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Between Brussels and Beijing PAGE 5–7

ITAR-TASS

BUILDING BRIDGES EAST APEC summit gets high marks for real road maps as Russia drives eastward CUSTOMS UNION RAINMAKERS Experts claim integration can bring member states $1 trln in two decades BRICS IS NOT ALL BUSINESS Moscow sees BRICS as a catalyst for global governance reform A EURO BY ANY OTHER NAME? Euro crisis may reshuffle the deck for currency reserves KEEPING THE LID ON IRAN Russia is convinced more than ever to keep negotiating


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Top agenda

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NOTES FROM THE EXPERTS

Vladivostok should aim for a knowledge-based economy David Gray PWC MOSCOW

"I am not sure if it makes sense to industrialise Russia’s Far East, in terms of heavy industry and manufacturing. You have to pick your target. A multi-pronged approach to development is key. In Asia you’re already seeing many countries move their economies away from

REUTERS/VOSTOCK-PHOTO

APEC DISCOVERING THE EASTERN FRONTIER ACCORDING TO IGOR SHUVALOV, RUSSIA’S FUTURE RAPID ECONOMIC GROWTH RESTS ON TWO LEGS – EUROPE AND ASIA

FOR RUSSIA, A SUN RISES IN THE EAST The Asia-Pacific region is becoming as important to Russia as the EU, but the first challenge ahead will be building the infrastructure. ARTEM ZAGORODNOV RBTH

Reminiscent of pre-game commentators discussing London's Summer Olym-

pics, the naysayers were out in force before the 24th APEC CEO summit opened in Vladivostok last month, A few shabby roads and the firing of one local transportation officials aside, Vladivostok’s reconstruction for the APEC summit went off on time and without a hitch. Equally important, the summit was a platform for sig-

nificant discussion on the risks and opportunities of free trade, resulting in a number of important investment deals for Russia’s Far East. "A few months ago people were saying the summit would be a disaster," said David Gray, managing partner at PriceWaterhouseCoopers Russia. Gray spoke

on the final day of the event. "The said we'd be living in tents, the bridge wouldn't be ready and we'd be taking the ferry to Russky Island," he recalled. "Now all that has been quickly forgotten." “Costs aside, the development they did here in Vladivostok will allow Moscowbased expats like me to

Expanding Asian corridors for growth Russia plans to develop its transportation systems, both the Tran-Siberian Railway and Northern Sea Route, into Asia. IRINA DROBYSHEVA RBTH

Global trade forecasts predict that trade within the Asian region will grow faster than trade between Asia and either the EU or the Americas due to intensive regional integration. Asia leads the world in terms of simplifying interregional customs procedures and cutting the costs of doing business. While Russia was preoccupied with accession to the WTO, many APEC countries opted for regional freetrade agreements. Since the mid-1990s, more than 70 free-trade zone agreements have been concluded in Asia. Mikhail Kholosha, head of the transport

development department of the Far Eastern Marine Research, Design and Technology Institute explained the potential for expanding existing Russian transportation infrastructure in the region:“Speaking about the

Far East, the best place to start is in the south of the Primorye Territory. Japan, South Korea and China periodically test the possibilities of freight carriage via the Trans-Siberian Railway and in regional directions,

such as the Multi-Modal Transport Corridors Primorye-1 and Primorye-2.These three corridors form a common, mutually complementary transport space,”Kholosha said. Several years ago, the

convince our bosses in London, NewYork or wherever about the benefits of longterm investment in Russia’s regions. Now they’ve seen it with their own eyes,”said Gray. The positive effects of Vladivostok’s $20 billion upgrade did not go unnoticed by foreign business emissaries there.

simple manufacturing to higher value-added products, and that’s where Russia needs to be. We can have a certain amount of manufacturing in the region based on natural resources (like timber), but the real value will be in the knowledge-type economy areas. Biotech and nanotechnology are areas where Russia could have a great future and Vladivostok be a part of that."

A key purpose of the summit was summarized by First Deputy Prime Minister Igor Shuvalov at one of the opening sessions:“All of the infrastructure is in place around Vladivostok now – a new airport, roads, railroads, educational and medical facilities. Within five years, our foreign trade should balance in favor of Asia and guarantee high growth rates in the Far East. Within 10 years, we want our trade volume with APEC states to be greater than with the EU.” The European Union currently accounts for around half of Russia’s foreign trade at approximately $320 billion. Well over half of this figure accounts for Russia’s exports to the EU. Oil accounts for 63%S of the EU’s total imports from Russia while gas accounted

for about 9% of imports. Manufactured goods, including machinery and transportation equipment, accounted for a mere 9% (according to the European Commission's Eurostat website). On the flip side, machinery and transportation equipment accounted for a whopping 45% of EU exports to Russia, with other manufactured goods accounting for an additional 24%. As Russia’s APEC trade currently stands at less than half its EU trade (though it has increased to 23% from 15% of the total since 2006, (according to customs data compiled by Bloomberg media), the purported increase in trade with Asia will likely come from additional Russian energy and agriculture exports. Russia’s leaders have been careful to emphasize that this rebalancing of trade toward Asia will not come at the expense of relations or trade with European Union member states. At the same time, a free-trade incentives with Asian countries have been a n n o u n c e d i n re c e n t months, in order to facilitate the rapid growth needed. “For us, joining the WTO

Greater Tumen Initiative, acting under the auspice of the United Nations Development Program, conducted a survey of experts, government officials and businessmen in Northeast Asia on the possibilities of cargo flowing to China’s Jilin Province. A rough estimate of the amount of freight passing through this

region in the year 2030 is 90–100 million metric tons. This means that the seaport in Troitsa Harbour in Russia’s Primorye Territory should be radically developed. It could become the biggest port not only in Russia, but in all of Northeast Asia. This cargo transit route alone could earn Russia billions of dol-

EU vs. APEC


Top Agenda

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NOTES FROM THE EXPERTS

New logistics network can speed freight to key markets

Making inroads with our Asian partners Viktor Vekselberg SKOLKOVO

"Despite a traditionally political connotation, the word 'innovation' came up in practically every discussion that took place at the APEC CEO summit. This applies to business, social and cultural themes. The word 'innovation' is a new approach, a new vision of life in the 21st

was a stepping stone to becoming an OECD member,” said Shuvalov. “We’re also engaged in several important integration projects – the Eurasian Economic Space with Belarus and Kazakhstan, free trade agreements with New Zealand and Vietnam. Russia takes on more risks by not integrating with Asia than by doing so.”

Transportation's Double-Edge In a recent report, PwC predicted that Russia’s exports to APEC countries would more than double to $206 billion by 2021. One of the most promising sources for this increase is also its greatest impediment. The Trans-Siberian railway is arguably the most important component of President Vladimir Putin’s plan to turn Russia into a major transportation corridor between Europe and Asia (along with the Northern Sea Route). Already operating at full capacity, it also requires billions of dollars of investment for upgrading the single rail line and building logistics facilities along the way. Russian sea ports also have a large role to play in the

lars a year, and there are several such growth points in the region. Last year, the first batch of containers arrived at the Troitsa Harbour marine port by truck from the Chinese city of Hunchun, near the Russian border. From Troitsa Harbour, they were dispatched to Japan on board a container ship.The

century. Today our relations with Western Europe and the United States are of a higher caliber than our relations with our APEC partners. We hope that the meetings we held during the summit and the presentations we made will help us to make inroads with our Asian partners and exchange experiences in the education and innovation spheres, among others."

country’s eastward expansion. "The amount of trade between Europe and Asia exceeds $1 trillion, and every percent of the cargo that is transported via Russian territory will bring our economy no less than $1 billion," Ziyavudin Magomedov, chairman of the board of Summa Group, said at a panel session. Currently less than 1 percent of the cargo is transported via Russia. A recently announced federal plan calls for increasing the traffic cargo at all of Russia’s ports from the current rate of 540 million tons annually to 900 million by 2020. About half of this increase is to come from ports on the Pacific Ocean.

Agriculture Push Currently, the eight largest APEC countries by population import over 100 million tons of grain annually (a more than $50 billion market at current prices). This is more than Russia currently produces.“APEC countries account for about 37-38% of all imports worldwide. Our percentage of that is currently zero,”explainedVyacheslav Nikonov, a member of the Russian Duma’s Budget and Taxation Committee.

Chinese province of Jilin, which borders Primorye, had been working towards that possibility for almost 10 years. Now, it takes two days to deliver cargo from Northeastern China to Japan, and there are plans to use the new transportation line not only for transit carriage between China and Japan, but also to carry

Currently Russia has neither the roads, railways nor the ports in place to direct its grain exports toward Asia (the grain now leaves ports on Russia’s European coastlines, destined for markets in the Middle East and elsewhere). But Putin’s promise to increase grain production from the current 80-plus million tons a year to around 120 million tons has already convinced industrial holding company Summa Group to invest in logistics in the region.

Natural Resources PwC predicts that Asia will become the world’s largest natural gas market by 2015, and the $7 billion deal Putin signed with Japan's Prime Minister Yoshihiko Noda confirms that Russia is planning to take full advantage of this trend. It is expected that most of the liq-

freight from those countries to Europe via the Trans-Siberian Railway. However, to optimise the project, it is necessary to increase the capacity of the border crossing at the Russian town of Kraskino. So far, it processes 30 vehicles a day, but there is a demand for 200 vehicles with containers. The construction of a mod-

Putin and recently appointed Minister of Far Eastern Development Victor Ishaev have placed much faith in “re-industrialising” all of Russia and, in particular,

the Far East. During my last trip to the Far East, officials and experts alike remained sceptical that the region could ever manufacture exportable goods cheaper or of better quality than neighbouring countries. However, Sergei Kryukov of the Russian Small and Medium-sized Business Development Bank said: “All of the problems impeding competitive products from being manufactured in the Far East are solvable through proper policies.” The question remains whether Russia will be able to increase exports to Asia via higher value-added goods, versus a continued dependency on raw materials.“Russia’s future rapid economic growth rests on two legs – Europe and Asia,” said Shuvalov. This year’s APEC summit was an acknowledgement of that fact.

ern border crossing point at Kraskino is slated for completion in the fall, but increasing capacity alone will not solve all the problems at the crossing. Customs procedures still need to be simplified and the port capacity at Troitsa Harbour expanded. The idea of improving combined land and sea cargo shipments be-

tween Russia, China and Japan was recently backed by all the members of a consultative meeting within the framework of the Greater Tumen Initiative. However Russia is still lagging behind, and other members have been more active in the scheme, despite the fact that it was intended to assist Russia's Far East.

uefied gas coming from the plant will be exported to Japan, as the island country ups imports and shuts down nuclear reactors in the wake of the Fukushima disaster. Recently completed oil pipelines to China, as well as plans for expanding their capacity, suggest natural resources will play a critical role in expanding Russia’s exports to APEC as it seeks to diversify away from European consumers. However, haggling over the price of oil with Chinese officials has thus far been an obstacle.

Increased Exports to Asia

EDITORIAL

Now a hard journey begins

R

ussia's Far East has long been a remote, rambling realm on Russia’s rim. It's a place where economic and social development is felt fitfully. Neither reform nor revolution has merged the isolated Far East with European Russia, and an insurmountable 6000 kilometres between Moscow and Vladivostok. Both the Russian Empire and the Soviet Union maintained a hybrid outpost to process raw materials behind the trappings of a military bastion. But the Asiatic boom of the late 20th century, resulting in an economic boom on Russia's doorstep, forces us to view the Far East anew. Russia must either up her stakes in the Far East enormously – or admit that this theatre remains a foreign land. There’s no alternative reaction to Asia’s huge growth. Holding the Asia-Pacific Economic Cooperation (APEC) summit in Vladivostok in early September held a special resonance for Moscow – and confirmed Moscow's commitment to up the stakes in the Far East. Whether Russia carried the summit off will be judged by foreign observers. For now, once can say that preparation for the summit was the largestscale effort in the post-Soviet period to boost the Far East with concrete investment: roads and bridges; the Sakhalin-Vladivostok gas pipeline; the rebuilding of the port terminals; and the upgrading of the airport. The infrastructure was built with the intention to make the region no longer "Far" - either from Moscow, or from Europe. Now that the summit is history, we have to embark on the real journey ahead.


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Policymakers

RUSSIA NOW WWW.RBTH.RU 27 SEPTEMBER 2012 SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA

BRICS WITH SERGEY RYABKOV

A catalyst for global reform CREATING A CONSTRUCTIVE CONVERSATION FIVE BRICS AT A TIME

VIP PREMIER MAGAZINE

Has BRICS become an instrument of global governance? No, BRICS is not a mechanism of global governance. It is not for me to judge whether it is or will ever be such a mechanism, but at this stage BRICS is a catalyst for global governance reform. Although three billion out of seven billion people in the world are citizens of BRICS countries and although BRICS accounts for 25% of the global GDP, I cannot describe that structure as a mechanism for global governance. BRICS is still to a large extent an association based on interests. This is what makes it strong and viable. Right now, in BRICS countries, 80% of the issues pertain to the economic agenda and only 20% to foreign policy. The main global forum for coordinating approaches to economics is the G20, while BRICS works within that group. Unlike in BRICS, the ratio in the G8 today is the reverse: 80% of the issues on its agenda relate to politics and 20% to economics. I don’t think we will ever come to see BRICS in “utilitarian” terms.

Has BRICS developed a common philosophy? Definitely. Its philosophy is to not rush the process of transforming BRICS into an international organisation. What centrifugal and centripetal forces are at work within BRICS? It would be more correct to speak about varyingspeed of development and the changing geometry. BRICS countries have different views regarding the priorities and the pace of progress on some issues. One such major political issue is the reform of the United Nations Security Council. Perhaps there are also topics like human rights, their role in the system of international relations and approaches to addressing problems in that area. But it is always the case that the glass is half full or half empty. Within BRICS, Russia always takes the side of those who favour concrete decisions and want to see the language of declarations translated into practical deeds. The year 2011 was unique for BRICS. All its participants were working in the UN Security Council: Russia and China as permanent mem-

bers and the others on a rotational basis. Is cooperation in the sphere of international security still on the BRICS agenda? It is not only still on the agenda, it is growing stronger. BRICS representatives in New York, Geneva and Vienna have established an ongoing dialogue and have been holding working meetings. They exchange messages and phone calls. It all takes place as part of the normal diplomatic and political routine. This is one of the major recent achievements. That is how interaction should be built if BRICS is not to remain an event involving heads of state meeting once or twice a year, as happened in 2011 when an informal BRICS summit took place in Cannes on the fringes of the G20, while the main event took place in Sanya, China. Interaction must proceed at all levels. If we have good coordination on pressing international issues concerning regional security, that already marks a step forward. Usually a group of states, especially large, significant ones with global interests, needs decades in order to grow from “the toddler stage” into a global player, a factor not of global

SERGEY RYABKOV ITAR-TASS

KATERINA LABETSKATA

NATIONALITY: RUSSIAN AGE: 62 OCCUPATION: DIPLOMAT

governance, but of global dialogue and practical cooperation. The first meeting of BRICS foreign ministers took place in 2008 and the first summit in 2009. BRICS has achieved a great deal during the past three years. I’m very optimistic about the future. Have criteria been developed to select future candidates to join BRICS? Common interests and a readiness to work according to the scheme of interaction that exists and is being followed by BRICS [are the criteria]. I think that at this stage the BRICS countries fully meet these requirements. It will take some time before BRICS expansion will again become part of the agenda. You do not want to admit new members, but you can create an institution of observers, like in the Shang-

hai Corporation Organisation. That will be our priority. The Russian side has proposed thinking about schemes for promoting BRICS dialogue with partners that are not members of that structure, but are interested in discussing specific aspects of the BRICS agenda. BRICS is creating its own development bank. Will it be involved in the development of Siberia and Russia’s Far East? We are working towards that end and we will seek it. The language in the final communique of the BRICS summit in Delhi makes it possible to work in that direction. So far, a BRICS development bank is only an idea. We have been given a year to develop, jointly with our colleagues from the Finance Ministry, the concept

Sergey Ryabkov entered the Foreign Service in 1982, serving in several positions both in Moscow at the Foreign Ministry headquarters and abroad, including the Department of European Cooperation and Russian Embassy to the United States. He has been deputy minister of foreign affairs since 2008, with a special focus on BRICS cooperation.

and submit it to the leaders at the South African summit. Our goal is to ensure that the financial resources of the future new development instrument be used to address problems on the territory of BRICS countries themselves, and not just to address problems in other regions of the world.


Policymakers

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Missile defence There is still time to reach a mutual understanding on ABM in Europe

Security Concerns To Be Taken Seriously ALEXANDER YAKOVENKO

Recently, the media has been describing Russia’s military-political policy as “aggressive”and threatening to the countries that are planning to deploy elements of the American anti-ballistic missile (ABM) defence system in their countries. This demonstrates a one-sided view of the complicated issue and misleads the public about the Russian position on the Euro ABM. I would like to clarify the situation concerning Russia’s position on the defence system. The inseparable connection between strategic offensive and defensive weapons has for many decades been an axiom for Russia and the United States. Military experts and politicians in the two countries have assumed that an imbalance in this area was fraught with destructive consequences for international security and strategic stability. Russia welcomed President Barack Obama’s 2009 decision to revise the plans for missile defence in Europe that would radically upset the strategic balance by giving the US substantial unilateral advantages. The decision helped to conclude the Strategic Arms Reduction Treaty (Start) on April 8, 2010,

AFP/EASTNEWS

SPECIAL TO RBTH

Russia sticks to the idea of a collective ABM system featuring Russia, the EU and the US.

which clearly states the inextricable link between strategic weapons and missile defence. However, while formally renouncing plans to deploy ABM, the US embarked on

Moscow needs guarantees that the NATO ABM Shield is not directed against Russia. a new missile defence project in Europe as part of the “phased adaptive approach.” Russia finds this initiative equally worrying because it envisages the deployment of a capacity of interceptor missiles and other anti-missile facilities

close to Russian borders and on waters adjacent to Russia. Russia has never denied the possibility of risks and threats arising from missile proliferation. The Russian initiative to create a joint European missile defence system based on a sectoral principle put forward at the Russia-NATO Council summit in Lisbon involved the formation in Europe of a common security perimeter with equal Russian participation. The NATO partners were invited to develop an architecture for a Euro ABM that would be jointly controlled and proportional to potential threats without undermining strategic stability.

Russia was prepared to develop its proposal on the joint Euro ABM taking into account the opinion of NATO partners, but on the condition that the equality of the parties is legally enshrined. Such an a p p ro a c h o p e n e d u p unique opportunities for Russia and NATO to build a genuinely strategic partnership based on the principles of indivisible secur i t y, m u t u a l t r u s t , transparency and predictability. Unfortunately, the United States and other NATO partners did not show a serious commitment to moving in that direction. They do not intend, at least for now, to take into account Russian concerns about the

architecture of NATO’s Euro ABM. They refuse to give Russia a say in determining the parameters of the future European missile defence system. The main stumbling block is guarantees for the nontargeting of missile defence deployed in Europe against Russia and our strategic nuclear forces. We are being assured at all levels that the future missile defence system is not intended to weaken the Russian nuclear deterrent. But our proposals to make these assurances legally binding are rejected. We are ready to discuss the status and content of such obligations, but they must be formulated in such a way as to enable Russia to judge on the basis of objective military-technical criteria how the US and NATO actions relate to their declarations. During the conference on missile defence issues held in Moscow on May 3-4, Russian experts presented comprehensive assessments of these criteria. But we did not hear an articulate statement on NATO’s position. We continue to assume that the creation of missile defence in Europe without Russia’s participation will inevitably conflict with the Euro-Atlantic’s ongoing search for common principles of regional security. There will be the risk of a rollback to the times of confrontation and dividing lines. The formation of new security architecture in Europe will be called

into question. There is still time to reach a mutual understanding. Russia has the political will to do so. But if this is to become reality, our partners must approach the task of taking into account Russia’s legitimate security interests in an honest and responsible manner. Failing that, Russia will have to act in accordance with the way events develop. Russia reserves the right to renounce further moves in the field of disarmament and arms control, although this would be a highly undesirable development. In addition, considering the inseparable link between offensive and defensive weapons, there may be grounds for our country’s withdrawal from Start. Russia is not shutting the door on dialogue with the United States and NATO on issues of missile defence or on practical cooperation in this sphere. But the road to such work lies in the creation of a clear legal framework for cooperation that would ensure that our legitimate interests are taken into account.

REUTERS/VOSTOCK-PHOTO

Without Russia’s participation, missile defence development in Europe may cause a rollback to a time of deep divisions.

Alexander Yakovenko is Ambassador of the Russian Federation to the United Kingdom

Eurasia Nations of the post-Soviet space can learn from the EU experience of integration

The Eurasian integration effort does not contradict WTO standards or the integration parameters acceptable to Western Europe.

Attempts at economic integration in the post-soviet space (involving Russia)

VLADIMIR CHIZHOV SPECIAL TO RBTH

Increasing integration of the countries of the former Soviet Union is among Russia’s chief foreign policy priorities. The main objective is not only to preserve and consolidate unity in the political, social, cultural and historical contexts, but also to reinvigorate trade and economic cooperation and encourage healthy competition. Neither the Commonwealth of Independent States nor the Customs Union of Russia, Belarus and Kazakhstan was established to increase

any form of confrontation with Russia’s neighbours but rather to pursue peaceful coexistence and cooperation with other blocs of nations, including the European Union. The idea that some former

Soviet nations will have to make a strategic choice between integrating within the former Soviet space or being part of other groups is far-fetched. Eurasian integration, which is focused on economic integration,

and the integration pursued by the European Union, are parallel processes. Furthermore, they are complementary. Most important, all these processes are founded on a comparable, similar international legal framework built upon WTO rules and regulations. Nothing done within the framework of Eurasian integration runs counter to WTO standards or contradicts the integration parameters accepted in Western Europe. The increased integration of Eurasian nations should borrow from EU experience as far as regulatory mechanisms and technical standards are concerned. This matter was thoroughly discussed back in 2005, when a package of road maps was adopted

ic Area. Brussels already perceives it as an objective reality. Obviously, the deeper the integration goes, the more adjustments will be called for in working with the EU. The emergence of supranational institutions within the scope of Eurasian integration haas added a new aspect to negotiations with the EU over the New Basic Agreement. This does not make the mission of negotiators any simpler, but I see no insurmountable obstacles and I am certain that my counterparts from the EU negotiating team will share our vision. At least, I hope they will.

ITAR-TASS

Post-Soviet Integration Is Good for Relations with Europe

for four EU-Russia common spaces (economic space; space for freedom, security and justice; space for external security; and space for education, research and culture). The road map for external security space stipulated that integration processes in various parts of Europe were complementary, so to present the former Soviet Union nations with an“either us or them” choice is inappropriate and unequivocally unfair to them. When scrutinizing specific issues, such as Customs Union parameters, Russia has a competent pragmatic dialogue with its partners in Brussels because the European Union itself is a sort of customs union. These issues do not need to be artificially politicized by experts and politicians. At the same time, at the official level, the EU shows a natural interest in integration processes within the former Soviet Union, specifically efforts to establish the Eurasian Econom-

Vladimir Chizhov is permanent representative of Russia to the EU.


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Case study

RUSSIA NOW WWW.RBTH.RU 27 SEPTEMBER 2012 SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA

INTEGRATION CUSTOMS UNION THE MOVEMENT TO REINTEGRATE HAS BECOME INCREASINGLY POPULAR NOT ONLY IN THE COMMERCIAL SECTOR, BUT ALSO IN PRODUCTION, INDUSTRIAL COOPERATION AND INVESTMENTS

Customs union integration could bring about $1 trillion in benefits over the next two decades, but benefits are conditional. EUGENE VINOKUOV EXPERT MAGAZINE

In the two decades since the Soviet Union collapsed and the center did not hold, centrifugal trends developed in the national economies of newly formed nations within the Commonwealth of Independent States (CIS). However, since the inauguration of the Customs Union in 2010, the tendency has changed, as leaders and economists have pushed for varying degrees of reintegration. This has been particularly evident in the commercial sector, as well as in production, industrial cooperation and the investment sphere. At this stage, this Common Economic Space (CES) encompasses Russia, Belarus and Kazakhstan, who are held to agreements governing key elements of economic integration within the troika – from the coordination of their macroeconomic policies to labour migration. This trend is best exemplified by the Customs Union, inaugurated in 2010, which incorporates Russia, Belarus and Kazakhstan. The first 17 accords shaping the framework came into effect on January 1, 2012 – these agreements govern key el-

ements of economic integration within the troika – from the coordination of their macroeconomic policies to labour migration. The first accords were implemented with Krygyzstan, Tajikistan and Ukraine already being considered for membership. The latter is a desirable addition to the Customs Union as it has great economic technological and social potential. Furthermore, the combination of Ukraine and the existing member states already accounts for 95% of exports and 86% of imports within the CIS between 2005 and 2010. Kyrgyzstan and Tajikistan are interested in joining in the economic integration, but not at any cost. However, the countries making up the core of the integration insist that new members should adopt the entire package of Customs Union and CES regulations and agreements, because members of an integrated union are supposed to share the same rights and commitments. Ukraine is a totally different case, though. Given its economic, social and technological potential, its membership in a post-Soviet integration initiative in any format would seriously strengthen this union’s positions. The CES troika and Ukraine traditionally account for more than 90% of combined GDP of CIS states.

The four countries in question accounted for 95% of exports and 87% of imports within the CIS in 2005– 2010. At the same time, the Ukrainian administration does not seem willing to meet its eastern neighbours halfway, instead favoring – at least verbally – closer ties with the European Union, including in trade and economic sectors.

Is Ukraine unsure about the Customs Union, favouring trade with Western neighbours? Recent studies have projected that Ukraine’s integration into CES could bring benefits of $1.1 trillion to the member states in the period 2011 – 2030. However, the Ukrainian administration itself remains undecided, verbally favouring trade and economic ties with the European Union. It's easy to forget that integration is not a ‘magic bullet’ which automatically ensures success. The immediate effects caused by the liquidation of tariff obstacles are relatively insignificant. Most of the benefits will be available in the longer run, within the scope of specific projects in manufacturing, food-processing and science-intensive sectors.

A close bond for Russia, Belarus and Kazakhstan

A Troika with Benefits The results of predictive financial equations have shown that the creation of the CES by Russia, Kazakhstan and Belarus will have a positive effect on the three member-states. The benefits of integration will be most tangible in Belarus because of its economic structure, foreign trade priorities and the scale of the national economy. It is likely that Belarus’s exports to the CES will double from the $18– 19 billion expected in 2012 to $36–38 billion in 2030. Belarus’s GDP is predicted to be at least 15% above the level envisaged without integration. The success of the integration in the post-Soviet space will be of critical importance to the Belarusian economy in the longer term. Belarus’s production pattern will undergo changes, as mechanical engineering and food processing are expected to contribute more significantly to overall industrial output. Belarus should prioritise efforts to reduce the country’s electricity and general energy consumption. Due to its economy’s heavy dependence on imported energy, it is unlikely Belarus will manage to address issues of competitiveness without boosting its energy efficiency. An increase in the efficiency of using primary resources will enable the country to curb growing en-

ergy imports, especially natural gas. Kazakhstan’s economy still largely depends on the dynamics of hydrocarbons output. This is largely due to Kazakhstan’s relatively high potential for building up its oil and natural gas production. Exports to the CES continue to grow, albeit quite insignificantly in relation to Kazakhstan’s GDP. At the same time, the integration scenario will provide a 4-point increase in GDP growth, due to upgrades in technology standards and reductions in energy and materials consumption. Due to its size, Russia’s economy shows less of an impact from the process of integration. However, it will still experience an additional 2 points in GDP growth by the end of the projected period. Overall, a deeper integration within the CES of Russia, Kazakhstan and Belarus - through more intense commercial relations, industrial cooperation and the sharing of technologies - will eventually result in an estimated 2.5% of combined GDP being added to these countries’ baselines. The CES member-states could see additional growth in GDP resulting from increased capital formation and mutual investments. Increased competitiveness of national economies could also foster a rise in produc-

PHOTOSHOT/VOSTOCK-PHOTO

A SMOOTH RIDE ON THE TROIKA OF ECONOMIES

tivity and larger trade turnover both within the CES and with trade partners beyond it.

Ukraine and the Customs Union Economically, there are many possible scenarios for the relationship between Ukraine and the CES member-states, including the status quo; ratification and implementation of the Free Trade Area agreement within the CIS; an agreement on the “deep and comprehensive” free trade area of Ukraine and the EU; and accession to the Common Economic Space. The resulting technological convergence could equalize energy and materials consumption and ensure that there is no gap between member states

A Common Marketplace Car exports from Russia to fellow members of the Customs Union increased sharply this year, benefitting some of the foreign carmakers that set up production in Russia, according to top officials. The surge took place a half-year after Belarus and Kazakhstan abolished customs clearance in trade with Russia. The value of Russian car exports to Kazakhstan expanded fourfold in the first quarter of this year compared to the same period last year, said Andrei Siepnev, trade minister of the Eurasain Economic Commission. (The Moscow Times)


Case study

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DIFFERENT VOICES

Viktor Yanukovych PRESIDENT OF UKRAINE

Ukraine must defend a new model of relations with the Customs Union, one which would presume a special attitude in the spheres of mutual interest. And this model should follow the three-plus-one formula."

Tatyana Valovaya MINISTER FOR INTEGRATION OF THE EURASIAN ECONOMIC COMMUNITY

You either accept all the liabilities and become a rightful member of the union, or don’t accept and get no benefits. There is no middle ground. The three-plus-one combination is unrealistic."

Nikolay Azarov PRIME MINISTER OF UKRAINE

On the bilateral level none of the parties forces the other to enter any of the unions. Neither Russian nor Ukrainian political leaders use such arguments as "enter this and get that."

Vladimir Putin PRESIDENT OF RUSSIA

80%

60%

72%

The chief sector in which Russia crucially depends on Ukrainian producers is aviation engine building. After the Soviet Union collapsed, all the helicopter assembly units remained in Russia, but the largest supplier of engines became a Ukrainian company. The majority of helicopters operated in Russia, as well as exported machines, are powered by engines prduced by Ukraine’s Motor Sich. Also of critical importance is technology cooperation in the military-industrial complex. The Centre for Analysis of World Arms Trade estimates that the annual supplies of Ukrainian-made components as part of Russian defense companies’ export contracts amounted to $250 million in 2008 – 2010, with sub-contracts worth a similar amount. Approximately half of Ukraine’s military exports are destined for Russia, which makes cooperation with Russian enterprises v i t a l ly i m p o rt a n t t o Ukraine’s defence industry. In the technology sphere, state borders have a negative effect on the efficiency of trade and cooperation between manufacturers located in different countries. Before components turn into an end product, they have to cross the state border several times, which results in significant losses of time, money and effort. It would be more efficient to create a single holding bound by the rules of the CES and incorporating sev-

eral dozen Ukrainian and Russian enterprises. Such regional cooperation would enhance the global competitiveness of local producers and is a potentially significant effect of integration.

Entering the Custom Union was a brave decision for Belarus and Kazakhstan. And I suppose the EU will take this fact into account and support both countries in entering the WTO."

ITAR-TASS (4)

with regard to the efficient use of primary resources. In terms of exports, full CES-based integration offers Ukraine the opportunity to substantially diversify its economy, with the Kazakhstan growth expected in the mechanical engineering sector being balanced by a smaller contribution from agribusiness and the metals industry. Favourable trade and economic relaBelarus tions between Russia and Ukraine will Russia encourage the development of Ukrainian engineering companies – analysts believe that building on its current en- Customs Union gineering potential will enapproval rating able Ukraine to eventually increase the share of machines and equipment in its According to EABR data, export structure to 20% by citizens of Russia, Belarus and Kazakhstan approve of 2030. In addition to engineering, the idea of integration. In the ferrous metal industry Ukraine, supporters are also appears to be a promising in the majority - 55%. sector for economic engagement. Russian metals producers have made more panding domestic market progress in renovating and have achieved remarktheir production facilities, able progress in the promanagement and strate- duction of electric furnace gies than their Ukrainian steel. Russian makers have peers over the last 15 years. built up a more competiThe Russian metals sector tive distribution network is steadier when it comes abroad compared to the to the structure of supplies; Zaporizhstal and Mariupol the ratio of domestic de- smelters. Ukraine’s export liveries to foreign supplies supplies are facilitated by is 50-50 in Russia com- sea communications with pared to 20-80 in Ukraine. consumers from China, The Severstal, Magnito- India and the Middle East, gorsk and Novolipetsk but these outlets are in smelters offer steel of high- danger of being lost if er-value ranges, including Ukraine upgrades its prolight-gauge steel. They oc- duction facilities slower cupy a niche in the ex- than its competitors.

Integration Fuels Technology Integration effects are conventionally divided into immediate effects, resulting in fast one-off improvements in terms of trade, and permanent effects, which are connected with the upgrade of less developed economies to the level demonstrated by the most advanced. One important effect is the upgrade of weaker integrating economies towards the technological level of

Currently, the CES countries and Ukraine import from 70% to 90% of engineering products from countries outside the Customs Union. In 2010, Russia imported 92% of its engineering products from outside countries, and for Ukraine, Belarus and Kazakhstan the figures were at 83%, 75% and 72%, respectively. The driving factor behind these figures is

State Borders have a negative effect on the efficiency of trade in the technology sphere.

The services sector, transport and telecoms are expected to grow at a faster rate.

integration leaders. The smaller the gaps, the faster the integration – this is the case with the former Soviet Union. Moreover, this enables the memberstates to maintain their national industrial potential. Integration does not mean automatic improvements, rather it offers opportunities that need to be taken advantage of over many years. Since unfulfilled promises or incomplete projects do not have an economic impact, member states must be proactive; boosting mutual trade in high-value areas such as engineering.

the technology gap and the inefficiency of the engineering sector. The technology sphere stands to gain the most benefits from integration. Production cooperation in aviation construction and shipbuilding, engine building, aerospace, nuclear power and power engineering is founded on both Soviet and newly emerging ties within the Customs Union and the CES. A recent trend is the broader and more significant engagement of partners from third-party countries in CES technology cooperation projects, including in

transport engineering. Examples includes Siemens and Alstom in Russia and GE in Kazakhstan. When analyzing the potential of trade in engineering products, we should assume that mutual trade will be able to replace import supplies from many countries. The closer the CES members get to the technology level of leading nations, the less they will import engineering products from these countries, preferring to import from countries within the CES. The percentage rises of such imports are predicted to be between 9% and 18% and are dependent on a narrowing of the technology gap. Economic integration provides a critical modernization tool for former Soviet Union nations and its benefits can be felt across multiple sectors. Provided that the political will remains, the trend for reintegration is likely to continue and will shape regional development for a number of years. Eugene Vinokurov, doctor of economics, is director of the Center for Integration Studies with the Eurasian Development Bank. Originally published in


08

Counterpoints

RUSSIA NOW WWW.RBTH.RU 27 SEPTEMBER 2012 SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA

GLOBAL FINANCE EURO CRISIS TO CHANGE BALANCE OF FORCES

BALANCE CAN CHANGE BUT LEADERS WILL SURVIVE The crisis in the eurozone may lead to more shakeups, bringing new players to the foreground. Yet the dollar will retain its position. Stanislav Mashagin SPECIAL TO RBTH

T

he world currencies are working against a backdrop of dramatic events, following the economic crisis of 2008. the malaise of the eurozone and the geopolitical changes in the Arab world. The balance of currencies has not changed for several decades. The principle share of the market belongs to the US dollar, with the euro (which inherited the shares of the German Deutsche mark and French franc) in second place and the Japanese yen in third place. The Swiss franc and the British pound trail at fourth and fifth place, respectively. However, over the past decade a few of the world leaders have taken some hard blows. Confidence in the stability of the dollar was heavily eroded in 2008, which saw the mortgage industry crisis and the bankruptcy of two of the world's most prominent corporations: the now-defunct Lehman Brothers and AIG, the insurance corporation that was "too big to fail." The euro, which was launched with such high hopes, can hardly be con-

sidered a safe haven now: the economies of Greece, Portugal and Spain have already proved unable to support such a weighty currency. Meanwhile, several hitherto relatively minor currencies have staked their claim to a share of world markets. The most serious overtures have come from the Chinese yuan, but accounts in the currencies of the other BRICS countries cannot be disregarded – particularly the Indian rupee, the Russian ruble and the Brazilian real. Foreign exchange investors, for the past several years, have talked incessantly about what the configuration of the world's currencies may look like in the midterm (in the next five years). Nonetheless, despite stern and constant predictions of the death of the dollar or the hopelessness of the euro, the actual balance rates remain unaltered.That is to say – beyond mere chatter – investors are not rushing to switch their dollar portfolios into another currency. Turbulent times, such as those at present, give rise to much speculation about the reliability of

one currency over another; but the overriding strategy remains the calculated and cautious approach of keeping funds in trusted currencies such as the dollar, the euro and the yen. Market players assess currencies on the basis of three main criteria: influence, stability and future outlook. The most influential, as we have mentioned earlier, are the US dollar, the euro and the Japanese yen, as well as the Swiss franc, and the British pound. Currently, the most stable currencies (in descending order) are the Japanese yen, the Hong Kong dollar, the Chinese yuan, the U.S. dollar, the Singapore dollar, the Swiss franc, the Russian ruble, the South Korean won, the Indian rupee, and the Israeli New Shekel. Regarding the future outlook, the“small”currencies of countries that are less dependent upon global trends and determine their own monetary policy without looking over their shoulders at others rank first and foremost. These include currencies such as the Swedish krona, the Swiss franc, the Canadian dollar, the Hong Kong dollar, Australian and New Zealand dollars, among others. The first two categories – influence and stability provide a list of the most liquid and trusted currencies: the yen, the yuan, the dollar and the franc. These are favored currencies in which investors would place funds over the mid-

World foreign exchange reserves(%) 2000

2001

2002

2003

2004

2005

US dollar

70.5

70.7

66.5

65.8

66.0

66.4

65.7

64.1

64.1

62.1

61.8

62.2

Euro

18.8

19.8

24.2

25.3

24.9

24.3

25.2

26.3

26.4

27.6

26.0

25.0

2.8

2.7

2.9

2.6

3.2

3.6

4.2

4.7

4.0

4.3

3.9

3.8

6.3

5.2

4.5

4.1

3.8

3.7

3.2

2.9

3.1

2.9

3.7

3.5

Swiss franc

0.3

0.3

0.4

0.2

0.2

0.1

0.2

0.2

0.1

0.1

0.1

0.1

Other

1.4

1.2

1.4

1.9

1.9

1.9

1.5

1.8

2.2

3.1

4.4

5.3

British pound Japanese yen

2006

2007

2008

2009

2010

2011

SOURCE: IMF AND ECB OFFICIAL REPORTS

THE NUMBERS

36% 40% 42% Of foreign exchange operations take place in London

Of Forex transactions are USD\Euro or Euro\USD

Is relative weight of USD in the IMF SDR basket

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term. However, if all three categories are combined, the only currency to meet all of these criteria is the franc. Even so, this is hardly a shining substitute for the dollar. Dealing in Swiss francs is extremely limited by the quantities the Swiss economy make available; moreover, the current exchange rate of the franc is now artificially pegged to the euro. The Swiss government claims that this is a temporary measure, but the franc makes an excellent replacement for any investment portfolio in euros. The Russian ruble deserves separate consideration, since it is surrounded by much controversy and opinions on it vary extensively. Several investment institutions and banks (particularly in the state sector) recommend buying the ruble, yet it does not seem that the ruble is capable of generating exceptional results without being linked to the markets. The ruble

is firmly tied to global markets, as a result of raw materials trade, to the US dollar. The ruble can win in two scenarios: if world markets grow, or if the dollar, euro or other global currencies drop. No one believes in the first scenario. As for the second, experience shows that the Russian government would not allow the ruble to devalue to mirror the US dollar or the euro. The most crucial thing for the Russian government today – in view of the weakness of financial markets and the inability to institute a fully fledged program of federal borrowing – is to reduce the actual value of the ruble. This is the government’s trump card for addressing the federal budget deficits and the pension fund shortages. What should be done with the ruble? It should be sold, spent and used for borrowing. The fact that the greatest weight in global financial

systems is commanded by the US dollar should not be ignored; American investments are found in almost every country across the globe, and the United States is the world's largest purchaser of goods and services.Whatever happens, this is a currency that will be boasting its dominance in the balance of world currencies for many years to come. Similarly, due to China's enormous influence on the world economy, China's currency will remain strong in relation to the market and alongside the US dollar. In uncertain times, investors will favor the strongest and most solvent currencies. This means that, these days, a good currency portfolio must include (in order of yield) the Swiss franc, the US dollar, and the Chinese yuan. Stanislav Mashagin is a partner at Personal Strategies asset management company


Counterpoints

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09

NEW CHALLENGES AHEAD FOR THE OLD CURRENCIES The US dollar and the euro retain their roles as reserve currencies, but the world currency balance is leaning toward emerging countries. Nikolay Podguzov SPECIAL TO RBTH

T

he most recent IMF data shows that the composition of world foreign exchange reserves has changed only gradually. At the moment, the US dollar retains its place as the leading reserve currency, at around 62% of total reserves. The US dollar, however, is on a gradual trend of decline. The eurozone crisis has slightly decreased the amount allocated to the euro, though not by much — euro reserves still stand at just below 25%. However, uncertainty surrounding the future of monetary union resulted in a loss of confidence that is re-

flected in the periodic pressure put on the euro. This loss of confidence is also evident in the flight of deposits from banks in the “south”to safe havens in the “north.” In going forward, much depends on the ability of Eurozone policymakers to resolve the debt and banking crisis, as far as future developments in world currency reserves are concerned. However, sovereign debt problems are not confined to the Eurozone. The United States faces a major challenge in its unsustainable fiscal position, which finds the country’s federal debt to GDP ratio at its highest level since 1950. In

the aftermath of the US Presidential election in November, economic failure could result in credit rating downgrades for the United States, as well as adverse interest rate volatility and weakness in the U.S. dollar. In the event of a break up of the monetary union in the eurozone, the immediate risk facing investors is the introduction of new currencies or, more accurately, the return of national currencies that existed prior to the euro. The situation would hinge on how fragmented the monetary union becomes. If only Greece exits, then the euro continues and Greece re-introduces the drachma, which would likely see a significant depreciation. However, if Spain and Italy were to exit as well, this would put a question mark over the viability of the euro and lead to it becoming the currency for a northern bloc dominated by Germany. Another scenario involves a German exit, but Germany

might not want to be seen as being responsible for destroying the euro “project,” for historical reasons. In addition, it is possible that a new Deutsche mark might appreciate rapidly, damaging German export competitiveness and denting economic growth prospects. In any case, the international monetary system is evolving toward a multipolar currency system that reflects changes in the global economy over the last 15-20 years. The center of gravity has shifted from West to East, and now the so-called “emerging” economies are making a significant contribution to global economic growth and world trade. The importance of their currencies will grow as these economies continue to expand. But reserve currency status is a function of not only economic size but also liquidity and transparency in money markets and capital markets. According to this scenario, Asian currencies such as the Chinese yuan could easily become important investment and trading currencies in the East. The Ruble's Positive Prognosis The role of the Russian ruble in the global economy may increase as well. There are strong pre-conditions in place for the ruble to become a regional reserve currency within the next several years. The Russian economy has main-

The international monetary system is evolving towards a multipolar currency system.

tained a moderate but sustainable positive growth rate of 3% to 5% since the 2008 economic crisis. Furthermore, Russia’s debt burden is the most conservative amongst G20 countries: only 10% debt to GDP ratio. Russian budget policy has also been prudent enough during recent years, with the absence of a budget deficit. So the future prognosis for the ruble is one of continued and even improved health. Russia’s balance of payments remains in positive territory, primarily due to a current account surplus. Consequently, Russian reserves have been on a sustainable recovery trend since 2008, and, currently, the Central Bank of Russia (CBR) has the third largest reserves in the world. Russia abandoned capital controls in 2007, and, even during the 2008 economic financial crash, authorities had no intention of bringing them back. Russian monetary policy has been recently been moving toward inflation targeting and, currently, the CBR operates under a nearly floating exchange rate regime. As a result, interest rate volatility has been reduced and the CBR is better positioned to keep inflation under control. Inflation in Russia has been brought down from double digits figures to 6.3% in 2011 and is forecasted to stay around 7% this year.

Russian regulators have also been working to improve the local bond market infrastructure. Russia’s local bond market cap amounts to almost $300 billion. By the end of the year, the Central Depositary in Russia will be launched and non-residents will be allowed to open nominal holder accounts for the first time.This improvement creates the necessary pre-conditions for the largest international clearing houses in the world to begin settling Russian local bonds. Hence, the process for ruble-denominated local bonds will be brought in line with best international practice over the next few months. The rise in the ruble’s standing is a reflection of the general strength of Russia’s investment position, particularly when contrasted with the current challenges facing the Eurozone. VTB Capital’s Russia Calling Investment Forum, at which the world’s business leaders, investors and politicians come together to explore investment opportunities, is a great example of Moscow’s growing importance as an international financial center. World business leaders expect we'll be seeing more of these investment summits in the near future, Nikolay Podguzov is head of fixed income research at VTB Capital

Russia's foreign exchange reserves

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News Analysis

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Business Rosatom wants compensation from, and maybe a stake in NEC

Russia’s Rosatom increased its claim against Bulgaria to 1 billion euros for work on a canceled nuclear power plant project on the Danube. MAURICE LEMAIRE RBTH

Russia's state nuclear company Rosatom wants to acquire a stake in Bulgaria's National Electric Company (NEC). The acquisition would be a response to NEC's failure to pay a billion-dollar debt on the cancelled Belene power plant. NEC may not be able to pay its debt if the International Court of Arbitration in Paris rules in favor of Rosatom, according to Kommersant. Nuclear power technology cooperation between the uranium mining group AREVA and the country of Bulgaria, which includes the creation of new power

units for the Kozlodui nuclear power plant (NPP), now looks unlikely. Bulgaria risks losing at least 1 billion euro - as well as investors’ trust - in the legal battle with Rosatom, which drastically increased the amount that it is seeking under a lawsuit filed against Bulgaria’s NEC. The decision to build the 2 gigawatt Belene nuclear power plant was made back in 1981, though the project was put on hold in 1990. In 2002, construction was resumed and, in 2006, Russia’s closed joint-stock company Atomstroiexport ZAO, a unit of Rosatom, signed a construction contract with NEC on the basis of an international tender. However, after Boyko Borisov’s right-wing GERB party came to power in Bulgaria, the project stalled, both sides arguing at length about the cost and terms of

PRESS PHOTO

Nuclear fears may prove costly for Bulgaria Bulgaria's failure to pay a nuclear debt could haunt it in more ways than one

construction. After almost five years of aggressive negotiations, Russia finally lost the 6.2 billion euro project in March 2012. Prime Minister Boyko Borisov blamed the closure on exceedingly high costs and the lack of an investor. “AREVA and Siemens, together with Atomstroiexport, were the main foreign subcontractors for the Belene NPP.The project’s shutdown has effectively dep r ive d A R E VA o f a n important source of revenue and prevented it from establishing itself on Bulgaria’s nuclear market. The project was also of interest

to the French nuclear industry, from the standpoint of maintaining and developing their nuclear power technology competencies,” said Leonid Bolshov of the Russian Academy of Sciences. The former prime minister of Bulgaria, Simeon II Borisov, said he believes that politicians are capitalizing on this problem to the detriment of national interests. “Over recent months, we have witnessed an extreme politicization of an issue that is of strategic importance for our country — one related to our ability to create a vision for our devel-

opment in the years to come. Personally, I am one of those who believe that, in 20 years, we will regret having missed the chance to become energy self-sufficient,” Borisov said. The project could have become a catalyst for Bulgaria’s economic development, as Rosatom was set to localize up to 70% of the NPP construction work. Potentially thousands of jobs could have been created, reducing unemployment in this EU economy. Europe, as a whole, is currently in need of large-scale projects for creating jobs and attracting foreign investment.

As for Rosatom, the agency is convinced it is within its rights to seek settlement. Assurances that the site will be used to build a modern natural gas-fired power plant is also questionable, according to analysts. Experts have called the idea “a technical adventure,” since it is uncertain how natural gas could be delivered to a power plant located in a region with no gas infrastructure.The price of electricity has risen 13%, causing Bulgarians to worry about the coming winter, when utility bills may turn out to be beyond the means of struggling families.

International Sergey Lavrov insists that talks are the only rational way forward

Russia paves the way for positive negotiations with Iran

ANDREI KISLYAKOV RBTH

Russia's foreign ministry urgently wants Europe and the United States to understand that there is no reasonable alternative to talks with Iran when it comes to the nuclear program. At a recent ministerial meeting held in Astana, Kaszakhstan, Russian Foreign Minister Sergey Lavrov spoke clearly: “At the top of the current international agen-

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Furthermore, Iran may target key dual-purpose infrastructure facilities, such as ports, desalination plants and other facilities used by U.S. forces. Although strikes on Persian Gulf cities make

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da is the situation around the Iranian nuclear program and the nuclear issue of the Korean Peninsula.We don’t see any alternative to negotiations in the current formats as a way to resolve these issues. It is the only way to make Tehran and Pyongyang address the concerns of the international community.” The day before Lavrov made this statement, Israeli authorities, yielding to pressure from the West, especially from the United Kingdom, revised their plans to deliver a military strike on Iran. According to Israeli media, a special

envoy of the British government delivered a message to the Israeli administration from Prime Minister David Cameron, who quite harshly called on Tel-Aviv to refrain from using military force against Iran. Israeli analysts said that the categorical message of the British side, along with telephone conversations between Prime Minister Benjamin Netanyahu and German Chancellor Angela Merkel, have cooled Israel’s mood towards Iran. Despite the obvious weaknesses of Iran's military, a ground campaign in high-

ly mountainous terrain with 70 million citizens is not feasible. “What is left is an air campaign against Iran’s conventional troops,” according to Russian military expert Aleksandr Kostin. Iran has many retaliation options. “As of today, the Army and Navy of Iran have tactical missiles that can effectively strike the marine and land forces of the United States in the region. Most of the U.S. military facilities are within the range of Shahab-3 short-range missiles with a range of 2,000 kilometres,” Kostin said.

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Peaceful discussions are the sane solution to the Iranian problem, Russian officials and independent experts claim.

little military sense, the psychological and political effect on the countries of the region could be considerable. “Having control of the Strait of Hormuz, Iran is also capable of influencing global trade. Damage to the oil infrastructure of any Persian Gulf country could bring about not only economic, but also environmental disaster. Bombardments of nuclear facilities in Iran itself, for instance, the nuclear power plant in Bushehr, could“produce a Fukushima-type accident, albeit at a smaller scale,” according to former French Ambassador to Iran François Nicoullaud. Considering the huge ramifications of any kind of attack, Russia is determined to keep the lines open for discussion and diplomacy.

Russia has doubts about any new sanctions against Iran.


News Analysis

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011

Society Pussy Riot case revealed divisions that run through the country today

Russian society is split on church role While Russians are divided in their opinions on the Church role in public life, commentators ask if the church should be involved in politics.

Russia's attitude towards religion What religion do you practise?

MAXIM IVANOV KOMMERSANT

Do the actions of the Russian Church upset you?

© KIRILL KALLINIKOV_RIA NOVOSTI

At least half of Russians believe that the Orthodox Church influences politics in Russia, while a quarter of respondents want the church to be more active in addressing issues considered important to the state. Surveys from the All-Russia Center for the Study of Public Opinion (VTsIOM) show that the number of Russians who believe the Russian Orthodox Church influences domestic politics has been growing over the past two years. The most recent studies from the center show that 50 percent of respondents consider the church to have an influence over Russian politics, compared with 44 percent in 2010. Moreover, 12 percent of respondents believe the church has a "significant" influence on state policy. The church has found itself in the unhappy middle of a variety of political events, the most notorious being the case of Pussy Riot, the punk group that took over

Young believers are increasing in today's Russia.

the altar of Moscow’s Christ the Saviour Cathedral on Feb. 21 and sang a “punk prayer”called“Holy Mother, Chase Putin Away.”The members of Pussy Riot received a two-year sentence last month, leading to international condemnation of the court's harsh treat-

ment and a lack of mercy from the church. Still, the church continued its forays into politics. On Feb. 26, Russian Orthodox Patriarch Kirill took part in the congress of the AllRussia People’s Front, a body created by President Vladimir Putin in the run-

up to last December’s State Duma Elections. And, on June 16, Russian Prime Minister Dmitry Medvedev told the general council of the ruling United Russia party that the state needed to draw on“values that are traditional in our state and society – supported by pub-

lic morals, supported by the church.” According toVTsIOM General DirectorValery Fyodorov, those who are against increased involvement of the church in politics are, for the most part, those who “do not approve of the work of the president and the

government,” but he categorizes them mostly as supporters of traditional opposition parties, including the Communist Party of the Russian Federation (KPRF) and the Just Russia party, rather than those who took to the streets this winter. Fyodorov noted that there is another group that calls for a strengthening the role of the church – they believe that the state must be “Orthodox.”“These are the people who believe that morals should be promoted, as should harmony of the state and society,”Fyodorov said. Even those who are not supporters of the church believe that there should be institutions that serve to unite and consolidate society, according to Valery Solovey, a professor at the Moscow State Institute of Foreign Relations. This may be so, but Mikhail Vinogradov, president of the St. Petersburg Politics Fund, said that support for the church is unlikely to increase in the near future. Dmitry Orlov, a political expert and member of the Public Chamber agreed. According to Orlov, the engagement between the church and the state peaked during the election campaign and is unlikely to keep growing.

Politics The Russian opposition has adjusted its slogans and objectives for the new political season

Now is the autumn of our discontent The Pussy Riot sentencing, arrests during street protests and utility rate hikes top the opposition's agenda. PAVEL NIKULIN RBTH

The opposition drew tens of thousands on September 15, marking the start of a new season of dissent in Russia. More protests, monitoring of regional elections in October and the release of arrested protesters top of the agenda, according to activists. Observers said they expect to see a change in the tactics and strategy of the opposition, including more specific social demands. Political expert Alexei

Mukhin believes that protests will become especially relevant this autumn, as Russians returning from summer holidays begin to feel the recent increase in utility fees. The new rates came into effect on July 1, but have remained virtually unnoticed as the Russian press was full of discussion over the law on foreign agents and the Pussy Riot case. Slogans demanding changes in social services are traditionally popular in Russia, but Mukhin said that the opposition will not overuse them this time. Instead, they will focus on criticising those actions interpreted as repression. ”These include the Pussy Riot trial

and the arrests of protesters during the rally on May 6, whom the opposition regards as political prisoners,” said Mukhin. In the wake of the Pussy Riot trial, the relationship between church and society has become one of the hottest topics in the press and the blogosphere. But Political expert Vladimir Pribylovsky said he has doubts that the anti-church slogans will be successful. “Opposition leaders have a problem with the church, they are dissatisfied with the degree of its involvement in the life of the country, but anti-clericalism will hardly make it into the top ten slogans,” Pribylovsky said.

OPPOSITION PROTESTS

Do you support protesters? ACCORDING TO POLLS BY THE LEVADA CENTER, RUSSIA IS DEEPLY CONFLICTED OVER THE PROTEST MOVEMENT.

But the most important mission for the opposition this political season is to create legitimate organizations. To this end, the opposition will hold elections at the end of October to create a coordinating council to bring together protest-minded politicians. There have been many attempts to create such an association, but so far none have had the needed resolve. The coordinating council has a far better chance of becoming legitimate, however, because opposition activists will be chosen in a real election which will occur after October 14, when Russia's local and regional elections will take place.

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Caucasus Once the favourite resort of Soviet leaders, the region attracts tourists from all over the world

ALEXANDER KILYAKOV RBTH

If you ask an average Russian to name things associated with the Caucasus, the list would probably look something like this: mountains, snow, war, highlanders, Islam, hospitality and vacation. This sequence is fairly accurate, but for those living in the Caucasus each of these elements is larger than life.

Mountains Although most people refer to a geographic region when they say “the Caucasus,” it is actually a mountain range stretching from the Black Sea to the Caspian Sea, separating Russia from the Middle East. The high-

est peaks are Mount Elbrus (18,300 feet) and Mount Kazbek (16,400 feet). These mountains cannot be called young – time has smoothed them, earthquakes are exceptionally rare, and there are no volcanoes. Many peaks are covered with snow year-round; winter, however, is the best time for mountain skiing and snowboarding.

out the 19th century, the Caucasus was a battleground for various players fighting for access to the Caspian Sea. The Soviet era was the only time when there were no wars in the region. Some scholars attribute this to the Soviet Union’s reasonable ethnic policy, whereas others argue that the socialist regime used extreme tactics to keep the locals in line resulting severe escalation of conflict in the region just after the fall of the Soviet Union.

War The Caucasus has been a battlefield in virtually every century. It is a strategically crucial region occupying a narrow neck of land between two bodies of water and is one of only two ways to reach the Middle East from Europe by land. At different times, this region has been part of the Russian Empire, the Crimean Khanate, the Ottoman Empire and Persia, as well as the home of a multitude of independent states. Through-

The Caucasus, a region of remote and untrammeled beauty for tourists.

sus. There art of dzhigitovka - the display of riding techniques and trick riding - was imported into Europe and the United States in the early 20th century, forming the basis for the hot-shot “western” riding style and Cossack vaulting.

Hospitality Highlanders There are only two regions in Russia where hill people live – the Caucasus and Altai. Combined with Islam, it creates a unique Caucasian society. Religious belief has played a significant role in the conflicts in the region. A key word for local highlanders is ‘Dzhigit’ denoting the most skillful equestrians in the Cauca-

If a highlander has a guest, he will treat him to the best food he has, even if he has to slaughter his last lamb or use the last kilo of flour. “ H o s p i t a l i t y h e re i n Chechnya is specifically respected. Anyone in Russia knows that, its some kind of legend in our country. I know that if you accidentally enter someone’s house, they won't ask you anything

and will grant you the most hearty welcome,” said Valentina Matvienko, chairperson of the Federal Assembly, during her recent visit to Chechenya. Vacation When the Caucasus, southerly and warm, became part of Russia, it was the resort of the aristocracy. These days it is a popular vacation spot for young Russians as well, but there is a shortage of tourist infrastructure. Local authorities, along with the company Resorts of the North Caucasus, as wells as the Corporation for Development of the North Caucasus, are working to improve the local infrastructure.

ITAR-TASS

PHOTOSHOT/VOSTOCK-PHOTO

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For centuries, the Caucasus has been Russia's frontier.

Highlanders in costume.

Dombai is the popular ski resorts in the Causcasus.

A welcome guest from Georgia

JENNIFER EREMEEVA

Widely known as an arena of endless conflict, the Caucasus region is also one of the most naturally majestic and culturally rich areas on earth.

GETTY IMAGES/FOTOBANK

Ancient land of war and hospitality

Classic Russian cuisine is hardly known for spices and exotic flavors, but over centuries, Russians have successfully incorporated the traditions of their near neighbours. One of the brightest examples is kharcho, a hearty and savoury meat and tomato soup that almost qualifies as a stew. There isn’t much agreement on the basic ingredients: some say lamb, others insist on beef; some favour rice while other prefer more traditional millet. One thing is certain, however: Kharcho gets its signature tangy sweet and sour layer of flavour from dried fruits. Fresh coriander, parsley, mint and dill offer a generous garnish.


Russia Beyond the Headlines #9 EV