May 2011, Russia&India Business Report by RBTH

50th Anniversary of Manned Space Flight

BUSINESS REPORT IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA

...Marching towards a common future

WEDNESDAY, MAY 11, 2011

Defence Russia's anti-ballistic missile defence system can cover Eastern Europe and the Black, Baltic and North Seas

An umbrella to shield from space threats

Victor Litvin ribr

Russian President Dmitry Medvedev has issued a decree to create Aerospace Defence Forces in the country before December 1 this year. The aerospace forces will work under a single command-and-control system to effectively ward off potential missile threats. It will be equipped with means to fight supersonic unmanned planes and non-nuclear missiles, says Russian Aerospace Forces Commander, Lieutenant General Oleg Ostapenko. The forces will be capable of destroying enemy targets in near space and could be used in the future for defence from stray asteroids, says Ostapenko. “Russia, for much too long, placed its bets on the enemy not starting a war against us because people here thought our nuclear-missile shield would guarantee that no one

would think of doing anything of the sort,”says Konstantin Sivkov, Vice-President of the Academy for Geopolitical Issues.“We can see, however, that this didn’t stop Georgia, which perfectly understood that we would not use our nuclear-missile shield in conventional warfare. Nuclear-deterrence forces need to have reliable protection against air and space strikes.Therefore, creating aerospace defence forces is extremely necessary,”he says.

The system will include a missile warning system and radar stations spread over regions. Under this programme, all the systems in Russia that monitor near and outer space, the country’s and its allies’ airspace, as well as their borders, will be integrated. This includes a missile warning system, radar stations in northern Russia, the Murmansk and Leningrad regions and the Komi

Republic. This will also include a radar station currently under construction in the Kaliningrad region, operating radar stations in Hantsavichy (Belarus), Armavir in the Krasnodar region, Gabal (Azerbaijan), Balkhash (Kazakhstan) and near Irkutsk. It also includes space missile warning system satellites in high-elliptical and geosynchronous orbit, a space surveillance system with radar and optical-electronic complexes in many different areas of the country and abroad such as the ones outside Nurek, in Tajikistan. In addition, the aerospace defence will include DON2N, a unique radar station complex outside Moscow, which will be able to detect objects ranging from five centimeters at hundreds of kilometers in the air.The station provides security for Moscow and the entire surrounding region, and also wields anti-missile/anti-air S-300 and S-400 air-defence systems.A S-500 air-defence system will also be created and armed with missiles capable of intercepting ballis-

Medvedev signs law to punish the corrupt Russian President Dmitry Medvedev has moved to spruce up his image as an anticorruption crusader as he signed off a bill to increase fines for bribery. The bill, approved by the Russian parliament earlier this month, raises fines for giving or taking bribes upto 100 times the amount of the bribe.The maximum fine is 500 million rubles ($18.3 million). "I hope this law helps fight corruption. The scale of corruption is horrifying," Medvedev said in a meeting with Russian Prosecutor General Yury Chaika. "It is an absolutely new punishment," the president said. RIA Novosti

Russia world’s 7th biggest arms spender

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Russia will set up a single command-and-control Aerospace Defence Forces later this year that will act as a shield against potential threats from space.

An officer seen at a control center of the next generation Voronezh-DM radar station, a missile warning system.

Energy Plans to build LNG plant in Yamal to tap Siberian gas

Surging oil price drives Russia to LNG option

photoxpress

With oil prices rising, Russia is set to ramp up LNG supply as an alternative. Tim Gosling Ribr

As fossil-fuel demand and prices surge due to recent events in North Africa and Japan, Russia is moving to strengthen its export operations with the construction of new facilities to produce liquefied natural gas. Transported by special freezer ships, LNG in large quantities frees both producer and purchaser from the tangled politics involved in building permanent pipelines. Russia already has one LNG plant on the Far Eastern island of Sakhalin that sells much of its output to Japan. In March, the Krem-

Russia India REPORT

lin announced plans for a similar processing plant on Russia’s western coast. Building an LNG plant on theYamal Peninsula, which taps into the vast reserves of western Siberia, is an alternative to supplying natural gas to Europe via pipelines. But it also underpins prospects for Russia’s contentious South Stream pipeline project to southern Europe by broadening supply options, says Energy Minister Sergei Shmatko. “Russia does not face a bottleneck in its obligations under the South Stream project, but has several alternatives,” Shmatko told Prime Minister Vladimir Putin. Uniting Russia's semi-state gas giant Gazprom with

A worker at the Sakhalin LNG plant. This stateof-the-art plant can supply fuel to Asia in tanker ships. The production capacity of the plant is 9.6 million tons of LNG per year.

News in Brief

Germany’s BASF and Eni of Italy, South Stream would pipe Siberian gas to southern Europe. But the project is ranged against the rival Nabucco pipeline promoted by the European Union which, if built, would skirt Russian territory and link Europe directly to the gas reserves of the Caucasus and Central Asia. Recent revolutions in North Africa have bolstered South Stream by jeopardising supplies for Nabucco, but both pipelines have been embroiled in geopolitical wrangling by countries along their routes. The planned LNG processing plant in Yamal would break the deadlock, as LNG can be shipped to any place that has a port and facilities to offload it. Overall, exports of LNG fromYamal, Sakhalin and the Shtokman gas field in the Barents Sea should move upto 85 billion cubic metres of gas annually to Europe and Asia, Shmatko said. Putin also ordered the energy minister to study the possibility of building an LNG plant on the Black Sea coast, close to Russia’s main oil export ports and the planned undersea route of the South Stream pipeline, which will come ashore in Bulgaria or Romania. VTB Capital estimates that, with the disruption of oil supplies to Europe caused by the Libyan conflict, Russian gas exports could grow this year by 10-15 billion cubic metres, or 7-10pc of Gazprom’s total exports. Prices on European gas spot markets also spiked after Japan’s earthquake. Meanwhile, leading private gas producer Novatek spent $526m (£321m) on a 25.1pc option on the plannedYamal LNG plant. Novatek already owns 51pc of the project and has a call option on another 23.9pc stake, should the plant go ahead.

tic targets in near space. What’s important is that the western, southern, central and eastern military districts’ anti-aircraft defence complexes, as well as their aviation fleet of interceptor aircraft, will be given to the aerospace defence forces for operational control. The aerospace forces command must be subordinate to the general staff. Some experts say that the strategic missile forces should become a part of the aerospace defence forces.This means that

should something happen and a signal from the missile warning system about an attack on Russia by enemy strategic missiles is received, a counter strike can be made without delay. Experts have also been discussing and exploring how Russia’s aerospace defence system can be integrated with Europe’s anti-ballistic missile system. The space forces’ chief said in April that Russia’s antiballistic missile defence system could cover Eastern Eu-

rope and the waters of the Black, Baltic and North Seas. “Our anti-ballistic missile system’s contribution would be in destroying ballistic missiles launched at targets in Russia, border regions between Russia and its neighboring countries and European states,” he said. He clarified that destroying missiles targeted toward Europe would be possible thanks to a joint military control centre that is being discussed as part of the European antiballistic missile system.

Equities Russia's stock market star performer of the year

ETFs ride high on emerging markets The burgeoning popularity of exchange-traded funds in Russia is bringing in more overseas funds, but some experts warn ETFs may increase market volatility. ben aris

business new europe

After ignoring the rise of emerging economies for much of the nineties, mainstream investors have woken up to the huge gains that can be earned in a relatively short amount of time from these markets, and have turned to the ExchangeTraded Fund (ETF). However, long-term investors in the biggest emerging markets warn that these funds may destabilise fast-growing stock markets. Russia’s stock market has been the star performer this year, but as the economy is increasingly dependent on oil, analysts worry that the increased importance of ETFs means any correction could be sudden and sharp. The appeal of ETFs is that, unlike a mutual fund, these funds can be traded on an exchange.That means investors can get in and out of a fund instantly. But, like a mutual fund, the underlying fund is based on a basket of stocks that give the diversity, which is the cornerstone of any long-term investment in a risky asset class. They also have low costs and a beneficial tax status. “ETFs have enjoyed a huge wave of interest from investors wanting to tap into highgrowth markets, as they can offer broad exposure or drill

down into specific areas,” says Chris Weafer, head of strategy at UralSib in Moscow. Few would have expected emerging markets to benefit from the flight-to-safety trade, but that is what has happened as developed markets bury themselves in a debt hole. Emerging-market

New money flows into Russia-focused funds in last week of March amounted to $486 million investments have done very well over the last two years, and Russia’s market has been one of the best performing in the world, up about 150pc in 2009 and 22pc in 2010. Most gains in 2010 were made in other emerging markets, but Russia is the leading BRIC market this year,

up 15p% over the first three months of 2011. The leading RTS index crossed the 2,000 mark in March as the valuation of Russian stocks overtook their pre-crisis highs for the first time in two years. The RTS is expected to pass its all-time high of 2,487.92 later this year. Russia is now attracting considerable overseas cash, and fund tracker EPFR Global says that new money flows into Russia-focused funds in the last week of March amounted to $486 million – up from $139 million the week before. By March-end, assets under management in Russia-dedicated funds hit a new alltime record high, breaching the $20 billion mark, according to Uralsib. Half of this is now in ETFs.“ETF investors continue to increase exposure to Russia,”says Weafer.

Global equity market performance: Feb-March 2011

While Russia's position in the military expenses rating has jumped up, its defense expenditure is dwarfed by those of China and the US, according to the World Arms Trade Center watchdog, which has analysed the world arms trade during 2002-2009.“We tried to assess every country’s attitude to military development,”Igor Korotchenko, head of the center, said. Research showed that Russia’s military expenses in 2009 amounted to $38 billion. In eight years, the country had managed to climb from 11th position to 7th.“There has been a six-fold increase in spending in the three years,”says analyst Igor Khokhlov. RIA Novosti

Sistema to decide on selling stake to ONGC AFK Sistema will take a decision on selling 25% of Bashneft to India’s ONGC in 2011. “We have made the strategic decision to sell the stake and have started negotiations with the ONGC. No talks with other partners are going on,”said the company’s CEO Mikhail Shamolin. He stressed that Sistema was interested in the ONGC because it has business in India.“Until things become clear on possible partnership with the Indian company, we do not intend to conduct any talks with other companies,” he said. Shamolin also announced that his company was considering the sale of Bashkirenergo.“Sale is an option that we do not rule out,”he added. Finam.ru

India to buy 1-2 mn tonnes of Russian coal India's surging demand for thermal coal will draw in 1 to 2 million tonnes of Russian supply for the first time in 2011 and compete with South African and Indonesian coal, said Indian importers and Russian exporters. Although Russian coal is likely to remain a minor part of India's projected 140 million tonnes of imports for 2011 and 2012, India has started to import Russian coal for the first time this year. This year, India's Adani Group has bought two cargoes of Russian coal. "Around 1 to 1.2 million tonnes of Russian coal could go to India this year," a Russian exporter said. RIBR

Roerichs Academy of Arts in Kullu soon

Embassy of Russia in India

The Roerichs' protected estate in the Kullu valley saw the laying of the foundation stone of the future Roerichs Academy of Arts on May 1. The ceremony, organised by the International Roerichs’Memorial Trust, became the central event of the traditional festival which is held twice a year in Naggar in western Himalayas. According to the plan approved by the IRMT Board of Trustees on March 25, 2011, the Academy will include a general education school with an artistic bias and a College of Arts. Russia's ambassador to India Alexander M.Kadakin, the vice-president and a life trustee of the IRMT, stressed that Russia would convert the estate into a world-class cultural, educational and research complex. RIBR

May 25

in the times of india

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BUSINESS REPORT in association with rossiyskaya gazeta, russia Wednesday, MAY 11, 2011

Region Yaroslavl hoping to attract India's pharma giants to set up manufacturing facilities

Investments A merger, not a takeover, say partners

Pharma hub targets top Indian companies

CUMI rides high on silicon carbide dreams The Volzhsky Abrasive Plant, in which CUMI International Ltd owns a controlling stake, firms up ambitious expansion plans. Tatyana Tarakanova RIBR

vostock-photo

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With economic clusters becoming a key priority of the government, Yaroslavl is hoping to become a pharma and tourist hub of Russia.

ing investors several finished areas for investment projects. Nearly 470 million rubles ($17.4 million) have been earmarked for the development of infrastructure parks and the creation of industrial areas in 2011, said Elfimov. Industrial parks provide a “one window”clearance for companies, simplifying bureaucratic hassles and making life much easier for investors, he says. But there is a long way to go.The Association of Industrial Parks estimates that there are 25 industrial parks open for business and 60 to 70 parks under development. The Yaroslavl Region takes pride in the successful development of three key projects: two industrial parks (Tutaev

Vladislav Kuzmichev ribr

India and Russia’sYaroslavl Region have similar economic priorities — the development of pharmaceuticals, information technologies, and the automobile industry — and may successfully implement joint projects, said Igor Elfimov, deputy governor of theYaroslavl Region, during a recent meeting with a visiting delegation of Indian businessmen. The region’s authorities are focused on developing industrial parks and are offer-

A worker at R-Pharm pharmaceuticals plant.

and Novoselki) and one production park (GavrilovYam). The Novoselki Park is spread over 455 hectares. It is now home to three hightech manufacturers: Komat-

The main draw of pharma cluster is its system of multilevel training of professionals su mining and construction equipment, Astron Lindab building systems, and Nycomed pharmaceuticals. “The Yaroslavl Region is ready to do everything necessary to become the pharmaceuticals capital of Russia,” says Governor Sergei

Vakhrukov. This ambition has been spurred by the inclusion of theYaroslavl Region in the Russian government’s Pharma 2020 strategy, which aims at stimulating growth in the local pharmaceuticals industry. In 2010, construction began on a new factory to produce the Russian active pharmaceutical substance“Pharmoslavl”,a joint initiative of the R-Pharm Company and the High-Tech Center “ChemRar”. By 2014, the factory plans to produce at least 66 varieties of active substances. More than $250 million has been invested in the pharmaceutical business. In 2010, the foundation was laid for a new factory for Nycomed, which will be the

Interview Cluster Helps Indian Products Penetrate Europe

It's a big plus for Indian investors Alok Kumar, Director General of Pereyaslavl Industrial Park, is upbeat about facilities and other incentives the region offers. Vladislav Kuzmichev

When did you become the head of the industrial park and what are your achievements? The techno park is three years old and I have been its head for less than a year. It was created as an industrial zone, and I brought international standards to it.We introduced the Plug and Play system so that any investor can get ready to use industrial and workplaces at once. He can come with his equipment and start production at a very short time. The park already has its own customs terminal. As a co investor, we started investment in modernisation of infrastructure and investment in power and heat generation, which we already provide to our resident. Are only Russian companies present in the industrial park? No. Among the foreign companies, there are Kodak, SunChemical and Nordenia. We are currently negotiating

nikolay korolev

ribr

Alok Kumar, chief of Pereyaslavl Industrial Park

with several American companies to establish a base for methanol production in our cluster. In last December, we signed a contract with a major Indian company on the production of a superconcentrate, 80% of which will be used by the production facilities that operate in the techno park. An agreement has been signed with Kraspharm, a major Russian pharmaceutical company. It will produce physiological solutions using the park’s facilities. The local university is training personnel for the pharmacological industry. Where are the cluster’s products sold? The bulk of the cluster’s

products are sold in Russia. But the cluster is potentially very interesting for Indian and other investors, because Russia is a member of the Customs Union with Kazakhstan and Belarus, which means that the goods produced here can be sold dutyfree to these two countries. These are also large markets. Also, Europe has imposed quotas on many Indian products. The Russian clusters make it possible, without raising much costs, to increase supplies of Indian products to Europe as after producing the goods here, they are considered to have been produced in Russia. One should also keep in mind that with the economic situation in the world, our presence in the fast-growing Russian market is a big plus to an Indian company’s credit score. Europe and America are experiencing economic problems, while the Russian market is vast and one can start a greenfield business and capture the local and export market. Where do you recruit your personnel from? Most of the employees are former Slavich workers. They are skilful. Bringing

technical persons by investor can be made possible. There is a vocational school that trains a new generation of personnel. How did you end up in Russia? My father is a technocrat and most of the projects he worked on were Soviet-supported. Like any father, he wanted his son to follow his footsteps. I came here in 1990 and graduated from Moscow Power Engineering Institute. After graduating, I went back to India, but only stayed there for a few months. I had become so accustomed to the Russian atmosphere and culture that as soon as I was asked to head a multinational company’s office in Russia, I agreed. It was a major company that owned a chemical production facility in Russia. Are you married? What food do you prefer? Yes, I have an Indian wife. She recently gave birth to our daughter. At home, we eat Indian and continental food. But when we visit our friends, we enjoy Russian food. My wife knows how to cook borsch (a soup of Ukrainian origin ) too.

flagship enterprise of the Yaroslavl pharmaceuticals cluster. By the end of 2013, the factory plans to produce modern medications for treatment and prophylaxis of nerve and heart diseases. The Novoselki Park has around 100 hectares of land. R-Pharm, the leading Russian distributor of medications in the hospital sector, plans to open its own factory inYaroslavl this year. In developing pharmaceuticals, theYaroslavl Region is hoping to attract Indian business. In December 2010 in Delhi, at the Fourth Russian-Indian Forum for Trade and Investments, R-Pharm signed a cooperation agreement with Dr. Reddy's, a leading Indian pharma company. This agreement is aimed at bringing about a phased transition to manufacturing in Russia. Many agreements were signed with Indian manufacturers of medical materials, equipment and software. Medikit, which specialises in manufacturing syringes and blood transfusion equipment, is negotiating with the Russian company Kraspharm to create a joint enterprise in Pereslavl-Zalessky. In January, the Yaroslavl government and Ranbaxy Laboratories Limited signed a memorandum on cooperation in healthcare and the development of the pharmaceuticals sector. The main draw of theYaroslavl cluster of pharmaceuticals is its system of multilevel training of professionals, which includes additional post-graduate and secondary professional education, support of scientific research, advanced professional training of doctors, and teaching new technologies to medical personnel. The idea of clusters has spread to the tourism industry. Yaroslavl was once a far larger city than Moscow and was the capital of a large principality. The region is counting on tourists from Asia.“In the near future, our city will host an Indian delegation.We will form a plan, and our cooperation with India, will expand,”says Eleonora Sheremetyeva, the head of the Administration of the Uglich Municipality.

The plant controls half of Russian market of abrasive tools and supplies it to 40 countries. grinding materials and abrasive tools, owns 25 plants similar to the Volzhsky in Europe and Asia. CUMI, however, found a superb asset in the Russian market; the company was buying a successful enterprise.TheVolzhsky Abrasive Plant continues to control half of the Russian market of ceramic abrasive tools and supplies its goods to 40 countries. Therefore, the Russian and Indian partners agreed that this was not a takeover but a merger of the two successful businesses. Four years of close cooperation have proved that such integration bears fruit. The output of silicon carbide went up by 15%. The production of abrasive instruments rose by 25%. In November 2009, the plant

launched the first facility in Russia for the production of fireproof nitrite-bonded slabs worth 3 million euros. The slabs are intended for the aluminium, porcelain and defence industries, including those for internal lining of nuclear submarine reactors. The Indian investors have substantially renovated and restored the production and technical facilities of the plant, which marks its 50th anniversary this year. Both sides place high premium on technology exchanges. Based on the recommendation of the Indian experts, the smelting furnaces’design and the organic-bonded abrasive formulas have been improved. The Russian specialists, for their part, shared their know-how for ceramicbonded tools production. The Indian owners did not doubt for a minute that they needed to preserve the plant’s social commitments. After CUMI International Ltd. bought into the enterprise, all the social benefits for the plant’s workers were kept intact. What’s more, the company recently invested 20 million roubles in renovating Kristal, the corporate health and recreation centre where the plant’s workers not only vacation but also go to recuperate. A third player in this effective partnership is the administration of theVolgograd region.“The agreement we signed with the regional authorities envisages investment tax breaks, support during complicated negotiations with natural monopolies and much needed assistance in finding top-of-the-line workers and engineering personnel,”says the plant’s Director General Director Sergei Kostrov.

THE QUOTE

Biggest producer in Europe

General manager of CUMI Interna-

JSC Volzhsky Abrasive Plant is the only producer of silicon carbide in Russia, the biggest producer in Europe and the biggest producer of ceramicbonded abrasive tools in Russia and the CIS. The plant is commemorating its 50th anniversary this year. Designed in the former USSR, the construction site was chosen because of a large raw materials base: quartz sand was mined in the Orlovsky Quarry on the right bank of the Vol-

K.Shrinivasan tional Ltd., member of the Volzhsky Abrasive Plant Board of Directors

The Volzhsky Abrasive Plant is our group’s biggest unit. It is the biggest producer of silicon carbide and uses world-class technology for the production of abrasive materials and grinding tools. It has a highly professional workforce, beginning with workers and ending with the executives.

ga River, the petro-coke came from the Volgograd Oil Refinery and the electricity supply was provided by the nearby Volga Hydroelectric power station. The first production line was launched in 1961. The first batches of abrasive grain were supplied to the international market in 1962. CUMI International Ltd. has an annual turnover of over $300 million. It invested over $150 million in production development over the past five years.

from personal archives

St Barbara's Church and Volga river, Yaroslavl.

TheVolzhsky Abrasive Plant, in which CUMI International Ltd, an Indian company, owns a controlling stake, launched a new facility for the production of silicon carbide in April.With an annual output of 75,000 tonnes of this raw material, the plant is the largest such facility in Europe and the only one in Russia. The first stage will cost $6.6 million and is due to go into operation in 2012. Subsequently, three more such modules are to be built. Silicon carbide is a diamondlike material with manageable nano-structure-dependent properties. It is used in various industries ranging from metallurgy to electronics. It is widely used for producing high quality refractory materials, technical ceramics, special elements for electronics and filters. In the future, the project envisages deep processing of silicon carbide. The plant’s managers and Indian owners see no problems with silicon carbide sales: there are already orders for the next few years. Officials at the plant are proud that it supplies its products to every country in Europe and will soon be a household name across the world. Another promising area of growth at the plant is alternative energy. A special silicon carbide fraction prod u c e d i n Vo l z h s k y i s processed in India into micro powders to be used in elements of solar cell banks.The

challenge now is to organise supplies of similar products to Russian markets. CUMI International LTD, part of Chennai-headquartered Muragappa Group, bought a controlling stake in theVolzhsky Abrasive Plant in September 2007. The deal was not struck instantly: Indian executives visited the Volgograd region three times, met the top management and studied the technology used at the plant.Volgograd managers, for their part, also came to India to discuss the guidelines for future cooperation. The case for going ahead with the deal was obvious. CUMI, whose core business is the production of

Indian and Russian partners lay the foundation stone for a new production facility for the production of silicon carbide. April, 2011.

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in association with rossiyskaya gazeta, russia Wednesday, MAY 11 2011

Medvedev's poll pitch: Purging the corrupt Aleh Tsyvinski, Sergei Guriev

resident Dmitry Medvedev has moved against some of the most powerful men in the government, including Deputy Prime Minister Igor Sechin, who is perhaps closest to Prime Minister Vladimir Putin. He signed a decree to strip Sechin, who was been until recently chairman of Rosneft, Russia’s largest oil firm, and others of their chairmanships of some of Russia’s biggest state-owned companies. The stated purpose of the decree was to improve the country’s investment climate, but the purge may reflect other more important goals. Medvedev has always recognised both the need to attract Russian and foreign investment and the country’s dismal investment climate.This time round, he outlined specific measures and set deadlines for implementing them. With some of the measures set to face stiff opposition from powerful interest groups, the reforms are set to be a major test of Medvedev’s real strength — and of his plans to run for another presidential term. Even partial success would allow a Medvedev re-election campaign to be built around linked

niyaz karim

the moscow times

themes of anti-corruption and transparency. Corruption and government accountability are probably the most important issues for Medvedev’s electoral base among the country’s rising middle class and “protest voters”. United Russia’s recent poor performance in regional elections shows that the electorate is fed up with the status quo and is ready to vote for an alternative.

The success of leading anticorruption activist Alexei Navalny is another wakeup call for Medvedev. Many of the measures proposed by the president are similar to those recommended by Navalny: removing government officials from the boards of state-owned companies, thus ensuring access to corporate documents for minority shareholders and developing a way to respond

to whistleblowers on corruption. Medvedev’s message is simple and clear: those who fear transparency are those who have something to hide. Navalny’s repeated requests for the minutes of several stateowned companies’ board meetings generated massive resistance. Two companies even tried, albeit unsuccessfully, to change the law to reject shareholders’ requests

for information. The most controversial of Medvedev’s measures is the removal of key bureaucrats from corporate boards. His orders list 17 state-owned companies and the powerful ministers and deputy prime ministers to be removed from board chairmanships by July 1. The president’s logic is straightforward: A government official in charge of an oil company or a bank faces an inherent conflict of interest. The chairman of a board must serve the interests of the company, but a government official must pursue public interest, which includes preserving a competitive environment in the oil or banking sector. Board chairmanships, however, remain the domain of the bureaucracy. Not a single state-owned company has an independent chairman. And the chairmanship is a crucial position as its occupant sets the agenda and controls discussions. It is difficult to talk about standards of corporate governance in Russia’s stateowned companies since most do not even have regularly scheduled board meetings, owing to the unpredictability of government officials’ schedules.This may seem little more than an annoyance, but it has an important implication: When there is no regular schedule for board

meetings, many independent directors — especially foreigners — often cannot attend. If the board chairman is not a government official and can commit to an annual schedule, highly skilled independent directors from around the world could be attracted. It is not clear who will replace the bureaucrats as board chairs. Given their importance, the new chairs must have the necessary skills and integrity. It is also uncertain whether the new board chairs will actually run the companies. Russia’s legal system is imperfect, and even serious violations of corporate governance are difficult to punish. It is not unthinkable that the management will simply ignore the boards. Finally, while some board members are truly independent, others receive “directives”from the government; it matters whether the new board chairs run their boards independently or follow the Kremlin’s orders. In the latter case, the new — and quite expensive — chairs would be treated as government proxies, making a mockery of the entire exercise. The good news is that Medvedev’s chief economic adviser, Arkady Dvorkovich, has said government directives “will be reformed”as well.We will know soon — certainly before July 1 — whether Medvedev can implement his agenda and whether he is willing and able to build his own power base in the process. Sergei Guriev is rector of Moscow’s New Economic School. Aleh Tsyvinski is an economics professor at Yale University.

A new era of joint defence ventures Arun Mohanty

specially for RIbR

he ill-conceived market reforms, masterminded by the Washington Consensus and executed by the then Russian regime in the aftermath of the Soviet breakup, dealt a fatal blow to Russia’s powerful military industrial complex that housed 70-75% of the nation’s scientific– technological assets. If the first decade following the Soviet disintegration saw an unprecedented decline in the MIC, developments in the past decade suggest a radical revamping of the complex. The first fundamental shift in state policy in the area took place under President Vladimir Putin's regime. He introduced a host of reforms: the creation of the state agency for defence order; a unified procurement system in the defence ministry; and the setting up of a govern-

ment commission to look into military industrial issues. The situation started changing for the better since 2004 when the state defence order for the country’s armed forces not only matched but also s t a rt e d e x c e e d i n g t h e amount of profit received from arms export. Defence allocation has been registering nearly 30% growth each year since 2005. The state programme for the 20072015 period, that seeks to equip the Russian armed forces with modern military hardware of the 21st century, amounts to whopping 5 trillion rubles. While the government allocated $6.7 billion for arms procurement in 2005, it went upto $8.8 billion in 2006. This was on top of the additional 50 billion rubles meant for buying high-tech weapon systems, and touched $46.8 billion (1.3 trillion rubles) in 2009. If the national defence budget amounted to just 214 billion rubles in 2001, it touched

302 billion rubles in 2007, which is more than 20% compared to the year 2006. Under the state defence programme covering the period upto 2015, 63% of the allocation would be spent for procuring new military hardware. In the new programme, the third one in the post-Soviet history, emphasis has been given on the serial procurement of weaponries rather than on research and development (NIOKR). But this does not mean that R &D would suffer from a lack of funds, says Russia’s first deputy prime minister Sergey Ivanov in charge of MIC. He stressed that emphasis would be given to research on new material creation, plasma physics, and microelectronics.While 94.1 billion rubles were allocated for research and development in 2007, it was raised to 1 trillion in 2008. The year 2006 turned out to be a turning point for MIC in the post-Soviet period. Russia keeps its defence budget

within 2.6 to 2.8 per cent of its GDP. The government is investing huge sums of money in MIC through state programmes and result-oriented federal programmes for technological renovation of the defence industry. The restructuring of MIC through a host of competitive holding companies in areas like aviation, space, air defence systems, shipbuilding and nuclear has created new possibilities for revamping the Russian defence industry. Russia plans to have 40 such large corporates with concentration of technological and financial resources by 2015. As revealed by PMVladimir Putin in his recent address to the Russian State Duma, the government would allocate an unprecedented 20 trillion rubles in 2011-2020 under the new state programme, which is three times larger than the earlier programmes. Also, Russia has firmed up ambitious plans for the modernisation of MIC itself since

new quality weapon systems can be produced on the basis of new equipments, and the government plans to spend 3 trillion rubles for it in the next 10 years. The government will invest 200 billion rubles each year for R&D, and producing dual-use technologies. In the backdrop of Russia’s massive MIC modernisation programme in recent years, the assertion by a section of India’s strategic community and media that Russia’s MIC is decaying and hence India should rethink its defence procurement policy drastically, particularly in Russian direction, is highly misplaced. Half-a-century old IndoRussian defence cooperation has entered a new qualitative stage with the emphasis on technology transfer, joint research and joint development that helps in augmenting India’s much-desired indigenous potential. We should not lose sight of the fact that Russia is still a

powerhouse of high tech that is essentially concentrated in its MIC, and India is Moscow’s most-preferred and most trusted partner in the area of sensitive cooperation.This is reflected in joint ventures like the development of Brahmos, the fifth generation fighter aircraft and multirole transport aircraft. In an era when transnational defence conglomerations are in formation with Anglo-Saxon and continental European groupings, India and Russia, given their high level of trust and civilisational links and history of productive cooperation, are left with no other option than to form yet another conglomerate for strengthening joint research, development, production and marketing by combining their technological and financial resources for mutual benefit of both countries. Arun Kumar Mohanty is Director of“Eurasian Foundation”, New Delhi.

Konstantin Simonov

The Moscow Times

nalysts have been talking about Russia’s natural resource curse for years, but now the discussion has reached people as well. Recent polls show that about half of all Russians are aware of the main fallout from the curse — that high oil prices, although profitable in the short term, negatively impact on the country’s long-term development.The logic is simple: A windfall of petrodollars from unusually high oil prices has corrupted the ruling elite, eliminating the incentive for them to diversify the economy beyond the export of natural resources. Nonetheless, there are many examples of countries whose

economies were heavily reliant on raw materials but were able to diversify.Take, for example, the US, which is one of the largest raw materials producers in the world. Last year, the US replaced Russia as the

We should focus less on curses and more on developing and modernising institutions. world’s largest producer of natural gas, largely due to its booming shale gas production. The US is in second place for coal extraction and is the world’s third-largest oil producer. But proponents of the curse theory tend to downplay the US as a leading global natural resource pro-

ducer. Norway, Canada and Australia are three other good examples. They prove that stable democracies and effective public institutions make the resource curse virtually unnoticeable. Ten years ago, the resource curse was a hot topic of discussion. Many focused on the need to raise taxes on the oil and gas industry to stimulate investment in manufacturing and other sectors. Russia has actually made some progress in diversifying its economy. Besides the manufacturing sector, Russia also has a significant services sector, and many economists believe that the growth of the service sector is a main indicator of a developed economy. You can find another indicator of Russia’s diversity by looking at its employment figures.

Today, 10.5 million Russians are employed in the manufacturing sector, or 10 times more than in the raw materials industry. Almost 12 million work in trade, 6 million in education, 5 million in healthcare and social services, 1.2 million in the hotel and restaurant business and another 1.1 million work in the banking and financial services sector.Thus, manufacturing and service sectors dwarf the raw materials sector in terms of people employed. The problem is that the manufacturing and service sectors produce relatively little wealth for the country. But even in a worsecase scenario, it is highly unlikely that employees would suddenly start working better or that the ruling elite would rush to implement reforms. We need to

niyaz karim

Look beyond Resource curse for Russia's woes

rely less on the theory of a natural resource curse as an explanation for most of Russia’s woes. Although there is some truth to this theory, Russia’s oil and gas wealth is by far not the main reason why the country lags behind other leading economic

powers.We should focus less on curses and more on developing and modernising the country’s political and economic institutions. Konstantin Simonov is director of the National Energy Security Foundation.

India ties will survive MIG loss Viktor Litovkin

Specially for RIbR

he Indian Defence Ministry’s announcement that the Russian Mig-35 failed to make the shortlist for the Indian tender to purchase 126 warplanes under the MMRCA (Medium Multi-Role Combat Aircraft) programme was bad news for the Russian Aircraft Building Corporation MIG. But it was not exactly a“bolt from the blue”.The result was expected. Why? There were six fighter planes competing for the $11 billion tender, which would load aviation industries for years to come. These were the American F/A18E/F Super Hornet by Boeing and F16IN Super Viper by Lockheed Martin, the French Rafale from Dassault Aviation, the Eurofighter EF-2000 Typhoon (from EADS), the Swedish Gripen NG (Saab) and the Russian Mig-35. At the 7th Aero India-2009 international air show in Bangalore, the sponsors described the Mig-35 as“absolutely the best”,as this writer heard from loudspeakers at the Yelokhanka air base. Huge roadside pictures of the Mig bearing the words “MiG – with India, for India!” were erected every 10-15 km on the way to the airfield. But two years on, at Aero India 2011, the Russian fighter was not even on display. What is the explanation for this? A few years ago, the Indians made a revolutionary decision to diversify their arms purchases. The equipment used by the Indian army and navy is 80% Russian/Soviet.The problems of the Russian defence industry, which is going through hard times, have an immediate impact on supplies to the Indian armed forces. The Vikramaditya (formerly the Admiral Gorshkov) aircraft carrier is a striking example. India commissioned its modernisation at the Sevmash shipyard, but the ensuing

seven-year delay virtually doubled the price. There are other, subjective factors.Yes, the Mig-35 looks very much like the Mig-29K, which the Indian Defence Ministry bought from Russia for the Vikramaditya carrier. Yet, in reality, it is a totally new plane that can ensure air superiority and precision strikes on land and surface targets without entering the enemy air defence zone. The Mig-35 is equipped to change direction quickly, which gives it a major advantage in a dog fight situation. Several months ago, India set some demands for its partners.Specialists have counted 14 of them,including replacement of some on-board equipment with foreign analogues, increase in the power and lifespan of the plane’s engines, and simplification of servicing and repairs.These require-

Russia lost the biggest aviation tender. Our military ties with India will, however, survive it. ments were not met on time. One can guess why. Given other equal conditions and combat qualities, they thought the Mig-35 would beat its rivals on the“price/efficiency”ratio. Alas, this was not to be. It is no tragedy that Russia lost the biggest aviation tender of recent years. Our military and technical ties with Delhi will survive it. We will continue working on the BrahMos missile, on the fifthgeneration fighter, the MTA transport plane, the Airborne Warning and Control System (AWACS), frigates and submarines, including the nuclear-powered Nerpa. It is important for both sides to draw lessons not only from successes but also from setbacks. As for the Mig-35: it will fly, if not in Indian skies, then in Russian and perhaps in some others.

BRICS' challenge to dollar power Yulia Tseplyayeva

www.forbes.ru

he share of the five BRICS countries (Brazil, Russia, India, China and South Africa) in the world economy is soaring. It already accounts for 20%. Pegging the US dollar to all these five countries seems an anachronism to some people. Many countries want to change this. But it is not that easy. First,each country has its own rules.Russia,for example,has no restrictions on current account and capital transactions. Only the low demand for roubles in other countries prevents the Russian currency from being used in international settlements,the reasons being technical and ideological.The situation is similar in South Africa, a much smaller economy. By contrast, China imposes strict control on capital transactions and foreign investors face a challenge when entering the yuan. Furthermore, there are several exchange rates of the yuan, which poses an obvious technical problem: what exchange rate will be used? How will it be converted into other yuans? Russia and China recently began trading in their own currencies (“rouble-yuan,yuan-rouble”). Settlements and contracts in the currencies of other BRICS countries are unlikely to be massive. Second, Russia is a commod-

ities supplier and all commodity markets use dollars. There have been attempts – which enjoyed much greater political support – to switch to other currencies in commodities trading, but they have all failed. For example, Iran was anxious to sell oil for euros, but it failed.Will Russia be able to sell oil and gas for roubles? Since Russia is a price-taker in the oil and gas market, we have little say in shaping the price and the contracts are pegged to the dollar or to some conversion rate. However, the first step is always the hardest. There is much to be said for switching to settlements in local currencies. For political reasons, the idea of diversifying currencies has support in many countries.When BRICS countries account not for 20% but 3540% of the world economy, they will be able to recalibrate the structure in their own interests.At present, the euro zone accounts for 16% of the world’s GDP and China for more than 12%. Both India, whose growth rate is in the double digits, and Brazil post impressive economic figures. The outlook for Russia is good too. If BRICS countries grow at the same rate as today, there will be more reason for mutual settlements in national currencies. Yulia Tseplyayeva is Chief Economist, BNP Paribas

All articles appearing on this page do not necessarily reflect the opinions and views of the editors of Rossiyskaya Gazeta and Russia India Business Report.

BUSINESS REPORT

Lifestyle

IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA WEDNESDAY, MAY 11 , 2011

Cuisine Papa John's, Wendy's, Burger King, Mr Sandy, Johnny Rockets, Country Chicken, Dunkin Donuts join the race to set up outlets in Russia

The Russian restaurant business has bounced back to pre-crisis high, with global food chains racing to open outlets in the country.

Rockets and Country Chicken, are planning to start working in Russia. Franchising is the standard route most transnational companies take to develop their business in Russia. In the case of WorldWide Papa’s Plc, franchises cover the northern part of Moscow, while the master franchise belongs to the company 4 Papas. Burger King recently signed a franchising agreement last year with the Russian company Ginza Project, which will develop Burger King stores in the Russian regions. In Moscow, Burger Rus LLC owns the rights to this brand and has already

recipients of the international award S. Pellegrino World's 50 Best Restaurants for the first time this year. It is considered one of the first Russian gourmet restaurants and treats guests to molecular cuisine.The format of inexpensive,“democratic”restaurants, including fast food and free flow, is one of the most successful sectors of the restaurant business in Russia. During the crisis, sales fell only 1%–2% compared to a 15% decrease in the most expensive sectors. This year, companies like Wendy’s, the main competitor to McDonald’s, Burger King, Mr. Sandy, Johnny

SVETLANA SOROKINA RIBR

The Russian restaurant company WorldWide Papa’s Plc recently raised $14.5 million on the Frankfurt Stock Exchange. The franchisees of the American company Papa John’s operate in St. Petersburg and consist of only four pizzerias. Upbeat about the Russian market, the owners of the chain, using the money garnered in the IPO, are planning to open 40 new stores in the next four years. Restaurant consulting agency RestCon also believes the food services market in Russia could reach the pre-financial crisis levels in late 2011.“Prior to the crisis, we were seeing a 25% increase annually,” says RestCon analyst Andrei Petrakov. “Today, the market isn’t growing as rapidly, but it’s still substantial at roughly 15% per year.”The financial reports of Rosinter and GMR, two of the biggest Russian restaurant companies, indicate revenue was up 17%– 20% in 2010. Foreign companies are not averse to working in the burgeoning market either. According to media reports, designer Roberto Cavalli plans to turn the legendary restaurant Praga in the very heart of Moscow into a club for young people and name it after himself. Plans have already been confirmed for a Cavalli Club in St Petersburg in November 2011. Restaurant services are also on an upswing. Varvary (Barbarians) on Strastnoi Bulvar in Moscow was among the

opened ten restaurants in the capital. Companies like McDonald’s, Subway and Starbucks also prefer the franchising system. Armed with its franchisees Donuts Project LLC, Dunkin’ Donuts is planning to build up a chain of 50 coffee shops in Moscow over the next few years. The value of the franchises and the royalties fluctuate from brand to brand and from region to region.Around 300,000 people order food from restaurants in Moscow every day, says Sara Bener, Burger King's general director. “The number of such people will double in 2011,” she predicts.

REUTERS/VOSTOCK-PHOTO

It's boom time for food business

Moscow's Varvary restaurant has made it to the S.Pellegrino World's Top 50 Restaurants list this year, which is a huge step forward for restaurants and food appreciation in Russia.

INTERVIEW DOING BUSINESS, INDIAN WAY

Khajuraho experience: Savour a taste of India in Moscow Hillary D’Souza, director of Khajuraho, an Indian restaurant in Moscow, says Indian cuisine is set to win over more Russians.

Hillary D’Souza, director, Khajuraho restaurant.

The group has business interests in minerals, metals and heavy engineering goods trading. One day, we were sitting with our boss Dr. J.S.Raghav and discussing various things, and then we came up with the idea of launching a restaurant. The word "Khajuraho" was new to Russia, and sounded exotic. It refers to the temple of love. That’s why we serve very healthy food, which brings much relish and pleasure to our guests.

second project was the Indian restaurant, Maharaja. Since then I have lived in Moscow, setting up different restaurants for different organisations. For the last eight years, I have been associated with Khajuraho, the brand owned by Stork Group companies.

How did you advertise the restaurant? The market is quite competitive; you have to look after quality if you want to reach the top.We hardly advertised, but people know us very well. Whoever comes to us, they come back again.We believe

ANISIA BOROZNOVA

How did you come to Russia? And how did you get into the food business? I started my career in the Persian Gulf. I have worked in major hotel chains around the world in positions ranging from restaurant manager to the food and beverage executive. I studied hotel and restaurant management at the American Hotel and Motel Association, which had a branch in the Gulf. In 1993, I got an opportunity to come to Russia to open one of the Chinese restaurants (it was named China Garden). My

ANISIYA

RIBR

in advertisement by word-ofmouth. Do you explain to your guests the right way of eating Indian food? Initially, we had some problems. We used to tell people how to eat and what to order. We explained that the curry goes with the rice. If you mix it,it tastes better.A few months after opening the restaurant, we needed to change the menu to suit guests’ wishes. In the beginning, we served only typical Indian dishes. But then, we included soups and salads to suit Russian tastes. We also changed the interiors; it’s more colourful now because India is associated with bright vibrant colours. Are all key jobs given to Indians?

When you come to a new country, it's much better to use locals. Instead of bringing a person from India and trying to train him, it's better to find someone here, who can do the same job. Out of 30 employees, we have only four Indians; the rest are Russians. You’ve opened restaurants in Mongolia and the Gulf countries. Couldyoucomparethese markets? I like Russia more; the market is very good here. People like exotic food. That's why they are interested in ethnic cuisine, especially Indian, because our countries have been friends for a very long time. The rules of operating documents, getting permissions; these procedures differ from country to country. In Russia, if you know the proper proce-

dures and the concerned departments, you can get permissions quite quickly. Is there scope for opening more Indian restaurants in Moscow? Moscow is an interesting and encouraging city for doing business, but there are not many Indian restaurants. Just compare it, for example, to Ulan Bator: there are 1.2 million people, and they’ve got 6 Indian restaurants in the town. In Moscow, the population is 11.5 million, the international community is very huge. But there are only around 10 Indian restaurants in Moscow. Basically, people in Russia like Indian food. Around 70% guests, who come to our restaurant are Russian. Only 30% are foreigners and Indians.

How do you look at the prospects of opening a Russian restaurant in India? I find Russian soups very healthy.In big cities like Delhi or Mumbai, people look for authentic cuisine, and I'm sure they might be interested in Russian cuisine. What’s your daily life in Moscow like? I have a family, my wife is from the Philippines. My son was born here, now he goes to the Embassy School. He speaks Russian. We go out very often. We have a car, but we can also easily move around using the metro. My wife speaks a little bit Russian too, so it's not a problem for us - going to a cinema or theatre. It was tough in the beginning, but now I’m used to the weather.

Drinks Vodka is still the king, but Scotch is catching on, especially among women drinkers; the biggest selling malts are Glenfiddich and Glenlivet

Whisky gives vodka a run for its money in Russia Russia is still the bastion of vodka manufacturers, but whisky-distillers are now in high spirits. No prize for guessing why. ROLAND OLIPHANT

Never say no to vodka in Russia? Well, those who swear by vodka are in for a new surprise as more Russians savour the highs of whisky. “Gin is down, tequila is down, cognac is static, but whisky imports are growing,” says Erkin Tuzmukhamedov, a well-known sommelier and one of Russia’s foremost whisky aficionados.“It was the only spirit that continued to grow during the crisis, and it accounts for about two-thirds of all spirit imports.” Russia is the world’s largest spirits market, consuming 275 million nine-litre cases in 2009, with the domestically produced vodka accounting for 229 million cases, says the

RUSLAN SUKHUSHIN

THE MOSCOW TIMES

Acquired taste: whisky is becoming a favoured tipple of the more discerning drinker.

Edinburgh-based Scotch Whisky Association. It won't be easy to assail the vodka’s supremacy, but marketing maestros in Edinburgh see “ s i g n i fi c a n t ro o m fo r growth”.

Why whisky? For one thing, it is genuinely new to the country. When the global craze for whisky took off in the late 19th century, imperial Russia was largely insulated by the state monopoly

on alcohol, which continued even after the 1917 revolution. For the next 70 years, the Soviet public had two choices of legal spirits: vodka, and French-style cognac, the latter mostly from

the Caucasus.Whisky wasn’t exactly unknown in the Soviet Union: the party and security elite could enjoy imported Ballantine’s, and an enterprising drinker with money could get hold of a

bottle of Teacher’s, but only in the black market! In fact, Russians really discovered whisky after then president BorisYeltsin lifted the state monopoly on alcohol in 1992. “It was a glamour thing.You watch a Hollywood film, and everyone is drinking whisky; you read Western literature, everyone is drinking whisky. We’d never had it before,”recalls Tuzmukhamedov. What started as a status symbol is now the preferred choice of the more discerning drinker. In the past 10 years, the sales of imported spirits have increased 40 times, driven by rising incomes and the growth of the middle class, saysVadim Dobriz of the Russian Regional and Federal Alcohol Markets Studies Centre. And whisky’s novelty has kept it ahead of gin, rum and tequila. Dobriz attributes this surguing popularity to drinkers

– especially women – who yearn for an alternative to knocking back shots of vodka. “Women don’t like vodka; they want something with flavour that they can sip. You’ll find female drinkers are a significant part of whisky’s success,” he says. The biggest-selling single malts are Glenfiddich and Glenlivet. White Horse, The Famous Grouse and William Lawson’s led the pack in the blended segment in 2010, while the most popular premium blends include Johnny Walker Black Label, Chivas Regal and Dewar’s. But there are peculiarities. The Irish whisky has a disproportionately strong presence, primarily because Jameson was one of the first brands to enter the market in the early Nineties.And, apart from the ubiquitous Jack Daniel’s, North America is sorely under-represented. The battle of spirits has not been won yet. The Federal

Service for Alcohol Market Regulation is pledging to reduce the number of import licence holders by half. Alexei Kudrin, the finance minister, last month unveiled plans for a four-fold increase in the excise tax on alcohol by 2014. For consumers, that would mean a huge tax increase on half a litre of vodka and other spirits – from the current 46.20 roubles to 180 roubles. But Russian distillers are optimistic. In February, Alliance 1892, a Kaliningrad-based spirits producer, signed a deal with Scottish suppliers to import and bottle its own blend. Dubbed “SevenYards”,the newcomer will take on The Famous Grouse and White Horse in the economy segment. The Praskoveiskoye distillery in Stavropol advertises a threeyear-old oak-aged whisky that“combines centuries of Irish tradition with the experience of Praskoveiskoye’s cognac masters”.

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