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VLADIMIR POTANIN, GENERAL DIRECTOR, NORILSK NICKEL Jul 15

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all the participants of economic relationships and always signify defeat for politicians.’

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‘From an economic point of view, the change needed is simple: we need to transition from a demand to a supply economy.’ VLADIMIR MAU, ECONOMIST, RECTOR OF RANEPA

Sep 15

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IN THIS ISSUE

Sanctions Tit-for-tat sanctions between the U.S., EU and Russia may hit economic growth

Plowshares Into Swords?

POLITICS & BUSINESS

Sanctions vs. Growth? Russia’s economic outlook for the rest of 2014 PAGE 2

BUSINESS & POLITICS

20 Undervalued Companies From Russia — with high earnings and low share prices PAGE 3

SPECIAL REPORT

Metals & Mining Firms push ahead in a tricky global marketplace

AFP/EASTNEWS

Russian Foreign Minister Sergei Lavrov and U.S. Secretary of State John Kerry continue to meet even as their respective governments trade sanctions.

The dispute over Ukraine has unleashed a spiraling exchange of sanctions, but critics charge the measures put economic growth at risk with little to show for it. DAVID MILLER SPECIAL TO RBTH

The U.S., Europe and Russia are hammering each other with economic sanctions in tit-for-tat rounds of combative diplomacy not seen since the end of the Cold War. But as the strategy threatens growth in Europe and Russia, critics claim the measures appear to have brought few concrete results. “No one is winning the sanctions war,” says Erik Jones, director of European and Eurasian Studies at The Johns Hopkins University. “These policies are less about in-

“a boomerang effect,” that will “push U.S.-Russia relations into a stalemate and seriously damage them.” Moscow responded to the Western sanctions by blocking food exporters in the U.S. and EU from selling goods in Russia for one year starting in July. The move banned French cheeses, American poultry and Norwegian salmon from Russian grocery stores. Exports from the European Union to Russia, the EU’s thirdbiggest trading partner, fell 12% in the first five months of the year, according to EU statistics. Yet a rising chorus of political observers say neither side seems to be having much of a deterrent effect on the other’s behavior. “All EU leaders really care

fluencing someone else’s behavior than about expressing solidarity and demonstrating resolve.” Western leaders have accused Moscow of providing direct military assistance to pro-Russia rebels in Ukraine’s east, a charge the Kremlin has repeatedly denied. As a result, Western countries have taken aim at Russia’s economy, cutting access for key Russian statecontrolled banks, oil companies and defense firms to Western financial markets. “We will turn the ratchet and Russia will suffer permanently from the increasing economic isolation that follows,” U.K. Prime Minister David Cameron told the British House of Commons in August. Russian PresidentVladimir Putin countered that sanctions will have

about… are optics,”concluded Leonid Bershidsky, a Berlin-based columnist for Bloomberg View, in an op-ed in early September. Meanwhile, signs are emerging that the dispute may damage economies in Europe and Russia. The U.S. has relatively little trade with Russia, making America less vulnerable to the fallout. European agricultural advocacy group Copa-Cogeca called the Russian ban on EU farm exports a“severe crisis,”in a statement published on Sept 5. The lobbying group said prices in the EU fruit, vegetable and dairy sectors have plummeted over 50% in some member states, adding that some 29% of EU fruit and vegetable exports are normally sent to ports in Russia.

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Siberian Coal for Chinese Industry The other black gold faces renewed prospects PAGES 4-5

MONEY & MARKETS

The WTO, Two Years On Enjoying the fruits?

Gas wars Disagreements between Russia and Ukraine over natural gas could impact the EU

A showdown over natural gas supplies between Russia and Ukraine is ramping up as winter approaches. European countries may get caught in the crossfire. DAVID MILLER AND SAM SKOVE SPECIAL TO RBTH

Ukraine is facing a cold, difficult winter after Russia halted supplies of natural gas in June in a standoff over debt and energy pricing that also threatens European fuel supplies. The two former Soviet countries have squabbled over gas for years, with Russia insisting that independent Ukraine should no longer receive preferential pricing and Ukraine accusing Russia of playing politics with energy exports. The controversy reignited this year against the backdrop of spi-

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raling civil unrest in Ukraine. Europeans, meanwhile, are watching with growing alarm as the dispute endangers their own fuel imports, with potential to make light bulbs flicker and thermostats plunge across the continent. Russia, one of the world’s top energy producers and exporters, supplies about a third of Europe’s natural gas. Roughly half of those supplies travel via pipelines through Ukraine, meaning that shipment problems there could create an energy shortfall downstream in Europe. “Ukraine is not ready for winter,” says Alexey Grivach, deputy director of Russia’s National Energy Security Fund.“If there’s not enough gas, they [Ukraine] may draw off gas in transit.” Natural gas, not to be confused

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Challenging Sanctions Russia says it is ready to challenge sanctions in the WTO

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Ukraine, Europe Face Gas Dilemma As Winter Nears

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Ukraine fears Russia will turn off the gas if a deal isn’t reached soon.

with gasoline, is vital for warming homes, powering factories and supplying raw input for electrical utilities. Demand for natural gas in Ukraine and Europe is set to spike as the cold of winter sets in. Russian natural gas exporter Gazprom says Ukraine already owes billions of dollars in back payments, and must significantly increase the amount that it pays for gas going forward. Many analysts believe that gas sales to Europe are too important to Russia’s economy for the Kremlin to allow any serious disruptions, even in the midst of the political

turmoil over Ukraine. Nevertheless, previous pricing disputes have created brief supply disruptions in Europe. Russian officials have already accused Ukraine of planning to siphon off gas that’s bound for Europe this winter. “Clearly, there is no other place Ukraine can take it,” Russian Energy Minister Alexander Novak told the Russian news agency Itar-Tass in early September. “So there will be no other way for them but to siphon off gas from the pipeline.” CONTINUED ON PAGE 2

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Outlook More sanctions, declining oil prices and a falling ruble could mean more trouble

NEWS IN BRIEF

Russia’s Economy: Eye of the Tiger

• Russia has risen three places in the World Economic Forum’s recently released Global Competitive Index, to 64th out of 148. The WEF says that Russia’s macroeconomic environment has continued to improve – up from 44th two years ago to 19th this year – because of low government debt and a government budget that has maintained a surplus. • The state railway companies of Belarus, Russia and Kazakhstan will work together on a joint venture to handle transit cargo between the economic hubs of China and Europe. Container traffic between China and Europe is currently worth approximately $1 trillion a year. • Poland’s press agency is reporting a notable jump in cross-border traffic from the Russian enclave of Kaliningrad, following the imposition of Russia’s ban on imports of foodstuffs from the EU. According to the press agency, prior to the embargo, just under 6,000 Russian cars a day were crossing into Poland. Since the embargo, traffic has jumped around 10%.

Yet exactly how much damage the Russian economy will suffer from sanctions remains to be seen. “The sanctions are bad insofar as they are raising the cost of capital at a time when the Russian economy is already sputtering,” says Erik Jones, director of European and Eurasian Studies, The Johns Hopkins University. Second-quarter data suggest “the effects have not been huge,” says Mr. Jones. Data from the third quarter will reveal much about the real impact, he says. Russia’s government canceled its seventh ruble bond auction on Sept. 2 as international tensions over Ukraine ratcheted up. Russia’s Finance Ministry, in a short, terse statement on its Web site, blamed “unfavorable market conditions” for the cancellation. Blocking access to international finance for large Russian banks will, in theory, eventually filter down to the day-to-day lives of real people as borrowing becomes more difficult, slowing business activity. “Borrowing costs will have the greatest impact on daily life because they will slow the pace of output and activity and put upward pressure on unemployment,”

The Russian economy is coming under pressure from U.S. and EU sanctions at a moment when growth is already sputtering.

DAVID MILLER AND SAM SKOVE SPECIAL TO RBTH

• Russia’s largest solar-panel power plant has opened in the Republic of Altai in Siberia. The Kosh-Agachskaya plant, which has a capacity of 5 megawatts (MW), will be the first of five solarpower facilities to open in the region by 2019. Russia currently gets 0.5% of its annual power output from solar energy.

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• European low-cost airline Ryanair has dropped plans to launch a direct flight from Dublin to St. Petersburg. Last year, Ryanair said it was negotiating with a number of Russian airports and could begin flights from Dublin in 2014. Ryanair competitor Easyjet has also backed away from plans to fly between St. Petersburg and London. • RosHydroMet, Russia’s national weather and environmental service, has found 38 cities across the country where pollutant concentrations are 10 times above acceptable levels. The agency RosHydroMet attributed the situation to the “growth of automobile transportation in big cities, as well as the low effectiveness of purifying waste and discharge of pollutants.” • Novatek, Russia’s largest independent gas producer, has been granted a license to export liquefied natural gas, or LNG. The move demonstrates that Russia will move forward with plans to liberalize the LNG market, which had been dominated by state gas giant Gazprom. The Energy Ministry won the right to grant licenses to outside firms in August. • Scientists at Russia’s Transplantation and Artificial Organ Federal Research Center have developed a bio-artificial liver that encourages patients to grow new liver cells. “The cell engineering device completely integrates into the recipient’s liver cells a year after the transplant,” said center head Murat Shagidulin.

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The direct cause-andeffect of the sanctions may be difficult for regular Russian consumers to discern. says Mr. Jones. “People will have less money in their pockets – that is how it will play out.” Yet the direct cause-and-effect of the sanctions may be difficult for regular Russian consumers to discern. “It will be hard for normal Russians to separate out how much of that is due to European policy and how much is due to the more general slowdown in the Russian economy,” says Mr. Jones. Moscow has responded to Western sanctions by restricting imports of U.S. and European agricultural

The Russian ruble has fallen substantially against the dollar since March.

products into Russia’s burgeoning retail sector, a measure aimed at punishing Western exporters. Food products like European cheese and American poultry have been banned for a year. Yet this measure also hits Russian consumers, blocking access to foreign brands and pushing up prices for some items in a way that average shoppers are more likely to notice directly. So far, polls suggest most Russians support the import ban. In a late-August poll by Moscow’s Levada Center, a combined 78% of Russians said their government’s decision to block foreign imported goods was“definitely positive”or“rather positive,”compared to 13% who called the move “definitely negative” or “rather negative.” However, in the same poll, 35% said they believed food prices were already rising in response to the restrictions. Another 41% said prices would likely rise later, while only 15% said they believed there would be no impact on prices. For the moment, Russia’s economy seems to be balancing on the cusp between expansion and contraction.

Despite overall positive growth in the first half, Russia’s Economy Ministry recently estimated that gross domestic product began decline in the middle of the year, falling by 0.2% in July compared with a year earlier, and by 0.1% in June. Sanctions may make the Russian central bank’s campaign against inflation more challenging. The bank has hiked its key lending rate to 8% this year to combat stubbornly persistent inflation. A Reuters poll of 15 analysts taken in late August predicted that Russia will miss its 5% inflation target for 2014, and instead end up with an inflation rate of 7.2%. The poll also predicted the Russian economy will grow by only 0.3% in 2014. Not all recent news for the Russian economy has been grim, however. Russia’s manufacturing sector grew for the second month in a row in August, showing Western sanctions had yet to push that sector into decline, according to data released by the British bank HSBC. The HSBC Purchasing Manager’s Index hit 51.0 in August. Any score above 50 indicates expansion. A figure below 50 would indicate contraction.

Ukraine, Europe Face Dilemma CONTINUED FROM PAGE 1

If Russia and Ukraine haven’t reached a gas deal by then, “this must be simply called illegal siphoning, or theft,” Mr. Novak said. Ukrainian Energy Minister Yuri Prodan dismissed the Russian accusations as “groundless.” Ukraine’s new administration, in turn, has accused Russia of plotting to cut natural gas exports to Europe in the dead of winter, although providing no evidence. In August, Ukrainian Prime Minister ArseniyYatseniuk told a government meeting,“We know of Russia’s plans to block [gas] transit even to European Union countries this winter, and that’s why their [the EU’s] companies were given an order to pump gas into storage in Europe as fully as possible,” according to the news agency Reuters. Mr.Yatseniuk gave no further details, and Russian officials dismissed the charge. In the midst of this controversy, Europe has reportedly drafted an emergency“Plan B”if Russian energy supplies should be somehow compromised. The EU could ban gas exports and limit industrial use in order to preserve household energy consumption, Reuters reported in early September, citing a source it did not identify.

QUOTE

Arkady Moshes POLITICAL ANALYST AND PROGRAM DIRECTOR AT THE FINNISH INSTITUTE OF INTERNATIONAL AFFAIRS

PHOTOSHOT/VOSTOCK-PHOTO

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• In response to decisions made by NATO member countries at their recent summit in Wales, U.K., to establish a “readiness action plan,” Russian military officials are developing a new military doctrine for the country. Although the specific contents of the new doctrine have yet to be announced, analysts agree it will classify NATO as the primary threat to Russia.

Russia’s economy is facing rising headwinds from inflation, sagging oil prices and a deflating ruble — at just the moment when economic sanctions from Western countries are beginning to bite. The country’s economy grew about 0.7% in the first seven months of the year as manufacturing expanded, according to government statistics. But warning bells are ringing for economic growth amid concerns that the worst of the sanctions have yet to set in. “The economy is close to recession,”Oleg Zasov, head of forecasting at Russia’s ministry of economy, told Russian news agencies in late August. The U.S. and Europe have slapped Russia with escalating rounds of sanctions this year as the conflict in Ukraine widened. The measures target firms in areas like arms manufacturing, energy and finance, as well as highranking individuals with ties to the government. In July, the U.S. Commerce Department said it would block the export of equipment to Russia that could be used for finding and producing crude oil in difficult-to-access Russian reserves, such as Arctic deepwater and shale oil. President Obama also suspended credits that encourage exports to Russia. Russia, one of the world’s biggest energy producers, relies on exports on oil and natural gas to support its flagging economy. The U.S. and Europe also went after large, important state-owned Russian banks, limiting their access to financing in the U.S. and Europe. These moves are designed to make it more difficult for Russian banks to acquire foreign currency to fund transactions, and therefore push up borrowing costs for Russian businesses.

REUTERS

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"I A German storage facility awaits Russian gas supplied via Ukraine.

Vital trade Oil and gas receipts make up more than 50% of Russian state revenues and 70% of the country’s exports. Hydrocarbons are a vital source of income in what is an otherwise stagnating economy. Some analysts said that, therefore, Russian energy exports are too important to the country’s economy to become a casualty. “I doubt Russia will cut off the gas supplies. It’s not in Moscow’s interests,” says Danila Bochkarov, senior fellow at the EastWest Institute in Brussels Others, however, caution that the situation in Ukraine has become

f people in Ukraine see that Europe does not show enough solidarity, there might be lots of people who would blow up the pipe. The level of emotional mobilization in Ukraine should be fully taken into account.”

so unpredictable that sabotage to the pipelines may be a real danger. “If people in Ukraine see that Europe does not show enough solidarity, there might be lots of people who would blow up the pipe,” says Arkady Moshes, director of the EU’s Eastern Neighborhood and Russia Program at the Finnish Institute of International Affairs.“The level of emotional mobilization in Ukraine should now be fully taken into account,” says Mr. Moshes.

Shaking up the market? All this uncertainty has prompted some voices in the European Union to suggest the EU should diversify

its gas suppliers. But to do so would take years of effort and be highly complex and expensive, the U.S.based Fitch Ratings service said in a recently-published report. The result is that, however the near-term problems are resolved, the EU will stay dependent on Russian gas for the foreseeable future. “Europe is unlikely to be able to reduce its reliance on Russian natural gas for at least the next decade and potentially much longer,” Fitch Ratings said in an analysis posted on its Web site on Aug. 26. “Any attempt to improve energy security by reducing European reliance on Russia would require either a significant reduction in overall gas demand or a big increase in alternative sources of supply.” The “only viable non-Russian pipeline under consideration”is an option to ship gas from Central Asia across Turkey to European markets, the agency noted. But the amount of gas that such a new project would yield is “not enough to cover the incremental increase in gas demand we expect over the period, let alone replace any supplies from Russia.” The United States gets no natural gas from Russia, putting U.S. policymakers in a very different position from their European counterparts.

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NEWS IN BRIEF

Stocks For investors with an appetite for risk, Russian firms offer high incomes on the cheap

Top 20 Undervalued Russian Stocks RBTH teamed up with Russian investment house Finam to identify 20 of Russia’s cheapest listed companies as measured by share price over earnings.

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• Russia has announced plans to establish a permanent base for the country’s Northern Fleet on the New Siberian Islands in the Arctic Sea. Northern Fleet Commander Admiral Vladimir Korolyov said that the ships stationed at the base will “ensure the safest possible navigation conditions in Arctic regions,” and also monitor the quality of the Arctic ice cover. • Officials in the Khabarovsk Region in Russia’s Far East have announced plans to conduct a census of Amur tigers. The census, which is held every 10 years, will be conducted in the winter. The government estimates there are currently 70-80 tigers in the region. The Amur Tiger, also known as the Siberian Tiger, is classified as an endangered species. The tiger’s total population in the Far East is estimated at about 400.

Undervalued Russian companies by industry

ALEXEY LOSSAN RBTH

Russian firms have long trailed their international peers when it comes to stock market valuations, bringing up the rear of the MSCI Emerging Market Index. Notably, Gazprom – Russia’s massive state-owned natural gas exporter – announced this year it had become the world’s most profitable firm in 2013 as judged by a metric known as EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization.The Moscow-based company raked in about $61 billion in EBITDA last year, beating out American champions ExxonMobil ($58 billion) and Apple ($56 billion). Yet pulling all of Gazprom’s shares together would reveal a total market valuation of about $89 billion, as of the beginning of September. That compares to $423 billion for Exxon and $593 billion for Apple. Gazprom is more like the rule than the exception. Taken as a whole, the universe of publiclytraded Russian firms features some of the greatest discrepancies between high corporate earnings and low stock prices available in the world of investing. Prominent among these are Gazprom itself, the world’s single biggest natural gas producer and exporter, and state-owned oil giant Rosneft, which pumps about 4% of the world’s crude. Both companies are majority owned by the Russian state, but have minority stakes trading on public exchanges. International investors shy away from Russian stocks for a host of reasons, many of them common to emerging markets, according to analysts. These include low corporate transparency, cash flow instability and, in some cases, high levels of debt. Many of Russia’s most important firms also get hit with a penalty for being directly owned by, or otherwise connected to, the state. An investment case for many of these companies, then, might begin with their profitability, but also rest on the removal of some or all of these constraints. For many Russian companies,“if at least some of these negative factors are removed, their share price would grow in no time,”says Finam analyst Anton Soroko.

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• The Central Bank of Russia is keeping its loan growth forecast for the rest of the year unchanged at 15%-17% and considers banks capable of refinancing their debt both this year and next. Bank head Mikhail Sukhov estimates that Russian banks will need to refinance around $8 billion this year. • State oil giant Rosneft could shed up to 25% of its staff, according to reporting by Russian business daily Kommersant. Rosneft is the world’s largest publicly traded oil company and has been hit by U.S. and EU sanctions. • Russia’s UralVagonZavod has backed out of deals with Caterpillar and Bombardier as a result of sanctions, according to company CEO Oleg Sienko. The company, which makes locomotives, subway cars and tanks, was named in the third round of U.S. sanctions, announced in July. • Russian inflation increased 7.7% year-on-year in August, according to statistics released by the Russian State Statistics Service (Rosstat). The inflation was fueled primarily by food prices, which increased as a result of Russia’s ban on imports of foodstuffs from the U.S. and the EU. GAIA RUSSO

mium for every dollar that the company earns. A low P/E basically means investors aren’t clamoring for the company’s stock, at least not relative to the total amount that the firm earns. The P/E ratio as a tool can’t be gracefully applied to loss-making ventures, since in those cases the figure would be negative. The Finam study intentionally excludes companies that didn’t make a profit last year.

ture customers for its energy resources. The list also contains other energy companies beyond oil and gas. These include heat generators TGK-1 and TGK-6, as well as RAO Vostok, a major power supplier in the Far East. Also included are St. Petersburg’s Lenenergo and Moscow’s MOESK. In addition there are metals giants, like the world’s largest aluminum producer, Rusal, and the

“If at least some of these negative factors were removed, their share price would grow,” says Finam analyst Anton Soroko.

The top spot in the ranking of undervalued Russian companies goes to oil pipeline firm Transneft.

Main favorites

massive steelmaker known as Magnitogorsk Iron and Steel Works. The list also features the Farmstandart, a pharmaceutical giant, and meat-producing and processing factory Cherkizovo. In all, the list features firms from a wide variety of sectors of the Russian economy, including pipelines, energy, finance, machine engineering, oil and gas production, construction, metals and the consumer sector. All of them have one thing in common, according to Mr. Soroko: for one reason or another, Western

The top spot in the Finam ranking of undervalued Russian companies goes to Transneft, the company that builds and operates Russia’s massive infrastructure of oil pipelines. Transneft’s capitalization is in fact lower than its profits. All of Transneft’s common stock is owned by the state, while only preferred shares trade on the market. Transneft oversees the extension of Russia’s oil supply chain to new markets, such as China and Japan, where Russia is hoping to find fu-

Russia’s 20 Cheapest RBTH joined forces with Finam, a leading Moscow investment firm, to identify Russia’s 20 most-undervalued, publicly traded companies based on P/E ratios, which is defined as market price per share divided by annual earnings per share. Energy champions Gazprom and Rosneft grace the list, along with the world’s biggest aluminum producer, Rusal. A high P/E ratio indicates that investors are willing to pay a pre-

investors aren’t piling into their shares for the time being. According to Finam, investors are currently wary of buying Gazprom shares, because of the unstable political situation in Ukraine among other things. Ukraine is one of the main transit territories across which Gazprom delivers natural gas supplies to Europe. By way of comparison, Gazprom’s only major competitor in Russia, the private company Novatek, has a P/E ratio of 12.4. Rosneft, as well as its CEO, former Deputy Prime Minister Igor Sechin, have both been singled out by the U.S. for sanctions. However, Finam analysts suggest that once sanctions are lifted and investors eventually return to the Russian market, they are likely to focus on Rosneft. Mr. Sechin is believed to be highly influential inside PresidentVladimir Putin’s inner circle. Rosneft also has strategic links to BP, which owns 19.75% of shares in Rosneft, and a strategic partnership with Exxon. According to Finam, the average P/E ratio for the Russian stock market as a whole is 13, compared to 19.9 for the S&P 500. The P/E ratio for S&P 500 has varied from 4.78 in December 1920 to 44.4 in December 1999, while usually remaining between 10 and 20.

Investors Turmoil continues in Russian markets, but analysts say stocks may be in for a lift

Russian Stock Market: Signs of Life? Russian markets have been whipsawed by violence in Ukraine and sanctions from the U.S. and Europe. Yet signs of a turnaround have begun to emerge. DAVID MILLER AND SAM SKOVE

Conflict in Ukraine as well as tensions with the U.S. and Europe have scrambled Russian markets, punishing stocks and the ruble while touching off a storm of capital flight. Yet even while the country braces itself for the full economic impact of sanctions, at least some investors and analysts can see a flickering light in the tunnel for Russian stocks. A poll of analyst price targets published in late August by Bloomberg suggested that the Micex Index of Russian stocks may rise 27% on average over the 12 months that follow – more than comparable estimates for China (19%), Brazil (13%) or India (5%).

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Despite taking some hits, Russia’s indeces are worth another look.

Meanwhile, U.S.-based Exchange Traded Funds, or ETFs, investing in Russia pulled in $265 million of new capital from investors in August, equal to 14% of their total market value, according to Bloomberg data. That was the highest of any of the 47 regions tracked by

the financial information agency, excluding developed areas Portugal and Hong Kong. “Overall the crisis has hurt [Russian] equities, but far less than it might have,”says James Beadle, an independent investment adviser who specializes in countries in the former Soviet Union. “Investors seem to remain optimistic that the crisis won’t dramatically worsen,”Mr. Beadle says. However, “at present this is a rather ambitious assumption,” he adds.“You would certainly have to be brave to dive into Russian stocks.” Only a few years ago, Russian equities were soaring to ever-greater heights, fueled by rising commodity prices and robust economic growth. That was before the financial crisis of 2008 wreaked havoc on global markets, sending the price of oil – and Russian stocks – plummeting back to earth. Since then, after a post-crisis recovery, Russian equity markets have

struggled to find a firm footing. This year, the value of Russia’s Micex Index has hovered at levels equal to about five times estimated earnings, the cheapest valuation among all the emerging markets tracked by Bloomberg. Since the outbreak of hostilities in neighboring Ukraine, which led to back-and-forth rounds of sanctions between Russia and Western countries, Russian stocks have largely followed the fortunes of the conflict. “The market has been hurt by the deterioration of Russia’s relations with the West,” Mr. Beadle says. “Any investor expecting the crisis to end would be right to buy Russian shares aggressively for a sharp bounce, especially those companies exporting commodities in dollars, which have ruble-based expenses. “Those less optimistic about the geopolitical environment would better steer well clear of the Russian market for now.”

• Webinar.ru, an online web and video conferencing service, raised $7.3 million in its first round of investment. Russia’s VTB Bank was the primary donor, with other funds coming from Intel Capital, the European Bank for Reconstruction and Development (EBRD), and Flint Capital. • Gazprom has announced plans to expand operations in Latin America. The company is currently in talks to acquire shares in a Brazilian shale oil field. Russia’s gas giant also intends to expand its operations in Bolivia. The company already has two projects in the country and is planning a third.

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• According to Maxim Reshetnikov, the head of Moscow’s Department of Economic Policy and Development, the Russian capital is moving ahead with plans to double the share of private competitive investments into the city by 2025 to 30%. Last year, $35.3 billion was invested in the city. In 2025, it aims to attract $82 billion. • The Russian government has established the Industry Development Fund to ease access to financing for industrial enterprises. The decision was announced by Prime Minister Dmitry Medvedev at a meeting with his deputies on Sept. 2. The fund will provide financing for projects ranging from $4 million-$5.5 million.

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Russian coal will provide fuel for China’s rise Anna Grinetz

Special to RBTH

Much has been made of the potential synergy between Russia’s colossal oil and gas reserves and Asia’s fast-growing, energy-hungry economies. Less has been said about the potential for Russian coal exports to Asia, but anyone interested in understanding global energy markets should take note of the significant potential for development there. Today, Russia is the world’s sixth-biggest coal producer, with the planet’s second-largest coal reserves, according to the U.S. Energy Information Administration. Some 352 million tons of coal are mined in Russia every year. About 40% of that is exported. The world coal market recently saw a drop in prices as the rapid development of shale gas in the U.S., and the resulting drop in gas prices, led to the exclusion of a large quantity of coal from international markets. As a result, in 2013 prices in the world coal market reached a three-year low, falling to $72 and $99 per ton for thermal and coking coal respectively. However, this change opens new doors for Russia’s coal companies, including the possibility of attracting new investors. By 2030, the Russian government aims to increase production volume to 530 million tons, and increase exports by 70 million tons. A total of $5.4 billion (250 billion rubles) will need to be allotted from the state budget to meet this objective. The goal here is, in part, to lower the amount of natural gas that is used for domestic consumption and replace it with an increase in coal and renewable energy. Sales of natural gas to Europe are a key Russian economic mainstay, and reducing domestic use would free up gas for export. Consequently, the quantity of coal in Russia’s domestic energy consumption should increase from 26% in 2014 to 36% in 2030. In addition, major projects in the coal sector will be realized with foreign investments. It is expected that by 2030, the amount of

Russian companies are interested in attracting foreign investors, since potential coal deposits are frequently located in regions with underdeveloped infrastructure. coal being exported will rise to 44%. But Europe, Russia’s traditional natural gas export market, is unlikely to be the target for these new supplies. Currently, some 90% of Russia’s coal is mined in regions far to the east of Europe but relatively close to the countries of the Asian Pacific rim. What’s more, 99% of reserves likely to be used for increasing production in the future are likewise concentrated in Siberia and the Far East. Consequently, Russia is eyeing Asia and the Pacific countries as the prime markets for these new exports. Russia’s biggest clients for coal have always been South Korea and Japan. But these were recently surpassed by China, which in 2013 imported roughly 12 million tons. Asian countries will be able to guarantee long-term demand for Russian coal. Coal consumption in these countries is anticipated to grow and should total 80% of world consumption by 2030. Russian authorities believe that Russia may be able to expand its share of this market from the present 6% to 15% by 2030. Russian companies are interested in attracting foreign investors, since potential coal deposits are frequently located in distant regions with an underdeveloped infrastructure. The Russian coal sector can already boast successful examples of mining projects in collaboration with Asian companies. In September 2010, Russia and China signed a memorandum of understanding and cooperation in the coal sector. The Chinese coal company Shenhua and the Russian Rostopprom and Inter RAO UES agreed to develop the Ogodjinsky deposit in the Amur region in Russia’s Far East. Another example of collaboration is the 2013 agreement between Russia’s En+ and Shenhua to develop the Zashulansky coal deposit. Both projects aim to supply the Russian domestic market, as well as to export the coal to China, which would guarantee the demand for the deposit’s resources. Anna Grinetz is a senior analyst at the RANEPA Center of Raw Material Economy.

in figures

14%

is the share of the world’s nickel produced by Russia’s Norilsk Nickel. Located in the world’s northern-most city, above the Arctic Circle, the company also produces 41% of the world’s palladium, 11% of its platinum and 2% of its copper.

1.3

billion dollars is how much Russia’s Alrosa, the world’s largest diamond miner, raised in its IPO last year. Alrosa controls 26% of the world’s total diamond production. Its rival, South Africa’s DeBeers, produces 22%.

24%

is how much the average price of gold decreased from 2012 to 2013 after a decade of growth. The drop is bad news for Russia’s gold producers, who have been ramping up production.

raw materials Russia’s metals and mining sector, second in importance to oil and gas, has a lower political profile

Russian Metals And Mining: Years of Renewal Global metals and mining firms face a difficult operating environment amid falling commodity prices. Russian companies are cutting costs and refocusing on domestic assets. david miller and Alexey Lossan rbth

Russia’s metals and mining industry, the country’s second-most important sector after oil and gas, has faced its share of adversity since the salad days of the past decade, when commodity prices were pushed skyward by a hike in demand from China and India. Today, as lower commodity prices put pressure on resource-producers around the world, many Russian metals and mining companies are nevertheless showing respectable profit margins, after shedding non-core operations and taking difficult steps towards rebuilding. Iron ore prices fell to a five-year low in September as Chinese demand slackened off and economic activity in Europe and Japan remained weak. Even so, for Russian firms, signs are emerging that, in some areas, the future may be looking a little brighter. “The global aluminum industry has turned a corner,”declared Rusal CEO Oleg Deripaska in a statement this summer after the firm, which produces almost 9% of the world’s aluminum, posted an income of $116 million in the second quarter of 2014. Those results marked the first time Rusal had reported a quarterly profit in over a year. Meanwhile, aluminum prices have been rising in the third quarter. “Positive price momentum is supported by strong fundamentals,” Mr. Deripaska said. Another hallmark of the sector is that Russian industries outside the realm of oil and gas are better insulated from the blast furnace of Russian politics than their cousins in the hydrocarbon trade. As U.S. and European officials

pursue sanctions against Russian energy, arms and finance firms, the producers of Russian steel, coal, diamonds, iron, palladium, aluminum and potash labor quietly in the background — not fully removed from politics, but farther away from the heat. Coal, especially, may be due for a renaissance in Russia, thanks to new investment plans in the country’s eastern regions, even as coal miners in the U.S. and Australia face some of the most difficult years in the history of their industry.

Russia is also the third-largest exporter of primary aluminum and steel and has the second-largest coal reserves in the world. Amid this trove of underground resources lie the crown jewels: the largest reserves of natural gas in the world and the eighth-largest reserves of crude oil. The outsized importance of oil and gas production in Russia to the country’s economy has led the Kremlin take a stronger hand there than in other commodities. Russia’s two largest energy producers – gas giant Gazprom and oil champion Rosneft – are both majority state-owned. But many of the large Russian extractive firms outside of oil and gas are privately held by owners who have also sold significant minority stakes to international investors via stock exchanges in Moscow, London and New York.

National Gold Mine

Russia, the largest land mass in the world, sits atop of some of the planet’s biggest reserves of minerals and natural resources. The Russian earth holds some 25 billion tons of iron ore, the thirdlargest reserves in the world after Australia and Brazil. High up in the frozen north, above the Arctic Circle, a company called Norilsk Nickel produces 14% of the world’s nickel and 41% of its palladium.

Big Steel

Efforts have been underway among Russia’s big steelmakers to sell assets, cut costs and refocus their ef-

“The global aluminum industry has turned a corner,” said Oleg Deripaska, CEO of Russia’s Rusal.

“The completely gloomy picture of the aluminum market... has changed,” says Ilya Balakirev, analyst at UFS IC.

Norilsk is also a top-four producer of platinum, with 11% of global output, and a significant player in the copper industry, with 2% of world supply. State-controlled Alrosa, the world’s biggest diamond miner, taps rich deposits in Siberia to yield 26% of global diamond production. Its South African rival, De Beers, is in second place with 22%. Despite years of tight control by the Russian government, Alrosa finally opened to public investment last year, raising $1.3 billion in an Initial Public Offering (IPO) on the Moscow Stock Exchange and reportedly selling some 60% of shares to U.S. investors.

forts domestically. To be sure, net profits are less frothy than another indicator of underlying profitability, known as “earnings before interest, tax, depreciation and amortization,” or EBITDA. Novilipetsk Steel, commonly known as NLMK, became the world’s most profitable large steelmaker in August after cutting costs. According to Bloomberg data, the firm’s most recent results yielded an EBITDA of $584 million for the second quarter, a margin of 21%, beating 24 of its biggest peers. Severstal, the steel and mining firm majority-owned by billionaire Alexey Mordashov, had previously been in place among that top 25,

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with a 19% margin, according to Bloomberg data. This summer, Severstal reached agreements to sell its North American assets in Columbus, Miss., and Dearborn, Mich., for a total of $2.3 billion, and used $1 billion of the funds to pay a special dividend. Mechel, the indebted coal and steel producer, is considering selling $2 billion to $3 billion worth of assets to help pay down over $8 billion in debts, its CEO Oleg Korzhov told Moscow’s Vedomosti newspaper in September. Mechel is in talks with state banks to restructure its debt. Russian news agency ITAR-TASS has reported that the government has approved two bailout schemes that would allow the firm to avoid bankruptcy.

Aluminum Rising

Rusal emerged as Russia’s champion of aluminum after consolidating the assets of smaller competitor SUAL and of international commodities trader Glencore in 2007. Today, Rusal operates in 19 countries on five continents, and is headquartered in Moscow. According to Rusal, global consumption of aluminum rose in the first half of 2014 to 27 million tons, up 6% in comparison with the first half of 2013. The fastest growth in demand on aluminum was in China (13%), Japan and South Korea (10%), and Central and South America (5%). “The completely gloomy picture of the aluminum market in the beginning of the year has changed today to a rapid price increase,” says Ilya Balakirev, chief analyst at Moscow brokerage UFS IC.

Gold production: Too much of a good thing? Russian gold producers may need to reduce their mining operations to prevent prices from falling further as the result of an increase in supply on the market. Leonid Khomeriki Special to rbth

Over much of the past decade, the rising price of gold made it a safe haven for investors put off by the volatility of stock markets. But in 2013, gold prices began to fall, and many market forecasters today think this trend is set to continue – due in part to a glut of gold on the market. Russian gold producers remain undeterred. By the end of 2013, for the first time in 25 years, Russia surpassed the U.S. in the total output of mined gold, reaching third place among gold-producing countries. Gold mining in Russia has been growing rapidly in recent years. According to the Federal State Statistics Service, also known as Rosstat, the amount of mined gold was 12% in 2013 and 7% in 2012. According to the Russian Gold Producers Union, gold extraction

and production in the first half of 2014 increased 27% in comparison with the same period the previous year and exceeded 116.7 tons. “We see that the consumption of physical gold is stable,” says Nikolai Zelensky, general director of Nordgold.“It is mostly consumed by developing countries such as China and India.”In his words, for example, China’s demand for gold in 2014 is approximately 1,000 tons a year, which is about 25% of world consumption. “Bearing in mind that Russia has a series of projects that gold producers must implement in 20142015, gold production in Russia will continue growing in the upcoming four or five years,”adds Mr. Zelensky. Russian regions continue increasing their gold extraction. In particular, according to Vladimir Pechenyi, governor of the Magadan Region (the main gold-producing region in the Far East), the development of ore deposits will help the region mine up to 80 tons of gold a year. By comparison, in 2014, the region plans to mine only 24 tons.

Photoshot/Vostock-photo

04

Russia is the world’s third-largest gold-producing country.

The increase in volume has done nothing to reverse the sharp fall in the price of gold in recent years. From 2012 to 2013, the average price of gold decreased 24%, while silver fell 38%. In his interview with the Kommersant business newspaper, CEO of PolymetalVitaly Nesis stated that if the market price for gold falls below $1,000 an ounce, some production operations will have to be closed. According to Mr. Nesis, economic incentive to launch new enterprises only exists only when the price of gold rises to $1,500-$1,600 an ounce. Therefore the recovery of the market will take place only after a worldwide reduction in the production of gold and silver, Mr. Nesis concludes. On September 9, the price of gold

on the cash market of precious metals in London was $1,256 per troy ounce. Meanwhile, according to data from the Russian Gold Producers Union, the break-even point for Russia’s gold industry is about $1,200 a troy ounce. Analysts say gold producers must make tricky decisions on mergers and acquisitions, and the subsequent closure of inefficient enterprises in order to reduce costs. “I think that M&A activity will intensify in our sector,” says Mr. Zelensky. Many geo-exploration companies in the world now have promising projects which they cannot develop on their own, given the fall in market values. Those firms make likely candidates for entering into joint ventures, he says.


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05

Russia, China agree to develop Siberian coal The Russian state technology conglomerate Rostech, target of U.S. and EU sanctions, has agreed to explore and develop coal deposits with China’s Shenhua Group. David Miller and Leonid khomeriki special to rbth

Sparks fly at Russia’s Severstal steelworks. The company sold its North American assets this summer.

Change in price of Russian commodities over the past 5 years

Natalia Mikhaylenko

Interview Vladimir potanin

“Business is Not a Sport” The general director of the world’s largest nickel producer on sanctions and his company’s future

In the last year you successively sold some assets in the U.S. and in Australia. Why did your company leave these markets? Was it part of a larger strategy? We are actively getting rid of unprofitable assets, which were dragging the company backwards. That is why we completely left the investment projects in Australia, keeping only one Australian license, and are currently working to leave the African projects. Selling these assets was planned long before the beginning of the political turbulence in our long-term strategy. How much has the political turbulence influenced Norilsk Nickel’s work? We are a private and a law-abiding company, we are incorporated in all the regulatory mechanisms and we are represented on international stock exchanges. The company’s production is very important for the economy. In particular, Nornickel supplies Europe with nickel for the steel industry. The political tension we are experiencing should not affect the company’s activity, since the company is deeply integrated in international economic processes. Economic sanctions damage all

the participants of economic relationships and always signify defeat for politicians. If politicians are obliged to impose sanctions, that is, decrease the value of assets located on the perimeter, it means they are not doing something right. HowmuchisthecompanytiedtoEuropean and American consumers? What damage will the expansion of sanctions bring you? Nornickel actively sells its products in Europe and the U.S.; for example, we supply palladium for the production of car exhaust systems. Palladium is used for the production of carbon dioxide emission traps, which is a not big, but nevertheless important element in automobile production. If a car that costs $30,000 does not have a $1,000 catalytic converter, it cannot be sold. Nornickel feels comfortable in the current conditions and we do not expect that sanctions or any other political-economic measures will affect us. However, we do have a plan B, which foresees the diversification of currencies in which we keep our resources, as well as the reorientation of our company towards Asian markets in case of problems in other markets. What made you create the 2013 Norilsk Nickel strategy? All companies need a strategy that is clear for investors. The strategy helps people judge how efficiently the management is able to lead the company. The 2013 strategy mainly intended to concentrate on firstrate assets and the increase of man-

Nikolay Korolyoff

Vladimir Potanin, co-owner and general director of the world’s largest nickel producer, Norilsk Nickel (Nornickel), and who, according to Forbes, is worth $12.6 billion, spoke with RBTH about the company’s departure from U.S. and Australian markets, as well as his drive to improve the firm’s efficiency.

His Story

Vladimir Potanin General director, norilsk nickel

In addition to his business interests, Moscow native Potanin works to improve corporate governance in Russia through the National Council on Corporate Governance. He is also a patron of the arts and sits on the board of the Solomon R. Guggenheim Foundation.

agement efficiency. In the context of the new strategy, which achievements do you think are the most important? According to the EBITDA indicator, we demonstrated a profitability of 44%, which means that only BHP Billiton (48%) came in ahead of us. Moreover, we witnessed a significant improvement in terms of contracts with banks and rating agencies, as well as for what con-

cerns restructuring bank credits. In particular, we increased credit periods, excluded mortgage loans and increased the flexibility of our portfolio management. You said that Norilsk Nickel is the second most efficient company in the world. Do you plan on surpassing BHP Billiton and becoming the first company, and if so, what do you need to do to realize this objective? Business is not a sport where there is no room for those who don’t come first. My friend, the world-famous hockey player Vyacheslav Fetisov, said that the first step off the pedestal is down. Long-term planning always has two alternatives. Depending on how we develop our mining policy, we will either have a big volume of marketable products with a slightly smaller EBITDA margin, or the contrary. Now we have set a target to keep our profitability at 40% for firstrate assets. Business is not a sport, but the earning of money, and BHP Billiton should not be relaxing. Prepared by Alexey Lossan

Rostech, the Russian state-controlled technology and defense concern targeted by Western sanctions, signed an agreement with China’s Shenhua Group, the largest producer of coal in the world, to explore and develop coal deposits in Russia’s Siberia and Far East. The total cost of the project, including the construction of coal-fired power plants that will sell electricity in Russia, China and other Asian countries, will be $8-10 billion, Rostech said in a statement posted on its web site. Moscow-based Rostech controls a vast network of hi-tech operations in both the civil and defense sectors, including the company that manufactures Russia’s famous Kalashnikov rifle. The firm is named among the targets of U.S. and European Union sanctions, which aim to limit the company’s access to western financial markets. The Rostech-Shenhua deal comes at a time of greater cooperation between Russia and China in the energy sphere, spurred on by increasingly difficult relations between Russia and Western countries. In May, Russian natural gas exporter Gazprom and China National Petroleum Corporation (CNPC) ended years of negotiations and inked a historic 30-year agreement worth $400 billion to deliver gas to China. In a statement responding to the U.S. and EU sanctions, Rostech accused EU politicians of escalating the conflict, and said that the measures would hinder both sides. “Those who impose sanctions should understand that such cooperation is double-sided,” the company said in a statement. “Both sides will suffer as a result of a breakdown.” Rostech’s chief executive, Sergey Chemezov, is also personally targeted in the sanctions, which freeze any assets he might hold abroad and restrict his ability to travel. Rostech has said the sanctions won’t affect any of Mr. Chemezov’s personal property. “All Mr. Chemezov’s property and funds are held in Russia,” the company said in a statement on its web site. “In this regard, the EU sanctions will not have a significant impact.” The Rostech-Shenhua agreement was signed September 4 by Mr. Chemezov and Yuzhuo Zhang, the chairman of Shenhua Group Corporation. The companies aim to explore and

It is expected that contributions to the currency reserve pool will be: China, $41 billion; Brazil, India and Russia, $18 billion each; and South Africa, $5 billion. The amounts are intended to reflect the size of each country’s economy. develop the Ogodzhinskoye coal deposit, located in the Amur Region. Coal reserves at the mine are estimated to be 1.6 billion metric tons. Rostech expects coal production to start in 2019 with an annual output reaching 30 million tons. The commodity will be largely exported to the Asia-Pacific Region, especially China. Rostech and Shenhua also plan to build a marine coal terminal at Port Vera in the Primorsky Territory with annual capacity of 20 million tons. The construction is slated to begin in 2015 and Port Vera will be put into operation in 2018 – 2019. “The project to construct Port Vera will help implement the development strategy for the Far East and the Russian coal industry. It will greatly expand the access of Russian coal companies to sales markets in the Asia-Pacific region,” said Andrey Korobov, CEO of RT Global Resources, the Rostech subsidiary that oversees commodity and infrastructural projects in Russia and abroad. The agreement also foresees constructing highvoltage transmission lines to China, as well as social and transport infrastructure. According to Mr. Chemezov, the project will help deal with the issue of power shortages in Russia’s Amur Region and China’s northern regions and meet the electricity demand of those territories. The project may also create 10,000 new jobs.

Developing Eastern Coal

The Russian strategy for developing the coal sector through 2030, as mapped out by the country’s Energy Ministry, foresees transferring the center of the production to Russia’s eastern regions, where Russian coal, thanks to short transportation distances, can compete in Asian markets, which now total 80 percent of the world consumption. “The Asian and Pacific Ocean regions are still the world’s locomotive for driving coal imports, while Europe on the whole does not appear to be a potential consumer,” says Alexander Grigoriev, Director of Research at the TEK Institute of Natural Monopoly Issues. “Nevertheless the price situation in the last 12-18 months remains rather depressing: prices on thermal coal are at a level of about $80 a ton. This places Russian exports at the limits of profitability, and only the devaluation of the ruble this year helped ease the position of Russian exporters,” says Mr. Grigoriev. “In Russia operating profitability barely exceeds 10 percent, and with all the costs the sector is just balancing on the edge of profitability,” says Kharek Avakyan, Financial Analysis Director at BPS Consult.


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Sanctions How will the recent tit-for-tat sanctions affect international treaties governing trade?

Two years on, a fresh look at Russia in the WTO

Russia Takes Aim at Sanctions in the WTO

Sergei Mikhailov SPECIAL TO RBTH

R

ussia’s accession to the World Trade Organization (WTO), when it finally came in August 2012 after almost two decades of fraught negotiations, provoked fears among those operating in the country’s more vulnerable industries. Would we be swamped by foreign products? Would domestic producers survive? Concern certainly ran high in my own area, the Russian meat industry. Now, on Russia’s second anniversary as a WTO member, we can take a sober look at whether those fears were justified. As a whole, from the perspective of the Russian meat industry, it does appear we joined the WTO on balanced terms. The quota system was preserved for chicken, which protects domestic production. Russia managed to achieve robust import substitution in this area, and today the poultry market is faring well. The situation turned out to be more complicated for pork. Although WTO membership did lead to an increase in imports due to veterinary restrictions, the cancellation of the import duty on live hogs caused many operators to curtail investment due to fears of a drop in prices. Russia needs to import about a million tons of pork a year to cover the needs of the market. Operators are not yet willing to invest in pork production because the market is too volatile. Today, amid market scarcity, the price is high. But both for us and for producers, not only is the current price level important, but so is longterm stability and predictability, which allow investors to calculate the return on their investments. Joining to the WTO, of course, does not mean Russia must refrain from taking steps to support its economy. In my view, serious prospects will open up should we take advantage of “green box” measures. The term is WTO jargon for certain types of programs that support a member state’s economy and are permissible under WTO rules. In contrast with customs tariff regulation, there are no restrictions on the “green box” measures. This primarily means stimulating consumer demand, which is now declining significantly due to the economic slowdown. Developed countries have programs to support socially vulnerable consumers (for example, food stamps in the U.S.). A similar program would help negate the impact of rising food prices due to the import embargo. The investment appeal of livestock production would rise. Such measures, compatible with the WTO, can create new growth opportunities for the entire country. Sergei Mikhailov is general director of Cherkizovo Group

VIEWPOINT

Joining the WTO gave Russian car dealers a boost Vladimir Mozhenkov

malizing trade agreements and resolving trade disputes.The U.S., EU and Russia are all WTO members, and these sanctions may contravene WTO rules, presenting a significant test for the body. “The WTO has traditionally refrained from getting directly involved in politically motivated conflicts,” says Ilya Balakirev, chief analyst at Moscow brokerage UFS IC. If the WTO rules that Russia’s food embargo was unlawful, then the legitimacy of the anti-Russian sanctions would come into question too, Mr. Balakirev says. But the WTO doesn’t have real power to cancel sanctions – at best, it can impose fines, he adds. On Aug. 20, the Polish government sent a request to the European Commission to consider Russia’s ban on agricultural imports from the EU inside the WTO. According to the Polish authorities, the country’s official losses from the ban imposed by Russia will amount to €750 million ($970 million). Furthermore, European Commissioner for Trade Karel De Gucht has already promised that the EU authorities will assist Poland in holding consultations at the WTO. “For Poland, the situation is particularly dramatic in that Polish agricultural produce had been affected by a sanitary ban even before this whole story took on such a scale, and Poland expected to receive compensation for its losses from the EU, as is the usual practice in cases like these,” explains Mr. Balakirev. However, after sanctions affecting a broad range of countries were imposed, the chances of that happening have reduced considerably.

In response to sanctions imposed by the EU and the U.S., Russia has initiated a WTO inquiry, arguing that the sanctions run counter to free trade rules. ALEXEY LOSSAN RBTH

Russia has taken initial steps toward filing a lawsuit in the World Trade Organization over sanctions imposed by the United States and European Union, the head of the trade negotiations department at the Russian Economic Development Ministry, Maksim Medvedkov, tells RBTH. Russia’s complaint is currently being heard by the WTO General Assembly, and Russia is considering specific steps toward filing a lawsuit against the U.S. and, potentially, other countries that have imposed restrictions on Russian companies. According to Mr. Medvedkov, such a lawsuit can be prompted by losses incurred by any Russian company, such as one entered on a sanctions list by the U.S., the EU, Canada, or Japan. Therefore, to file a lawsuit in the WTO, the Russian side must first produce a company that has suffered as a result of sanctions.“Our response to the unilateral steps by the U.S., the EU and several other countries was balanced and in line with Russia’s rights and obligations under its international agreements, including those of the World Trade Organization,” Russian Foreign Minister Sergei Lavrov said in an exclusive interview with RBTH. The U.S. and Europe have slapped trade and financial sanctions on Russian individuals and firms over Moscow’s position in the Ukraine crisis. Russia has responded by banning food exports from the EU and U.S. A key question is whether the sanctions might violate the rules of the WTO, which is a global trade platform for negotiating and for-

Chances of success While there have been minor cases involving sanctions in the history of the WTO, large-scale sanctions have never been applied to a member state.“WTO member states can introduce sanctions in some cases,

AFP/EASTNEWS

VIEWPOINT

Russia has questioned the legality of sanctions under WTO rules.

IN FIGURES

2 years is the length of time Russia has been a WTO member. The country spent 18 years in negotiations.

98% of world trade is controlled by WTO rules, according to Jorge Castro, a WTO lawyer.

for instance in the event of a war or an emergency in international relations, when restrictions are imposed in the interests of national security,” Mr. Medvedkov says. However, he continues, when the U.S., the EU and Canada were introducing their sanctions against Russia earlier this year, no country was at war with Russia. In practice, different countries have a different interpretation of the requirements of national security. For instance, Sweden once imposed restrictions on footwear imports for reasons of national security, arguing that minimal do-

mestic production was vital for maintaining war readiness. Jorge Castro, a counsellor at the WTO Legal Affairs Division, points out that the WTO currently unites 160 member states, with 98% of world trade under the control of WTO rules. “By joining the WTO, member states assume the obligation to refrain from imposing trade restrictions against each other. The main purpose of the organization is to find positive solutions to trade disputes. This is no place for resolving theoretical issues. It is a practical system intended to ensure a market balance,” he says. Most disputes inside the WTO are resolved early. Out of the 481 disputes initiated inside the WTO, only 268 ended in a panel discussion, and in only 18 cases in the history of the organization were final decisions issued. Speaking at a press conference in Moscow on Aug. 28, Economic Development Minister Alexei Ulyukayev said that Russia may give up its plans to file WTO suits if the West does not escalate the sanctions further. “The situation is dynamic and depends on partners’ behavior. If they show a certain de-escalation, we shall refrain from these measures; if not, we’ll speed them up,” the minister said.

Oil Russia is boosting energy ties with Asian partners as relations fray with the West

China Offered Stake In Oil Field

SPECIAL TO RBTH

Vladimir Mozhenkov, vice president of the AvtoSpetsTsentr Group

Chinese company CNPC may get a 10% stake in Vankor, oil major Rosneft’s biggest production asset, in exchange for $1 billion, Russian media report. ALEXEY LOSSAN RBTH

Chinese investors may receive up to 10% in the Vankor oil project of northern Siberia, one of the largest production assets of the Russian state-controlled oil company Rosneft. Russian PresidentVladimir Putin announced the outline of the plan at the construction launch of a new gas pipeline in Siberia, telling members of a Chinese state delegation that “the plan will secure state support, and we will encourage your participation.... There are no restrictions for our Chinese friends.” Russian newspaper Kommersant reported that the Chinese state company, China National Petroleum Corporation, or CNPC, may get up to 10% in Vankorneft for approximately $1 billion, citing an unnamed source who is familiar with the situation. Russia is expanding energy trade ties with China as tensions mount between Russia and its traditional export market, Europe, over unrest in Ukraine. In May, Moscow and Beijing ended a decade of talks over natural gas supplies, approving a mammoth 30-year contract worth $400 billion between Russian energy giant Gazprom and CNPC. The developing energy alliance between Russia and China carries outsized geopolitical significance, uniting one of the world’s biggest energy producers with one of its largest consumers at a time when relations are becoming more dif-

ALAMY/LEGION MEDIA

T

he two years since Russia joined the World Trade Organization have brought a number of benefits, due to the expansion of free trade. Indeed, one need look no further than Russia’s auto market to see a case in point. Of course, car dealerships in Russia began consolidating in the early 2000s, before Russia’s WTO membership. Foreign automakers had brought modern business processes, training programs, recruitment methods and certification, logistics and sales systems to Russia. This facilitated the creation of an advanced niche in the Russian economy. Since then, some €12-13 billion has been invested in dealership enterprises built by private investors in Russia. By the time Russia joined the WTO, car dealerships were springing up like mushrooms in Russia and foreign vehicles were extremely popular. None the less, Russia’s participation in the WTO served as a major step toward integration into the world business community. Lower import duties on automobiles opened doors for everyone involved: importers, dealers and consumers. Lower prices had a positive impact on sales. The market expanded year-on-year in 2012, and its decline in 2013 would have been much more dramatic had there been no customs duties. Even the Russian government’s protectionist measures – levying a recycling fee on importers on account of reduced import duties – had an entirely beneficial effect on the market. This made it possible for Russia to establish a business associated with vehicle recycling, which, in turn, stimulated demand. Russians started to get rid of their old cars and buy new ones. On the one hand, of course, automakers were the losers in that they had to pay a recycling fee. But on the other hand, the recycling fee created additional preconditions for buying a car. In other words, had there been no recycling fee, new car sales may have been lower. WTO accession not only spurred demand in the Russian auto market, but also helped establish an auto recycling process. Overall, more openness has been a positive.

Since being slammed with western sanctions, Russia’s Rosneft has stepped up cooperation with China.

ficult between Moscow, Brussels and Washington. Rosneft, Russia’s biggest crude producer, is also Russia’s largest oil exporter to China. In 2013 the Moscow-based company signed a deal with CNPC to export 360 million tons of oil over 25 years for $270 billion, with $17 billion to be

As a result of sanctions, Rosneft is unable to take out credit for more than 90 days, so looking to China is perfectly logical. paid up front. The company is to deliver another 100 million tons of oil to the Chinese company Sinopec. Rosneft and CNPC are also in talks concerning joint works on the Barents Sea and Pechora Sea shelves. But up until now, Rosneft has had no functioning joint ventures with Chinese companies, underscoring the importance of this

new deal. “This decision is driven by Rosneft’s financial needs rather than some potential benefit from a specific deal on the Vankor deposit,” says Anna Grinets, Chief Analyst of the Center for commodity-based economy at the Russian Presidential Academy of National Economy and Public Administration (RANEPA). In 2013 Rosneft net debt amounted to about $44.5 billion, while the company’s debt payments will peak in 2014-2015, with $30 million to be paid, according to Ms. Grinets. Moreover, as a result of U.S. sanctions, Rosneft is unable to take out credits for more than 90 days. Turning to China for investment appears to be the logical next step in this context, says Ms. Grinets. According to Ilya Balakirev, UFS chief analyst, the decision to sell a stake in the project is dubious but looks reasonable in the current circumstances. “Rosneft is seeking to refinance

a large debt that is worrying investors,” Mr. Balakirev says. “By selling a minority stake in a strategic asset, the company can raise about $1 billion without losing control of the field.” Such a sale would also be a political olive branch from Moscow to Beijing, easing the further expansion of Russian-Chinese relations in future, Mr. Balakirev says. The Vankor deposit, located in the north of the Krasnoyarsk Territory in central Siberia, was initially launched back in 1988. At the start of 2014 the initial recoverable reserves of oil totaled 500 million tons of oil and condensate and 182 billion cubic meters of gas. “TheVankor cluster is not a new, undeveloped or complex project. The deposit already has the entire infrastructure, including the Purpe pipeline. This means that the Chinese are being invited to join a developed and profitable project with no huge investment requirement,” Ms. Grinets says.


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SANCTIONS AND THE WTO Fyodor Lukyanov EXPERT

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he “war of sanctions” between Russia and the West over the Ukrainian conflict has created a new situation inside the World Trade Organization. For the first time, economic measures are being applied to a member state capable of large-scale retaliation. Previous instances of politically-motivated sanctions concerned countries of a different caliber. Take, for example, sanctions against Argentina over the Falklands conflict, or sanctions against Yugoslavia in the early 1990s. Russia is a different ball game, because of its size and its ability to reciprocate. Indeed, Russian President Vladimir Putin this summer introduced an embargo on agricultural and food supplies from a number of countries. Tellingly, the measure is titled, “On applying individual special economic measures aimed at ensuring the security of the Russian Federation.” This wording is deliberate and should be viewed in the context of Russia’s membership of the World Trade Organization, a body that aims to liberalize global trade. Article XXI of the General Agreement on Tariffs and Trade (GATT), on which the modern WTO is based, is titled “Security Exceptions.” It says that any member state has the right to take measures that it “considers necessary for the protection of its essential security interests … taken in time of war or other emergency in international relations.” That phrasing is quite loose: everyone can interpret security interests as they see fit, and practically anything can be presented as an “emergency in international relations.” President Putin has stressed that the measure does not run counter to Russia’s obligations in the WTO.“In our WTO accession agreement, we set it such that in the interests of ensuring the country’s security, we have the right to impose certain restrictions,” he said. “They have restricted access [for Rosselkhozbank] to credit resources in international banks ... In effect they are creating more favorable terms for their goods on our market, so our retaliatory steps are quite justified….” From the very start of this war of sanctions, both sides made statements threatening to contest the measures taken against them in the WTO. That was what Russian Prime Minister Dmitry Medvedev and Economic Development

Minister Alexei Ulyukayev said right after the “first alarm,” when the Obama administration decided to exclude several Russian banks from Visa and MasterCard payment systems. For its part, the EU threatened a lawsuit in response to the Russian embargo. However, so far neither has happened and is unlikely to do so. In a war of sanctions, each side maintains that it operates within WTO rules. But even if they manage to prove that the actions they take are in line with the letter of the agreements, the breach of their spirit is obvious. Decisions are driven exclusively by political logic. Rivalries are not economic in nature, but strategic and geopolitical. Economic governance institutions are becoming either an arena for — or instruments in — that confrontation. But of course this is not how it was all intended to be. The fundamental premise of the WTO and the other Bretton Woods structures

in the early 21st century was that there would be no more large-scale political confrontations in the world. Global economic interdependency would push traditional forms of rivalry into the background, and economic disagreements were to be resolved within the WTO and other similar institutions. Yet the crisis in this approach began long before the Ukrainian conflict. The accession of large developing economies, especially China, turned the WTO from an organization of likeminded countries into a structure which harbors different interpretations of “fairness.” There emerged a critical mass of countries seeking a different application of the same norms. Western founders of the global system realized that the instruments they created were beginning to contribute to the success of others. When economic competition between huge powers increases, it creates big waves in poli-

tics, for example in U.S.-China relations. The case of Russia makes this politicization obvious. Geopolitical rivalry between Moscow and its Western partners in the WTO actually never stopped. Sanctions against Russia show that the market decides things, until it runs up against the political will of the world’s strongest power. When that political will interferes, market forces retreat. Should this logic continue, the very ideological foundations of globalization come into question, because countries are closely following today’s events, extrapolating the meaning of the conflict for themselves. All the more so, since the United States itself initiated the creation of preferential trade zones instead of universal rules. Fyodor Lukyanov is the editor-in-chief of Russia in Global Affairs and chairman of the board of the Foreign and Defense Policy Council.

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RUSSIA NEEDS REFORMS, NOT A SANCTIONS WAR

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utual sanctions are always extremely unpleasant, and the application of sanctions and the “hot” trade war between Russia, Europe and the United States can have no good result. Today the world is going through a global systemic crisis comparable to the crises of the 1930s and 1970s. This is a very difficult situation that could aggravate the economic picture in Russia and Europe. However, the sanctions were not a precursor to Russia and Europe’s economic problems, as they arose much earlier. Rather, the sanctions are a consequence of the crisis. The European economy has been characterized by low or zero growth in recent years, and in turn Russia is balanced on the verge of recession. There is no recession in Russia yet, but there is a significant slowdown, for which there are several reasons. Firstly, many of the countries in the European Union - Russia’s main trading partner, accounting for more than 50% of turnover - have

experienced recession, and it would be strange to see rapid growth in Russia. Secondly, there are cyclical reasons: reduced investment activity by major corporations in 2012-2013, especially by state-owned corporations, and the investment cycle (for example, preparation for the Sochi Olympics). Thirdly, by 2008, the reserve of restorative growth had been exhausted. But in 2009, owing to the crisis, there was a significant decline in the economy, followed by a recovery which, for a short time, supported moderate economic growth. But the main reason for the economic growth slowdown is that the economic growth model for the 2000s, with its steady expansion in demand, has been exhausted. This is due to external circumstances, since oil prices stopped rising, as well as for internal reasons. Some economists call this the middle-income trap. Russia has become a country with high labor costs and relatively poor economic institutions, one of the indicators used in the World Bank’s Doing Business survey. According to per capita GDP dynamics, in recent years Russia has risen to the lower level of the developed coun-

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Russian innovation development was marked as a priority by Russia’s government in the mid-2000s. Economic growth based on innovation is now gaining new momentum, thanks to an unexpected push – economic sanctions imposed by the U.S. and the EU - which could accelerate the process of economic modernization.

September Monthly Memo: Cooperation on Terrorism? How and why did U.S.Russia counter-terrorism cooperation fail to reach its early promise? What needs to be achieved before U.S. and Russian negotiators can once again speak optimistically about how to combat new terrorist threats before they extend to Russia or to the U.S.? Find out in the latest RD monthly memo.

From Ukraine to Iraq - War Reporters at Risk

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TATIANA PERELYGINA

Vladimir Mau

tries, while the quality of its institutions has remained at the developing-country level. To date, this is the main structural problem in the Russian economy and it doesn’t have an easy solution. Businesses are willing to put up with relatively weak institutions in a low-cost environment or pay more when guarantees are provided by strong institutions. However, a combination of bad institutions with expensive labor is undesirable for entrepreneurs, and does not encourage investment. Economists spoke of this problem long ago. From an economic point of view, the change needed is simple: we need to transition from a demand economy to a supply economy – with economic stability and predictable rules of the game, available credit (which requires low inflation), and taxes acceptable to stimulate the development of production. Economic development is not straightforward. In the face of rising political tensions caused by the situation in Ukraine, part of the Russian political elite is beginning to rely on the mobilization of our society’s potential. Meanwhile, in today’s world it is very important not to impose further sanctions on ourselves. A much more effective response might be economic liberalization, which would provide the necessary modernization for institutional growth. This was the path that China took when faced with international sanctions following Tiananmen Square. Against this backdrop, China decisively strengthened economic reforms. And soon after, in 1992, the country experienced an investment boom. To all this we must add another structural problem: the need to modernize the welfare state. In particular, this means education, health care and pensions. In Russia, the welfare state was created in the industrial era and adapted to its needs. A person had to learn and practise one specialty, and life expectancy was below retirement age. Now the situation is different. To succeed in the labor market, a person should learn throughout his life and do different things. One visits the doctor not only out of necessity, but preventatively, creating a different burden on the health care system. In solving all of these problems, it is important to preserve our greatest achievement of the past 10-15 years – macroeconomic stability. It’s hard to find, but easy to destroy.

Quarterly Report: Russian innovation

In an exclusive interview, Olga Kravtsova, former director of the Moscowbased Center for Journalism in Extreme Situations, discusses the execution of American journalists in the Middle East by ISIS, the kidnapping of reporters in Eastern Ukraine, and the risks journalists take in order to provide coverage of military conflicts. Subscribe now at russia-direct.org/subscribe

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Breathing New Life Into “Crime And Punishment” Oliver Ready speaks to RBTH about his acclaimed new translation of Dostoevsky’s classic – and why the 19th-century Russian novel remains as relevant today as ever.

ANITA KONDOYANIDI

Literature New translation of Dostoevsky’s classic novel focuses on linguistic nuance and subtlety

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have a multitude of meanings. Raskolnikov says his heart is zloe. Evil? Spiteful? Nasty? For me, none of these. I chose something different, on the evidence of his character throughout the novel – as I understand it,” says the author. Completed in 1866,“Crime and Punishment” was immediately heralded as a great achievement by readers and critics alike. Its first partial translation (into French) appeared the same year. By the end of the 19th century, the novel had been translated into German, Polish, Italian and other European languages. The novel had a unique influence over world literature throughout the 20th century, and the profound existential questions it raises continue to strike readers as relevant today. “The preoccupations with the inauthenticity and virtuality of his own existence that bedevil Raskolnikov are now shared by many young people across the world,” Mr. Ready says. “Raskolnikov’s sense of impotence, of not being able to turn words into deeds, is as dangerous now as it ever was. There are, of course, many other themes that have lost none of their relevance: the human costs of capitalism, child

abuse, broken families and alcoholism.” Dostoevsky’s work is widely considered a portrait of the “mystery of the Russian soul.” He is often seen as the most “Russian” of all the great Russian writers. But the global popularity of his novels suggests that there is also something universal about his work. Asked about this, Mr. Ready responds that “the knee-jerk reaction would be to say that it is his fascination with extremes of character, of pride and humiliation. Actually, though, much of this could be found in the French and English novels that Dostoevsky devoured and even – in the case of Balzac – translated.” According to Mr. Ready, “one thing that is typically Russian about “Crime and Punishment” – or at least typical of the great Russian literary tradition – is its obsession with cultural inauthenticity, the fear that ideas and even values imported from the West, often questionable enough in themselves, can quickly become fake, cheapened and corrosive in Russia.” He continues, “this anxiety is already there in Pushkin and can still be found in Russian writers today.”

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The novel inspired artist Mikhail Shemyakin, who designed the sets for a ballet version.

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Oliver Ready, the translator of a new and evocative English version of Fyodor Dostoevsky’s classic novel, “Crime and Punishment,” seems to have almost a special relationship with the book’s anti-hero, Raskolnikov. In Mr. Ready’s take, Raskolnikov is most at home in the world of words, whether books, newspapers or letters from acquaintances and relatives. He analyzes them as if he were a literary critic, or a detective. He is not just a student and a murderer. He is a reader and a writer, whose literary debut, an article about crime, is one of the great missing clues in the novel. The very fact that Raskolnikov is a man of letters redoubles the importance of getting as close to the original text as possible. Out this year in Penguin Classics, Mr. Ready’s new translation of “Crime and Punishment” aims to preserve the original’s troubled and polyphonic narrative along with the varying language and vocabulary of its different characters. Mr. Ready, a research fellow in Russian society and culture at St. Antony’s College, Oxford, U.K., chose neither to use 19th-century English nor contemporary language. Instead, his vocabulary floats somewhere in the middle of the 20th century. He tries to avoid words that appeared after the 1960s. This makes the new translation’s language “modern, but not contemporary.” Earlier translations tended to smooth over Dostoevsky’s stylistic peculiarities, robbing the novel of the unique, jagged tone and nervous repetitions that best represent Raskolnikov’s anxious state. Mr. Ready sought to preserve these lexical peculiarities of Dostoevsky’s language in his own work, while also trying to maintain the novel’s hypnotic and compelling power. In doing so, he inevitably stumbled on some unique features of Russian that are so difficult to reproduce in English.“All those particles and adverbs, often denoting elusive emotions and emphasis rather than meaning – dazhe (even), kak by (as if), kak-nibud (somehow); all those deliberate – and accidental – repetitions; all those short, apparently simple words that actually

1. Tourists follow in Dostoevsky’s footsteps in St. Petersburg. 2. The cover of Oliver Ready’s new translation of “Crime and Punishment.” 3. Actors participate in Dostoevsky Day, which takes place in St. Petersburg on the first Saturday in July.

Literature Emigré is honored with the first street named after a Russian writer in the city

Writer Honored with New York Street It took fans of the Russian-American writer and journalist Sergei Dovlatov less than a year to get the street where he lived in Queens renamed in his honor.

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Sergei Dovlatov WRITER

ELENA BOBROVA RBTH

five op The t

al aft er d ark

MOSCOW BY NIGHT tou it rs f cap or e xploring the Russian

AFTER SUNSET, THE RUSSIAN CAPITAL IS A DIFFERENT PLACE. COOL BREEZES DRIFT IN FROM THE RIVER AND THOUSANDS OF LIGHTS ILLUMINATE THE CITY’S MANY PARKS. TAKE ONE OF THESE NIGHTTIME TOURS TO SEE MOSCOW FROM A DIFFERENT PERSPECTIVE.

Unable to publish his work in the Soviet Union, Sergei Dovlatov published a book a year for the 12 years between the time he emigrated to the U.S. in 1976 and his death in 1990. His works were finally printed in his homeland after perestroika.

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NewYork has honored the memory of RussianAmerican writer and journalist Sergei Dovlatov by naming a street after him in Queens. “The Russian diaspora has made a considerable contribution to the development of our city and we appreciate it, as is evident from the honoring of the outstanding Russian immigrant, who for many years lived in New York,” said city council member Karen Koslowitz at the unveiling ceremony on Sept. 8. Officials from the mayor's office and Dovlatov's widow, Elena, unveiled the first sign with the street’s new name, which was attached to a traffic-light pole at the intersection of 108th Street and 63th Drive in Forest Hills. Dovlatov wrote many of his most famous books on this quiet, unassuming street, including The Zone (published in 1982), The Compromise (1983),

Ours: A Family Album (1989),The Suitcase (1990) and A Foreign Woman (published in 1991).While living in New York, Sergei Dovlatov was able to publish his works in Russian, although in limited circulation and only in U.S. and French publishing houses. Practically unknown in his

VISIT RUSSIA The Visit Russia tour company offers night tours of Moscow by car or minivan with a personal guide. The three-hour tours are $84 and cover sites outside the city center, such as the Moscow City business district, as well as the capital’s best-known monuments. The tour includes a visit to Sparrow Hills and the main building of Moscow State University, where visitors can get an unforgettable look at the city from a special a viewing platform. visitrussia.com

CITY DISCOVERY For more adventurous travelers and lovers of urban legends, City Discovery offers a night walking tour through the secret tunnels of Metro-2, the KGB prison, and the infamous “middle of nowhere.” Participants will ride on a night tram, see Moscow’s “zero kilometer” and visit Khitrovka, the center of crime in early 20th-century Moscow. Adult tickets are $33. city-discovery.com/ moscow

homeland before perestroika, he began to become popular in Russia in the 1990s, with readers particularly responding to his sense of humor, his vivid characters and his skill at displaying all of the curiosities of Soviet life. In NewYork, he also edited “The New American,” a liberal,

CITY SIGHTSEEING MOSCOW Moscow’s traffic jams are not severe after dark, making it easier to drive through the city streets on City Sightseeing Moscow’s “Moscow Never Sleeps” double-decker bus tour. Buses depart from Red Square every day between 7:30 p.m. and 10 p.m. The hour-long sightseeing trip is an excellent way to see the major sights of Moscow’s historic center. Adult tickets for the hop-on-hop-off tour are $23 and are valid for 24 hours. city-sightseeing.com

All of these tours are conducted in English, but guided tours in other languages are available upon request

Russian-language emigré newspaper, and was later a regular contributor to The New Yorker. “I would like to thank every single person who signed the petition, friends and people we don’t know, everyone who lent their voice to this initiative, who wrote letters. Even though a large number of those voices came from outside the United States, they still mattered and they were counted. So thank you. Democracy at work,” said Dovlatov’s daughter Katherine. In an interview earlier this year, Katherine said, “My mom and I are both very excited, happy, grateful, and a little sad. We both feel that this is a great honor, especially in a country that became Sergei Dovlatov’s second and last home. I also think it is fitting that it happened in New York, because it was here, in America, where my father became what he always dreamed of being: a published, working writer.” The initiative was started by New York resident and Dovlatov fan Alex Rubin. He launched an online petition proposing to rename the street in November 2013. In less than one year, it received the 18,000 signatures required to submit to the New York City Council.

TOURS BY LOCALS The Moscow branch of Tours by Locals offers a variety of night tours of the capital, for groups (up to $ 240 for up to 8 people) or individuals. The average length of a trip is three hours, but the route is entirely dependent on the wishes of the participants. Every Tours by Locals guide is ready to offer a unique route through the city. toursbylocals.com/ night-moscow

MOSGUIDES Night Tours in Moscow from Mosguides offer a variety of routes and schedules. The participants themselves determine the duration of the tour and the company’s guides can book at table at a special restaurant or club in advance. Tours can be taken on foot, by car or by boat. Price and schedule of tours available upon request. en.mosguides.ru/ moscow/night

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