Belarus’ stage-managed democracy fails its test from the West

Graham Stack in Minsk for business new europe (www.businessneweurope.eu)

Belarus President Alexander Lukashenko has recently been trumpeting his desire to hold ‘unprecedently fair and open’ parliamentary elections as part of a thaw in relations with the West. Underlining his intentions, he demonstratively provided a warm welcome to a contingent of 450 observers from the Organisation for Security and Cooperation in Europe (OSCE).

He also promised major improvements to the electoral process in a country widely billed as ‘Europe’s last dictatorship’. But today, Monday September 29, revealed the limits of ’stage-managed’ democracy. The OSCE observers refused to play their scripted role – and declined to recognize the elections as free and fair.

In contrast to Russia’s ‘managed democracy’ where only a handful of Western election observers were invited to elections in 2007, Belarus’s ’stage-managed democracy’ actively welcomed a large OSCE contingent, a fact that Anne-Marie Lizin, Vice President of the OSCE Parliamentary Assembly and special coordinator of the OSCE short-term observers, warmly praised in a Minsk press conference discussing the OSCE mission’s findings September 29.

However, despite opposition fears, the OSCE observers did not allow themselves to deceived by appearances, and refused to find the elections democratic.

“The clear signals to improve the election process were not implemented and substantial improvements are required if Belarus is to conduct genuinely democratic elections,” said Lizin, adding that the elections “fell short” of democratic standards.

The OSCE’s findings will be a setback for Lukashenko who has staked a lot of personal credibility on securing Western recognition for the parliamentary elections.

Lukashenko declared last week that if the West failed to recognize the elections as democratic, he would break off the nascent thaw in relations.

The OSCE observers criticized specifically the lack of transparency in vote counting. In 48% of polling stations, the transparency of counting was assessed as bad or very bad. In 35% of cases, OSCE observers were prevented or hindered from observing the count.

The OSCE was broadly critical of most aspects of the elections, saying in a statement that “the legislative framework continues to present obstacles for elections in line with OSCE commitments. The media coverage of the campaign did not provide meaningful information for voters to be able to make an informed choice. Political parties played a minor role and restrictions imposed by the state authorities did not allow for a vibrant campaign with real competition.”

OSCE representative Geert Ahrens however expressed optimism that the originally expressed intentions on the parts of the Belarus authorities to hold fully democratic elections, while not properly implemented, still provided the basis for ongoing dialogue and for improving relations with Europe.

“We would only be too happy to come up with a positive report,” said Ahrens, who still spoke of a ‘wind of change’ in Belarus. Lizin also said it was possible that the good intentions expressed by the country’s leadership had simply not be adequately communicated down the line.

But for all the diplomatic phrases, OSCE’s refusal to recognize the elections as democratic is a blow to authoritarian President Alexander Lukashenko, who likes to be seen as in control of everything.

The OSCE formula that Belarus has shown enough good intentions and made sufficient minor improvements for dialogue to continue could be face-saving on both sides.

However, putting all the diplomatese into perspective, Lizin, when asked to compare Belarus elections with Russia’s ‘managed democracy’ parliamentary elections of 2007, where she had been an observer in Vladivostok, stated unequivocally that the Russian poll had been much more democratic.

Opposition also lose

The elections were not only disappointing for Lukashenko, but also for his opponents. No democratic candidates managed to win their constituencies in Belarus’ first past the vote system where party allegiance plays virtually no role.

This constituted a major surprise. It was widely anticipated that the authorities would actively ensure the election of a number of opposition candidates to the parliament. Lists of opposition candidates supposedly prescripted for election victories were circulating on the Internet on the eve of elections.

However, when late in the night head of the Central Election Commission Lidia Yermoshina announced the voting results in 100 out of 110 electoral districts, not a single opposition candidate had won in his or her constituency. The opposition alliance United Democratic Forces fielded 70 candidates out of a total of 264 competing for the 110 seats.

Opposition figures attributed their failure to enter parliament to lack of access to media and electoral manipulation.

In addition to the non-transparency of vote counting referred to by the OSCE, opposition figures pointed to the prevalence of early voting, which reached up to 92% in voting wards largely populated by students.

Alla Salivonchik, 42, the head of a student dorm, told bne how she checked off the names of the students who had been to vote, “a relict from Soviet times” she said.

Opposition figures argue that, during early voting, sealed urns were not protected at night against simple substitution. In comments to bne on the day of voting, Jens Eschenbacher, member of the OSCE election observation team, confirmed to bne that the high level of early voting was a “Belarus peculiarity” and the overwhelming majority of election observers arrived too late to monitor the early voting adequately.

However, the final OSCE report had little to say on the prevalence of early voting.

“International observers just don’t grasp that it’s possible to substitute entire urns of votes,” Sergei Kolyakin, leader of the Belarus Communist party said at a press conference on election day. “They can’t get their mind around the idea. It’s not European.”

Kolyakin and Vladimir Nistyuk, both opposition candidates running for Minsk constituencies, also alleged that a major goal of electoral manipulation was to ensure the minimum turnout of 50% in Minsk, where voting activity on election day seemed very low frequency.

The final turnout countrywide was 75% according to the Central Election Committee,

Most people questioned by bne on the streets of Minsk confirmed that they had already or intended to vote.

Their almost unanimous complaint, however, was about the lack of information on candidates. Most voters talking to bne said they only learnt in the polling station which candidates were running in their constituency. They made their decision on the basis of the scarce information provided about the candidates on the premises of the polling station itself.

“We chose the youngest candidate, because the country’s future is in the hands of the young. Older people will simply sit in the parliament and do nothing,” said Anna, 54 and Anatolia, 57, now pensioners, formerly engineer and doctor respectively. Like most Minsk inhabitants interviewed on the strets, they declined to provide a surname. The 30 year old candidate they chose was in fact a communist.

“I chose the candidate on the basis of from a big rather than a small town, and high level of education,” said a 19 year old student who declined to give her name.

Lena, a 30 year old university lecturer said she did not yet know who she would vote for, but she would choose an opposition candidate if there was one running in her constituency. Otherwise she would go by level of education. She declined to give a surname in case she lost her job.

Alla Salivonchik, 42, and Elena Panuryna, 44, both said that she had voted for factory directors, as people who had achieved something and were not interested in power in and for itself.

Asked about their attitude to Lukashenko, passers by either declined to answer or said there was no current alternative. Only Sergei, a 21 year old student who wasn’t intending to vote, said that he was against the president.

Protestors allowed on the streets

While failing the electoral test, stage-managed democracy’s one real masterstroke yesterday was to allow opposition forces to take to the streets without any accompanying police presence.

This contrasted sharply with the harsh treatment meted out by Russian riot police to  similar unauthorised rallies last year, which was broadcast round the world.

Following the end of polling, 1000-1500 opposition supporters, mostly young, assembled outside the headquarters of the Central Electoral Committee on Minsk’s October Square for an unapproved demonstration together with opposition leaders Alexander Kozulin and Alexander Milinkevich and a large foreign press contingent.

Among the crowd were an Orange-style youth group called Young Guard who pitched symbolic tents on the square, reminiscent of the tent cities of Ukraine’s Orange Revolution in 2004. Young Guard chanted for an end to the Lukashenko regime.

Young Guard members however refused to comments on ties to organization in the Ukraine.

With no police presence anywhere to be seen, the Young Guard lit flares, hoisted flags and led the rally on an colourful unapproved march down Minsk’s main street, Independence Prospect, even pausing provocatively in front of the feared KGB headquarters. They then proceeded to the Government building on Lenin Square, where they called for the release of a number of political prisoners.

With still no single policeman in sight, the demonstrators marched back up to October square where they were addressed by Kozulin, who asked them to disperse peacefully.

In comments made to bne during the demonstration, Kozulin, recently released from jail, expressed fears that the West could lower its demands of Belarus regarding human rights and democracy in exchange for Belarus moving away from its close alliance with Russia.

“The danger exists, especially after the Georgian conflict. Lukashenko knows to exploit it,” he said.

Belarus’ stage-managed democracy still to lack opposition

Graham Stack for business new europe

Despite numerous declarations by President Alexander Lukashenko in advance that the parliamentary elections held yesterday September 29 would be democratic, not a single Belarusian opposition candidate was elected to the Belarusian House of Representatives.

During an opposition demonstration after end of polling, opposition leader Alexander Kozulin, only recently released from prison, said it was already clear that leading opposition candidates were trailing in their constituencies.

This was despite the fact it was widely anticipated that the Lukashenko administration would allow a number of opposition candidates to be elected to improve the country’s standing in the West.

Kozulin’s fears were later confirmed when head of the Central Election Commission Lidia Yermoshina announced the voting results in 100 out of 110 electoral districts. Not a single opposition candidate had won in his or her constituency.

Belarus operates a first past the post electoral system without party lists. Many voters questioned by bne on the streets complained about the lack of information about the candidates provided. Most voters seem to have decided on the premises of the polling station for whom to vote, basing their decision on age, education and experience of the candidates, as detailed briefly in the electoral information provided at the polling station.

In addition to the lack of information, opposition figures pointed to the very high level of early voting as providing opportunity for falsification of the elections by simply substituting sealed urns.

Belarus had demonstratively extended a warm welcome to international election observers, including a large contingent from the Organisation for Security and Cooperation in Europe (OSCE).

The ’stage-managed’ democracy approach differed strongly from Russia’s ‘managed democracy’ where the number of Western election observers for parliamentary  elections in 2007 was strictly limited.

In comments to bne on the day of voting, Jens Eschenbacher, member of the OSCE election observation team, confirmed that the high level of early voting was a ‘Belarus peculiarity’ and most election observers arrived too late to monitor the early voting adequately.

The OSCE will present its findings on the elections at a press conference later today.

Opposition leaders also pointed to the fact that very few opposition representatives were allowed to monitor the vote counting process.

However, the Belarus regime will claim that the presence of OSCE observers and the participation of opposition candidates in elections suffices for the elections to be declared free and fair.

In an interview with Western press last week, Lukashenko said he would break off the nascent thaw in relations with the West if the elections were not recognized as such.

In a further manifestation of Alexander Lukashenko’s ’stage-managed democracy’, a unapproved Orange-style opposition demonstration numbering 1000-1500 marched last night from the Central Election Commission headquarters in the Palace of the Republic on Oktyabrskaya Square past the feared KGB headquarters on Independence Prospect down to the Parliament on Lenin Square.

They encountered absoutely no police presence – in strong contrast to the harsh treatment meted out by Russian riot police to similar unapproved rallies in Russia last year, and broadcast worldwide by TV channels.

The demonstration then returned to Oktyabrskaya square where Kozulin called on it to disperse peacefully.

In comments to bne, Kozulin called Belarus' new economic policy of privatization and improving the investment climate “superficial and only for show”. He said he did not expect any improvement in the political climate to come from increasing foreign investment in the country. However, he declined to expressly warn Western investors from investing in the country.

Kozulin told bne he feared that the West would lower the demands it was making of the Belarus regime in an effort to woo Belarus away from its alliance with Russia, and in return for opening the economy to Western investment.

Russian oligarchs, state banks take advantage of financial turmoil

Graham Stack for business new europe (www.businessneweurope.eu)

With Russian banks reeling after September’s stock market sell-off and liquidity shock, cash is king. Oligarchs and state companies with deep pockets have launched mopping up operations.

Mikhail Prokhorov, flush with an estimated $10bn after selling his stake in metals giant Norilsk Nickel earlier in the year, on September 23 acquired a 50% stake in Russia’s largest investment bank Renaissance Capital through his Onexim Group.

Prokhorov paid only a knockdown price of $500m for the 50% stake, even though Renaissance Capital was valued at up to $4bn by VTB in failed acquisition talks a year ago. According to Vedomosti, before the onset of the liquidity crisis, Western investment banks valued Renaissance Capital at $7bn-10bn.

In an interview with Kommersant in June on his future investment plans following the sale of the Norilsk stake, Prokhorov said his philosophy was “to sit by the river and wait for a good asset to float by.”

A bne source recently met with Dmitry Razumov, general director of Onexim, who said he was excited about having a lot of cash to do “great distressed deals.”

Renaissance Capital insists the deal was the result of long negotiations, not of the stock market crash. The truth is probably somewhere in between: Prokhorov had been looking to buy into Renaissance Capital, with which he had links in the 1990s, but the bank was not for selling. Then came September’s crash.

Renaissance Capital’s owners deny rumours that the bank got into financial difficulties after the huge sell-off in the Russian market, saying the bank had not delayed a single payment and suffered no losses or writedowns. However, Vedomosti quotes insiders as saying that the bank had serious problems with liquidity and needed to raise $800m. In the end, according to Vedomosti, Prokhorov picked up the stake in Renaissance Capital for half of a previous offer.

Cash in hand

Prokhorov is one of a number of oligarchs who sold assets in the past year – and now have cash in hand to spend.

Another is oligarch Filaret Galchev, owner of Russia’s largest cement producer Eurocement, which acquired 6% of Swiss cement giant Holcim on the open market on September 23. That 6% of Holcim cost $1.72bn at the closing share price of September 22. Galchev is flush with cash after slashing his stake in Russia’s largest bank, Sberbank, over the last year from 3% to 1.85% for around $1bn. And it seems he has put this to good use.

Attention will now shift to the investment plans of Galchev’s fellow Sberbank shareholder, oligarch Suleiman Kerimov. Kerimov is a cash king in Prokhorov’s league. Over the last year, Kerimov cut his Sberbank stake from 6% to 1.5%, sold his stake in silver producer Polimetal for around $1.8bn, in a major construction project for $3.5bn, and in NTK cable TV operator for another $1.5bn.

The Wall Street Journal revealed on June 30 that Dutch bank Fortis had appealed directly to Kerimov’s Millennium Fund for a €400m cash injection in the context of a share issue. A flurry of other reports point to Kerimov buying into other major European banks, including Deutsche Bank and HSBC, following the plunge in their share prices.

With stocks in Russia now cheap as chips, and banks and real estate confronted with liquidity problems, the time might have come for Kerimov to make a cash-fuelled comeback to Russia.

State makes inroads into financial sector

Apart from oligarchs with war chests, state banks and state-linked companies are well placed to mop up stricken credit institutions.

The first bank to run into difficulties, investment bank KIT Finance, sold out to Leader asset management company, a Gazprom affiliate. And on September 23, state development bank VEB acquired top-30 bank Sviaz Bank after it also defaulted on obligations.

Most ominously, rumours are swirling that Troika Dialog, Renaissance Capital’s arch rival investment bank, is in trouble. A number of media reports said Sberbank could acquire a stake in Troika Dialog.

Alternatively, according to Interfax’s sources, Troika could receive debt financing from Sberbank, in particular a short-term loan for $300m at a high interest rate. Vedomosti sources put the size of the loan at $500m. Sberbank has declared it wants to move into investment banking as part of its new strategy under CEO German Gref.

Russia’s second largest state-owned bank VTB is already a major player in investment banking, having set up its own division. Were Troika Dialog to sell up, it would cast doubt on the future of stand-alone investment banks in Russia, just as it has in the US.

And were Sberbank to acquire Troika, it would mean the brashest proponents of Russia’s free market – its freewheeling and successful home-grown investment banks – had finally come under the spell of the state.

Financial crisis causes assets to change hands

Graham Stack for business new europe (www.businessneweurope.eu)
State-owned VEB, also known as the Development Bank, agreed to buy a 98% stake in top thirty private bank Sviaz Bank, which failed to meet obligations last week. This was the first government bail out of a major private bank since the stock market sell off and liquidity crunch last week.

Sviaz Bank, although a private bank, is involved in distribution of pension money, making it too important to be allowed to fail.

“Svyaz Bank bears a large social responsibility for transferring money for the payment of pensions and social benefits … across the entire country,” a Sviaz Bank statement said yesterday.

Sviaz Bank is closely connected with state company Russian Post that distributes pensions through its vast network of post offices.

Sviaz Bank CEO since autumn 2007 is Alla Alyoshkina. Alyoshkina held a senior position in Russia’s largest bank Sberbank until Sberbank management was changed last autumn.

Alyoshkina is seen as very close to Andrei Kazmin, former Sberbank CEO until the management change last year. Media reports allege she is his common law wife.

Kazmin was reshuffled from head of CEO to head of Russian Post, and Alyoshkina move to head Sviaz Bank was obviously connected with his move to the post office.

As of August, Svyaz Bank held 60 percent of its assets in Russian equitiesand found itself unable to answer margin calls from its creditors last week.

Investment bank KIT Finance found itself in a similar position last week, and sold out to Leader asset management company, a Gazprom affiliate.

And on Monday September 22, Russian investment banking was shocked by the news that metals oligarch Mikhail Prokhorov had agreed to buy a 50% stake in top investment bank Renaissance Capital for only $500m.

Despite the deal, Fitch Ratings downgraded RenCap’s individual rating to D from C/D and the outlook for its default rating to negative from stable yesterday September 23. Standard & Poor’s placed Renaissance’s long-term rating on credit watch for a downgrade, citing liquidity concerns.

On Monday September 22 rumours were also swirling that Sberbank was in talks to take a stake in Renaissance’s arch rival investment bank Troika Dialog. Later in the week, Sberbank denied it was considering acquiring Troika.

IN other banking sector ownership changes, Rossiisky Promyshlenny Bank, or Rosprombank, has been sold to a foreign investor, a banking source told Prime-Tass Tuesday, September 23.

Also, Ivan Tyryshkin, the former CEO of Russian investment bank Aton Capital, has bought Russia’s Pioglobal Asset Management, according to Prime Tass.

Pioglobal Asset Management was owned by its CEO Yevgeny Kogan and Russian tycoon Alexander Gaidamak, according to business daily Kommersant. Kogan and Gaidamak also own investment bank Antanta Capital.

The deal comes in the wake of severe losses incurred by Pioglobal Asset Management as a result of the recent stock market meltdown, Kommersant reported.

Finally, Deutsche Bank, which took over United Financial Group from former Finance Minister Boris Fyodorov in the period from 2004 to 2006, has recently concluded a deal to buy another of Fyodorov’s assets, UFG Asset Management, according to Kommersant.

Sistema Hals neck-deep in debt

Graham Stack for business new europe (www.businessneweurope.eu)

Sistema Hals tops the list of Russia’s most financially endangered real estate companies, in the wake of the financial storm that has swept over from Manhattan to Moscow.

“All real estate companies are having problems due to the financial crisis, but HALS are right out in front with $1.2bn debt, and only $30-$40m on its books. HALS in in trouble,” says UralSib real estate analyst Eldar Vagabob.

Confirming the developer’s difficulties, Sistema HALS announced Wednesday 17 that it would sell almost a quarter of its illiquid projects to raise up to $500m cash. Sistema Hals stock has fallen 66% since the beginning of the month.

“They’re in danger, but they won’t go bust,” argues Rencap’s Alexei Yazykov, pointing to the Sistema parent holding’s deep pockets.

Sistema Hals is a subsidiary of Sistema AFK, owner of Russia’s largest mobile phone operator MTS. “Sistema automatically covers for them, so they will find finance on a holding level if need be,” says Yazykov.

According to Vagabob, HALS has not only strong financial support, but powerful political patrons. Sistema holding owner, oligarch Vladimir Yevtushenkov, is a close friend of long-serving Moscow mayor Yury Luzhkov, and the concern was created in the 1990s on the back of Moscow’s fixed line operator and other municipal assets.

Critics says that precisely this powerful backing has created the moral hazard allowing HALS to run up mountainous debt without real cash flow.

In particular, Yevtushenkov’s appointment of his 26-year-old son Felix as president of the real estate division in 2006 raised eyebrows. Such apprehensions only increased at the end of May, 2008, when Yevtushenkov junior announced immediate plans to raise a further $600m debt, despite the credit crunch.

Six weeks later, his father removed him as CEO, replacing him with the experienced Sergei Schmakov. But the move now seems to have come too late.

Sistema HALS specializes in high-end commercial properties, including building the Moscow headquarters for German industrial giants Siemens and Daimler Benz, and launching projects for the Sochi Winter Olympics in 2014.

If HALS ran into real trouble, it would be highly embarrassing for Moscow city hall, and the inbred Moscow development sector, shortly before Mayor Luzhkov is due to depart office and would like to secure succession.

Storm clouds around the PIK

Storms clouds are also seen to be gathering around major residential developer PIK.

Fitch Ratings put PIK on negative rating watch on Friday, September 18.

Fitch estimates that half of PIK’s total gross debt matures before 31 December 2008 – placing it in a very tricky position.

Rencap’s Alexei Yazykov however disputed this.

“According to our information, PIK has total debts of $1.5bn, $900m of which is short-term. But with short term we mean within twelve months. They may have difficulties funding future projects, but they won’t go bust.”

Vagabob also argues that, compared to Sistema HALS, PIK has “stronger balance sheets and greater exposure to residential projects with pre-sales supporting cash flows.”

As recent as September 15, PIK was able to draw a $230m Sberbank loan to finish payment on a $350m project.

The loan also points to PIK’s good links to the largest Russian banks.

PIK does not have the same level of backing of Sistema HALS. But, as Yazykov and Vagabob point out, as Russia’s largest developer of mass residential housing, it has political significance nonetheless. Acceleration of mass housing construction is a key plank in President Dmitry Medvedev’s programme.

“Big state banks would be told to rescue it should anything happen,” says Yazykov.

But even if none of the large companies were to go bust, many projects will now be put on ice. Sergei Polonsky, chairman of non-listed Mirax, one of the main builders of Moscow’s prestigious City project, said Wednesday his company would not “start any new construction work nor take a single credit nor buy any new projects,” according to Vedomosti.

The real estate sector is particularly hard hit by the financial crisis, argue Fitch, because of the debt-intensive business model, with cash flow only coming late in the day.

Besides Sistema Hals and MIrax, Fitch include LSR Group and Open Investments on their negative outlook list.

However, Alfa Bank’s Elena Mills points out that individual business models vary hugely from company to company within the sector.  AFI Development, for instance, counts as a cash rich company.

According to Natalia Oreshina of commercial real estate agency Art Property, smaller speculative operations will suffer. “Every second company has been trying to invest in real estate without doing the calculations. There has been a lot of speculation.”

Now speculation is focused on who is going under first.

Russian state banks make headway in Ukraine

Graham Stack for business new europe

In his first policy speech as a presidential candidate back in February, Dmitry Medvedev called on Russian companies to expand abroad via foreign acquisitions. Russia’s leading banks have followed the president’s orders to the letter.

Since taking over at the helm of Russia’s biggest bank Sberbank in November last year, German Gref has launched a new expansion strategy and the first port of call was Ukraine. True to his word, within two months of his appointment Sberbank had acquired a Ukrainian subsidiary, the smallish Kyiv-based NRB.

In March, Gref explained his strategy for NRB: to inject $150m into NRB capital in the short term, an 11-fold increase, and $400m over the longer term, thus lifting NRB into the country’s top-10 list of banks within three years. Gref said the number of branches would surge 10-fold by 2010 from the current 25 to 250. Implementation of the bank’s new strategy took its first big step in August with a full-scale rebranding of the bank from NRB to its new name Sberbank Rossii – making no bones about whose bank it is.

Although this was a pioneering strategy for Sberbank, it was merely following in the fresh footprints of Russia’s second largest bank, state-owned VTB.

In the first half of 2007, VTB acquired two Ukrainian banks and merged them in the second half. “After a period of rapid growth, VTB is [Kyiv stock exchange] listed and shot up to become Ukraine’s 11th biggest bank,” says Millennium Capital’s Viktoriya Bezverkha. “In the first seven months of 2008, VTB Ukraine’s assets have grown 60% compared to 20% for the industry, mainly due to extremely rapid retail expansion.” VTB has set its sights on being one of the top-three banks within two or three years, an aim that Bezverkha finds “very plausible.”

With much of the Ukrainian banking sector overly reliant on wholesale funding from abroad to fund its business growth, having a large parent bank like VTB or Sberbank lends a considerable competitive advantage. Most analysts believe Russian state banks, with their huge assets, stand to gain relative to their private competitors as the credit crunch dries up access to cheap foreign funds, which in turn will boost the competitive position of their subsidiaries in Ukraine.

Russia gets a head start in the Arctic race

Graham Stack for Russia Profile

Despite media hysteria about alleged conflicts looming over Arctic resources, most experts say Russia is playing a constructive role.

Russia’s planting of a titanium flag on the seabed at the North Pole last summer was one of the media eventsof 2007. In combination with soaring energy prices and melting Arctic ice, the images sparked sometimes wildly speculative panic-mongering about the “coming Arctic war.”

In fact, the hype around the flagplanting was little more than an election campaign gag for the pro-Putin United Russia party – the United Russia flag was one of the items deposited on the seabed in a time capsule, and expedition leader, famous explorer Artur Chilingarov is a United Russia deputy.

But there was a scientific purpose to the expedition as well: to gather seabed samples. They were required to support of Russia’s claim that the submarine Lomonosov ridge running through the Central Arctic is an extension of Russia’s continental shelf.

Russia is filing its claim in the framework of the United Nations Convention on the Law of the Sea (UNCLOS). UNCLOS allows countries to expand their maritime Exclusive Economic Zones (EEZ) beyond the current 200 nautical miles from the coastline up to a maximum of 350nm, in the case that their continental shelf extends so far out to sea. A country has sole rights to exploit mineral deposits located in its EEZ.

And for a country like Russia that positions itself globally as an all-round energy supplier to Europe and beyond, the Arctic’s oil and gas resources constitute not just a source of extra income, but crucial to the Kremlin’s plan of building Russian energy companies into global majors.

This might be a source of friction were Arctic resources tantalisingly outside of Russia’s reach. But in fact the lion’s share of Arctic hydrocarbons seem to be located in recognized Russian waters. Making Russia the least likely country to launch aggression to change boundaries.

A tale of two studies

July 23, 2008, saw the prestigious United States Geological Survey (USGS) publish its widely awaited official analysis of the oil and gas riches of the Arctic. The document is destined to become a key reference point for US policy in the area.

The USGS study trumpeted that the Arctic “may constitute the geographically largest unexplored prospective area for petroleum remaining on Earth.” According to the survey, Arctic resources account for about 22 percent of the undiscovered, technically recoverable resources in the world: about 13 percent of the undiscovered oil, 30 percent of the undiscovered natural gas, and 20 percent of the undiscovered natural gas liquids in the world.

The USGS survey, however, ignores the very different findings of a Wood Mackenzie survey published November 2006. Wood MacKenzie’s study found that the Arctic only contained 3% of the world’s recoverable hydrocarbon reserves. “The Wood Mackenzie is proprietary and we haven’t bought it,” laconically explains the leader of the USGS Arctic team, Don Gautier.

In stark contrast to USGS’s enthusiam, Wood Mackenzie’s lead author, Andrew Latham, commented, “our assessment basically calls into question the long-considered view that the Arctic represents one of the last great oil and gas frontiers and a strategic energy supply cache for the US.”

Without entering into details of methodology, the huge discrepancy between these figures shows just how much remains basically guesswork. And memories of the hyperbole about Caspian Sea resources in the 1990s should incline observers to prefer the more conservative estimates.

But just as significant as their contradictions on quantity, are the studies shared findings on the quality of the Arctic’s hydrocarbons.

Firstly, both studies agree that the Arctic’s hydrocarbon resources consist predominantly of natural gas. ‘Arctic resources are gas-prone with around three times more gas than oil,’ according to USGS’s Don Gautier. According to Wood Mackenzie, 85% of the discovered resource and 74% of the exploration potential is gas.

The second shared finding is that, according to Gautier, while 84% of the undiscovered oil and gas is indeed offshore, most of it “lies within national boundaries as currently defined.” This means the UNCLOS rules on extending those boundaries are in fact of secondary importance.

Thirdly, and crucially, most of the gas is in the Russian sector. “The West Siberian basin in outstanding for gas,” is one of USGS’s main conclusions, and the East Barents Sea is also ranked excellent. Around 60% of total Arctic gas lies squarely in the Russian EEZ.

So it seems Russia has already won the ‘coming Arctic war’ without a shot being fired.

UNCLOS is no cause for alarm
But this still leaves around 30% of Arctic resources lying more than 200 nautical miles offshore. UNCLOS, and it’s expert Commission on the Limits of the Continental Shelf (CLCS) will decide who can claim jurisdictions over these areas.

This is where Russia’s controversial claim to the North Pole, i.e. the Lomonosov ridge, comes in.

Russia’s claim to the Lomonosov ridge is indeed disputed by Canada and Denmark – but purely within the legal framework of UNCLOS. All three countries have voluntarily signed up to accept its findings, and no party has ever said they might not do so.

The crucial point is that all signatory states have committed themselves to UNCLOS precisely as a non-conflictual, impartial means of resolving questions of marine jurisdiction. Only the US refuses to sign – because of the impingement of sovereignty this involves.

“Rights to the resources of the continental shelf beyond 200nm have been enshrined in international law since at least 1994, when UNCLOS entered into force and so far all of the Arctic states have followed the procedures established under UNCLOS for claiming those rights,” says Martin Pratt, head of research at Durham University’s International Boundaries Research Unit (IBRU). IBRU published the definitive map of Arctic boundaries August 5, 2008.

According to Pratt, “all the available evidence still points to a peaceful division of the Arctic.”

“The conflict potential is inflated mainly because people find it exciting to talk and write about, and perhaps also to some extent because some people miss the cold war,” argues Indra Øverland, Head of the Energy Program at the Norwegian Institute of International Affairs (NUPI). “There are in fact not more territorial disagreements in the Arctic than in most other parts of the world. Such disagreements are a normal part of inter-state relations.

The perceived ‘race for the Arctic,’ according to Øverland, is merely a reflection of a UN ruling that a country has 10 years to make claims beyond the 200-mile zone.

Since Russia was one of the first to sign up, in 1997, it is compelled to get a move on in filing its claims.

“Russia does play by the rules laid down in UNCLOS, and agrees with the other Arctic nations that this convention is the basis for future developments in the region,” says Alf Håkon Hoel, head of the politics department at the University of Tromsø in the Norwegian Arctic.

“But that doesn’t mean that the Arctic coastal states aren’t keen to secure rights to exploit resources in such areas in the future,” counters Pratt.

“That is the process in which Russia is currently engaged with the Commission on the Limits of the Continental Shelf,” he continues, “and once the outer limit of the Russian continental shelf has been defined, it won’t be able to claim sovereign rights over any other areas of Arctic seabed.”

However, the idea that signatories to a UN convention regulating maritime jurisdiction would then come to blows over its findings, is as absurd as suggesting war could break out between Germany and Poland over voting rights in the European Commission.

Moreover, the timescale of the division and exploitation of the Arctic is likely to stretch decades into the future, with the UN’s Commission on the Limits of the Continental Shelf (CLCS) not due to complete its work till 2020.

And only when all disputes have been solved, will it be possible to commit the massive investment and start the pioneering work needed to get at oil and gas lying far offshore.

“Referring to the extension of the continental shelf beyond 200 miles, I would say that possible resources in this area will only be relevant in a much longer time perspective, for technical and economic reasons,” argues Arild Moe of Norway’s Fridtjof Nansen Institute.

“There is no imminent conflict over resources there, of which we know little and about which the most recent USGS study is not particularly optimistic,” says Moe.

Technology, not territory, is the key to the Arctic

The barrier Russia and other countries face in accessing Arctic resources is not connected with maritime jurisdiction, but with technology.

The most ambitious current Arctic project underway is Gazprom’s giant Shtokman field in the Barents Sea. With 3.8 trillion cubic meter of natural gas and more than 37 million tons of gas condensate, the field contains enough gas to fuel Europe for seven years.

But the question is how to get it. The field is 550km off shore from the port of Teriberka, 4000m beneath the seabed. Further hazards include icebergs, drift ice, sub-zero temperatures polar nights, megawaves and an uneven seabed. Quite simply, nothing like this has ever been attempted.

“Nobody has yet attempted multi-phase gas flow transportation over such a distance, and that’s the main technical and technological problem today,” Alexander Selin,an official at Shtokman license holder Sevmorneftegaz, told Interfax at the end of July.

According to Konstantin Batunin of Moscow’s Alfa Bank, not even Gazprom knows yet what technology will be used. Russia’s gas giant has enlisted the help of Norway’s Statoil and France’s Total as junior technology partners, and this international collaboration to pool expertise is another sign of how the Arctic is likely to produce new partnerships rather than fuel rivalries.

Oil and gas development and the opening of the Arctic to shipping due to global warming – the summer of 2008 showed the lowest icelevel since records began  also mean that new shipping technologies are needed to master the Arctic waters.

And here as well Russia is kitting up.

In 2007, Russia started the merger of all state-owned shipping and ship-building assets into two giant holding companies

Sovkomflot-Novoship, now the world’s fifth largest shipping company, and the United Ship-building corporation. Both of these companies are under orders to focus on energy shipping in general, and ice-class vessels in particular.

And March 25, 2008, a state-linked investment company FLC bought a 70% stake in three German shipyards belonging to Norway’s Aker group – shipyards specialized in building dual-action ice-class ships, the stern of which doubles up as an ice-breaking bow.

Finally, August 27, 2008, Russia’s seven nuclear-powered icebreakers were transferred from the trusteeship of a private shipping company and transformed into a state enterprise – Atomflot, part of the newly-formed nuclear power state corporation.

So regarding Russia’s North Pole flag-planting stunt of 2007, the medium was the message: Russia displayed it had the bathyscape technology to conduct Arctic seabed operations.

But much of the Western media preferred to believe that Russia’s flag planting was an aggressive assertion of rule over the North Pole – and conspiracy theorists even perceived a Kremlin masterplan to seize control of Christmas.

Those conspiracy theorists will see their fears confirmed with Chilingarov s next bathyscape dive: as announced end of July, he intends to dive to the bottom of the Mariana Trench, the deepest part of in the world’s oceans. The Mariana Trench is in the middle of the South Pacific – surely indicating a Kremlin claim to Easter Island.

Tymoshenko prefers Kremlin to Yushchenko

Graham Stack for business new europe

In a further sign of her startling pro-Moscow shift, Ukrainian Prime Minister Yulia Tymoshenko called on President Viktor Yushchenko to clarify with Russia the price for gas for 2009. She said this was an essential precondition to her finalizing the 2009 budget.

“The budget can be clarified after the final price for the natural gas is fixed. I think that if the Ukrainian president is talking so much about “Moscow’s hand,” then let him try to receive gas from this “hand” at moderate prices in the short term,” Tymoshenko said after a government session, as quoted by Interfax.

In a veiled threat not to pass the budget before an agreement is reached, Tymoshenko said the Rada would not clarify the budget until a final price had been arranged with Russia.

Underscoring the shift in Tymoshenko’s position regarding Russia – a shift that has triggered a secret service investigation into her dealings and accusation of treason – Tymoshenko explicitly put the blame for deteriorating relations with Russia on President Viktor Yushchenko, not the Kremlin.

Tymoshenko’s current position regarding gas prices is a u-turn on her position at the start of 2008 on paying Ukraine’s gas debts to Russia.  In talks over size and payment of Ukraine’s gas debt, Yushchenko took a conciliatory position and Tymoshenko a stridently anti-Kremlin position.

Now they have reversed their roles.

“President Viktor Yushchenko is personally responsible for all the radical decisions made with regards to Ukraine,” Interfax cites Tymoshenko as saying at a news conference Wednesday September 17 , referring to alleged Russian initiaives to restrict the free trade regime with Ukraine.

Tymoshenko went on to actively back Kremlin claims about an information war being waged against Russia by the West and Western allies.

“When information wars are declared on some countries, and when states are insulted and humiliated, Ukraine anticipates a return blow. Therefore, Viktor Yushchenko will be personally responsible for all the bad trends in relations between Ukraine and Russia, in my opinion,” Tymoshenko said, according to Interfax.

Gas price conflict next up

Yesterday Alexander Shlapak, an aide to Ukrainian President Viktor Yushchenko, admitted that the Ukrainian government’s gas price projection of $250-260/tcm in its 2009 budget now appears to be unrealistic and will need to be raised at least to $300/tcm.

“However we note that this expectation is still below the projected European market price of $340/tcm for 2009. Negotiations between Russia and Ukraine over pricing have yet to be completed,” write UralSib analysts.

Several months ago Gazprom signed an agreement to purchase Central Asian gas in accordance with its “net-European” gas price formula (average gas price in Europe minus excise taxes, transportation costs and Gazprom’s margins).

Since Ukraine consumes almost all of the Central Asian gas, a gas price for the Ukraine below the EU market price less transport differential would make Gazprom sales to Ukraine loss-making, argue UralSib analysts.

Ukraine is threatening to use as a bargaining chip the tariffs it charges for Russian gas transit to Europe.

Yesterday Uriy Kolbushkin, Deputy CEO of Ukraine’s gas distribution monopoly Naftogaz, said that Natfogaz could increase gas transportation tariffs for Russian gas by over double to 86 hryvnya for 1000 cubic meters for 1km starting from 2009, according to Vedomosti.

UralSib analysts writes, “we note that Ukraine provides transit for about 80% of Russia’s total gas exports to the EU. If Gazprom increases gas prices for Ukraine too aggressively, the Ukraine may respond by raising transportation tariffs and Gazprom’s margins would be squeezed.”

Russia is making it clear that the gas price hike for Ukraine is not political. Yesterday Gazprom also announced a price hike for Armenia, a loyal Russian ally. However the price hike for Armenia looks like being more gradual, according to UBS.

Orange eats itself, what’s the next course?

At the Verkhovna Rada’s session this morning, Speaker Arseniy Yatseniuk announced that the ruling coalition composed of the Yulia Tymoshenko Bloc and the Our Ukraine-People’s Self Defense Bloc (NU-NS) was officially dissolved.

This spells the end not just to the  ’democratic coalition’, but to ‘Orange’ itself.

Four years after the Orange revolution stopped former prime minister, now opposition leader Viktor Yanukovych becoming president in rigged elections, the two main figures in Orange, President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, are now  as distant from each other as each is to Yanukovych.

Moreover, Timoshenko and Yanukovych possibly share something very important  against Yushchenko:  at the heads of strong parties, both might stand to gain from shifting political power from the presidency to Ukraine’s parliament, the Rada.

It is still unclear whether the current political crisis is a repeat of 2007’s early elections and coalition reshuffle, or something very different: a concerted effort by the Rada majority to seize power from the president.

What does seem clear is that the Orange coalition  between Tymoshenko’s Bloc Yulia Tymoshenko (BYuT) and Yushenko’s Our Ukraine-People’s Self-Defence (NU-NS) will not be renewed.

Early elections are the most likely outcome.

According to the Constitution, parliamentary parties have 30 days to form a new coalition, after which point the president has the right, not the obligation, to dissolve parliament and call new elections.

Brokerage Galt & Taggart analysts write, “with the majority of parties already renting billboard ad space and organizing election offices around the country, pre-term parliamentary elections remain the most likely scenario.”

Ukrainskaya Pravda reports today that Prime Minister Yulia Tymoshenko, head of the eponymous bloc, has already ordered her deputies to mobilise for elections.

Tymoshenko is reported to have told deputies that she sees the Orange being reformed as 10% with a 90% chance for  elections.

Confirming the low probability of any coalition being formed, BYuT deputy Andrei Shkil said today that both Yushchenko’s party Our Ukraine and the Ukraine Communist Party were refusing to hold talks with BYuT on forming a coalition, according to korrespondent.net.

Early elections will benefit BYuT. BYuT stands to pick up votes both from NU-NS, suffering from the single digit ratings of ineffective president Yushchenko, as well as from the oppositional pro-Russian Party of Regions: Tymoshenko has conspicuously flirted with a pro-Russia position during the Georgian crisis.

However, all members of the current coalition will do all they can to avoid the blame for another bout of expensive early elections.

Thus Yushchenko has called for a renewal of the ‘democratic coalition’, by taking the small Lytvyn Bloc on board.

BYuT has also been in talks with the Party of Regions (PR). But an alliance with PR would prove unpopular among Tymoshenko’s core constituency. The possibility of a coalition of BYuT with the Party of Regions (PR) was not even discussed at today’s BYuT parliamentary faction meeting, according to Millenium analysts.

A BYuT-PR coalition would, however, create a huge majority in the Rada, sufficient to override the presidential veto on legislation and allow the Rada to continue shifting power from president to parliament.

“A coalition between BYuT and the Party of Regions would serve to unite Ukraine’s east and west, but it is unlikely to be supported by the Donbas business elite, including Rinat Akhmetov, Serhiy Taruta and Vitaliy Hajduk,” write Galt&Taggart analysts.

Millenium analysts agree that “a coalition  between BYuT and the Party of Regions would be very unlikely due to diverging opinions of these political forces on most policy matters.”

“We continue to see an anticipated election as the most likely scenario,” says Millenium analyst Bogdan Kochubey.

Rencap’s Geoff Smith, however, says BYuT-PR could work out: “Tymoshenko and Yanukovych have a chance to prove that they have tired of deadlock,that they accept that power must be shared and exercised with restraint,that they realize how urgently effective government, reform and privatization are needed.” says Smith. “It could be beautiful – but don’t hold your breath.”

What we don’t know:

We don’t know what Tymoshenko wants.  Does she want simply to shore up her majority in parliament at the expense mainly of Our Ukraine, to free herself on dependence on Yushchenko? In this case, elections are on the cards. But Ukraine would remain a presidential republic, with Yushchenko responsible for foreign policy and able to veto laws.

Does she want to change Ukraine into a parliamentary republic, thus usurp power from Yushchenko? She would then have the top job without having to wait a year for presidential elections. A year is an eternity in politics, her current popularity is only slightly in front of Yanukovych’s, and next year could see economic problems ahead. To make the changes, she would need to hook up again with Party of Regions, but not necessarily in a formal coalition. But what would be in it for Party of Regions?

What’s the significance of her shift to moderation regarding Russia, and her obvious ambivalence about Nato membership? Is this preelection manoeuvering to  win the pro-Russian vote from Party of Regions? Or a concession towards the Party of Regions? or an attempt to stave off a potentially crippling gas price hike?

Tymoshenko might be hoping for a landslide elections victory, eliminating Our UKraine and cutting swathes into the PR vote. That would set her up in a position to change the constitution and move to a parliamentary republic with herself as prime minister.

Eurasian frontier markets are top reformers in World Bank ranking

Graham Stack for business new europe

Azerbaijan is today celebrating its meteoric rise in the World Bank’s authoritative annual “Ease of Doing Business” ranking, released September 11. The Caucasian oil oasis shot up from last year’s place 97 to this year place 33, just one below Israel, making it the world’s top reformer. And it is not alone at the top: placed two, three and four among the world’s swiftest regulatory streamliners were fellow Eurasian frontier markets Albania, Kyrgyzstan and Belarus respectively.

The World Bank ranking, that surveys legislation and regulation and includes feedback from companies on registration and tax matters, is the recognized global benchmark for business environment and market entry conditions, in particular for small and midsize business.

And, according to the results of the new survey, Eurasian countries are proving to be the World Bank’s most diligent students: 34% of all reforms improving the business environment across the world 2007-2008 were enacted in Eastern Europe and Central Asia.

The surprise is, however, which countries within this regions were responsible for the lion’s share of reforms. Not the heartland of Poland, Russia and Ukraine, but a splurge of frontier markets, led by Azerbaijan.

Azerbaijan notched up improvements on seven out of 10 indicators of regulatory reform, according to the World Bank. Azerbaijan started operating a one-stop shop in January 2008 that halved the time, cost, and number of procedures to start a business. Business registrations increased by 40% in the first 6 months. Azerbaijan also eliminated the minimum loan cutoff of $1,100, more than doubling the number of borrowers covered at the credit registry, and set up an e-government system allowing taxpayers to file and pay taxes online.

Belarus, aka ‘Europe’s last dictatorship’ and where the state still owns most industry, this year shot up to place 85 from a lowly 110 in 2008.

This was the result of a year’s concerted reforms that won it the number 4th top reformer spot in the ranking. Starting a business became a whole lot easier thanks to a unified registry database, a time limit for registration, and halving of the minimum capital requirement. In addition, a one-stop shop for property registration caused time required to register property to fall from 231 days to 21.

As mountainous as Belarus is flat, and as politically turbulent as Belarus is authoritarian, Kyrgyzstan came in one place below Belarus in the overall ranking, but third place globally as reformer, with one-stop shops for registration and streamlining of construction permission.

Follow my leader

The trailblazer among Eurasian countries, however, remains Georgia. Previous years’ star reformer is this year’s star performer. Georgia takes place 15 in the world for ease of doing business, making it number 1 among the post-Soviet states, far ahead even of the Baltic states, and only one place behind business paradise Finland.

This has made it an example to follow in countries across the region. For as the World Bank’s Doing Business team explains, “if there is any advantage to starting late in anything, it’s that you can learn from others.”

This copycat effect could lead to further sudden leaps towards liberalization in states that seem to be suffocating in red tape. Belarus reformers for one often refer to the Georgian example when arguing that their goal to reach the ranking’s top 25 is feasible.

One example no one is following is Russia’s. Russia languishes at place 120, a drop of eight places over last year. The World Bank comment on Russia is brief and sad: “In the Russian Federation no major reforms were recorded.”

The only silver lining for Russia might be that newly-elected President Dmitry Medvedev has named improving the regulatory environment for small business and tackling corruption priorities for his presidency.

But even that may not help much: Ukraine for all its four years of Orange liberal rhetoric, fares even worse than Russia in the ranking. It came in at place 145, between Surinam and Madagascar.

Cosmetic surgery

However, there are question marks about the report’s findings.

One problem is that the ranking could become a victim of its own success. Governments actively boost their Doing Business ranking by initiating reforms on paper that lack follow-through in enforcement – and thus remain largely cosmetic.

World Bank representative in Belarus Martin Raiser sounded a cautionary note in comments made to bne in July.

“The Belarus authorities have set themselves ambitious goals to improve their rankings in international rankings on the costs of doing business,” Raiser said. “While we welcome the ambition to tackle these challenges broadly, we recognize that the authorities are aiming at efficiency improvements rather than wholehearted institutional change.”

Indeed, the Belarus government’s commitment to moving up the ranking in did not stop hundreds of individual entrepreneurs taking to the streets to demonstrate against the government in early 2008, a bold undertaking in Aleksandr Lukashenko’s Belarus. They were protesting against new government regulations forbidding individual entrepreneurs to hire additional workers, demanding they re-register as firms. The new regulations forced many individual entrepreneurs to quit their business.

“There were demonstrations on the part of individual entrepreneurs in the centre of Minsk, but nothing appeared about them on TV, it was all hushed up and then they were dispersed by force,” a former stall owner forced to turn taxi driver told bne in Minsk in June.

So, before rushing off to set up a bar in Azerbaijan – placed higher than Israel in the Word Bank ranking – listen to what people on the ground are saying as well.

A high-placed foreign advisor in Azerbaidzhan recently made the following comments to the bne blog:

“Petty corruption has indeed been reduced here – you don’t really see policemen hassling people for bribes anymore. But this is not the kind of corruption that anyone is worried about. We’re talking about massive corruption on a scale that is unimaginable by Western standards.”

“Take for example a well-known international oil and gas company which has been working in Azerbaijan for many years. When they have to import a small, specialized part such as a pump, say, that is only worth some $500, they end up paying around $10,000 to get it across the border,” claims the source.

“In the West, when people consider Azerbaijan, they expect corruption but they have no idea about the level it has reached. If someone were to say: ‘give me 100% of the value of the goods’, people would be like ‘are you crazy?’ But here 100% is nothing – 500%, 600% or 700% is completely normal. It’s ridiculous, but that’s the reality.”

“It’s human habit, you push things as far as they’ll go. No one has done anything to stamp out corruption, so it’s gone completely out of control and is killing the country.”