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Q&A with the head of the Kremlin’s new investment fund
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How the collapse of Communism changed people’s lives
20 Years After the Coup
Sergei Dovlatov’s home gets a makeover from his fans P.07
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Wednesday, AUGUST 10, 2011
News in Brief
Urban Planning Can a hub-and-spoke expansion save the city from itself?
Customs Union Clears Another Hurdle On July 1, customs checks dissappeared on the borders between Russia, Belarus and Kazakhstan as the three countries took another step toward an E.U.-style free trade bloc due to become fully operational by 2013. While businesses have been jubilant at the prospect of the world’s geographically largest economic space, with 170 million consumers and free labor and capital flows, some citizens have been angered by price hikes on certain goods caused by higher import duties.
Efforts to Improve Transport Safety Hit Snags
In the face of traffic gridlock and astronomical real estate prices, President Dmitry Medvedev made a surprise proposal to expand the size of Russia’s capital. Nina Vazhdayeva, Dmitry Surin Itogi Magazine
City planners are considering an ambitious plan to turn a large swath of the Moscow suburbs into a federal center with relocated ministries and government buildings. Officials said the preferred location for the federal center is a 356,000-acre chunk
of land southwest of the city. Experts said more than one trillion square feet of real estate could be built in the area, which could ultimately be home to two million people. Officials said they are uncertain if the area will be a municipality, a district or a city neighborhood. “Building the satellite city will be a shot in the arm for developing nearby districts in the Moscow region,” said Vladimir Avdeyev, a general partner at commercial property firm S.A. Ricci. “While business activity
is likely to be concentrated in the administrative center, the city’s residents will spend their leisure time in the neighboring villages, where there will be condominiums for government officials.” Real estate experts said the new development, tentatively called“Moscow-2,”will also feature high-end boutiques and restaurants. Architects said such a large-scale development presents significant challenges, adding that the need to blend administrative offices and business cen-
ters with residential development and social infrastructure will require careful planning. “The plan has to be implemented over 25 to 50 years; otherwise the new city will outgrow whatever we build,” said Pavel Andreyev, an architect and the head of Workshop 14 at the Mosproject-2 design institute. A key goal of the project would be the creation of a transportation network to prevent it from becoming a burden on the region’s already overburdened roads.
Moscow to Double in Size A new plan calls for expanding Russia’s capital to the southwest, nearly doubling the area of the 10-million-strong megalopolis.
International Relations Russian president separates sovereignty of breakaway republics from W.T.O. entry
Beyond the Georgian War In a major interview, President Medvedev expressed regret over how the events of August 2008 transpired and denounced the use of force in foreign policy. Artem zagorodnov
russia beyond the headlines
New Telescope Heralds Return to Space In July, Russia’s Federal Space Agency launched the Spektr-R radio telescope from Kazakhstan’s Baikonur Cosmodrome. The telescope will communicate with ground-based observatories to form a“dish”spanning an area 30 times the Earth’s diameter, reported the Christian Science Monitor. It will have the capability to deliver images at 10,000 times the resolution of the United States’ Hubble Space Telescope. The launch comes after the grounding of the last American shuttle, making Russia the only nation capable of carrying humans into space. A nonmanned mission to Mars expected to bring soil samples back to Earth is scheduled for November, while Glonass — Russia’s equivalent of G.P.S. — is to become operational by year’s end.
would’ve tried to get him to come to Russia, or some third country... simply talk him out of this,” he said. As a W.T.O. member, Georgia has leveraged its ability to block Russian entry into the organization to demand its own customs checkpoints be installed on the breakaway republics’ borders with Russia. Medvedev commented that giving in to such pressure would be “immoral” on his part. However, the president expressed hope for a peaceful future. “Сonflicts are no good for anyone, ever. Those who say you can resolve something through violence are liars. Conflicts have never resulted in anything good,” he said. “It is important for us to move on from this sad chapter of our relations,” said Medvedev. “We should remember what happened, but be focused on the future. We should restore the strong bonds that existed.” reuters
On the eve of the third anniversary of Russia’s conflict with Georgia, Russian President Dmitry Medvedev sat down with representatives from Ekho Moskvy radio, RT television and First Caucasus television to discuss the consequences of the conflict and the future of Russian-Georgian relations. During the discussion, Medvedev expressed his desire to improve the relationship between the two countries. “I would be very happy if the Georgian, Abkhaz and South Ossetian authorities went to the negotiating table to discuss how they would continue living side by side,” said Medvedev, indicating that Russia would strongly support such a process. Medvedev also took full responsibility for his 2008 decision to send troops into South Ossetia and Ab-
khazia, and indicated that over a day had transpired before he consulted with Prime MinisterVladimir Putin over the matter. “[August 2008] was a moment of truth for Medvedev,”commented political scientist Vyacheslav Nikonov in the leading business daily Kommersant. “He had to make a conscious decision that was supported domestically, but received a very harsh reaction abroad and set Russia on a confrontational course with Western governments.” Medvedev lamented that a pol i t i c a l s o l u t i o n wa s n o t found. “If we had managed to prevent this war, it would have been to everyone’s benefit, and Georgia’s in the first place. The fact that it didn’t happen is a real tragedy,”said Medvedev. “Had I realized back in July 2008 that Mr. Saakashvili was nurturing such plans…I Medvedev: “Conflicts are no good for anyone, ever.”
Following two major boat catastrophes and several aviation disasters during the summer, Russia’s president, Dmitry Medvedev, has called for an overhaul of the country’s aging civil air fleet and additional checks on waterway safety. The plans have already run into trouble amid concerns by regional airlines that they lack the funds to upgrade aircraft. Additionally, Russianmade planes are simply not avaible for sale in the quantities required. “The financial situation of local airlines is so complicated that without subsidies they cannot build a business plan on the basis of [local] aircraft,” airline industry analyst Oleg Panteleyev told The Moscow News.
Medvedev on the W.T.O., Middle East and Saakashvili at www.rbth.ru/13225
Can Russia learn from China’s booming economy, or should it focus on relations with developed markets?
Tandem Economics How upcoming presidential and parliamentary elections will affect business page 6
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most read Medvedev: South Ossetia Cannot Merge with Russia Yet
Grassroots Russian politics is enlivened by local activism rooted in environmental awareness and a disdain for corruption est ended in a decision to narrow the highway from 600 meters (2,000 feet) to 100 meters (330 feet) and prohibit commercial construction either side of the highway.
Evgenia Chirikova unintentionally entered politics to protect a forest near her home from a major highway project.
Environmental and anticorruption crusaders like Evgenia Chirikova and Alexei Navalny may become Russia’s first formidable homegrown political opposition.
build a highway to St. Peters burg. Chirikova gathered local resi dents and spoke out in favor of re routing the highway. Bureaucrats reacted to this initiative with be
Russia beyond the headlines
“I was so naive at first. I thought the highway was a mistake. I thought I lived in a law-based state,” said Chirikova.
Five years ago, Evgenia Chiri kova, a resident of the Moscow Region town of Khimki, had no fan base outside her own friends a n d f a m i l y. S h e w a s a typical 30-something Russian woman, focused on her children and her career. She had no inter est in politics. “I didn’t think it was possible to change anything,” she said, “so politics seemed a senseless endeavor.” Chirikova, 34, could pass for a student in her jeans and T-shirt. She doesn’t look like a person known for her criticism of Prime Minister Vladimir Putin and the ruling United Russia party, a per son who commands the attention of a broad spectrum of opposi tion parties and movements. Her metamorphosis from sub urban working mother to one of Russia’s best-known activists oc curred after the Moscow city government decided to bulldoze the forest next to her house to
Navalny became famous defending the rights of minority shareholders in large Russian state companies. wilderment, while many local res idents were suspicious: In Russia, an international multibillion-dol lar project had never been stopped by a forest before. Said Chirikova, “The Khimki administration didn’t understand what we wanted. ‘If you want to live in the woods,’ they said, ‘go to Siberia.’”
“If we’re afraid, we’ve lost”
Evgenia Chirikova found a new
identity for herself — and mil lions like her — by giving voice to a local grievance. Chirikova didn’t realize what she was getting into. “I was so naïve at first. I thought this high way must be some mistake. I also thought that I lived a law-based state.”During the Khimki Forest conflict, 10 activists were maimed by unknown assailants. Chirikova, too, received anon ymous threats. But she refused to give up. Some thought she must be crazy; others thought that she was an aspiring politician trying to make a name for herself; still others believed that she had a commercial interest in the deal. “It’s the bureaucrats who turned me into an opposition leader,”said Chirikova. “I became a citizen very late, at 30.” “Every time [someone else was beaten up], I said to myself: one more time and I’ll run away,” Chirikova said. “But you can’t spend your life running away. If we’re afraid, then we’ve lost.” Her many exchanges with bu reaucrats who told her that the highway was a federal project and therefore not subject to change did nothing to increase her con fidence in the powers that be. “I
grew up fast,” said Chirikova. The wide range of beliefs among Chirikova’s supporters shows that there is a demand in Russian society for specific prob lems to be solved, said Alexei Mukhin, head of the Center for Political Information.“That’s why traditional opposition movements afraid to switch from slogans to actions are losing popularity,”said Mukhin. The fight for the Khimki For
Defending Minorities is Important Most Russians (55 percent) feel that defending the rights of political, ethnic, religious and sexual minorities is an important priority. According to Gayrussia.eu, most Russians who disagree with allowing gayrights activists to demonstrate cite the importance of the majority’s position. However, the same poll found that 66 percent of Russians don’t believe in the universal application of Western standards to their own society.
Mikhail Prokhorov hopes to put his business acumen to use as the new leader of Right Cause, which marks the return of big business to national politics. Anna Arutunyan
The Moscow News
T h e K re m l i n ’s a m b i t i o u s privatization program received a boost with the election in July of billionaire Mikhail Prokhorov to lead the Right Cause probusiness party. After his election, Prokhorov said he plans to make Right Cause the“second party of power”after Prime Minister Vladimir Putin’s United Russia party. Prokhorov, who had previously called for a 60-hour work week, shied away from targeting a purely businessoriented constituency. It wouldn’t be right, he was quoted by com merce-oriented paper Kommer sant as saying, “to be a party of business and the intelligentsia.” And Right Cause’s previous slo gan, “Capitalism for all,” would have to go, Prokhorov said. “It’s not true; it doesn’t happen that way,” Prokhorov was quoted as saying.“Capitalism is for people who like risk, and a fair govern ment must offer people social guarantees and support.” Instead, Prokhorov said the party has a clear and ambitious agenda: “To get into the State Duma with the highest possible number of votes.” As such, its constituency is “heads of families — men and women who make important de cisions every day.” That agenda, some analysts
Mikhail Prokhorov hopes to pull Right Cause onto the national scene.
said, makes the party well posi tioned to carry out some of the less-popular market reforms that key liberals in the government, such as Deputy Prime Minister and Finance Minister Alexei Kudrin and presidential econom ic advisor Arkady Dvorkovich, are calling for. “It is possible that if and when
Right Cause gets into the Duma, then the less-popular social and economic steps that are being dis cussed as part of the revised 2020 program should be realized by someone,” said Nikolai Petrov, a political expert with the Carne gie Moscow Center. “I think the Kremlin’s logic is that a liberal force should play the role of a
Mikhail Prokhorov AGE: 46 Hometown: Moscow FAMILY: SINGLE
Mikhail Prokhorov made his money in the precious metals sector, man-
aging the reform of Norilsk Nickel and the creation of Polyrus Gold. A well-known playboy, Prokhorov is the third-richest man in Russia according to Forbes, and the only non-American to own an NBA franchise — the New Jersey Nets.
Hometown: Butyn FAMILY: SINGLE
Alexei Navalny earned a degree in law from the People’s Friendship University in Moscow in 2003. He made his name by buying small amounts of shares in major Russian companies and then requesting financial information from the corporations under laws governing shareholder rights. When he found evidence of corruption, Navalny would post the information on his blog, http://navalny.ru.
AGE: 34 hometown: Moscow FAMILY: Married,two kids
Evgenia Chirikova holds degrees in engineering and finance from the Moscow Aviation Institute and an M.B.A. from the Academy of the National Economy of the Government of the Russian Federation. In the late 1990s, she moved to Khimki in search of a “green” area in which to raise her daughters. With her husband, Mikhail Matveev, Chirikova runs two small businesses specializing in electromagnetic equipment.
$250,000 was raised by Alexei Navalny through his blog to support an anticorruption crusade that has taken on major state-owned corporations.
Corruption If you can’t beat them, join them
Right Cause Can money boost the prospects of liberals?
Mikhail Prokhorov Boosts Business Agenda
Out of the Woods, A New Opposition
One of the people who doubted Chirikova’s chances for success was lawyer Alexei Navalny, an ac tivist and blogger who has made his name fighting corruption in state companies. Several years ago, he was a member of the liberal party Yabloko and worked on a committee to protect Muscovites. “People came to me complaining about the construction of a high way in Khimki,” he said.“My an swer then was that it was sense less to get involved.You wouldn’t put together an initiative group and anyway all be beaten up.” Chirikova was one of the people who came to Navalny.“Now I see how wrong I was,” said Navalny. Today, Navalny is an active sup porter of the Khimki movement and is helping members make sense of the competitions to build the highway, in which, according to Elena Panfilova, head of the Russian branch of Transparency International, “corruption is a large component.” Like Chirikova, Navalny be came famous thanks to actions rather than words, defending the rights of minority shareholders in large Russian state companies. They are a new kind of opposi tion in Russia, oriented toward solving real problems, said Niko lai Petrov of the Moscow Carn egie Center. “If with Evgenia it’s the transformation of a civil po sition from a private protest, then Alexei targets political activity at the outset,” Petrov said. Chirikova “didn’t plan to go into politics; she was pushed into it by the local authorities,” said Mukhin, adding that both Naval ny and Chirikova“have the image of a popular leader responding to public despair.”
Navalny: “It was senseless to get involved”
kamikaze — heading a govern ment that will carry out unpop ular measures—and then it can be replaced. What Prokhorov has been saying could play a role in this context.”
Not the opposition
But what was clearly emerg ing from Prokhorov’s comments was that, while a renewal of the political system was necessary, he had no intention of opposing the status quo. “We need to remove the word ‘opposition’ from our lexicon,”he said, Kommersant reported.“Be cause for our citizens, opposition is associated not so much with political parties, but with mar ginal groups that have long lost touch with reality.” And in a clear break from the more opposition-minded rheto ric of previous Right Cause lead ers — which included members of the Union of Right Forces — Prokhorov said there was noth ing wrong with forming a coali tion with United Russia if both parties have similar views on some issues. Analysts said this falls in line with the government’s role in closely monitoring the party’s for mation. “Things like this are always ap proved and agreed on in advance,” said Olga Kryshtanovskaya, a so ciologist and a coordinator of United Russia’s liberal wing. Key officials from Putin’s gov ernment — such as Alexei Kudrin and First Deputy Prime Minister Igor Shuvalov — had previously been mentioned as possible can didates to lead Right Cause. Prokhorov’s announcement that he was interested in the post was reportedly preceded by meetings with Medvedev and Putin. His election marks the first time that big business has openly entered the political arena since Yukos chief Mikhail Khodorkovsky’s failed attempts in 2003.
Companies Try to Provide the Perfect Bribe Some Russian businesses have decided that the best way to deal with the problem of corruption is to take a creative approach. Ksenia Leonova kommersant
The latest survey by Canadian public opinion research compa ny GlobeScan indicated that 67 percent of Russians consider cor ruption to be the country’s most serious problem. But Andrei Sharkov, the owner of online confectionary Chocobox, saw these numbers as an opportu nity. In April, Sharkov designed a new kind of chocolate gift box called“A sweet piece of the bud get.” The box contains 30 bars with wrappers featuring gov ernment officials and logos of
state-owned companies that have been exposed as corrupt. Sharkov borrowed the charac ters for his chocolates from an ti-corruption blogger Alexei Na valny, who also provided online P.R. Chocobox was careful to change the colors in the logos. Said lawyer Igor Trunov, “This should protect the company from liability for harming business reputations.” A box of chocolates called Not a Bribe, however, introduced by chocolate manufacturer Konfa el at the beginning of 2009, did not take with consumers, and for good reason. Two years ago, GlobeScan found that only 23 percent of Russians thought cor ruption was a serious prob lem.
Changing Attitudes Toward Corruption
MOST READ Gorbachev, a Leader Who Changed the World http://rbth.ru/12398
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20th Anniversary of the Coup The fall of the Soviet Union altered economic habits as much as the political system they were based on August 24, 1991: a crowd holds the Russian tricolor at a public funeral in Moscow for the three persons killed during the coup.
Slide Show at www.rbth.ru/13233 GETTY IMAGES/FOTOBANK
A Time of Fear and Expectation VLADIMIR RUVINSKY, ANASTASIA GOROKHOVA
RUSSIA BEYOND THE HEADLINES
Like many Russian children in August 1991, Ilya Poliveev experienced the drama of the failed coup against Soviet Leader Mikhail Gorbachev in his mother’s shocked expression as the family watched television news and his parents anxiously exchanged whispers. “I can still recall lots of images from the news: the Russian White House with black burn marks and the look on Gorbachev’s face, which essentially was the same as my mother’s,” recalled Poliveev, 26, who lived in Magadan in Russia’s Far North in 1991 and now works as a stylist in Moscow. Twenty years ago this month, between Aug. 19-21, Communist
hardliners attempted to topple Gorbachev and thereby halt his reform program known as perestroika and a proposed reworking of the documents governing the Soviet Union. But the attempted putsch failed and Muscovites rallied around Boris Yeltsin, the president of the Russian republic, who famously stood on a tank outside the White House, the seat of the Russian government. Gorbachev, who had been placed under house arrest in the Crimea, returned to Moscow after Yeltsin’s successful stand, but he was fatally weakened as a leader and the dissolution of the Soviet Union began almost immediately. “The thing I most remember is fear,” said Svetlana Prudnikova, who was a teacher in her 40s when the coup occurred. But “it was also a very active and promising time. Everything felt very real—and energetic.” Vera Grant remembers digging for potatoes at her grandparents’ dacha near Moscow, and the
adults intently listening to the radio, even in the fields.“The tension was thick,”said Grant, a 26year-old concert promoter. But two decades after the founding of a new state, one that began with great hopes for democracy and prosperity, Russians are deeply ambivalent about what has been achieved in the intervening years and the current trajectory of their country. And that now colors their view of what happened in 1991, and whether it is worth celebrating. A mere eight percent of Russians look back on the events of August 1991, and the subsequent collapse of the Soviet Union, as a democratic revolution, according to the Levada Center, an independent polling agency. Thirty-six percent of Russians, echoing the sentiment of Russian Prime Minister Vladimir Putin, describe the fall of the Soviet Union as a tragedy and 43 percent dismissed what many see as a seminal moment in Russian history, the failure of the August
Then and Now: Purchasing Power While some yearn for a return to the times of cheap foodstuffs and fixed wages, a new study shows Russians are much better off materially now than 20 years ago. BEN ARIS
BUSINESS NEW EUROPE
In the months after the fall of the Soviet Union, western goods long banned by the Communist Party began to flood into the country. Street vendors stocked their kiosks with soft toilet paper, Levi’s jeans, good shoes and foreignmade cigarettes. But what is the point of quality products if you can’t afford them? The irony of the free market is that most things are actually expensive. “Many people yearn for a bygone era, the symbols of which were vodka for 3.62 rubles, sausage for 2.20 rubles and bread for 13 kopecks. Today, you cannot get anything for a ruble. But has our existence worsened because of this?” asked Margarita Vodyanova in a piece in the newspaper Obshchaya Gazeta. The minimum salary for a Rus-
sian just after the fall of the Soviet Union in 1991 was 548 rubles a month — 72 U.S. cents, at real rates of exchange — according toYevgeny Gavrilenkov, chief economist at Troika Dialog. But this was still enough to have a decent life, as the state provided housing, education, utlities, health and child care, vacations and re-
Per capita income has increased by 45 percent, while consumption per capita has more than doubled since 1991. tirement homes. None of this was of particularly good quality, but it was universally available, and it was all free. Money went a long way in 1991 Russia. The basic minimum salary could buy 74 loaves of bread or a choice of: 6.2 kg of meat; 6.5 kg of sausage; 13.5 liters of vegetable oil; 163 liters of milk; 6 kg of cheese; 160 eggs; 28 kg of sugar; or 3.5 liters of vodka.
Dynamics of Consumption
A recent survey conducted by the Higher School of Economics and the magazine Ekspert on changes in Russian living standards between 1990 and 2009 found that per capita income has increased by 45 percent, while the volume of consumption per capita has more than doubled according to G.D.P.-based consumption figures. If you measure quality of life in terms of possessions, Russians are living much better now than they were 20 years ago. In 2008, a consumer could buy 70 percent more durable goods, 25 percent more food, and two to three times more cigarettes, vodka, cars and clothing than he could during the Soviet era. At the same time, however, household spending on childcare and education has increased substantially, along with spending on health care. The survey notes that the World Health Organization (W.H.O.) found that Russian spending on private health care is now 40 percent of total health care spending — a level well above the E.U. average. The average amount of living space for Russians has risen about 40 percent over the past two decades, to a current level of about 237 square feet per capita, although this is still behind a country such as Finland, where the number in 2009 was 420 square feet per capita. A 45 percent increase in income is actually not very much over 20 years, especially considering that incomes plummeted for most of the 1990s and only began to rise after the 1998 financial crisis. And although most Russians enjoy higher incomes now than they did 20 years ago, a recent survey showed that one in five Russians today lives below the poverty line and is worse off than he was under the Communists.
coup, as nothing more than a power struggle among bureaucrats. “It was the illusion of freedom and the illusion of change,” said Philip Bochkov, now an art director. He recalled that his family crawled around their Moscow apartment during the coup because it was near the White House and his neighborhood was alive with rumors that snipers were on the roofs and randomly targeting people. “Today, no one fights for anything, but rather everyone is just always ‘against’ something,”said Grant. “The main thing is that things do not become like they once were.” Natalia Moshkina recalls a sense of jubilation in the crowds when her grandmother and mother took her to the White House for a rally after it was clear the coup had failed. “There was a sense of excitement, democracy, of social foment,”said Moshkina, a 34-yearold advertising executive in
has persisted as the principal legacy of the collapse of Communism. And Russians continue to aspire to the promises of twenty years ago, even if they are unsure how or if they can be achieved. For Irina Potapova, a 51-yearold masseuse who lives near Moscow, Russians still need to develop a civic awareness. Too often, she said, public service is seen as a cash cow, not a calling.“In politics,”she said,“corruption should be rooted out.”
Moscow. But as she looks back, 20 years after the events, Moshkina says she remembers that time with a sense of despondency.“I have a feeling that the country missed a great opportunity,” she said.“As for me personally, I have become more pragmatic and more cynical.” According to Boris Dubin, head of the Social and Political Studies Department at Levada,“most Russians now see the 1990s in a negative light associating this decade with economic collapse, chaos, cultural degradation… while a miniscule number of the most socially active talk about receiving basic freedoms.” He also noted that public hostility to the 1990s has been stoked by the Russian media, which has consistently described the decade as a period of unremitting chaos. “People became increasingly more disillusioned,” he said. But Dubin also noted that “democratic rhetoric has seeped into people’s pores”and the idea that democracy is a good thing
IN HIS OWN WORDS
IN 1991, HEAD OF ST. PETERSBURG’S FOREIGN ECONOMIC RELATIONS COMMITTEE
43% 36% 8% of Russians consider the revolutionary events of 1991 simply a struggle for power among the elites of their country at the time.
consider the coup to have been a tragedy that lead to the collapse of the country, echoing the words of Vladimir Putin in 2005.
think that it was a triumph of democracy over the reactionary forces of Communism. This figure is down from 13 percent in 2006.
Different generations of Russians remember the turbulent events of August 1991 with a range of emotions dominated by uncertainty mixed with hope.
It was clear that if anyone wanted to reverse the situation, there would be a great number of victims. In the beginning, that was all we knew for certain. Then the coup ended and its organizers dispersed.”
Economic Difficulties of Transition Still Felt Russia’s economy is still affected by decisions made in 1991. FELIX GORYUNOV SPECIAL TO RBTH
In February 1990, Quentin Peel, Moscow bureau chief for the Financial Times, took part in a television program on the impact of the transition to a market economy on people’s lives. “At first it would be painful indeed,”Peel said on the program. “But afterwards it would be better. And better. And better.” Two decades have passed since the Soviet Union ceased to exist, and many Russians would argue that Peel’s predictions have yet to come true. A few facts and figures show that by choosing the Americanstyle free-market economy over European-style socialism during the transition in 1991, Russia’s ruling elite created a difficult new way of life for the average Russian while paving the way for the oligarchy and an economy dependent on the export of natural resources. The new economy began with shock therapy, resulting in skyrocketing living costs, loss of savings and cuts in social benefits, and the sale of lucrative state assets in the notorious loans-forshares program that created today’s billionaires.
Twenty years later, these effects are still felt. According to income-gap research by the Levada Center, the wealthiest 10 percent of Russians earn 17 times more on average than the poorest 10 percent, while in Moscow they earn 40 times more — an outrageous level of inequity. Additionally, the economy has become primarily an exporter of raw materials. Despite claims
By deciding against European-style socialism, Russia’s ruling elite created difficulties for the average citizen. from the Kremlin, the Soviet Union was not dependent on commodities exports. Data on G.D.P. and exports from 1990 show that finished products accounted for 77 percent of all Russian sales abroad. According to the recent World Bank Russian Economic Report, “Oil and gas composed less than half of total exports in 2000. In 10 years, this figure had grown to two-thirds of total exports, with an additional 15 percent of exports coming from other extractive commodities and only 9 percent from high-tech exports,
mainly in the defense industry.” Stanislav Menshikov’s 1997 analysis, “The Anatomy of Russian Capitalism,” explains that commodities dominate because extracting industries ensure high profit margins. Between 1995 and 2001, the profitability in fuel industries rose from 20.8 percent to 35 percent. The pretax profits from oil exports increased still more — from 18.2 billion rubles in 1995 to 720.3 billion rubles in 2003 — and taxes and duties from oil exports now account for more than half of federal budget revenues. Russia’s transition to market strategies that integrated Russia into the global economy as a raw material supplier has made the country vulnerable to the whims of the international commodities markets. A former Communist party functionary who was an architect of political reforms in early 1980s told me:“The reforms were a deadly necessity. It was painful to see a great nation with a developed economy and welleducated people lagging behind capitalist countries in living standards. Social democracy was our best option. But when I see what has become of this country now, my only feeling is shame.”
Russia BEYOND THE HEADLINES
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Beer Takes on Vodka Vodka has long been associated with Russia, but beer has become increasingly popular in the country, which is one of the world’s largest markets.
International brewers have taken note, buying up local producers and opening production facilities in the country. The industry faces new challenges, however,
ECONOMY in brief
after the State Duma passed a law allowing the state to regulate beer as it does hard liquor. Meanwhile, vodka distillers innovate to remain competitive.
Rupert Murdoch Sells Russian Asset
Alcohol A rapidly growing market for beer has attracted foreigners despite Medvedev’s anti-alcohol campaign
Influx of Brands Comes to Russia Despite New Law on Beer Local brewers compete with foreign brands for a market already stretched thin by increased taxes and lack of availability. Roland Oliphant
Domestically produced beers, like cars, carry a certain amount of stigma. Even foreign brands
The Moscow Times
There’s a hiss, a rush of bubbles. Golden liquid fills up the glass, and a good head of foam forms. “This was made just two days ago. It’s fresh,” said Masaru Hemmi, chief brewer of Japan’s Kirin Ichiban, pouring at the Moscow Beer Company’s factory in Mytishchi. The occasion was last month’s start of licensed local production of Ichiban. Both sides feel justified in pouring a few well-earned drinks. The Moscow Beer Company reckons it can sell Ichiban, which is one of the most popular beers in its home country, to Japanese restaurants and food enthusiasts. Ichiban is confident it has secured its foothold in the $20 billion Russian beer market. Despite the optimism, these are not easy times for Russian brewers. Over the past decade, the beer market surged by 40 percent, but then the global economic crisis, increased taxes on alcohol and saturation depressed the market by as much as 15 percent, causing the country to slip from third to fourth place worldwide for total consumption. “Russia has lost 12 [million] to 15 million hectoliters [roughly 10.26 million to 12.78 million U.S. beer barrels],” said Igor Dementyev, general director of The Moscow Beer Company, a midsized brewer.“That means that approximately five or six breweries like us should be closed. And it is happening; a lot of breweries have been closed and will be closed.”
More than 40 brands of foreign beer are produced locally in Russia.
produced under license are widely considered to be inferior to genuine imports. Specifically, this is linked to an alleged propensity to cause headaches. “Abroad, drinking a six-pack of Heineken is no problem. Here, two bottles will give me a headache,” complained one beer aficionado. One urban legend links the mysterious headaches to extra alcohol — or more sinister chemicals — added to popular brands to keep the population docile. However, there’s not much choice but to buy Russian. High import tariffs mean that imported beers make up just 0.5 percent of the market — compared with about 15 percent in the United States. In Russia, that segment is largely replaced by licensed domestic production. There are more than 40 foreign brands now produced
Size of Russian Beer Market
locally — ranging from classic Czech lagers such as Pilsner Urquell (produced by SABMillerin Kaluga) to iconic Irish stout Guinness (produced by Heineken in St. Petersburg).
Consumers New Law Restricts Beer Sales
Beer Ban to Hit Kiosks and Train Stations Lena Smirnova
the moscow times
The State Duma recently approved additional restrictions on alcohol sales in the country that will end sales of beer at night and from kiosks. The law is expected to fully enter into force by January 2013, but it is already causing shock waves in the industry. Danish brewer Carlsberg, which owns local market leader Baltika, saw its stock fall to a near four-month low in July. Under the new law, stores will be banned from selling drinks that contain more than 0.5 percent alcohol between 11 p.m. and 8 a.m. Experts said it is unlikely that the restrictions will have an impact on alcohol consumption because people will simply buy the products earlier or illegally. “This bill won’t reduce alco-
holism in the average citizen, but it won’t harm the consumer and the producer either,” said Vadim Drobiz, director of the Research Center for Federal and Regional Alcohol Markets. “Nighttime crime will be reduced as well as nighttime hooliganism.” Train stations and kiosks will be banned from selling any alcohol under the new law. These semi-permanent outlets now account for one-third of Russia’s beer sales — or about $6 billion, Reuters reported. Some industry representatives welcomed the restrictions. “Kiosks are a humiliating presence for a large city such as Moscow,” said Alexander Romanov, general director of the Alcohol Manufacturers Committee. “Kiosks that sell alcohol should not exist.” But other industry representatives fear that the ban on alcohol sales will make kiosks unprofitable and will force them to close. Alcohol sales account for almost half of the profits for kiosks, SABMiller’s Kirill Bolmatov told Ve-
Vodka New Product Targets Premium Buyers
New Organic Vodka Wants to Capture Twenty Percent of Market A new entrant plans to take 20 percent of the Russian premium vodka market by the end of 2013 via self-promotion as an exclusively organic brand. Lena Smirnova
The Moscow Times
It has become harder to obtain adult beverages now that the Duma has finalized a ban on nighttime sales of drinks with more than 0.5 percent alcohol.
The Moscow Beer Company has seven licenses on the books, including a 40-year contract to produce German Oettinger and a 25-year contract with Denmark’s Faxe, as well as its new
Kiosks will be banned from selling beer under new legislation.
domosti.Vyacheslav Kuzmin from the Union of Russian Brewers warned about the disappearance of kiosks from rural areas.“They are often the only source where people can buy food products,” Kuzmin said. “It will hit people hard.”
deal with Kirin. The local beer market is a battlefield of giants, with little room for small independent breweries. Carlsberg Group, AB InBev, Efes Breweries International, Heineken and SABMiller together control more than 85 percent of the market. Baltika, which is the biggest brand and part of the Carlsberg Group, has a total brewing capacity of 5.2 million hectoliters [approximately 4.4 million U.S. beer barrels] per month. By comparison, The Moscow Beer Company, which started out as an importer of beers and soft drinks in 1994 and only began producing its own brews in 2008, turns out just 2.5 million hectoliters [approximately 2.1 million U.S. beer barrels] per year. Market analysts now say Brazil has displaced Russia from its place as the world’s third-largest beer maker, and Germany is snapping at Russia’s heels to move into fourth. So what went wrong? For a start, Russia is not really among the great beer-drinking nations. Even after the rapid growth in consumption over the past decade, Russians consume just 66 liters (about 139 U.S. pints) of beer annually per capita, according to estimates by Baltika. Czechs get through a staggering 151 liters (about 319 U.S. pints), while Germans drink 108 liters (about 228 U.S. pints) annually, according to a 2010 report by Carlsberg. Experts put the drop down to three factors: The market was probably saturated anyway; the financial crisis of 2008 ate into disposable incomes; and the government has drastically ratcheted up taxes on beer. The beer excise went up 200 percent, from three rubles per liter to 9 rubles per liter, in January 2010. This year the tax is up to 11 rubles, and plans exist for further hikes. The real heavy hitters are the Russian brands — which account for the remaining 85 percent of the market. The biggest selling local brand (and the jewel in Carlsberg’s Russian crown) is the Baltika product line, which accounts for 40 percent of all beer sales in Russia.
The OrganicVodka Group, a subsidiary of Finland’s Saimaa Beverages, will make its local debut in September with Drova, a low premium Russian-made vodka, and the premium Finnish-made Suomi vodka. Oleg Kraizmer, Saimaa Beverages’ acting director, said that the vodkas are made with organic grains and water from the bottom of Lake Saimaa, and rest in special reservoirs for a month before being bottled. Despite the challenging market, the company is counting on its clean label and curious customers to achieve its sales goal. “The number of customers who are ready to try something new if it is interesting to them is
greater,” said Sergei Kleshukov, the company’s general director. Alcohol industry analystVadim Drobiz said the organic production idea will be useful for the company’s advertising campaigns, but added that experienced buyers will pay more attention to the popularity of the premium brand and the status it confers.
“The number of customers who are ready to try something new if it is interesting...is greater,” said Kleshukov. “Nobody will be looking into it as an organic project,” Drobiz said. “People will see the marketing behind it, see the lake as a story.” Premium vodka makes up 1.7 percent of the vodka market. Russian Standart leads the market with 30 percent of sales; Belaya Beryozka follows with 20 percent.
Embattled media mogul Rupert Murdoch has sold his Russian advertising company News Outdoor to the state-owned investment bank VTB Capital. News Outdoor is a big player in the billboard business. The massive ads that dominate the streets of Moscow each cost between $400 and $4,000 a month. Former Moscow MayorYury Luzhkov, who was ousted last year, was criticized for his inability to control the explosion of billboards, and efforts to limit their numbers have only been partially successful. In its statement announcing the deal,VTB Capital said that the new management will,“interact with authorities to implement programs aimed at improving the appearance of cities.”
Russia To Regain Positions In Grain Market Favorable weather conditions have led to a higher-than-expected harvest of 92 million tons this year, 20 million of which are likely to be exported, according to Agriculture Minister Elena Skynnik. The news comes after the lifting of a yearlong ban on exports on July 1, which was imposed to fight price hikes following disastrous wildfires in 2010, and hurt Russia’s position as the world’s third-largest grain exporter. The key buyers of Russian grain are Turkey, Egypt, Azerbaijan and Israel. Russia will supply grain to Nicaragua and North Korea as part of humanitarian aid.
GLOBAL RUSSIA BUSINESS CALENDAR 3rd annual interra international youth innovation forum in siberia september 22–24, 45 oktyabrskaya st. novosibirsk, russia
Siberia’s largest event of the season offers government officials, international businesspeople, scientists and artists from various fields the opportunity to unlock their creative potential. ›› www.interra-forum.ru/
2011 Yaroslavl global policy forum september 7–8 yaroslavl, russia
This year’s event will explore the role of “The Modern State in the Age of Social Diversity.” Guests include Immanuel Wallerstein of Yale University, Parag Khanna of the New America Foundation and Craig Calhoun of N.Y.U. Previous guests have included Russian President Dmitry Medvedev, Italian Prime Minister Silvio Berlusconi and CNN’s Fareed Zakaria. The forum will include discussions on global income inequality, security issues and the role of democracy in multi-ethnic societies and will take place in one of Russia’s oldest cities, which turned 1,000 last year. ›› www.gpf-yaroslavl.ru/
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Russia BEYOND THE HEADLINES
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Money & Markets
Kirill Dmitriev gained experience at Delta Private Equity Partners, a U.S.-government backed investment fund.
FIRST PERSON Kirill dmitriev
Governments Must Learn When to Let Go
C.E.O. Russian direct investment fund
Easing Returns for Investors Square in June.“We thought long and hard about the best form for the fund, to make it as attractive as possible to investors. The state finance will be limited to a minority role of no more than 50 percent minus one share in any project. It means the co-investor doesn’t have to invest into anything they don’t believe will earn returns. I don’t see the R.D.I.F. as a political initiative; however, the political goals of the government will be achieved from these investments — but as a by-product.” Dmitriev is currently hiring staff, mostly Russian professionals, and the first $2 billion will be released by the state in September. The first investment is anticipated by the end of the year, said Dmitriev. After that, the state-owned debt agency and de facto development bank Vneshe-
business new europe
President Dmitry Medvedev has launched a drive to improve Russia’s investment climate and is putting $10 billion of the state’s money where his mouth is: the Russian Direct Investment Fund (R.D.I.F.). This new sovereign wealth vehicle aims to attract the world’s leading funds to co-invest in major projects. The hope is that it will dramatically increase private equity investment by reducing the perceived risk of doing business in Russia. The appointment of Kirill Dmitriev to run the fund is a testament to the commercial nature of the project. One of Russia’s new generation of rising business leaders, Dmitriev cut his teeth working as a manager at Delta Priv a t e E qu i t y P a r t n e r s , a U.S.-government backed investment fund designed to promote capitalism by financing the growth of independent business in Russia. He then set up the highly successful Icon Private Equity — a $1 billion fund that invested in projects across the C.I.S. At the same time, he founded the Russian Association forVenture Capitalists and advised the government on the creation of the RussianVenture Company, a statebacked fund promoted by Prime Minister Vladimir Putin to kickstart the country’s venture capital sector. “I am not a politician. I am a fund manager, and the primary goal of the R.D.I.F. is to earn returns for the investors,”said Dmitriev, sitting in a café on Red
Special to RBTH
ow much state in an economy is good for an emerging market? While most agree that the private sector is the most efficient manager, academics say that at the start of transition, the state has to be heavily involved. “All emerging markets follow a similar pattern,” said the National University of Singapore’s BernardYeung during a presentation at the annual meeting of
Government involvement in the economy is a necessary stage, but the state must eventually let go.
Kirill Dmitriev, the C.E.O. of the Russian Direct Investment Fund, discussed how Russia can improve its image as an investment destination.
The structure of the R.D.I.F. is designed to allay the fears foreign investors have about investing into Russia. Such worries are illustrated by the Russian stock market, which has been the bestperforming significant market in the world over the last decade, but is still stuck with an average price-to-earnings ratio below seven — a stark contrast to the early teens enjoyed by other major emerging markets. Russia also
“I am not a politician... and the primary goal of the R.D.I.F. is to earn returns for investors,” said Dmitriev.
A major focus for the fund is to offer investment firms some reassurance. The state will share the risks.
conombank (V.E.B.) will release another $2 billion each year over the next four years. The Kremlin hopes that the fund will also attract $90 billion from private coinvestors. “Russia is a very attractive investment destination and people have to some extent lost sight of what the country has to offer,” said Dmitriev.“It is the sixth-largest economy in the world — even Russians forget this fact — and the number of people earning more than $10,000 a year has tripled in the last six years. I am not saying that everything is good, but the rising incomes have led to an incredible amount of change in a remarkably short time.”
performs far below emerging market peers in terms of both incoming portfolio and direct investment volumes. A major focus for the fund, then, is to offer investment firms some reassurance. With the state limited to a minority stake, investors will not only have the security of a controlling stake but, more importantly, the state will share the risks and be subject to the same rule of law and corporate governance practices as its co-investors. The structure of the fund is also designed to allow it to tap into the expertise of the type of investor it hopes to attract — namely, the best in the world. An in-
vestment committee, which will meet as needed, can approve deals up to $250 million and will feature professional investors from Russia and around the world. The supervisory board, which will meet four times a year, will determine the strategy and also approve deals up to the $500 million maximum. Government officials will join that board, but international institutional investors and professionals will make up the majority. The final level of supervision will be an international advisory committee composed of representatives from the leading global funds and getting together once a year. “There will be some ‘no-brainer’ investments, as the primary goal of the fund is to produce returns, but we also want to leverage the expertise of our partners,” said Dmitriev. Among the international investors that have already expressed an interest — and will probably end up on the international advisory board — are Goldman Sachs, Blackstone, the Abu Dhabi Investment Authority, Kuwait Investment Authority, China Investment Authority, Permira and Caisses des Depots. The point of roping in all these big names is to create the same sort of creative discussion found at events like the annual Davos forum, with the difference that the fund can actually act on their insights.
is the size of the newly created fund. It will offer foreign businesspeople, who have largely perceived Russia as a risky market, reassurance by co-investing into major projects and thereby sharing the risk.
is Russia’s rank among the world’s largest economies, with the number of people earning over $10,000 annually having tripled in the last six years. Contrary to common perceptions, Russia has the wealthiest middle class of the BRICS countries.
of foreign direct investment flowed into Russia in 2010, the secondhighest level among all emerging markets. PepsiCo’s $3.8 billion purchase of juice-and-dairy king Wimm-Bill-Dann marked its largest investment outside the U.S.
Finance Global furniture giant wants to appeal to Russia’s burgeoning middle class with easy credit
Ikea Bank to Furnish Credit The furniture giant wants to expand point-of-sale lending through it’s own credit operation, following the example of other Russian retailers.
Russia’s Consumer Lending Market
the E.B.R.D. (European Bank for Reconstruction and Development) in Kazakhstan last May. “At the start of the process, the state has to engage in a ‘Big Push’ to get the wheels of commerce turning, simply because it is the only entity with the money or resources to do anything. However, once the economy is up and running, at some point it must change to a ‘nurture’ strategy and step back.” Yeung was joined on his panel by Sergei Guriev, the director of the New Economic School in Moscow. The two men argued that state involvement in the economy is necessary, but will eventually strangle it unless the government can let go. Guriev said that once the economy is working, the key is for the state to disengage and hand over the job of driving economic growth to the entrepreneurs and small- and mediumsized enterprises. Yeung added that once the economy starts to function, it also starts to use up its resources, so a key element of nurturing is“creative destruction”— companies that are not efficient must go bust to allow their resources to be put to better use elsewhere. A lack of creative destruction is the short road to stagnation, but this is where it starts to get tricky. During the Big Push, governments set up powerful lobbies and vested interests that don’t want to see their companies downgraded or sold off. It can be argued that Russia has already reached the point where it needs to transition to a more-caring, less-involved kind of government. But while Russia has made a lot of progress, the needs of its economy are very mixed. A joint survey conducted in May by the Moscow Higher School of Economics and the Russian economic magazine Expert found that
Russia is at the point it when needs to transition to a morecaring, less-involved, kind of government.
BUsiness New Europe
Like most Europeans, Russians are used to finding the Ikea brand stamped on their tables, chairs and packages of meatballs, but they could soon find the ubiquitous blue-and-yellow logo on their credit cards, as well. The Swedish retailer is reportedly considering creating its own retail bank in the country, joining a host of other shops and car manufacturers looking to take advantage of expanding consumer credit. While retailers obviously enjoy the sales boost that credit schemes offer, the costs can add up if they leave the running and risk to a contracted bank. Credit Europe Bank currently provides the loans at Ikea’s stores across Russia, but analysts told The Moscow News the company could cut its total costs by up to 2 percent by setting up its own operation. Russian daily Kommersant reported that Ikea will now set up its own bank in partnership with Ikano Finance, part of a group spun off from the retailer in 1988, but still controlled by Ikea owner Ingvar Kamprad and family. However, while retailers worldwide run their own credit operations, in Russia only licensed banks can offer such services. And after going through all the time and trouble to get a banking license, it doesn’t make much sense to stop at offering loans to your own customers.
Ikea currently operates 12 stores in Russia.
For the moment, Henrik Jensen, Managing Director of Ikano Finance Russia, says that a final decision has yet to be made: “Ikano has been considering different opportunities, including setting up a local bank, but, so far we have not applied for bank registration.” Other retailers, however, have jumped right in, joining a trend pioneered by a range of international car manufacturers including General Motors, Volkswagon and Toyota. French food retailer Auchan is expected to import its Banque Accord Group in the near future, while electronics retailer Svyaznoi teamed up with Promtorgbank to launch Svyaznoi Bank last year. The company has said it hopes to develop Svyaznoi Bank into one of the leading financial institutions in the country. It has al-
ready issued 500,000 credit cards with a loyalty bonus program attached. Chasing the under-leveraged consumer The prize at the end of these metamorphoses is the huge potential of Russia’s under-lever-
Point-of-sale lending is a niche that offers serious opportunities for both retailers and traditional banks. aged consumer. Consumer credit — particularly at the point of sale and via credit card — is expanding again as consumers regain their confidence and turn to upgrading their homes and cars. But income and wage
growth remains somewhat sluggish, which means that growth in retail sales numbers is increasingly driven by consumer loans. “Retail sales increased 5.5 percent year-on-year in May, almost unchanged from 5.6 percent in April, despite the continuing decline in disposable income [down 7.7 year-on-year in May] and subdued real wages growth [up 2.6 percent year-on-year],” said Alexandra Evtifyeva, an economist at VTB Capital. “The robust consumption growth is supported by the acceleration in retail lending [up 22.8 year-onyear in May] and a tightening labor market.” In particular, point-of-sale lending is a niche that offers serious opportunities for both retailers and traditional banks, as the small, unsecured loans offer
a high yield. Even Russia’s overwhelmingly dominant retail bank Sberbank is now keen to get a hold on customers as their aspirations peak at the point of sale; Sberbank has agreed to a joint venture to develop BNP Paribas subsidiary Celetem — currently the country’s seventh-largest point-of-sale lender. On Jun. 22, Sberbank raised its forecast for its overall retail loan book growth to 25 percent this year. “This is good news for Sberbank in our view, as Cetelem is a strong partner that will bring important know-how, technology and risk-management systems to develop Sberbank’s consumer loan business”said Simon Nellis, a banking analyst at Citi Group.“[It] will allow Sberbank to capitalize on expected strong growth in point-of-sale lending in Russia.”
since 1991, both incomes and consumption per household have soared. Sectors connected to the boom in retail spending power have been the clear winners, and the state is already in the position where it need do little more than nurture growth in these areas. On the other hand, the manufacturing sectors are still struggling. The state’s involvement in the power and automotive sectors has been highly successful, but the national champions in sectors such as shipping, aviation and metallurgy have yet to really get going. Still, the Kremlin seems to have gotten the message. The state has relaunched the privatization process, which is planning to raise up to 1 trillion rubles ($33 billion) in the next three years. But the stakes are high. Russia used up a lot of its spare capacity in the crisis, and slower growth of about 4 percent is not fast enough to prevent things like infrastructure slowly crumbling away. Even assuming the government stays on course, it still has to get the speed of transition from its Big Push to nurturing the economy right, and that will not be easy.
Russia BEYOND THE HEADLINES
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Looking west or east? It’s time to take the brakes off the economy ports, which in turn would hit Russia’s energy and metal sectors, not to mention the financial sector worldwide. As a result, Russia was very slow to react to the crisis and lost valuable time. Putin and Russia now claim credit for avoiding the street unrest in countries such as Greece and Spain, but their solution, like that of China, was purely Western — namely, deficit spending. Long before the crisis, Russia totally ignored numerous warnings about its high-risk economy, continued with its state capital-
pening the proceedings at the St. Petersbug International Economic Forum in June, Russia’s Minister of Economic Development and Trade Elvira Nabiullina spoke of global leadership passing to emerging markets because of their high growth rates and the anaemic economies and huge debt of the developed countries in the West. Many Western investors buy into this logic, too. For instance, Jim O’Neill, the Goldman Sachs economist who coined the BRIC acronym in 2001, has said that the term “emerging markets” was now outdated due to their current and potential growth and the shift in economic power from West to East. In the last few years, and especially since the global economic and financial crisis,“the Rest” have therefore not only asserted their economic, but also their moral, superiority over“the West.” And yet, despite China’s success of the last 30 years, it remains far from matching Western levels of development, living standards and technology. However fast they might be developing, emerging markets remain decades or even centuries behind advanced nations. By definition, they are not developed and remain weak on democracy, the rule of law and corporate governance, and very strong on corruption and environmental degradation. Measured by per capita income, many remain poor or desperately poor, and all face huge developmental challenges. So while there is certainly a strong investment and business case for the emerging markets, reaching Western standards will not be easy for the BRICS, the Next 11, the CIVETS or any other investment banker’s pet acronym. Russia is a case in point. The country’s hubris and economic illiteracy during the go-go years between 2000 and 2008 led to major policy mistakes from which the country still suffers. When the first signs of the global economic crisis appeared, Putin made exactly the same mistake as Germany’s finance minister Peter Steinbrück. Full of schadenfreude, both politicians gloated that the crisis was a distant and purely Anglo-Saxon problem that wouldn’t affect their countries. Both utterly failed to understand that a downturn in the United States would hit European ex-
Russia’s hubris during the go-go years led to major policy mistakes from which the country still suffers. ism and failed to reign in the ballooning bureaucracy and corruption. Moscow thus missed its best chance in decades to diversify the economy during the good years up to 2008 and now faces the much bigger challenge of growth and development in a far harsher environment full of risks. Medvedev is now getting some praise from investors for his reform efforts, but in fact many of his initiatives, such as greater privatization or removing government ministers from the
Ian Pryde is founder and C.E.O. of Eurasia Strategy & Communications in Moscow.
How Russia can copy china’s success Deiter Wermuth
The Moscow Times
he old theory perpetuated by developed economies that free trade and free capital flows are always good is increasingly under attack. Even at the International Monetary Fund, the old orthodoxy is on the way out. Markets usually produce desirable results, but not all the time. In some situations, it may pay to control them. No one believes anymore that the financial sector should regulate itself, that financial innovation will necessarily boost productivity or that globalization benefits everybody. If left to themselves, market forces often lead to monopolistic structures, an unfair income distribution, corruption, a destruction of the environment and, most important, suboptimal economic growth. In the case of Russia, I have increasingly begun to wonder whether some trade restrictions and capital controls are actually desirable for the country. Could it be that the vast difference in medium-term growth rates in gross domestic product of China and Russia has something to do with the fact that China tightly controls its exchange rate as well as capital flows in general? China’s economy expands rather steadily at a rate of almost 10
ussian business has always been highly dependent on the government and good relations with authorities. This interrelationship between business and the state is nothing new. It even existed in imperial Russia, when private business grew not so much as the result of personal initiative and skill as it did by permission of the tsar. Russian business is just as scared of the state and government officials as it is dependent on them. Businesspeople in most countries are careful to avoid doing anything that would bring harm to the state, but in those countries with an effective legal system, they at least feel protected from abuses by government officials. But these protections do not exist in Russia. If a businessperson tries to take a mayor or governor to court, he knows he might lose his business and even end up behind bars himself. In Russia, any sizable business has traditionally sought protection not with the courts or the state, but by following direct instructions from the chief executives of the country. Under the tandem, however, Russia has two“chief executives”
China successfully keeps out undesirable inflows, while Russia has the opposite problem: it must fight capital flight. preciation of the renminbi against the dollar, China’s G.D.P. will exceed that of the United States in just seven or eight years, at which point it will be 10 times larger than Russia’s. So the question I have is whether China’s record-high saving and investment ratios are a direct or indirect result of making it difficult for the private sector to export capital, as well as a policy that discourages investment abroad while giving the Chinese large incentives to invest at home.
Net capital exports are, by definition, equivalent to the surplus in a country’s current account. In 2011, both the Chinese and the Russian surpluses will be about 5 percent of G.D.P. The difference is that the People’s Bank does the capital exporting in the form of an accumulation of foreign currency reserves, mostly dollar-denominated, whereas Russia’s Central Bank largely refrains from intervening in foreignexchange markets. Its reserves are more or less constant at about $500 billion. The implication is that Russia’s private sector will be a net capital exporter of more than $70 billion this year. Given the poor state of the country’s capital stock, wouldn’t it be better to keep some of the money at home? If I cannot buy foreign assets — because it is forbidden or tightly controlled — I have no choice but to to invest the money domestically. In this way the supply of monetary capital rises and real interest rates fall. The capital stock and potential G.D.P. will thus grow at a faster rate than before. Just as the doctor ordered. It is obviously easier to restrain capital inflows than outflows. China successfully keeps out undesirable inflows, while Russia has the opposite problem: It must work to attract foreign investment while also acting against capital flight. There are many ways in which people and firms can circumvent capital export controls. One method is to export goods at below-market prices. Another is to import at above-market prices. The differences can then be parked in foreign accounts. The administrative effort to follow the flow of money is considerable and will work only partially. Longer term, it is clearly a better strategy to improve the domestic business climate. A stabilization of the ruble exchange rate would also help. Since large ups and downs are confusing to market participants, investors will hesitate to invest in Russia, or, at the very least, they will demand higher risk premiums. Both effects reduce economic growth. Since the external value of the ruble has often changed dramatically in response to equally dramatic changes in commodity prices, the administration should consider adopting the Chinese model of a structurally undervalued and fairly stable exchange rate against the euro. A large appreciation of the ruble in the wake of the new commodity boom would inevitably lead to a big increase in imports and thus destroy a part of Russia’s domestic production base. This is what is sometimes called Dutch disease. When the inevitable happens and the ruble declines again, the companies that might benefit from the improved international competitiveness will simply not exist anymore. Dieter Wermuth is a partner at Wermuth Asset Management.
russia through our window
Tandem economics The Moscow Times
percent, while Russia chugs along at less than 5 percent. China’s success story is mainly the result of its high investment ratio. At about 45 percent of gross domestic product, China’s investment ratio is twice as high as Russia’s. This means that the capital stock rises much faster and that there are almost no bottlenecks in production. This, in turn, keeps down inflation, permits easy monetary policies and boosts growth. Based on present trends of 9 percent real growth, 4 percent inflation and a 5 percent annual ap-
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boards of state companies, just reverse earlier policies which should never have been made in the first place. The outside world generally thinks that the Russian state is very strong, but in fact it often cannot get things done at all. Bureaucratic resistance, apathy and sheer incompetence undermine many government policies and hinder growth. Medvedev’s policy of high-tech modernization is also problematic. Again, history sheds light on the problem. For all its military capability and educational levels, the Soviet Union was largely incapable of mass production, one reason among many being that it concentrated on churning out great specialists, but not on great generalists capable of handling complex problems involving different areas of knowledge. Now, Russia is striving for high tech, and the country is the world’s second-largest producer of business school graduates. But many Russian employers do not want or need whiz kids from top business schools because in this strange economy they are simply superfluous to requirements. The West is obviously hamstrung by its current economic problems, but advanced countries can still call on the best science, research, technology, design and products in the world. And their companies would jump at the chance of decent investment opportunities in emerging markets for the huge piles of cash on their balance sheets. Moscow would do well to declare Russia totally “open for business”and get on with it rather than continuing to put the brakes on its own economic development.
— President Dmitry Medvedev and Prime Minister Vladimir Putin.Which of them would business owners prefer as the next president, and which could they rely on to protect their interests? It would seem that Medvedev is the obvious answer. After all, he is the one who said:“Freedom is better than a lack of freedom,” that the authorities should stop “nightmarizing”businesses by harassing them with onerous, unnecessary inspections. It was Medvedev who suggested that criminal punishments for economic crimes be mitigated and who has made the battle against corruption one of his top objectives. Recently, though, the presidential administration has disagreed with the decision made by Putin’s government to raise the social tax from 26 percent to 34 percent.The Kremlin believes this move will suffocate business and has demanded that the government find a way to lower the tax. The government has all but ignored the demand. At the same time, the two sides can’t agree on a compromise proposal to raise the tax on profit by 4 percent in exchange for lowering the social tax to 26 percent. Meanwhile, Putin has been quite active in the past few months meeting with small- and
medium-sized business groups and attending business forums. Judging by his remarks at these meetings, Putin sounds very much like a liberal who supports the market economy. What’s more, Putin has commissioned a team of prominent liberal economists headed by Vladimir Mau and Higher School of Economics president Yaroslav Kuzminov. Ironically, the country’s economy is
Competition between the president and prime minister gives business a taste of freedom that it wouldn’t have otherwise. being entrusted to people whom the authorities not long ago labeled as“modern-dayYegor Gaidars.” It looks like both tandem members are campaigning and trying to position themselves as “business-friendly” candidates. So, which of the two is better for business? Probably the best answer is neither. The main reason is that neither Putin, as president and prime minister, nor Medvedev has succeeded in curbing corruption. Both have proven powerless to defeat — or even tame — a corrupt bureaucratic leviathan that,
The Finalists more often than not, simply ignores instructions from above, including direct orders from the president and prime minister. Neither Medvedev nor Putin is able to break the existing system without radically reforming and restructuring the entire system of governance by introducing more competition and establishing an independent judiciary. Because neither Putin nor Medvedev is better than the other for business, the private sector would probably benefit most if the current tandem continued intact in one form or another because competition between the president and prime minister gives business a taste of freedom that neither partner could provide separately. Even when the competition is staged, competition still motivates each tandem member to outdo each other. In reality, however, the tandem will not survive past the State Duma elections in December, much less the presidential election in March. Soon we will find out who will drop out of the tandem and who will remain as the presidential candidate. Unfortunately, the business community will play only a minor role at best in determining who that candidate will be. Georgy Bovt is Moscow-based political commentator.
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in OUR first issue of rBTH, we challengED readers to interpret winston churchill’s famous quote about russia being “a riddle wrapped in a mystery inside an enigma.” Here, We offer excerpts from the two finalists’ essays. the winner will enjoy a trip to moscow and st. petersburg.
Russia ... is a collection of souls, hidden in the eye of a needle, shelled safely within an egg, stowed in the warm belly of a duck, which slumbers inside a hare’s heart, its legs cocked and ready to sprint, and locked safely in an iron chest buried beneath an ancient oak, as if it were the very seed of life itself. Matthew Miller (winner) Verona, Pa.
Though classics of Russian literature have given us insight into the Russian soul, are Fyodor Dostoyevsky’s analytics ingrained in the Russian mind and Alexander Pushkin’s feeling in the Russian heart? And while a Russian may never smile, does that mean he does not welcome us with open arms? Tomas Kasparaitis (runner-up) Columbus, Ohio
Letters from readers, guest columns and cartoons labeled “Comments,” “Viewpoint” or appearing on the “Opinion” and “Reflections” pages of this supplement are selected to represent a broad range of views and do not necessarily represent those of the editors of Russia beyond the headlines or Rossiyskaya Gazeta. Please send letters to the editor to US@rbth.ru This special advertising feature is sponsored and was written by Rossiyskaya Gazeta (Russia) and did not involve the reporting or editing staff of The new york times. web address http://rbth.ru E-mail firstname.lastname@example.org Tel. +7 (495) 775 3114 fax +7 (495) 988 9213 ADDRESS 24 Pravdy STR., bldg. 4, floor 12, Moscow, Russia, 125 993. Evgeny Abov Editor & publisher Artem Zagorodnov executive Editor lara mccoy guest editor (U.S.A.) olga Guitchounts representative (U.S.A.) andrei Zaitsev head of photo Dept Milla Domogatskaya head of pre-print dept mikhail apakin layout e-Paper version of this supplement is available at www.rbth.ru. Vsevolod Pulya Online editor To advertise in this supplement contact Julia Golikova, Advertising & PR director, at email@example.com. © copyright 2010, ZAO ‘Rossiyskaya Gazeta’. All rights reserved. alexander gorbenko chairman of the board. Pavel Nigoitsa General Director Vladislav Fronin Chief Editor Any copying, redistribution or retransmission of the contents of this publication, other than for personal use, without the written consent of Rossiyskaya Gazeta is prohibited. To obtain permission to reprint or copy an article or photo, please phone +7 (495) 775 3114 or e-mail firstname.lastname@example.org with your request. Russia Now is not responsible for unsolicited manuscripts and photos.
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Literature Writer’s home gets a makeover on the 70th anniversary of his birth
The Dovlatov Story: Émigré Writer Defied Stereotypes A group of devotees is hoping to revive interest in Russian dissident writer and émigré Sergei Dovlatov by reconstructing his last home on Pushkin’s estate.
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BORN: SEPTEMBER 3, 1941 UFA,
FROM PERSONAL ARCHIVES
Since Sergei Dovlatov’s death in U.S.S.R. New York in 1990, the American DIED: AUGUST 24, 1990, N.Y.C. audience for the exiled Russian dissident writer has dissipated. But efforts are underway by In his youth, Sergei Dovlatov wealthy friends and fans to conflunked out of what was then Lenvert one of his last homes in Rusingrad State University, and so sia — a simple log cabin on the was drafted by the Soviet Internal family estate of Alexander PushTroops to work as a prison guard in kin — into a museum. high-security prisons. At the same time, his devotees His larger life began when he emihope to revive interest in his work, grated to the United States in 1979 especially his fiction, which 25 and was accepted into an elite inner years ago graced the pages of The circle of writers, editors and critics. New Yorker. He was an absurdist unknown to his Before he left the Soviet Union fellow Russians until 1989, a year in 1979, Dovlatov worked as a before his death. Today, he is nearly tour guide at the estate of the forgotten in the U.S., where he first 19th century Russian writer, and succeeded, but is becoming increasrented a room in a log cabin on ingly known at home. By 2009, his the Mikhaylovskoye preserve, but books were so rare in the U.S. they this was no voluntary immersion were selling for more than $100. He in Pushkin’s world. might well have been amused. At the time, Dovlatov was deeply frustrated by his inability to get his work published, was living in poverty, and was torment- Sergei Dovlatov in Tallinn, 1974. ed by debt. His reminiscences formed the basis of the story through the character of Mikhail story” would come to denote a “Zapovednik” (“The Preserve”), Ivanich. paradoxical event that defies steacclaimed by critics as one of his The house is associated not only reotypes. Dovlatov’s writing only best works. with his fiction, but with his reached Russian readers in the Much has changed since Dov- thoughts about emigration. A year 1990s, after his death. But the latov lived on the estate. Gone after arriving at Mikhayalovskoye, sense of freedom in his fiction resare the “squadrons of tourists” Dovlatov followed his wife to the onated with the times. who got on the writer’s nerves. United States where, at last, he Now a group of businessmen They vanished together with the earned a living from his literary want to rekindle some of that inSoviet Union, said Svetlana work. terest by renovating the house at Kovshirko, a local woman and Through the 1980s he published Mikhaylovskoye where Dovlatov manager of the literary hotel a succession of books — sad, iron- rented a room and turn it into a Arina R. ic and imbued with compassion museum. Almost all the houses in the for his fellow human beings — Dovlatov once wrote of the area have been bought by strang- and his stories were published in house where “stray dogs got in ers and renovated; the log hut in The New Yorker magazine. Dov- through holes in the floor.” And which Dovlatov lived is one of latov was lauded by the Nobel he wasn’t exaggerating. the few exceptions. It survived in Prize winning Russian poet JoIn the 1990s Ivan Fyodorovich its most basic shape because its seph Brodsky who valued “the died from alcoholism and his owners were too poor to repair muted music of common sense” wife Yelizaveta sold the house to the cabin. It was owned by a in his work. Vera Khalizeva, a retired woman wood-cutter called Ivan Fyodofrom Moscow. She patched up rovich and his wife Yelizaveta. A dissident discovered at the holes in the floor with plyDovlatov rented a room from home wood but otherwise little them when he came to the vilDovlatov later enjoyed a burst changed. The wooden house was lage, and he immortalized Ivan of popularity in his native land, crumbling when it was bought Fyodorovich in “The Preserve” and the expression “a Dovlatov about 12 months ago by a group
of Dovlatov fans who prefer to remain anonymous. The house remains in a decrepit state. The floor sags underfoot and the ceiling is more or less supported by poles. Some of the items used by the writer remain: an iron bed, a wooden stool, and a fragment of a mirror. The walls are covered with wallpaper from the 1970s. Repair work has just begun. “Our task is to preserve everything while replacing the rotten parts,” said one worker on the project. Igor Gavryushkin, a representative of the new owners, explained that the preservation of the house is not a commercial project: “The investors are successful people who have no lust for gain,”he said, adding that they are motivated by their “love and respect for Dovlatov.” Gavryushkin said he hopes to have the house at least partly repaired by Sept. 3 to mark Dovlatov’s birth 70 years ago in Ufa, Russia. In September, an exhibition by the local artist Igor Shaimardanov, which is devoted to Pushkin and Dovlatov, is scheduled to open. Dovlatov had no interest in official celebrations or memorials. “It is always like this: First, they do a person in and then start looking for his personal belongings,” he wrote about Pushkin. But something similar is happening to Dovlatov today; the new owners of the house are hoping to obtain personal belongings from the writer’s friends and relatives.
A Home at the End of the World
The house in which Sergei Dovlatov spent the summer of 1978, a year before his emmigration to New York, is located in the Pskov region village of Berezino and is more than 100 years old. There are still a few Berezino residents who remember Dovlatov’s stay, sometimes not very fondly. A neighbor who made it into Dovlatov’s tales as a drunkard was not happy with the way the author portrayed his lifestyle.
A year ago, the house was bought by Dovlatov’s fans in order to turn it into a museum in his honor. The devotees hope to begin restoration work soon, but at the moment it remains in bad shape — although full of many of the great author’s personal belongings. See the slide show at www.rbth.ru/13171
So, Do Theater and Politics Mix in Russia? John Freedman
THE MOSCOW TIMES
ailed businessman Mikhail Khodorkovsy and writer Lyudmila Ulitskaya came together rather like Plato and Socrates last week to discuss the state of the State of Russia. No, this was not an unexpected event involving the actual individuals; it was an unexpected event involving actors who played them on a stage. And, yes, it was unexpected. There are few things Russian theater avoids with more dexterity and conviction than politics. It has almost always been this way. In the 19th century, plays that pushed too far into political or social commentary were routinely banned. Even after the revolution there was just a short window of time during which directors and writers used theater as a mouthpiece for sociopolitical topics. Those efforts quickly fell by the wayside or turned into propaganda. Maybe that is why in the highly political 1980s and 1990s, there were only scattered attempts to engage in political theater in Russia. There is a sensation among Russians that politics are dirty and that theater is called, in some way at least, to remain“clean”by not involving itself in politics. Over the last 15 years, you could approach almost any theater artist and hear a variant of phrases like: “Oh, I pay no attention! That doesn’t concern me! I just do my work.” That is changing, however. As the politicization of daily life continues to grow, and as the next presidential election on March 11, 2012, draws ever nearer, the notion of political neutrality is losing respect in the theater community. The staged reading of a series of letters exchanged by Khodorkovsky and Ulitskaya in 2008 and 2009 is a case in point.
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Echoes of PostImpressionist Painters Slide Show at www.rbth.ru/13162
Ana Tsarev said that her experience landscaping gardens in different countries influenced her art.
A contemporary artist, based in New York but with Russian roots, finds her voice in the lush eloquence of flowers and brings her vision to St. Petersburg. MARIA GOLUBKOVA SPECIAL TO RBTH
An exhibition of paintings by Ana Tsarev called “The Life of Flowers”opened at St. Michael’s Castle, an annex of the Russian Museum in St. Petersburg, in July. Tsarev, who has a gallery in New York, has a penchant for vivid and rich colors, an ener-
getic style and laconic composition. In the tradition of naïve artists, Tsarev explores the magnificent diversity of flora in farflung places. “Ana Tsarev has developed a powerful, sweeping style that echoes the energy of the Post-
Politics are dirty, and theater is called, in some way at least, to remain “clean” by not involving itself in politics. heard playwright Maksym Kurochkin make in January during a public discussion of contemporary Russian theater at a festival in Austin, Tex. Kurochkin stood up and said that the time has come to embrace socially engaged plays. He pointed out that plays that addressed social issues directly in the late 1980s are now so outdated that they are “impossible” to read.“However,”he added,“I have the feeling that the time has come when we must begin writing those plays that no one will be able to read in 20 years.” The reading of the Khodorkovsky-Ulitskaya correspondance at the Joseph Beuys Theater was not a “play,” per se. But it was a theatrical and a political event. That is an innovation, but it is one that Moscow theater artists are increasingly trying on for size.
Scaling the Skyscrapers to Escape Modern Realities
AUTHOR: PAVEL KOSTIN
Impressionists,” said the curator of the exhibition, Alexander Borovsky, referring to French art after Manet.“Her method relies on moulding, superimposition of layers and tactile contact with paint and canvas.” The large portraits of flowers seem to be replicas of one another, but they are transformed through color and mood. The bright and exotic strelitzias, elegant orchids and regal lotuses are the real heroes of Ana’s works. After spending many years as a professional gardener, landscaping gardens in many countries, she is now giving a new lease on life to short-lived buds. “Orchids are my favorite flowers,” she said.“What I like most is the opening buds, but in general I like all flowers. They are like children to me. And they never let you down.” This is Tsarev’s first exhibition in Russia. The 74-year-old artist received an invitation from Vladimir Gusev, director of the Russian Museum, who visited her gallery in New York. Preparations took about a year, and now about 50 of her paintings are on display at the palace. The “World of Flowers” exhibition opened July 14 and runs through Sept. 5. Tsarev was born in Croatia, but has Russian ancestry. Her trip to St. Petersburg for the opening was her first visit to Russia in 60 years.
The event, directed by Varvara Faer and hosted by Mikhail Kaluzhsky, was organized by Georg Genoux, the German-born founder of the Joseph Beuys Theater in Moscow. Genoux has repeatedly organized or staged politicallyoriented productions in recent years. And while he has been an important force in bringing politics and theater into the same sphere, he is hardly alone. Playwright Mikhail Durnenkov wrote recently that belonging to the opposition is now“fashionable,”whereas it used to be fashionable to not care. Writing on Facebook, Durnenkov declared that to his “amazement” he realized he had a positive attitude about it. “We have always thought it was ‘terrible to be in opposition.’ I think the shift of the paradigm from ‘terrible’ to ‘fashionable’ is a genuine step towards democracy.” I am reminded of a comment I
TITLE: ROOFTOP ANESTHESIA
Art New York–based artist has exhibit at Russian Museum
RUSSIAN WRITING 2011
oung Russian novelists are redefining the world around them. Their fresh perspective gives a modern dimension to the country’s celebrated literary tradition. Unburdened by the Soviet baggage of their forbears, but uncertain about Russia’s future, younger writers are forced to look honestly at their surroundings. Immediacy and a characteristic focus on the loneliness of young adulthood are keynotes of Pavel Kostin’s short novel, “Rooftop Anesthesia.” Set in a decaying urban landscape of skyscrapers and streetlamps, it follows the introspective Peter in his attempts to escape the pressures of modern life by scaling the tallest buildings in his hometown by night. Peter advertises online for assistants. He quickly finds that his hobby, which he has nicknamed“urban extreme,” is turning into a cult and a commercial enterprise. This trajectory forms a powerful exploration of the corporate branding of the modern world. In a key passage, the narrator expounds — via e-mail — an intensely personal concept he calls “blithe fury.” He describes battling through rainy streets to “tear the dense wet day apart”; he defines blithe fury as overcoming resistance, “pushing back the wind.”By the time the Internet-savvy Nemo and the business-minded Sergei have finished with his hobby,
there is no longer space for the individualism that urges Peter out into the stormy nights. In order to produce a marketable video, they must wait for a sunny day. From the opening line, the narrator uses the summer heat of a provincial Russian city as a metaphor for the conformism of the “urbanites”around him; the ability to be “normal” is “to smile in the orange air of July.”This rejection of social conventions appeals particularly to the booming young adult market. For older readers, there is an intriguing freshness in the raw innocence of a writer still finding his voice. There is something of the farce of Bulgakov in the novel’s surreal midnight episodes, an ironic echo of the rooftop perspective that the devil achieves above Moscow. It’s playful, postmodern stylistic montage is also vaguely reminiscent of Venedict Eforeev’s iconic prose poem,“Moscow Petushki,”the rambling 1969 monologue of an alcoholic intellectual on a train. Both novels share the savage underlying message that ultimately the only sane reaction to life in an insane world is to attempt escape by any means. The English translation of “Rooftop Anethesia”is published in one volume, together with Andrei Kuzechkin’s “Mendeleev Rock,” another serving of youthful alienation and group dynamics in the city, with side orders of violence, incest and rock ’n’ roll. Andrew Bromfield, famous as the translator of Boris Akunin’s historical whodunnits, has provided serviceable renditions of both authors’ use of street slang and streams of consciousness. “Rooftop Anesthesia” is available in the volume “Mendeleev Rock,” published by GLAS New Russian Writing, http://www.glas.msk.su/order.html
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As the Russian cartoon series expands its reach, its creators are concerned about maintaining the series’s high-quality animation and sophisticated storylines.
derlying humor is exclusive to Russia, which is why the adaptation for China took more than three months. In order to decrease the turnaround time in the future, Riki must decide if it should remove the multi-layered subtexts and leave only the main themes of tolerance and peace, or keep the storylines unchanged. “Parents say: ‘Children do not understand the subtext of this cartoon,’” said Nadezhda Kuznetsova, the head of Petersburg computer animation studio, which is the part of the Riki group that produces “Smeshariki.”“The series is full of allegories, background intimations.”
ANASTASIYA NAPALKOVA EXPERT MAGAZINE
On a recent visit to the Riki Production Center in St. Petersburg, a list of requirements for Chinese translators of “Smeshariki” was hanging on the wall—the hugely popular Russian cartoon is being adapted for China, where the series has been in promotion since March. China is only the latest market for “Smeshariki,” which began selling foreign distribution rights to overseas distributors in 2008; it was the first Russian cartoon bought by foreign TV broadcasters. In August, “Smeshariki” will begin broadcasting through one of the biggest international children’s channels – Nickelodeon – in the C.I.S., Central Europe and Africa. The expansion into these markets will require the Riki studio to increase its animation production from 35 minutes to 245 minutes per month in 2012. “Smeshariki” was interesting to foreign distributors because the series promotes popular ideas like tolerance and peace.The original subtexts of the series, however, are beyond the understanding of foreign audiences. “It is useless to explain to foreign channels that the series is targeted at an audience of children four to 16 and adults. They do not believe that producers can employ such complexity and depth in a children’s product. Therefore, we are positioning “Smeshariki”overseas as a product for younger schoolchildren,” said Ilya Popov, the general producer of the Riki Group. Additionally, much of the un-
“Parents say: ‘Children do not understand the subtext of this cartoon,’” said Nadezhda Kuznetsova. As “Smeshariki” expands, it faces competition not only from local products, but also from Disney. According to the instruction guide for“Smeshariki”script creators,“the cartoon should be interesting to an adult and understandable to a child.” This approach, typical of all Soviet animation, allows the cartoons to appeal to a very broad audience. The average annual rating of the cartoon on the STS channel shows that the number of viewers between 16-54 exceeds the number of six-to-15 year-olds by 100,000. This philosophy works in the Russian market, but as “Smeshariki” expands, it faces com-
petition not only from local products, but also from Disney, whose stories have universal accessibility. Even locally, “Smeshariki” is beginning to feel the heat from the competition. For all animation, some 80 percent of revenue comes from licenses — the right to put the images of the characters on products for children. Over the past three years, this market grew by 25-30 percent year on year. For “Smeshariki,” which began when there was almost no competition, the period of rapid growth is over, and its sales of product licenses is increasing by only 15 percent a year. In order to maintain its position in the market, “Smeshariki” must increase sales of licensed products 2.5 times by 2015, from the current $200 million to $500 million. Smeshariki multiplication “Reaching a wider audience is both our strength and weakness,” said Ilya Popov.“We can hold the attention of all girls and boys aged four to 15 for maybe two or three more years. Then communication channels will develop.” In response to this segmentation, Riki decided to appeal to different segments of their viewing audience through sub-brands. The “Malyshariki” project was launched for kids under three: It involves the same characters but in their early childhood. The “Malyshariki” first appeared in books, but soon the will have their own television series. In late 2011, a full-length Smeshariki movie will be released, aimed at 14 to 25 year-olds — the age of most moviegoers.
“Smeshariki” Seeks Global Audience
In order to expand their reach, the protagonists of “Smeshariki” may have to lose their Russian-ness.
Animation in Russia The domestic animation industry in Russia has faced challenges because it is difficult to make money from cartoons in the country. According to Russian law, children’s programs cannot be interrupted by commercials, so the only way animation makes its way to the screen is through another law that requires channels to allocate 10 percent of their airtime for children’s shows. But since these timeslots do not generate income, it is easier and cheaper to fill them up with foreign animated series. A Russian animated movie costs around $100-150 per minute, while a Western movie typically costs $7 per minute, even including the additional expense of translation. According to the industry analysis group Movie Research, live-action series are even cheaper. Russian cartoons have only one way to a wide television audience: the top-ranked children’s program Spokoinoi Nochi, Malyshi! (Good night, kids!) which airs every evening from 8:50 to 9:00 pm, has a captive audience of 5 million view-
Growth in Russia
Watch Smeshariki cartoons at www.rbth.ru/13051
ers. Because this show has a very specific timeslot of six-and-a-half minutes, domestic animation creates episodes specifically for this format, and in this instance has a competitive advantage over foreign cartoons, which are generally longer. However, the competition among brands of animation both domestic and foreign is increasing because of the potential of the Russian licensing market. According to the Licensing Industry Merchandisers Association (LIMA), licensed products account for 60 percent of sales of children’s products in the United States, 40 percent in Europe and only 15 percent in Russia. Half of the $1.5–2 billion market belongs to Disney, which is consistent with its marketshare worldwide. Eleven Disney cartoons are in the top 23 brands represented in retail chains: two of them — Disney Princesses and Winnie the Pooh — are ranked No. 1 and No. 3, respectively. “Smeshariki” takes second place, with 10 percent of the market.
Animation Classic cartoons face an uphill battle to survive in a glutted marketplace
Fading Cartoon Empire’s Lasting Legacy An iconic Russian studio, birthplace of Russia’s mostbeloved cartoon characters, celebrates its 75th birthday despite a gloomy financial forecast. LUCIA BELLINELLI SPECIAL TO RBTH
Cherished Cartoon Characters
Gena (left) and Cheburashka are icons of Soviet animation Animators work inside the Soyuzmultfilm studio.
up your sleeves and look for new and original ideas.” Over the course of its long history, Soyuzmultfilm produced many animated classics, taking their themes from Russian fairy tales or the stories of famous Western writers such as A.A. Milne and Rudyard Kipling — scrupulously adapted to fit the Soviet agenda. Indeed, many wellknown Western characters have a clandestine Russian alter-ego.
The American Winnie-the-Pooh is a cheery, gormless, upbeat fellow who likes to keep his head perpetually buried in a pot of honey. However the Russian version of Pooh (Vinni Pukh) is a chubby, dark bear who drinks from a Russian samovar and is up to no good. His adventures take place in a miniature world that recalls characters from traditional Russian tales. Similarly, the cat-and-mouse
Nu, pogodi! The cartoon resembles the adventures of Tom and Jerry, but this hard-living wolf’s bravado is somehow endearing.
Vinni Pukh The Russian Pooh is less naive and more mischievous. He eschews honey and instead drinks out of a samovar.
Cheburashka Not quite a mouse but cuter than Mickey, Cheburashka became an Olympic mascot in 2004.
The Hedgehog Internationally known animation master Yuri Norstein conjured up one of the most beloved characters of all time.
Once upon a time there was the paper kingdom of Cheburashka and Gena. It was called Soyuzmultfilm, and the characters that have populated this kingdom since 1936 are the icons of Soviet animation. Today, this magic kingdom celebrates its 75th anniversary in the midst of a serious economic crisis. The company is suffocating under large loans and is being crushed by the competition. During the Soviet era, Soyuzmultfilm was a monopoly, a cartoon empire that produced its own animation and also reinvented many Western classics. From 1936 to 1991, the animation studio made nearly 1,500 films. During the height of production in the 1970s, the 200 artists employed by the studio created almost 30 films a year. Today, however, the studio releases no more than five. “Financing is the real problem,” said Vasily Shilnikov, director of the company, now known as the United State Film Collection.“We must understand that there are other production studios, and that the same artists also work for them. Therefore you need to roll
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adventures of Tom and Jerry provide the inspiration for the cartoon“Nu, Pogodi!”which features a battered wolf that hunts a chubby bunny with disastrous results. The cartoon’s name comes from an expression that all Russian children know, and which is roughly translated as “Well, just you wait!” But even as the artists of the 1970s looked to the West for inspiration, the studio’s real masterpieces arose from Russian folklore, such as animation master Yury Norstein’s“Hedgehog in the Fog”(1975). The story features the adventures of a hedgehog who heads out into the forest to visit his friend the bear and encounters a surreal and sometimes frightening world. Today, the studio is looking to its past successes in search of a way to achieve profitability in today’s crowded marketplace. The studio’s current project is again a story that is inspired by the West, but given a Russian twist. “We are currently working on Gofmaniada, a new film that, if all goes according to plan, should be ready by 2014,” said Shilnikov. The film is based on the stories of German writer E.T.A. Hoffman, who wrote a number of wellknown stories, including “The Nutcracker”and“The Sandman.” The movie will be produced entirely in stop-gap rather than computer animation, which is widely used in the West.
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