where every fourth inhabitant is a student, researcher, university lecturer or employee of the Russian Academy of Sciences – a modest $2,500 per month can attract the cream of the crop. 5. Are Russian start-ups fully transparent? Threats from aggressive local businessmen or corrupt courts undeniably exist in Russia, but so far these do not seem to have impacted tech entrepreneurs and investors. Esther Dyson, a U.S. business angel who has invested in 15 Russian start-ups as well as in search giant Yandex, says she has never witnessed any serious threats. “Tech companies tend to be more transparent, with value that depends on the people who work there rather than on natural resources or assets that depend on some favorable regulatory conditions,”she says. The Russian start-up scene seems largely to have been spared the scourge of corruption. “In the digital sphere, greedy civil servants don’t know what to look for – or where,” says Gleb Davidyuk, managing partner at iTech Capital, a Moscow-based venture fund. However, many investors tend to have their start-ups incorporated under a Western jurisdiction, which they feel will better guarantee the protection of intellectual property as well as shareholders’ rights.

6. What are the exit options? In this still very young market, insufficient exits are an issue. In ecommerce, for example, just four exits have taken place so far, an industry report by East-West Digital News revealed recently. “It is critical to invest in segment leaders, as exit options for #2 players are even more difficult,” says Intel Capital’s Mr. Taber. 7. What if I operate from abroad and don’t speak Russian? Investors in Russia do not necessarily have to speak Russian, since many start-up entrepreneurs and local partners speak English. But intervening directly in the market definitely requires a physical presence in the country. While some international funds, from Intel Capital to Germany’s e.ventures to Japan’s UMJ, have an office in Moscow, others such as Mangrove Capital Partners andVentech have representatives who travel to Russia frequently. 8. Should I invest in Russian startups? These are the key benefits: - Russia is now the largest Internet and mobile market in Europe. - There are opportunities in many Russian high-tech industries, from innovative software to nanotechnologies and clean tech to biomedicine. - Russia has a large and fastgrowing consumer market. - High-quality science and technology skills. - Lower labor costs. - More start-ups, stronger entrepreneurs, a quickly developing ecosystem. - Abundant funding. - Strong government commitment and support for innovation.

In addition to the privately owned funds, state-backed lenders are becoming increasingly active. Leading investment bank VTB Capital expanded its private equity division in 2012 and also bought a stake in Fast Lane Ventures, an Internet incubator that has supported several successful start-ups in the past couple of years. Finally, there are two governmentbacked funds to provide money to start-ups.The RussianVenture Company has $1.5 billion of federal money to co-invest with privately run funds as the minority partner. And state-owned high-tech agency Rusnano has also managed to bring in several deals. The big break for high-tech startups came with the successful IPOs of Mail.ru, which raised $912 million in London in November 2010, and Yandex, which listed on Nasdaq in May 2011 with a valuation of $11.2 billion. Russian online retailer Ozon.ru, Russia’s “Amazon”, was raising money at the time. “When we were fundraising in 2010, at first investors were not very interested in Russia, but following the Mail.ru IPO things changed,” says Ozon’s French CEO, Maelle Gavet, who was cited by Forbes as one of the “Women to Watch” in its 2012 survey of the World’s Most Powerful Women. “After that, they were a lot better prepared. They knew a lot more about the Russian Internet and we started to get people calling us,” Ms. Gavet says. Now the institutional money is starting to arrive. Investments into Russian high-tech firms more than doubled in value to $550 million in 2011, up from $220 million the year before, according to data from Fast Lane Ventures. Among the big ones were Rakuten, a Japanese venture capital firm, which took a $100 million stake in Ozon.ru; Northwest’s $70 million stake in Avito, an eBaylike website; and a $55 million in-

SNAPSHOT

What’s Hot in Russian Tech THE TOP 50 RUSSIAN STARTUPS PROJECT OFFERS GLIMPSES OF THE HOTTEST COMPANIES ON RUSSIA’S TECH SCENE. SEE THE FULL LIST AT RBTH.RU/STARTUPS

vestment by Bessmer and Russia Partners in KupiVIP. Ozon’s $100 million was almost immediately spent on buying Sapato.ru, an online shoe store set up by Fast LaneVentures – the first big exit for the incubator – to add to Ozon’s burgeoning e-commerce business. In December, U.S. venture capital firm Domain Associates announced a $93 million co-investment with Rusnano subsidiary RusnanoMedInvest (RMI), into Russian pharmaceutical firms Marinus Pharmaceuticals, Lithera and Regado Biosciences. These companies have several new drugs in the advanced stages of clinical trials for the Russian and U.S. markets, including a treatment for epilepsy. But the fastest growth is probably still ahead. Revenues from Russia’s Internet business are growing

Myapps.com allows users to create their own mobile application. Soon to be available in the AppStore, it currently has a few hundred individual users and a dozen corporate subscribers, including a Japanese restaurant that used it to create its takeaway menu, leading to a seven-fold increase in sales.

The big break for hightech start-ups came with Mail.ru’s $912 million London IPO and Yandex’s NASDAQ offering. at 30% a year and the volume of e-commerce is growing even faster: Russians spent an estimated $18 billion on goods bought from online stores, according to a survey by the Russian Association of Electronic Communications and Moscow’s Higher School of Economics. Mr. Hartmann, the KupiVIP CEO, estimates this will rise to $50 billion to $80 billion over the next five years. “Typically, people start to buy things after they have been online for about three years, and they buy things like fashion after seven years,”Mr. Hartmann says.“But Russia’s online population is so young that that seven-year wall has yet to hit. When it does, in the next few years, the market here will become the largest in Europe.”

ViEye, the flagship product of Computer Vision Systems, works by recognizing regular human gestures that can be used to control various devices. Similar solutions are used in game consoles (such as Kinect for Microsoft Xbox), but ViEye can be used for a range of applications in electronics, medicine and the automotive industry. It’s also cheaper, more precise and works in any weather conditions.

Dnevnik.ru was established in 2009 as a free school network. The site currently serves 35,000 Russian and Ukrainian schools. Dnevnik offers a comprehensive IT solution, including a school management system, online tests and the school’s website. After attracting $5 million from Runa Capital last year, it is now collaborating with schools in Hungary, Poland and Israel and is targeting the U.S. and China.

Top 50 Russian Start-Ups

WHERE ANGEL INVESTORS A N D CO O L I D E A S M E E T ! ALYONA REPKINA

Read Special Business Report on rbth.ru/startups

Russia Beyond the Headlines has teamed up with Digital October and PwC to compile a groundbreaking rating of the top Russian start-ups (to be updated twice annually) in three categories - IT (191 companies), High-tech (22) and Lifescience (10). The rating uses criteria such as the amount of investment capital attracted, corporate legal protection, presence in the media and team to assign a grade from AAA (highest) to CC (lowest). All companies must be incorporated in Russia, employ no more than 100 people and be no older than four, five or six years (in IT, high-tech and life sciences, respectively). For a complete description of methodology, visit rbth.ru/startups/methodology.

A science fair project from Southern Russia may revolutionize the gaming and computer market with its screenless 3D images projected on to water vapor. KIRILL RUDENKO RUSSIAN BUSINESS INSIGHT

Maxim Kamanin, CEO of Displair, got the idea of making a display with images projected into the air with the help of water particles in 2010, when he was coming to the end of his studies of programming at Astrakhan State Technical University. Having studied physical theories, Maxim was convinced that the technology required to put his project into practice existed. He made the first functional model in just a couple of weeks, with the help of his father and brother, and took it to the Seliger 2010Youth forum, not far from Moscow. The first Displair was a combination of a projector and a screenless display that allowed images to be projected from the computer. Kamanin then enlisted the help of some friends, who worked feverishly to produce the first successful test sample of the display by 2011. The display had multi-touch

functionality for controlling images using gestures. The system is capable of registering up to 1,500 touches simultaneously, with a response rate of less than 0.2 seconds, making the number of users operating the system at the same time virtually unlimited. Images are projected on to a four-millimeter-thick stream of air with water particles so small that they remain intact even when the image is penetrated by a hand or other object. “Once TechCrunch and Mashable wrote about the Russian project, our inbox almost exploded,” says Andrei Melnikov, Displair’s operational director. “We were inundated with letters from investors, wellwishers and people wanting to know when the new device would be available.” The company has since received over $1 million in investment, which it has used in hiring 50+ staff, product development and marketing. “You need an international network for a completely new product to have more than just sporadic sales in your own region,” Mr. Kamanin says. The device generates a 30-inch

display with picture quality sufficient to read texts. Finland’s Fog Screen produced the first prototype of a screenless display in the early 2000s. The system uses airflow with water particles as a screen. Its limited interactivity, however, is a major drawback – the Finnish developers have to make use of Kinect (Microsoft’s development for the Xbox game console), which has certain shortcomings. Some American and Russian developers are also working on “air screens,” but Displair doesn’t regard them as competitors for now. “Their products are much bulkier – the devices weigh between 80 kilograms and 200 kilograms, whereas ours weighs a mere 10 kilograms,” Mr. Melnikov says. “Another important aspect is their interactive capability. None of them has the multi-touch option. Finally, there is the core audience. Of all the companies developing the air screen, only Displair caters for mass consumers, whereas the others focus on business, especially showbiz and advertisements.” When it comes to what it regards as its real competitors, Displair is

concerned mostly about the makers of LCD, LED and touchscreen solutions. “There are other factors that show this, besides our desire to enter the consumer market with this technology. “In Japan, touchscreen terminals that are used to pay for services or to buy tickets are not very popular. They [the Japanese] are obsessed with hygiene, which is a feature of their mentality; however, in this situation, like in any other [that requires] touching something, the airdisplay solution will come in quite handy,” Mr. Melnikov says. The company is preparing the first commercial model of the device for production, while also pursuing further upgrades of its technology and extension within the product range. Displair systems will be produced in the special economic zone of Zelenograd, near Moscow, and the first commercial batch is expected to be completed this spring. Displair has been approached by Samsung and LG about developing the technology together. But the Russian entrepreneurs are in no hurry to share their secrets, preferring to keep control of their product and their business.

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3D Penetrable Images Made Out of Fog and Light

Displair can enhance gaming experience.

The Displair product differs from competitors in its low mass, multitouch capability and target audience.

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Money & Markets

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Finance A new report by Ernst & Young says genuine outflows are only half the official figures

Russia Bets On Its ‘Pacific Vegas’

'The twin factors driving capital outﬂows from Russia are an aggravation of the Eurozone crisis and the poor investment climate at home.' CENTRAL BANK CHAIRMAN SERGEI IGNATIEV

Mark Galeotti SPECIAL TO RUSSIAN BUSINESS INSIGHT

STATE MATTERS

Investors Should Harbor No Illusions Yulia Tseplyaeva SPECIAL TO RUSSIAN BUSINESS INSIGHT

ast year, privatization delivered around $7 billion for the Russian budget — more than in the previous decade. The government has stated its intention in 2013 to sell state assets worth at least $10 billion, but international investors should not harbor any illusions. After years of hanging in the air, privatization got a sudden boost in 2009: oil prices were low and the Russian treasury was short of cash. That was when the aggressive plan to sell off the country’s major assets to the tune of $10 billion per year was framed. But soon after, the oil situation and budget revenues returned to normal, and privatization was shelved. Prime Minister Dmitri Medvedev, however, insisted on pursuing it, because he saw it as a way to improve Russia’s economic performance, by reducing the state’s share in the economy. But there is no consensus within President Vladimir Putin’s team: some favor continuing privatization; others propose leaving key assets in state hands. From that perspective, the $5 billion secondary public offering of Russia’s largest bank, Sberbank, which last year accounted for the lion’s share of privatization revenues, should not be seen as a victory for advocates of reducing the state’s slice of the economy. Banks, in contrast to oil and gas, have never been considered by Russia’s current leaders as a strategic resource. VTB is in need of capital, so more privatization this year is likely. Authorities were planning to sell 10% of the bank’s stock last year, but delayed the placement. Among the other assets up for sale this year, the world’s largest tanker company, Sovcomflot, and diamond giant Alrosa are of most interest. A stock flotation by Sovcomflot has been in the offing since 2010, but has been persistently delayed. Alrosa’s privatization has been hindered by wrangling between the federal government and that of Yakutia, the region that also owns a stake in the diamond business, and does not want to lower it. The federal government, which owns around 51%, fears losing control and insists on a parity reduction of stock. Privatization of other natural resource companies is even more unlikely. Although this year will see closure of a $50 billion deal between Rosneft and BP, involving the sale of Rosneft stock, in reality this “exchange with a surcharge” resembles nationalization. The authorities plan the sale this year of 5% of Russian Railways, one of the world’s largest transport companies. However, the deal is so fraught with technical difficulties that its timely completion is less likely than Rosneft becoming fully privatized in 2016. Yulia Tseplyaeva is chief economist at BNP Paribas Russia.

The Truth About Capital Flight Genuine capital flight is only half the official figure, according to a new study by Ernst & Young, together with the Russian Direct Investment Fund and Moscow State University’s Intelligent Reserve Center. Instead of $80 billion leaving Russia in 2011, the report says, when various accounting quirks, offshore M&A deals and errors and omissions are taken into account, the real outflow was $40 billion. The backstory of Russia’s capital flight comes from the notorious 1990s, when businessmen simply grabbed as much cash as they could

again, to $57 billion, according to Central Bank estimates. Most experts see outflows falling slightly again in 2013, to about $50 billion. Capital flight now is also very different from in the 1990s. “You have to remember that, in proportion, the current capital flight is a much smaller proportion to the size of the economy than in the 1990s,” says Ivan Tchakarov, chief economist at Moscow investment bank Renaissance Capital. Russia’s GDP had grown to just under $2 trillion last year - around twentyfold since the 1990s - while capital flight has stayed approximately the same. Not all the capital leaving is actually Russian, either. In 2011 the biggest outflows came from Russian subsidiaries of foreign banks,

“We can expect capital flight to persist over the next several years,” says Alexei Devyatov, of Moscow’s Uralsib Bank.

“Capital flight is now much smaller compared to the size of the economy,” says RenCap’s Ivan Tchakarov

and whisked it away to an offshore haven. Hundreds of billions of dollars fled Russia, but began to return during the boom years of the 2000s, when entrepreneurs realised they could make handsome profits from domestic investments. With the 2008 crisis, capital flight began again. It peaked at $134 billion in 2008, but fell to $56 billion in 2009 and $34 billion in 2010, after the economy bounced back. The figure grew again in 2011 on fears triggered by the Eurozone crisis, reaching $80 billion. Last year the outflows slowed

making loans to their parent banks in the West, says Andrei Klepach, a deputy economic development minister. A legal quirk means that foreign banks can’t set up branches in Russia, but have to incorporate local subsidiaries. The same problem in 2008 led the Central Bank to warn foreign banks to curb this kind of lending. Another big source of capital flight is the profits of Russian overseas holdings that are reinvested into that foreign holding, or Russian companies paying off foreign loans.These profits are made abroad

Some $350 billion has fled Russia since the 2008 global crisis. But things aren’t as bad as they seem. BEN ARIS SPECIAL TO RUSSIAN BUSINESS INSIGHT

and reinvested abroad, but because the parent company is Russian an accounting peculiarity counts this money as capital flight. Analysts have been arguing for years that Russian companies making money overseas and growing their businesses there should be viewed as a positive, like with corporates paying off foreign debts. Analysts estimate another $20 billion of capital flight is actually reinvested foreign earnings. Even when the accounting quirks and other distortions are taken into account, however, $40 billion in outflows is still a lot of money, and it is mostly leaving because of the poor investment climate, corruption and uncertainty over Russia’s future. Central Bank chairman Sergei Ignatiev said in January there are twin factors driving capital outflows from Russia: aggravation of the Eurozone crisis and the poor investment climate at home. Ernst &Young’s report argues the poor investment climate doesn’t play a big role in driving capital flight, however:“There is no statistical relationship between investment climate indicators and the estimated real capital outflow figures,” the report says. Alexei Devyatov, an economist with Moscow investment bank Uralsib, estimates that a one percentage point decrease in the Eurozone composite industrial production index leads to an extra $300 million to $500 million of capital outflows from Russia. Another big change is that higher oil prices lead to bigger outflows, while in the past more petrodollars meant more economic growth.“Expensive oil is no longer viewed as

IN FIGURES

$80 billion is the official total of capital outflow leaving Russia in 2011 that is widely cited in international media.

$40 billion is the actual figure that should be cited, according to a new study by Ernst & Young.

$20 billion of the original figure is estimated to be Russian companies reinvesting their foreign earnings.

a growth catalyst,” says Mr. Devyatov.“Given the economic weakness in Europe and slow progress with institutional reforms in Russia, we expect capital flight to persist over the next several years.” Uralsib remains pessimistic, foreseeing capital outflows reaching $50 billion-$60 billion in 2013 and $40 billion-$50 billion in 2014-15, versus the official forecast of zero capital outflows in 2013 and $30 billion-$40 billion in 2014-15. Commodities are primarily responsible for capital outflows, says Alexander Ivlev, Ernst & Young’s managing partner in Russia. “Russia’s capital outflow situation is comparable to that of the many export-oriented economies, such as Kuwait, Norway and Japan,” he says.

Economic Thinkers Urge Reform CONTINUED FROM PAGE 1

Mr. Gref also warned Russia’s officials that they were not taking full advantage of the opportunities offered to Russia by its membership of the WTO since its accession last year.“In our heads we are still not in the WTO,” he said, comparing Russian officials to a hockey team playing without knowing the rules of the game. “Today we are only losing out on global markets,”Mr. Gref added. “We [are winning] only in oil and gas exports. [But] falling growth rates show that we can’t continue to increase oil and natural gas extraction at these rates.” A day later at the Gaidar Forum, Mr. Lamy backed Mr. Gref’s criticisms: “I’m a little surprised that Russian officials still discuss the WTO as something in the future. You’re already in the WTO. It’s time to realize this and not discuss whether or not you should abide by the rules. You have to abide by them.” John Goldstone, Professor of Public Policy at George Mason University, pointed out that an abundance of cheap energy in the U.S. will hurt the Russian economy in the near future. “Manufacturing that is driven by the search for low-cost energy will increasingly move back to the United States. This will be difficult for the Russian economy, which has depended on high-volume but relatively high-cost production of nat-

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Mark Galeotti is Professor of Global Affairs at New York University.

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hile President Barack Obama has spoken often of an American “pivot toward Asia,” this has been a central plank of Russian geopolitics for a decade. Amid multi-billion dollar energy deals and growing security cooperation with Beijing, a significant role may also be played by plans to establish a Las Vegas-style gambling complex outside Vladivostok, Russia’s biggest city in the Far East. The proposals date back to 2009, when President Vladimir Putin’s government banned organized gambling across Russia, except for four regions: Vladivostok, Kaliningrad to the west, Azov City on the Black Sea and Altai in Central Asia. They are all close to Russia’s borders, with an eye to attracting foreign tourism and investment. Priority is being given to Vladivostok, chosen to cater for a fast-growing Asian gaming market. While Russia’s Far East is under-populated, it is close to China: an estimated 400 million people live within a one-hour flight. The first five casino hotels are planned to be built by 2016, and by 2022, there will be 16 new hotels, a yacht club, shopping malls, golf links, artificial beaches and all the other glitzy accessories of a new “Pacific Vegas.” Some $2 billion in federal funding has been allocated, and $625 million in investment capital has reportedly already been raised. Generous tax breaks have also attracted the interest of five international casino groups so far. The casinos could help diversify Russia’s Far East away from its dependence on energy, fishing and industry, and may rake in as much as an estimated $5.2 billion a year, with spinoffs such as amusement parks and shopping centers. The resort hopes to attract 10 million tourists a year, around one-quarter the number of Las Vegas’s visitors. As with Las Vegas, however, it may also attract the underworld. Fraud in construction can give way to laundering money in casinos, loan-sharking to desperate gamblers and the selling of sex and drugs to visitors on the side. There have already been contacts between Russian gangs and their counterparts in Las Vegas, but the Chinese gangsters who dominate nearby Macao have been less helpful. Macao (with $33.5 billion in revenues in 2011) has overtaken Las Vegas as the world’s gaming capital, and its gangsters are reluctant to share their best practice with new competitors. Developing the Far East, Russia will find itself competing with powerful economic interests in the AsiaPacific region. Mr. Putin’s administration is just as much a gambler there as the punters he hopes will flock to the new “Pacific Vegas.”

Former Finance Minister Alexei Kudrin called for reforms to be speeded up.

“The rule of law goes beyond the ease of doing business, and here Russia has a long way to go,” said Mr. Ferguson.

ural gas and oil, as the global market... is increasingly saturated by expanding outside of Russia. Russia will have to greatly diversify its economy and change its core economic relationships,”Mr. Goldstone said.

Mr. Medvedev was more upbeat about Russia’s progress, pointing to the country gaining eight places in the Doing Business ranking last year.“The 112th place is good, but we need to do more,”Mr. Medvedev said. He set the goal of maintaining 5% annual GDP growth in the coming years, but was criticized by former Finance Minister Alexei Kudrin, who said that such growth could be achieved only after extensive institutional reforms and no sooner than five years from now. Russia’s economy came in for praise from Niall Ferguson, of Harvard University, who compared Russia favorably with some Western countries over its finances. “In fact, [Russia] looks pretty good,” said Mr. Ferguson. “If the gross debt measured by the IMF is 11% of GDP, a tenth of what it is in many South European countries, and if the deficit last year was in fact a small surplus... “The West is in a stationary state because of its laws and institutions... The excessively complex regulation has come to be the disease of which it purports to be the cure,” he said. “There are problems [in Russia],” Mr. Ferguson said.“The question of the rule of law is something that goes far beyond the ease of doing business, and here unquestionably Russia has a long way to go. [But] there’s something to celebrate in the rapid improvement we see in institutional quality in countries like Russia.”

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IS A NEW COLD WAR COMING? ANTI-RUSSIA LOBBY CONTROLS OBAMA Andrei Tsygankov ECONOMIST

he recent crisis between Russia and the U.S. over the Magnitsky Act has provoked speculation of a new Cold War. Congress led the way by passing the act, named for Hermitage Capital lawyer Sergei Magnitsky, who died in pre-trial detention in Russia in 2009, which denies visas to Russian officials presumed responsible for human rights violations and freezes their U.S. assets. The Russian State Duma retaliated by passing the“Anti-Magnitsky Act,”which targets U.S. citizens who Russia considers to be violators of human rights. They include officials linked to torture and other violations at the Guantanamo Bay prison and judges who acquitted or gave light sentences to U.S. parents who abused or committed involuntary manslaughter against children adopted from Russia. In addition, deputies banned the adoption of Russian children by U.S. citizens. U.S. policy toward Russia continues to be shaped by the anti-Russia lobby. It views the U.S. as the leading democracy in the world and Russia as one of the main global obstacles to this world order. The Magnitsky Act not only punishes Russian officials without any proper investigation or trial, but also targets Russia exclusively as if it were the world’s worst violator of human rights. This confirms that the anti-Russia lobby’s main goal is to isolate and discredit Moscow, cynically using human rights as a cover for geopolitical strategy. Hermitage Capital CEO William Browder, the main lobbyist for the Magnitsky Act, and Senator Benjamin Cardin, its main champion in Congress, were primarily driven by the desire to humiliate and shame Russia. As was the case under former U.S. President George W. Bush, the success of the anti-Russia lobby is predicated on a weak presidency and Russia’s careless attitude toward its image abroad. U.S. President Barack Obama showed his desire to work with Russia on a number of issues of mutual importance, from missile defense to counterterrorism, nonproliferation and economic development. Mr. Obama did not initially support the Magnitsky Act, but he was all but forced to sign it because the repeal of

the Jackson-Vanik amendment, something Mr. Obama overwhelmingly supported, was attached to the Magnitsky Act. At the same time, however, Russia’s response was clearly foolish. For all the talk about the importance of soft power, the Kremlin chose a retaliation that will shape Russia’s negative image in the West for years to come. From a reputational standpoint, penalizing U.S. adoptive parents, the overwhelming majority of whom are law-abiding, loving and caring, and punishing Russian children, many of whom are disabled and waiting for adoption, was the worst possible choice. Russia’s anti-U.S. campaign remains largely reactive. The Kremlin’s retaliation by supporting the anti-Magnitsky act has little to do with

Mr. Obama needs to control the agenda and not let the anti-Russia lobby dictate terms and conditions. human rights and is almost exclusively about protecting Russia’s sovereignty. The official reaction to the Magnitsky Act may only be the prelude of other blunders to follow. The emotional side of such a reaction is frustration and anger, and it is notoriously difficult to successfully channel anger into moderate policies. Russia and the West have been through this before and are still recovering from its consequences. If European countries adopt their own versions of the Magnitsky Act, or if Mr. Obama eventually agrees to expand the Magnitsky list to include senior Russian officials, the crisis in U.S.-Russian relations has the potential to escalate. To resolve this crisis in U.S.-Russian relations, Mr. Obama needs to control the Russian agenda and not let the anti-Russia lobby dictate its terms and conditions. At the same time, the Kremlin should learn to control its emotions and not allow them to shape the country’s foreign policy. Andrei Tsygankov is professor of international relations and political science at San Francisco State University. This article was first published in The Moscow Times.

THE DANGER OF ASYMMETRY Richard Lourie AUTHOR

residentVladimir Putin’s initial response to the Magnitsky Act was right on the money: to accuse the U.S. government of monumental hypocrisy by focusing attention on Washington’s record of torture and illegal rendition of terrorism suspects. That reaction also had the tit-for-tat structural symmetry that is standard in such cases. More important, it allowed the Kremlin to take territory it had not occupied since Soviet days: the moral high ground. Back then, Soviet officials would counter U.S. criticism of human rights violations with the standard question, “And what about your blacks?”Historian Martin Kenner even contends that progress in the civil rights movement was accelerated by the criticism from Moscow, a sort of social-justice race running parallel to the arms and space races. Apart from symmetry and high ground, there was also an excellent contextual reason to attack the U.S. for its practices of torture and rendition. The subject is very much in the air again because U.S. President Barack Obama has nominated John Brennan, currently his chief counter-terrorism adviser, to be the new CIA director. Four years ago, that nomination proved impossible because of Mr. Brennan’s favorable remarks about rendition and waterboarding. In addition, the new film “Zero Dark Thirty”, detailing the manhunt for Osama bin Laden, was controversial even before its recent release because its violent opening scenes of waterboarding suggest that this torture led to actionable intelligence. This was an ideal moment for Mr. Putin’s attack to resonate with U.S. popular culture as well as on Capitol Hill. A significant percentage of Americans, especially among those who voted for Obama in November, are still angered by the damage that former President George W. Bush andVice President Dick Cheney caused to the U.S. global image. If Mr. Putin’s idea was to stick it to the U.S., he couldn’t have found a better means and moment to do it. Yet Mr. Putin’s big mistake was when he turned his initial symmetric response into a

foolish asymmetric one. By denying Americans the right to adopt Russian children, the reasoning must have been some combination of “The Americans are sentimental, this’ll hurt them!” and “Who do they think they are, coming here and shopping for our blond, blue-eyed darlings?” In the end, of course, it is Russia’s own orphans who will suffer the most. The old Russian saying,“Beat your own so others will fear you,” was probably not designed with kids in mind. Patriarch Kirill, the head of the Russian Orthodox Church, has called on Russians to adopt more children. It’s a good idea. This is also a moment where the opposition or spontaneous groups that are changing Russia slowly, from

Mr. Putin’s big mistake was when he turned his initial symmetric response into an asymmetric one. the bottom up, could come forward with a massadoption program. But it seems that they, like Mr. Putin, are also letting a rare and valuable opportunity slip by. What makes this whole business even odder is how adroitly Mr. Putin dealt with French actor Gerard Depardieu, grabbing world headlines and changing the perception of Russia as a place where artists like the punk group Pussy Riot are persecuted to making it a rather safe haven for international movie stars fighting for reasonable income-tax rates. Yet only time will tell whether Mr. Putin’s play on Mr. Depardieu was smart. It may turn out that, like many post-Soviet people, Putin has thrown out the dialectical baby with the Marxist bath water. Dialectics stressed that things inevitably turned into their opposite. As a Russian citizen, Mr. Depardieu may yet end up on Red Square protesting the arrest of some fellow “Russian” artist, a sight the world media would gobble up. Stay tuned. Richard Lourie is the author of “Sakharov: A Biography” and “The Autobiography of Joseph Stalin.” This article was first published in The Moscow Times.

NATALIA MIKHAYLENKO

A MAKE-OR-BREAK YEAR FOR REFORM Sergei Guriev, Oleg Tsyvinsky ECONOMISTS

f 2013 slips through the country’s fingers, Russia will fail to fulfill President Vladimir Putin’s promise to gain a slot as one of the top 20 countries for best business climate. This year looks set to be a decisive one for Mr. Putin’s pre-election promises on economic policy. Chief among these was a pledge that Russia would have one of the top 20 business climates in the world by 2018. Plenty of time, it seems. However, unless 2013 is utilized properly, Russia will struggle to meet this objective. Why does it matter so much? First, the target is measurable and the ranking is determined by a body independent of the Russian government. Second, the promise cannot be fulfilled without improving the performance of the country’s institutions. Third, improving the business climate will spur economic growth. A year ago, Mr. Putin set out his economic reform priorities in an an article entitled “We

need a new economy.” They were formalized in a decree signed May 7, immediately after his reinauguration, which instructed the government to“take steps to achieve, in particular, the following objectives: improve Russia’s position in the World Bank’s ‘Doing Business’ index, from 120th in 2011, to 50th in 2015 and 20th in 2018.” The clock is ticking. The 2013 Doing Business rating, published in fall 2012, put Russia in 112th place. According to a Kremlin directive in November, the gap between 50th and 112th places is to be overcome in just two jumps — in 2014, Russia needs to reach 81st. The 2014 Doing Business rating will be published this fall, and while the legal framework is in place, no laws were passed last year to improve the business climate. Parliament was busy with other important matters: regulating the Internet and NGOs, increasing fines for attending rallies and slander, and its response to the U.S. Magnitsky Act. As a result, the directive is likely to remain in the filing cabinet. Last year was not completely devoid of action, however. The government drafted a set of

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 TIM WALL, ARTEM ZAGORODNOV EXECUTIVE EDITORS ELENA SHIPILOVA EDITOR PETER PURTON GUEST EDITOR OLGA GUITCHOUNTS REPRESENTATIVE (U.S.) 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. TO ADVERTISE IN THIS SUPPLEMENT CONTACT JULIA GOLIKOVA, ADVERTISING & PR DIRECTOR,

roadmaps to improve the business climate, with the aim of raising Russia’s position in the 2015 rating. Another key promise is the exact time frame set for the privatization of state property. Mr. Putin instructed the government to draw up, by last November, a privatization plan to

We believe it is perfectly feasible to fulfill Mr. Putin’s promises to improve the business climate and to privatize assets. But for this to happen, 2013 must be a year of deeds, not words. provide for “the government’s complete withdrawal by 2016 from the capital of companies in the ‘non-raw materials sector’ that are not natural monopolies or related to the defense industry.”Specifically, this means the full priva-

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tization of all banking assets and transportation assets in competitive sectors. The implementation of this ambitious program will improve the managerial performance of the privatized companies and raise the level of economic competition. The only question is whether the program will actually be implemented, since previous privatizations have been systematically discarded. Unlike the push to move up the Doing Business index, in this case even the preparatory work remains untouched. If 2013 does not see the publication of a 201416 asset privatization program, then all hope of implementing Mr. Putin’s decree on schedule will be lost. What is the likelihood that Mr. Putin’s campaign promises to improve the business climate and to privatize assets will be kept? We believe it is perfectly feasible, but in order for it to happen 2013 must be a year of deeds, not words. THIS COMMENT, BY SERGEI GURIEV, RECTOR OF THE NEW ECONOMIC SCHOOL IN MOSCOW, AND OLEG TSYVINKSY, PROFESSOR AT YALE UNIVERSITY, FIRST APPEARED IN THE RUSSIAN BUSINESS NEWSPAPER VEDOMOSTI.

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Culture Taste the best of the capital at the cool converted Red October chocolate factory

An Island of Innovation and Hipsters A chocolate factory-turned-culture mecca on the Moscow River, Krasny Oktyabr packs the city’s best galleries, dining, nightlife and views onto one tiny island. JOY NEUMEYER SPECIAL TO RUSSIAN BUSINESS INSIGHT

The newest addition to the island’s art scene, Red October got off to a strong start last fall with a Soviet-themed installation by conceptualist duo Ilya and Emilia Kabakov. High ceilings and iron columns recall the gallery’s past as a factory floor. www.redoctobergallery.com

Shopping Bra-shaped pendants and a gold-and-sapphire bracelet that appears to be made of pencils are among the unusual works of jewelry designer Vladimir Markin. Markin’s playful (and pricey) designs have been featured in Elle and Vogue Russia; call or e-mail ahead to make an appointment.

PRESS PHOTO

Older Russians still recall the smell of chocolate that wafted from the factory’s red-brick buildings, which date from the late-19th century. In the Soviet era, Krasny Oktyabr (Red October) became the country’s most popular candy. In recent years, old factory floors have transformed into galleries, clubs, lofts and offices for hot media outlets such as liberal online TV station Dozhd. Despite being associated with the arty media set, Krasny Oktyabr’s diverse attractions draw all types. At Strelka Bar, bureaucrats rub elbows with independent filmmakers, while businessmen and backpackers alike can be found at Lumiere Brothers. Krasny Oktyabr offers a good day out in Moscow all by itself. Take in an art exhibition, snack on smoked haddock and dance at a rooftop club – all without having to hail a cab.

www.vladimirmarkin.com

If diamonds are too bling, then the designer Tshirts at T-SHKA (located on the central factory’s fourth floor) make colorful gifts and sell for a mere 800 rubles ($25). To really feel like one of the in-crowd, hang around to drink an espresso and peruse the electronic music selection.

A varied audience of students, young professionals and hipsters attend the Strelka Institute’s events.

Culture The Lumiere Brothers Center for Photography hosts the city’s finest photo exhibitions. Many shows draw from the center’s extensive Russian photo archive. Others feature big contemporary names from Russia and abroad, such as a recent show of New York nightlife chronicler Wendy Paton. The gallery also has an excellent shop, with black-and-white prints of 20th-century Moscow that make for elegant souvenirs.

Business Business travelers temporarily bereft of a workplace should consider a membership at Digital October, a hot co-working site that offers monthlong access to meeting rooms, a hip restaurant and more, at individual and corporate rates (individual memberships begin at 7,000 rubles, or $230). Finish a presentation, meet with an investor or just plow through your e-mails, then head out for more fun after dark.

www.lumiere.ru

www.digitaloctober.ru

For a relaxed meal, a cup of coffee or a beer in arty surroundings, Art-Akademiya is a perennial favorite. Opened by artists Yevgeny Mitta and Vladimir Dubosarsky, the restaurant boasts a long bar, comfortable cracked-leather sofas, as well as paintings by Pavel Pepperstein and other contemporary artists.The reasonably priced menu offers pasta and pizza starting at 280 rubles ($9), along with classic Russian favorites such as borscht for 390 rubles ($13).

Food Strelka, the island’s best restaurant, is affiliated with the Strelka Institute of Media, Architecture and Design.Velvet banquettes and curtains create a funky retro vibe, while in summer the outdoor terrace draws constant crowds. Its new Danish chef, Yves Le Lay, has infused the Russian-European menu with Scandinavian flair, with dishes like smorrebrod topped with smoked haddock and horseradish. During the day, têteà-têtes take place over eggs or a three-course business lunch at 380 rubles ($12); at night, the cocktails flow freely as the creative intelligentsia assembles. www.strelka.com/bar

www.t-shka.com

www.academiya.ru

Nightlife Krasny Oktyabr’s nightlife scene was once ruled by the glittery Rai, known for its long lines, snooty bouncers and flexible dancers. But after Rai closed its doors last year, Krasny Oktyabr’s most popular spot for drinking and dancing is the younger, more democratic Gipsy. In warm weather, it boasts the island’s most popular openair terrace. Year-round, there’s a pop-centric main floor and a more house-music and techno-heavy upper level. On the menu are Indianinfluenced appetizers.

IN FIGURES

$6.5 million was invested by tycoon Alexander Mamut in 2009 into the Strelka Institute for Media, Architecture and Design, named by Domus magazine in January 2013 as one of Europe’s Top 100 Architecture and Design Schools.

www.bargipsy.ru

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For a night that’s rowdy but pretension-free, head next door to Rolling Stone Bar, where the age range and sartorial influences vary widely. Covers of the Russian version of the eponymous magazine hang on the walls, though they’re usually obscured by the crowds and smoke. Rolling Stone DJs favor rock over techno.

The former chocolate factory on the banks of the Moscow River is home to art, design, media and high-tech projects, plus great restaurants and clubs.

www.facebook.com/BarRollingStone

Travel A single city combines rich history, religious tolerance and a peek into Russia’s large Muslim community

Kazan: a Fusion of Europe and Asia The best place to see a clash of Russia’s varying cultures and religions lies a 90-minute flight from Moscow - on the banks of the Volga River.

If you go: Kazan is an easy weekend trip from Moscow. Flights are available all day and a round-trip ticket runs to about $250. It is also possible to take an overnight train from Moscow’s aptly named Kazan Railway Station, for about $150 for a place in a four-person cabin, or $280 for a place in a two-person cabin.

TOBY FISHER SPECIAL TO RUSSIAN BUSINESS INSIGHT

Kremlin (formerly Lenin) Street in Kazan.

Kazan’s strikingly beautiful Kul Sharif mosque.

the 1,000th anniversary of the city’s founding. Heading back into the city from the river, you see its Russian heritage. The Kazan Theater of Opera and Ballet dominates Liberty Square, and closer to the city center is Kazan Federal University, near Bauman Street, a long pedestrian walk at the heart of the city. Here the souvenir shops alternate with restaurants, many offering Turkish cuisine – a testament to the

ethnic ties between Tatar and Turkic cultures. You’ll also find traditional Tatar dishes – the honey-coated fried dough known as chak-chak, served with tea, comes highly recommended. Across the Bulak canal is Kazan’s central market, which is not on the tourist trail but shouldn’t be missed. The vendors are primarily Tatar or central Asian, and it’s a good starting point for exploring the Tatar district.

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The centrally located Hotel Guiseppe is a popular mid-range choice. Located just steps from the kremlin, rooms in the cozy, Italian-themed hotel go for between $100 and $250, depending on the type of room and number of occupants. The hotel also features a popular pizza place. Giuseppe.ru

LORI/LEGION MEDIA(2)

A trip to the city of Kazan, on the Volga River some 600 miles east of Moscow, is almost like visiting another country. The city, which will host the 2013 World Student Olympics, or Universiade, July 6-17, is the capital of the Republic of Tatarstan – whose population is almost evenly split between the Muslim Tatar and Orthodox Russian communities. Kazan’s appeal is rooted in this mix of cultures, which is reflected in the city’s architecture and cultural offerings. Dominating the city skyline is the kremlin, Kazan’s ancient fortress. There is a large mosque as well as a Russian Orthodox cathedral – Tatarstan became part of Russia during the reign of Ivan IV (the Terrible), whose forces put the city under siege in 1552. Next to the mosque, the Annunciation Cathedral is revered by Orthodox believers as the home of the icon of Our Lady of Kazan, one of the holiest in Russian Orthodoxy, built between 1554-62. As well as the religious sites, the kremlin also features the Söyembikä Tower, which leans on its side. English-language tours are available. The Kazanka River joins the Volga at Kazan and gives a good view of the city’s modern face, including Millennium Bridge, built in 2005 for

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Across the river from the kremlin, a more upscale choice is the Hotel Mirage. The rooms here, which feature minimalist furnishings and fluffy white duvets, range from $125 to $400. Mirage-hotel.ru In addition to the pizzas at Guiseppe, locals recommend Pashmir, which features Central Asian/Turkish cuisine, which has highly influenced local food. Pashmir.ru

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