Will Putin sign up China?

Graham Stack for Russia Profile (www.russiaprofile.org)

 

Russian Prime Minister Vladimir Putin’s last visit to China, when he attended the opening of the Beijing Olympics in August of 2008, went badly wrong when Georgia opportunistically attacked South Ossetia, and the resulting war damaged relations between Russia and the West. Putin could now continue Russia’s eastward shift on his upcoming visit to China, by signing long-term gas supply agreements between Gazprom and the China National Petroleum Corporation.

Speculation is mounting that a long-term gas supply agreement might finally be signed between the Russian gas giant Gazprom and China National Petroleum Corporation (CNPC). The plan, outlined in a number of memorandums signed by the Russian and Chinese sides, but since bogged down in negotiations over price, envisages new gas pipelines from Western and Eastern Siberia to China and the development of virgin East Siberian gas fields.

As president, Putin was closely involved in the negotiation process during his previous visits to China, and may feel that it’s now time to go the final mile. The last Memorandum of Understanding on the issue was signed in 2006: it specifies a pipeline running from West Siberia with a 30 billion cubic meters capacity, and another from East Siberia with a capacity of 38 billion cubic meters, with work due to start in 2011. That date is now clearly unrealistic, but still, for most analysts, it is just a question of time.

“We have long taken for granted that Gazprom will sell significant amounts of gas to China,” said Alfa Bank energy analyst and Head of Research Ron Smith. “The resource base of East Siberia and Russia’s Far East is very large, including two untapped world-class gas fields in Chayanda and Kovykta that are very well situated for pipeline exports to China, not to mention the Sakhalin reserves that are already being tapped.” So analysts perceive Putin’s hastily arranged visit to China as indicative of the fact that a long-term deal has been finalized for signing.

Negotiations to date have been shrouded in secrecy, but the main problem holding up implementation of the project has been arguing over the price mechanism. Russia is rooting for the same price mechanism applied to Gazprom’s European Union customers. China has pushed for a discount price previously paid by former Soviet countries, such as Ukraine. “Since then, however, the discounted deal with Ukraine ended in a very high-profile manner, and Russia is also paying full price for gas purchases from Central Asia,” said Chris Weafer, an analyst at UralSib brokerage. “Hence the rationale for China’s discounted price demand is eliminated.”

But the Chinese may instead want a gas price linked to coal prices and not to oil prices, as is the case for European customers. Since there is no global market price for gas, gas prices are linked to the cost of the fuel gas substitutes for, which in Europe is crude oil and heating oil. In China, however, gas will substitute mainly coal used in power generation. “We are not sure whether the Chinese prefer a coal-linked price, as that fuel generates the bulk of the country’s power, or whether it is a matter of a simpler argument about the absolute level of prices,” said Smith.

“Linking the price of gas to the one of oil is an anachronism,” argued Mikhail Korchemkin of East European Gas Analysis. “There is an oversupply of inexpensive gas in the world, and the market prices of oil and of gas often move in opposite directions.”

Coal prices are currently very low following the economic crash, while oil prices have soared back up to 2007 levels, making it harder to reach a compromise. However, according to a source quoted by the Russian business daily RBK, in the absence of final agreement on a long-term price mechanism, Gazprom and CPNC could still provisionally agree on fixed prices for short-term delivery volumes.

But the Chinese have some trumps that could induce Gazprom to bring the prices down from the European levels. Firstly, China is flirting not only with Russia, but also with Central Asian countries. The 7,000-kilometer-long Central Asia-China pipeline is set to take Central Asian gas to China, particularly from Turkmenistan, which has contracted to supply 40 billion cubic meters of gas annually for 30 years. Korchemkin believes that Turkmenistan probably agreed to prices around 50 percent lower than Gazprom’s European price. “Moscow will be keen not to lose the opportunity to be a direct gas supplier to China, especially with a lot more uncertainty over future gas export volumes to Europe,” said Weafer.

Secondly and most importantly, with the economic crisis having raised the cost of borrowing even for Russian giants such as Gazprom, Chinese state companies can offer cheap credits unavailable elsewhere. The summer has seen a slew of Chinese credits granted to Russian companies in telecommunications, cement and energy. According to Kingsmill Bond of Troika Dialog brokerage, “China provides cheap financing and equipment for the development of Russian infrastructure. As the head of the Russian cement association poignantly said, ‘we can’t borrow from Russian banks at less than 20 percent, but from China we can borrow at under ten percent.’”

In June of 2009, China provided Turkmenistan with a $4 billion loan to develop its massive South Yolotan field. But the mother of all such deals was signed between Russia and China in February of 2009, with CNPC and the China Development Bank offering a $25 billion loan to Russian oil pipeline operator Transneft and state-owned oil company Rosneft, as part of an agreement for Russia to supply 15 million tons of oil annually for 20 years. The credit, at an unbeatable estimated interest rate of 5.7 percent, will finance oilfield development and pipeline construction from East Siberia to China.

“If that deal were to be replicated in the gas sector, we could see a timeline agreed not only for the pipelines, but also for the development of the giant Kovykta gas deposit, as that is the logical source of gas sales to China,” said Weafer.

Georgia vs. South Ossetia: The Prequel

The South Ossetian conflict flaring up in late 1989 started the break up of Georgia. The conflict of 2008 might well have sealed it.

Four months after Slobodan Milosevic’s speech on the Kosovo Field June 1989 symbolised the start of the Yugloslavia conflict, Georgia’s nationalist leader Zviad Gamsakhurdia, backed by over 20,000 supporters including paramilitaries, rolled towards the South Ossetian capital Tskhinvali, to assert ethnic Georgian rule over the entire territory of the republic. Ossetian groups duly blocked Gamsakhurdia’s entry to the town, and violence broke out. Andrei Sakharov, not long before his death, commented gloomily on the creation of “minor empires” in the former Soviet republics.

The standoff escalated through 1990. In April 1990, the Supreme Soviet in Moscow ruled that the ethnic autonomous territories of any republic seceding from the Soviet Union retained the right to remain in the Soviet Union. Then it was Tbilisi’s turn to pour fuel on the fire. In August 1990, the Georgian Soviet adopted a law prohibiting regional parties from participating in Georgian elections. Excluded from the political process in Georgia, South Ossetia boycotted parliamentary elections in October 1990, instead holding elections to their parliament in December 1990.

In response to the South Ossetian elections, the newly-elected Georgian parliament abolished the autonomy status of South Ossetia, declared a state of emergency in the region and in late December, imposed an economic blockade on the region that was to last to July 1992.

The conflict finally escalated into war the following month. In the first days of 1991, the Supreme Council of Georgia passed a law on the formation of the National Guard of Georgia. Then on January 5th, at the time of the Orthodox Christmas festivities, several thousand Georgian troops, police and paramilitaries entered Tskhinvali and carried out violent reprisals and atrocities against the population, ostensibly in search of arms.

The weekend war

The initial fighting took place mainly in and around Tskhinvali, around the Georgian villages, and north along the road to North Ossetia, the lifeline of the South Ossetians in the face of the Georgian blockade.

According to Nikola Cvetkovski of Caucasus Links, who has written a history of the South Ossetia conflict, the fighting in Tskhinvali initially divided the town into an Ossetian-controlled western sections and a Georgian-controlled east. But fierce resistance from Ossetian irregulars meant that already by the end of January, 1990, Georgian forces withdrew to take up positions on the heights around the city. From there they enforced a blockade that lasted almost one and a half years, and aimed at cutting the town off from heat, electricity, water and food.

Actual fighting was low intensity, deploying mostly light arms. Fighting however peaked regularly at weekends, as the so-called ‘weekend warriors’ of paramilitary formations arrived from Georgia proper. The ‘weekend warriors’ were themselves more interested in looting than fighting. As a result, military fatalities stayed low, but of the roughly 1000 Ossetians killed in the conflict, only around 100 are regarded to have been militia members: the remaining 900 were civilians. In addition, according to Alexei Zverev, ethnic conflict expert at Vrije University of Brussels, 93 villages (mostly Ossetian) were completely burned down.

Even the newly-formed Georgian national guard, intended to become the core of a new Georgian army, was recruited and financed “almost exclusively by private individuals, especially successful black-market entrepreneurs,” according to Swiss security expert Christoph Zuercher, who has written the classic account of the Georgian crisis in “The Post-Soviet Wars”.

Georgia’s second main (para)military formation prosecuting the war, the Mkhedrioni (Georgian for medieval knights), was, according to Zuercher, “created in 1989 by Jaba Ioseliani, a former patron of the Soviet underworld, and funded its activities from criminal dealings, including extortion and racketeering,” and constituted “a private army at the service of the state when it was waging war against secessionist minorities.”

“The Georgian militias—the Mkhedrioni and the National Guard—were to a very significant extent driven by the presence of private entrepreneurs of violence, undisciplined weekend warriors, who conducted frequent attacks on the civilian population and took hostages,” Zuercher continues. “But in the case of the Ossetian and Abkhazian fighters, the use of military force was not mainly motivated by private profit, but by the perceived threat to the status quo posed by an independent and nationalistic Georgia. (…). Once the Georgian militias entered their territories, Ossetians and Abkhazians saw their fears confirmed, and organized violence ceased to be an option and became a necessity,” adds Zuercher in his seminal study.

Russia appears on the scene

Until then, the Soviet Centre, in its death throes, had remained largely on the sidelines in the conflict. The Soviet leadership had apparently latterly struck a deal with Tbilisi, allowing Gamsakhurdia a free hand in South Ossetia in return for accepting Soviet supremacy. This deal was shown up during the Moscow Putsch in August 1991, when supposedly nationalist Gamsakhurdia – in sharp contrast to events in Moscow and Leningrad – meekly accepted the authority of the Provisional Committee established by the putsch, and subordinated his armed units to the Soviet Interior Ministry.

The failure of the putsch, however, destroyed Gamsakhurdia’s authority: On December 22, 1991, in the last days of the Soviet Union, approximately 500 National Guard soldiers entered Tbilisi and drove Gamsakhurdia out, marking the start of the Georgian civil war. The new interim authorities—Ioseliani (leader of the Mkhedrioni) and Kitovani (head of the National Guard), then called Eduard Shevardnadze, former Soviet foreign minister, back from Moscow to head Georgia.

The struggle for power in Tiblisi now hugely exacerbated the ongoing ethnic conflicts, as the deposed president mounted military resistance from his home region in western Georgia against the new authorities in Tbilisi – and thus triggered the Abkhasian conflict, flaring up in spring 1992 and turning to war by the summer.

The conflict constellation now also changed due to the appearance of an entirely new actor: Boris Yeltsin’s Russia. Yeltsin’s new Russia, born of the idealism of the Perestroika liberal movement, and riding high on the wave of enthusiasm following the defeat of the Putsch, was more concerned about the rights of minorities in neighbouring states than the Soviet leadership had been. Russia was also sensitive to the concerns of the North Ossetian leadership, who were inundated with refugees from the South Ossetian conflict and feared further destabilisation.

According to Alexei Zverev, this new conflict constellation made Russian intervention on the side of the South Ossetians look increasingly probable. In mid-April 1992, Georgian artillery resumed daily missile attacks on the residential quarters of Tskhinvali. Then, in 20 May 1992, unidentified gunmen, whom the Ossetians claimed were Georgians, massacred a busload of Ossetian refugees fleeing Tskhinvali.

The massacre prompted North Ossetia to cut the gas pipeline to Georgia, and elicited furious statements from Russian politicians, including chief reformer Yegor Gaidar. By June 1992, Boris Yeltsin’s administration seemed to be on the brink of intervening to protect South Ossetia.

The situation was ironically saved only by a further escalation of Georgia’s own civil war between Shevardnadze and Gamsakhurdia in Western Georgia, which was simultaneously making conflict between Tbilisi and separatist Abkhazia look imminent. In the face of this extraordinarily dangerous situation, Shevardnadze could not possibly afford to fall out with the Russians.

On 22 June 1992, Yeltsin and Shevardnadze duly met with North and South Ossetian representatives in Sochi and signed a ceasefire agreement. The agreement envisaged the deployment of joint Russian, Georgian and Ossetian peacekeeping forces. The peacekeepers moved into the region on 14 July, 1992.

In view of the civil war raging at the time in Georgia and the start of the Abkhazian conflict, no one initially gave the South Ossetian ceasefire much chance. But it held 16 years… until August 7 2008.

Germany’s elections and Russia’s gas

Graham Stack for Russia Profile (www.russiaprofile.org)

 

Despite the rhetoric, Germany’s likely new coalition may slowdown nuclear power phase-out, but will not cut back on Russian gas.

 

If, as is likely, Germany’s September 27 national elections result in a new governing coalition between incumbent chancellor Angela Merkel’s Christian Democratic Union (CDU) and the small liberal Free Democratic Party (FDP), the planned phase-out of nuclear power in Germany will be slowed indefinitely, ostensibly to reduce dependency on Russian gas. However, analysts say the shift will make no significant longterm impact on German demand for Russian gas. Moreover, FDP head Guido Westerwelle as probable foreign minister is likely to be as Russia-friendly as his social democrat predecessor Frank-Walter Steinmeier, the loser of the election.

 

The man almost certain to be Germany’s new foreign minister did not mince his words when drawing conclusions from the Russian-Ukrainian ‘gas war’ January 2009, which saw supplies to Europe halted for a number of days.  “We Europeans have to do everything to free ourselves from dependency on a single supplier of energy,” Guido Westerwelle told Poland’s Gazeta Wyborcza in March, referring to Russia. “In Germany the government has made the mistake of phasing out nuclear power for ideological reasons. That makes us vulnerable to foreign energy suppliers. Germany should do what most of our European neighbors are already doing: achieve a reasonable energy mix, with renewable energy such as solar and wind power, fossil fuels such as oil, coal and gas, but also nuclear power.”

 

Westerwelle’s call to postpone nuclear power phase-out to reduce dependency on Russian gas found an echo in one of the minor scandals that livened up an otherwise lethargic election campaign in September: a detailed election-campaign PR strategy apparently commissioned by Germany’s large energy concern E.ON, subsequently leaked to the press, advised lobbyists to actively harp on the population’s “historically rooted fears of Russia.” “E.ON can draw on these fears for its own benefit,” read the leaked PR plan.

 

With Chancellor Angela Merkel’s CDU also in favour of slowing nuclear power phase-out, this coming shift in German energy policy might seem to be one of the immediate implications for Russia to come out of yesterday’s elections.

 

Russia currently supplies 37% of German gas imports. Germany relies on gas for 12% of electricity production and around 25% of total energy needs. Nuclear power, originally to be phased out by 2022 and replaced by renewable sources, counts for around 25% of power generation and 12% of total energy requirements. These figures give rise to fears that renewables will not be able to fill the space left by decommissioned nuclear plants, leading to even greater reliance on Russian gas.

 

However, analysts claim that much of the anti-Russian rhetoric is merely a political strategy to make slowing the phase-out more acceptable to voters, while it will in fact hardly impact on projected Russian gas deliveries to Germany.

 

“I do not think that a possible postponement of the envisaged nuclear phase-out is related to fears of increasing dependency on Russian gas,” argues Marcel Viëtor, Head of Foreign Energy Policy Program at the German Council on Foreign Relations. “Rather this fear is being developed by the atomic lobby to argue for the postponement. Fear of dependency on Russian gas imports is rhetoric but not factual since the Russian companies are mutually dependent on European gas markets,” says Viëtor.

 

Pierre Noel of the European Council on Foreign Relations also argues that the real reasons behind the coming policy shift is lobbying from German energy companies, who earn good money with nuclear power, together with growing electricity demand in Germany and carbon emissions reduction goals.

 

Furthermore, Russian analysts doubt that the move will even impact significantly on the projected volume of gas supplied to Germany from Russia.

 

According to VTB Capital’s gas analyst Lev Snykov, “such a move would not impact my long-term forecasts for Gazprom’s exports to Germany. Long-term Russian gas exports to Germany will grow at a low single-digit rate, although the market share may deteriorate due to a strong push towards LNG.” Similarly, energy analyst at Renaissance Capital, Alexander Burgansky, believes that, “German demand for gas may not now grow as fast as some people had expected, but Gazprom’s supplies are anyway protected by the minimum off-take commitments under the long-term contracts.”

 

Analysts also point out that Germany’s largest energy companies such as E.ON, although lobbying domestically for a suspension of nuclear power phase-out, are also heavily involved in Russia’s gas sector. EON’s CEO Wulf Bernotat is in fact a member of the Gazprom’s Board of Directors, as the company holds a 6.5% in the gas giant. E.ON and German chemicals giant BASF are also taking stakes in the major Siberian Yuzhnoe-Russkoe gas field.

 

Thus it was logical that Thursday September 24 EON was among a group of the world’s largest energy companies addressed by Russia’s ex-president, now prime minister, Vladimir Putin, in the town of Salekhard on Russia’s Yamal peninsula. Putin called on the international companies to invest in gas production in the region, destined to become Russia’s main production region in the long term, as older fields decline. Gazprom estimates total investment needed at $100bn.

 

Germany has particular interest in the massive Yamal development, according to UralSib energy analyst Viktor Mishnyakov. “Yamal is of strategic importance for the Russian government and for Gazprom as this gas will be the source for the Nord Stream pipeline project.”

Nordstream pipeline is a controversial Gazprom-led project to bring Russian gas directly to Germany via the Baltic Sea bypassing transit countries such as the Baltic countries and Poland.

 

There has been vociferous opposition from Poland and Baltic states to the pipeline. But, according to Marcel Viëtor, this is one energy policy that definitely won’t be changed under a CDU-FDP coalition.

 

“The CDU has shown different, more critical rhetoric on Russian domestic
issues than SPD did – but it has supported NordStream and German companies
cooperating with Russian companies, investing in Russia, just like SPD did,” says Viëtor. ”In a CDU-FDP-coalition this attitude is most likely to be continued.”

 

Russia – “Europe’s natural partner”

 

Apart from adjusting energy policy, the new German government’s Russia policy is likely to remain pragmatic and constructive, including disavowing Ukraine and Georgia’s bid to join NATO. With Westerwelle almost certain to become new foreign minister, the influence of SPD elder statesman Gerhard Schroeder in shaping Germany’s Russia policy will cede to the influence of FDP elder statesman Hans-Dieter Genscher, the Federal Republic of Germany’s legendary foreign minister from 1974 to 1992.

 

With 20 years marked since the fall of the Berlin Wall this autumn, events in which Genscher played a crucial role, an FDP-led foreign ministry will be especially minded to take a pragmatic and measured policy towards Russia, considering Moscow’s support for German reunification 1989-1990. Awareness of the Kremlin’s constructive role towards unification twenty years ago has even been heightened in recent weeks by archival revelations of how bitterly European leaders such as then British Prime Minister Margaret Thatcher and French President Francois Mitterand were initially opposed to the idea.

 

Outside of energy policy, the FDP regards Russia, in Genscher’s words, as “Europe’s natural ally, not natural enemy.” Added to this is the generational factor: 47-year old Westerwelle sees himself as one of a new generation of politicians that includes US president Barack Obama and Russian president Dmitry Medvedev. Westerwelle is thus an enthusiastic supporter of Obama’s “reset” policy of improving relations and cooperation with Russia. “If President Medvedev emphasizes he is a moderate politician and wants to reform his country and pursue disarmament, we should take him at his word,” he told Gazeta Wyborcza. “He is a young politician, and together with the US president, who is also young, he will have the chance to go down in history in a positive fashion.”

Ships, chips and automobiles: “Reset” German-style begins

Graham Stack for Russia Profile (www.russiaprofile.org)

 

Germany is opening its doors to Kremlin –linked companies looking for technologies in automotive manufacture, ship-building and microchip production. While the current German election campaign means any investors promising to save jobs are welcomed, the new openness could also point to an economic, European dimension to “reset”.

 

When US President Barack Obama came to power ten months ago and promised a “reset” to relations between the West and Russia, the talk was of missile shields, NATO expansion, Iran and Afghanistan. No one thought that reset could ripple out to include the ownership of embattled German car plant Opel. But precisely this seems to be the case, according to Arkady Dvorkovich, econmomic adviser to Prime Minister Vladimir Putin.

 

“It is a very good political signal,” Dvorkovich said on Tuesday, September 16, referring to the deal that will see Russia’s state-owned Sberbank and Canadian car components producer Magna take a majority stake in Opel, European subsidiary of bankrupt US car giant General Motors. “It means the U.S. administration is ready for maximum economic cooperation with us,” Dvorkovich said at the Reuters Russia Investment Summit. Following bankruptcy, GM is owned by the US Treasury.

 

According to Dvorkovich, powerful anti-Russia interest groups were out to scupper the deal, accounting for General Motors’ down-to-the-wire hesitancy over the deal. But President Barack Obama’s support for the Russian bid tipped the scales, according to Dvorkovich.

 

As a result, Sberbank, Russia’s largest bank, and Magna, the world’s largest car components producers, will each receive 27.5% of the car maker. Sberbank will inject $0.5m and the German government $1.7m. Magna will oversee the restructuring of the company, with an eye to the Russia market.

 

Coming in the same week that Obama implemented a key reset policy by tearing up plans for an anti-missile shield stationed in Poland and Czech republic that Russia opposed, the presidential nod for Russia’s Opel bid raises the question whether there is an economic – and European – dimension to reset.

 

Certainly the German government under Chancellor Angela Merkel has been warming to Russia ever since Obama came to power in January 2009. Merkel had previously positioned herself as a skeptic on Russia, compared to her predecessor in office Gerhard Schroeder, and sought closer ties with the US. But Germany now seems to be moving in the wake of Obama’s reset to reembrace Russia.

 

In 2007, a wave of acquisitions by Russian oligarchs in sectors ranging from airlines to tourism caused jitters in German.  But last week, visiting the prestigious International Automotive Fair in Frankfurt last week, Merkel talked down the risks associated with Russian investors. calling Russia a “market of the future, not something to be kept at arm’s length.”

 

Merkel backed the Sberbank-Magna-Opel deal strongly and publicly all the way, despite criticism from her own economy minister and officials involved in administrating the crippled car maker.

 

This also despite the fact that the real strategic investor in the Opel case, as well as in similar deals in the pipeline for Germany’s Infineon chipmaker and Wadan shipyards, is evidently the Kremlin, through proxies such as state-owned Sberbank or other state-linked companies. This both politicizes the deals and makes them quite opaque, since it is unclear what economic entity will end up with the stake. “Our medium-term view is that Sberbank may well be a conduit for the transaction and a more logical Russian state or industrial entity will eventually be passed the stake,” says banking analyst David Nangle from Renaissance Capital, referring to the Opel case.

 

On the other hand, it is very clear what the Kremlin wants from the deals: “If the import of technologies does not take place, it will mean that (the deal) was just a waste of time,” Sberbank CEO German Gref was quoted saying to journalists on Friday.

 

The German government’s willingness to support such deals – with the nod from Obama – may point to a European dimension to reset, looking to integrate Russia economically despite the risks, rather than keep it at arm’s length.

 

Ships and chips

 

Two other deals similar to the Opel rescued have been broached by the Russians during the summer. Both involve opaque, Kremlin-linked structures bailing out struggling German companies that despite their losses have technologies the Russians want.

 

On Friday, September 18, media reported that Russia’s largest telecommunications holding AFK Sistema is negotiating to purchase a share in Infineon, the largest German microchip producer. According to Kommersant business daily, the deal currently under discussion is for Sistema to acquire 15-20% of the company for EUR 1bn, with the purchase funded by Russian state corporation Bank for Development (VEB). Sistema is a private company (although historically linked to Moscow city government).  However, following a succession of deals where the Kremlin has helped Sistema, “this [deal] could be an anticipated reciprocal ‘favour’”, says telecoms analyst Ivan Kim of investment bank UralSib. Sistema owns Russia’s largest chip producer, Sinterra.

 

And in a smaller, but similar deal, former Russian energy minister, Igor Yussufov, current member of the Gazprom board of governors, is set to acquire Germany’s bankrupt Wadan shipyards, based in Wismar and Rostock.

 

It is widely believed Yussufov is acting on behalf of Russian state-linked strategic investors, including state-owned gas giant Gazprom, and the state-owned United Ship-building Corporation. The financially stricken Wadan shipyards possess unique ice-breaking technologies that Russia needs to retool its naval shipyards to build transport vessels for energy projects in the Arctic. Again this deal has been welcomed by Merkel and the German government, despite the opaqueness about who is actually buying these asets.

 

Thus the German government seems to look positively on the Kremlin’s shopping around for technologies to modernize the Russian economy. For Vladimir Putin, and his colleague as head of state engineering and defence corporation Russian Technologies Sergei Chemezov, who according to Putin biographer Alexander Rahr were both involved in industrial espionage on Germany during Soviet times, Russian access to German technologies is a dream come true.

 

Do these deals mark an economic, European dimension to reset? On Friday, September 18, Putin called on Obama to follow up on cancellation of missile shield plans by supporting Russia’s bid to join the WTO – the longest bid in the history of the organization, with Russia the largest economy to remain outside the WTO. Former German chancellor Gerhard Schroeder has stated openly that the US has been blocking Russia’s WTO accession for political reasons. Obama’s position on Russia’s WTO bid might show whether reset can develop an economic dimension. US reset on Russia’s WTO bid will also have knock-on effects for Russian-Europe ties, since the signing of a new Russian-EU partnership agreement is largely dependent on Russia’s achieving WTO membership.

Russia: Saved by the oil, Medvedev asks what next?

Graham Stack for Russia Profile (www.russiaprofile.org)

As the ongoing crisis descended on Russia in the last quarter of 2008, its most blatant manifestation, twinned with the stock market collapse, was the plummeting oil price, falling from a record-breaking $145 to a low point of $35 a barrel. Back then it seemed that collapsing oil prices would trip Russia up as catastrophically as they did in 1998. But they soon recovered, leaving Russia ever more dependent on the black gold, and causing the country’s president to appeal to the public for help in kicking the addiction. But is Russian society able and willing to respond to his pleas for modernization?

One year on since the collapse of the Lehman Brothers ushered in the crisis, the oil price has more than doubled from that low point, to reach $72 per barrel last Thursday, with the stock market following eagerly in its footsteps. Each day, economists are proclaiming the sighting of more green shoots in the economy, and it now seems that the price of oil will be the factor that lifts Russia out of collapse, rather than ditching it.

The oil price hike looks set to continue in the short term. Last week, the International Energy Authority (IEA) raised demand forecasts for this year and next by 500,000 barrels. OPEC, also meeting last week, retained its current quotas to support the price. As a result, Goldman Sachs, Wall Street’s biggest commodities dealer, declared that oil prices could hit $85 a barrel by the end of 2009. Gazprom’s boss Alexei Miller predicted that oil could even break the $100 per barrel mark.

So despite the global crisis, oil prices have fallen only to their 2007 level – a level that at the time was hailed as unprecedentedly high. Compare this to 1998, when in the wake of a regional (Asian) economic crisis, oil prices collapsed as far down as $8 a barrel.

And there was more oil-related “good news” for Russia last week. Russia’s crude output in August hit an 18-year high. State-owned Rosneft notched a 5.5 percent year-on-year increase thanks to launching its Vankor field, and the sector as a whole is slated for a 0.3 percent increase on the year instead of the originally estimated 1.1 percent drop. Consequently, the Russian Trading System (RTS) index is likely to reach a new high for 2009 this week. Analysts and economists forecast the resumption of growth this quarter.

No credit revival

But coming out of the immediate crisis, the Kremlin is confronting the fact that Russia is now more dependent than ever on the price of oil – the very dependency that Kremlin policies over the last eight years have been trying to reduce. This is not just because the stabilization fund, intended to act as an air bag in the case of a commodity price crash, will have been used up by 2010 on funding a massive budget deficit. And not just because the current oil price still seems detached from the fundamentals and another sharp drop could still be around the corner next year.

The problem is that the flow of cheap financing from global markets to Russia that drove a lot of economic growth during Vladimir Putin’s presidency has now dried up for good. It was the dramatic expansion of credit during Putin’s second term that created the first signs of diversification – through consumer demand and the funding of new industrial projects.

The continued availability of such funds was crucial to the “Putin plan” of diversifying the economy. According to Chris Weafer of UralSib, “the evidence is that, even from the early days of Vladimir Putin’s presidency, there existed at least a broad outline of a long-term development plan to transform the economy from its dependency on natural resources to one with a better range of drivers, where the risk of the sort of boom-to-bust cycle experienced recently is substantially reduced.” The mechanism for achieving this was the classic plan to “move up the value-added chain.” Weafer claims that “the main message of last week is ‘don’t worry so much about the oil price.’ By far the bigger problem is the near-absence of credit and lending in the economy.”

Cheap credit and open Kremlin encouragement for Russian companies to borrow abroad caused an influx of international funding into the Russian private sector that now has left the county’s companies with nearly $500 billion in foreign debt to pay back. And no new credit is on the horizon. This means that growth, when it resumes, will be one-legged, based on and limited to commodity sector revenues, bereft of the prospect of industrial diversification as envisaged by Putin – and all the more vulnerable to another downturn in commodity prices.

Medvedev turns from economy to society for modernisation

With the credit-starved economy unable to deliver the modernization the Kremlin wants, there is no alternative now but to turn to society and campaign against the litany of social ills that throttle Russia’s prospects just as much as the drying up of credit markets has. This is the significance of Dmitry Medvedev’s cri de coeur article “Forward Russia!” published Thursday, September 10, almost exactly one year since the start of the crisis.

“First, let’s answer a simple but very serious question,” begins Medvedev. “Should a primitive economy based on raw materials and endemic corruption accompany us into the future? And should the inveterate habit of relying on the government, foreign countries, on some kind of comprehensive doctrine, on anything or anyone – as long as it’s not ourselves – to solve our problems do so as well? And if Russia cannot relieve itself from these burdens, can it really find its own path for the future?”

“Twenty years of tumultuous change has not spared our country from its humiliating dependence on raw materials,” he continued. “With a few exceptions, domestic business does not invent nor create the necessary things and technology that people need. We sell things that we have not produced, raw materials or imported goods.”

Alongside calling for heightened rule of law, Medvedev has recently called attention to crucial social problems: road deaths that have robbed Russia of an incredible 300,000 citizens over the last ten years, and alcoholism and smoking accounting for many times that number. Economists put the cumulative effect of these evils at two to three percent of GDP per year.

Thus, with Putin’s plan to tap industry for a modernization drive left on the rocks by the outgoing credit tide, Medvedev’s plan is to tap society’s modernization potential. The day following the publication of the article, a raft of proposals to regulate the alcohol market was published.

There should be some easy gains here, analysts say. It surely can’t be that hard to persuade Russians to wear a seatbelt or to drink and smoke less, especially given the extent of media control. All Western governments have wrestled with these same problems over the last 30 to 40 years with considerable success.

But huge hazards await anyone trying to change Russian society from the top, as Mikhail Gorbachev found out to his cost during his Perestroika-era anti-alcohol campaign – a campaign that positively impacted life expectancy, but reflected negatively on Gorbachev’s popularity. Basically, Russians do not like being preached to by their leaders.

This is the risk Medvedev will run if he tries to mobilize a distrustful society for modernization. It is a dilemma that a colleague of Medvedev’s, the Governor of the Kirov region Nikita Belykh, documented very accurately on the exact same day when Medvedev’s article was published.

Thirty-five year old Belykh, the former head of opposition liberal party the Union of Right Forces (SPS) and a sharp critic of Vladimir Putin’s policies, was appointed to head the Kirov region by Medvedev in December of 2008. “When I was in opposition,” Belykh said at a roundtable discussion on “Society and Reforms,” “I despised the authorities. Now that I am in office myself, I still don’t like them, perhaps even less so, but to be honest, I am starting to dislike society as well. A more destructive, obdurate, inadequate and stupid institution than society does not exist. We sit down together at one table, talk, discuss problems, reach an agreement and sign, and the next day they are out demonstrating against you under your window.”

“People refuse to recognize that the authorities can achieve anything,” Belykh was quoted by polit.ru as saying. “There’s an assumption of guilt. Any actions are regarded either as a provocation, or simply go unnoticed. It’s difficult not to act as a dictator, to break with the liberal idea.”

Medvedev calls for democracy po-russki

“Russian democracy will not merely copy foreign models. Civil society cannot be bought with foreign grants,” Russian President Dmitry Medvedev has said in an article published today September 10 by Internet newssite Gazeta.ru, expressing a conservative evolutionary vision of democraticisation.

Crucially, however, Medvedev said that parties would play a central role in Russian democracy, competing for power at all levels, and even nominating candidates for the post of president.

“As in most democratic states, parliamentary parties will be leaders in the political struggle, regularly replacing each other in power. Parties and their coalitions will form federal and regional governments, not vice versa, and nominate candidacies for president, and regional and local government leaders,” Medvedev said, according to Interfax.

But this won’t happen overnight. Medvedev said genuine democracy has to develop through experience and practice, and cannot simply be imported. “Only our own experience of democratic development will give us the right to say that we are free, we are responsible, we are successful,” Medvedev wrote. “Political culture cannot be changed merely by imitating political events of progressive societies, (…) freedom cannot be copied from a book, even if it is a very good book. (…) But no one will live our life for us. No one will become free, successful, and responsible for us,” Medvedev said.

Medvedev argued in favour of gradualism rather than the attempts at radical democraticisation Russia saw in the 1990s.

“We have no right to put social stability at risk and threaten life even for the sake of the loftiest of the goals. (…) Reforms are intended for people, not people for reforms. (…) Change will come. Yes, it will be gradual and well thought out, and go step-by-step. But it will be steady and consistent,” Medvedev said, according to Interfax.

Medvedev significantly failed to mention the role of the mass media and freedom of the press in his article. Instead, he highlighted an effective judiciary as the missing link in Russia’s attempts at democraticisation to date.

“Democracy is in need of protection as much as the fundamental rights and liberties of our citizens are. First of all, protection from corruption, which breeds lawlessness, lack of freedom and injustice. We are just beginning to build such a protection mechanism. The judiciary must be its nucleus,” he wrote.

Although insisting Russia had to take its fate in its own hands, Medvedev also said Russia needed more international integration to be successful. “Our internal financial and technological capabilities are insufficient today to give a real boost to the quality of life. We need money and technologies from countries of Europe, America and Asia,” he wrote, according to Interfax.

Medvedev also highlighted the roots of the demographic crisis. “The population is shrinking with every passing year. Alcoholism, smoking, traffic accidents, poor access to many of the modern medical technologies and environmental problems cut the life span of many people. An increase in birthrate that has made itself felt, does not compensate for the number of deaths,” he said.

Medvedev has made a series of strong statements about the impact of alcoholism on Russia’s development, and spoken positively about Mikhail Gorbachev’s ill-fated anti-alcohol campaign. However, specific measures have yet to be formulated.

Afghan heroin could kill US-Russian reset

Graham Stack for Russia Profile (www.russiprofile.org)

In context of the “reset” in U.S.-Russian relations, the two countries’ cooperation over Afghanistan has been hailed as a model for working together in other areas, ranging from Europe to Iran and North Korea. But with the reset hardly underway, opinion differences are already emerging between Moscow and Washington over anti-narcotics policy in Afghanistan.

Russia’s security policy hawks tend to react negatively to the United States acting unilaterally, deploying interventionist military power and tweaking UN mandates to expand missions. But when in 2008 U.S. hardliners pushed for the American military and allies to widen the fight against the Afghan Taliban to include military engagement of the country’s billion-dollar narco-industry, including a shoot-to-kill policy against heroin producers and a blanket aerial crop-eradication campaign, Russia’s siloviki stood up and applauded.

U.S. hardliners regarded Afghanistan’s opium production as a crucial source of financing for the strengthening Taliban insurgency, and drew inspiration from the America’s experience of having fought and largely won a war with drug producers in Columbia. In 2007, the U.S. ambassador to Columbia William Wood, an ardent supporter of aerial crop eradication, was reassigned to Afghanistan to step up the war on drugs. “If there is no poppy, there is nothing to traffic,” Wood told reporters on arrival. In 2007, military operations supporting manual eradication got underway, and in January 2009, a leaked letter by NATO’s Supreme Commander General John Craddock to European counterparts declared an effective shoot-to-kill policy for the drug war, saying it was “no longer necessary to produce intelligence or other evidence that each particular drug trafficker or narcotics facility in Afghanistan meets the criteria of being a military objective.”

Iraq, Iran and North Korea are all examples where Russia has vehemently opposed the use of American military force against weapons of mass destruction. But without any sense of irony, Viktor Ivanov, the head of Russia’s Federal Anti-Narcotics Service (FSKN) speaking in February called Afghanistan’s heroin “a weapon of mass destruction of a special kind,” and expressly demanded that the United States and its allies in Afghanistan engage and destroy it.

Ivanov’s reasoning is clear: Russia is the country worst affected by Afghanistan’s heroin exports. According to FSKN statistics, Russia has up to 2.5 million drug addicts, mostly in the critical reproductive age group of 18 to 39, with the number surging by 80,000 a year. Ninety percent of drug addicts in the country use Afghan heroin. These alarming figures do not take into account the enormous number of HIV infections transmitted via dirty needle sharing. “Today it is self-evident for everyone that the state should take decisive emergency measures to prevent an approaching national catastrophe,” Reuters reported Ivanov as saying in May, adding that “it is time the world community got serious about the Afghan drug problem.”

Although Ivanov has no official foreign policy remit, he is not simply a law-enforcement officer lobbying for a larger budget. A former KGB officer, he is a longstanding associate of the current Prime Minister Vladimir Putin, and a key member of the influential “silovik” network of former KGB officers from St. Petersburg responsible for Russian security policy. He was a top Kremlin aide throughout Putin’s presidency before moving to the FSNK in 2008. And there is also a special personal background to Ivanov’s interest in Afghanistan: he served there with the Soviet forces in the 1980s during the Soviet Union’s disastrous occupation. His move to the FSNK duly shifted the organization’s attention from the domestic to the international dimension of Russia’s heroin problem.

It is testimony to Ivanov’s influence that the joint declaration given by U.S. President Barack Obama and Russian President Dmitry Medvedev at June’s Moscow summit listed combating illegal drug trafficking alongside the fight against terrorism and armed extremism as shared goals in Afghanistan, with Obama acknowledging that “Russia has deep concerns about the [Afghan] drug trade and its infiltration into Russia.”

New man on the job

The Obama-Medvedev summit was the birth of the U.S.-Russian “reset,” and the new spirit of cooperation was marked by Russia’s agreement to allow the transit of U.S. weapon cargo to Afghanistan. But ironically, as part of Obama’s global adjustment of foreign policy, the U.S. policy in Afghanistan is also being reset – and the results are not looking like anything Russia would want them to be.

Obama’s shift away from George Bush’s hardline policies has seen both general Craddock and ambassador Wood lose their posts this year. Instead, a veteran Democrat diplomat Richard Holbrooke has taken over the U.S. policy in the area as the American special envoy to Afghanistan and Pakistan. Holbrooke is a longstanding opponent of any form of crop eradication, whether on ground or by air, and indeed largely denies that Afghanistan’s opium trade is the main source of funding for the Taliban insurgency.

“If the drugs ended tomorrow, it would not have a major effect on the Taliban source of funding,” Holbrooke declared in June at a ceremony to mark General Stanley McChrystal’s assumption of command of American and NATO forces in Afghanistan.

Holbrooke pointed out that the ground-based crop eradication program has been costly in terms of money and lives, and has failed to make any impact. These are points the Russians agree with – but instead of ending crop eradication, Ivanov is demanding a step-up to aerial eradication, and lamented general Craddock’s departure in an interview he gave to the Kommersant daily in June.

In response to Holbrooke, Ivanov claims it would be possible to end the Afghan opium production swiftly, and adduces two examples: firstly, he says, following the UN’s condemnation of Afghanistan’s heroin exports in 1999, in 2000 and 2001 the Taliban reduced the opium harvest practically to zero. Secondly, the U.S. crop eradication campaign in Columbia has been largely successful. According to Ivanov, 74 percent of the coca crop was destroyed in 2008, with no increase in armed resistance.

Ivanov says the UN should force the United States and its allies to take decisive action against opium production in Afghanistan, firstly by declaring Afghan’s narcotics trade an international threat, as it has done with terrorism and piracy. Following this, Russia should make the next annual renewal of the UN mandate for international troops in Afghanistan conditional on action against heroin production and trafficking. “The further presence of coalition forces in Afghanistan should be made conditional on an undertaking to destroy drug fields,” Ivanov told a conference in April. Russia’s UN Security Council veto means that theoretically, Russia has the leverage to do this.

Ivanov has gone as far as to propose tying U.S. transit of weaponry to Afghanistan via Russia to a more active pursuit of crop eradication on behalf of the Americans. “The granting of transport corridors to NATO forces in Afghanistan should be conditioned on a commitment to destroy sown areas, laboratories, stocks and other infrastructure of the Afghan drug business,” he told Russia’s Duma in late June.

With Russian demands for crop eradication becoming more strident while U.S. strategy moves decisively away from the approach, the signs do not bode well for U.S.-Russian cooperation in the one policy area where it has been strongest to date.

At the same time, however, U.S. strategy is shifting away from unconditional support for the Afghan President Hamid Karzai, an opponent of crop eradication who has been frequently accused of protecting major figures involved in opium and heroin production. Indeed, on August 28 reports appeared in the media that Holbrooke had had a major row with Karzai over allegations of ballot-stuffing in the August 20 presidential elections.

A more distanced approach toward the Karzai administration could make Holbrooke’s plan to go after the big fish of heroin production and trafficking, instead of the small fry opium farmers, seem more plausible to the Russians. This is something that Ivanov, who has called for a UN blacklist of Afghan drug barons to be compiled, could go along with. On the other hand, Russia’s drugs tsar is skeptical that the big fish can be found in Afghanistan. “All these people live a long way from Afghanistan, for instance in United Arab Emirates and Saudi Arabia,” he told Kommersant in June

Medvedev moves against state corporations

Graham Stack for Russia Profile (www.russiaprofile.org)

Medvedev Asks State Prosecutor General to Inquire into the Activity of Seven Major State Corporations

The much-anticipated shift toward more liberalism in Russia marked by Dmitry Medvedev’s election as president in March of 2008 but delayed by last year’s war with Georgia and this year’s economic crisis looks to be slowly getting started. Under the Kremlin’s patronage, an alliance appears to be forming against the state corporation juggernaut.

In December of 2007, a key Medvedev friend and confidante, university friend and law faculty colleague Anton Ivanov, now chairman of the Supreme Arbitrage Court and as such the chief of Russia’s system of commercial courts, said that “relations between state and business are like a seesaw – they tip to one side and then to another. There was a time when the state had lost influence over business to the extent that it practically handed out indulgences for the non-payment of taxes. Now we are in tougher times. Perhaps the seesaw has even tipped too far in the other direction, and it is time to re-determine the correct balance between business interests and state authority.”

Anton Ivanov plays a similar role for Dmitry Medvedev to the one that Sergei Ivanov played for former-President and now Prime Minister Vladimir Putin – a trusted friend and a top official. And whereas Sergei Ivanov counted as a key member of Putin’s hawkish network of former St. Petersburg KGB agents known as the “siloviki,” Anton Ivanov is a key figure in Medvedev’s liberal network of the St. Petersburg civil law scholars, nicknamed the “civiliki.”

However, the shift from statism back toward liberalism has been slow in coming. Cynics argue that Medvedev is merely a placeman until Putin resumes the presidency in 2012. Optimists say a planned policy shift has been derailed by the Georgian war in 2008 and the economic collapse in 2009.

Until now the cynics seemed to have the better arguments. However, in what is seen as Medvedev’s first real independent initiative, on August 10 he requested the State Prosecutor General Yuri Chaika to audit the activity of the seven state corporations set up in 2007 to manage various fields of the economy, from the defense sector production and export to the construction of facilities for the 2014 Sochi winter Olympics.

With their wide-ranging powers and little room for oversight and accountability, the state corporations seem to adhere to a state-dominated model of bureaucratic capitalism that could crowd out private enterprise and increase corruption. Moreover, over the previous eight years their anomalous legal form – neither truly state-owned nor private, neither truly non-commercial nor solely profit-oriented – has outright contradicted much of the progress in creating a unified legal space in Russia.

In speeches and interviews in the run-up to his election as president, Medvedev frequently repudiated “state capitalism,” calling it a dead end and declaring that he is on the side of private enterprise and innovation. His failure to back words with deeds until now only reinforced the impression that he was a puppet of his Prime Minister Vladimir Putin.

Collective discontent

Medvedev’s move comes just after a number of different bodies raised a chorus of criticism of state corporations in June and July. This points to a carefully orchestrated campaign to discredit state corporations and to the fact that the president has enough political backing across state bureaucracies to get his way.

The first blow was dealt by the “civilik” Anton Ivanov. In early June, in an interview to the Vedomosti business daily, Ivanov publicly reprimanded state corporations, calling for a moratorium on their creation and for the enforcement of “generally-binding norms for all legal entities.” “It is not for nothing that legal scholars criticize state corporations,” he said. “Because their assets are private, but you can’t call them private in essence. And if the decision was to be taken to liquidate a state corporation, who would get the stakes in the companies owned by them? We need to stop calling old structures by new names, when they in fact remain the same in essence.”

In June, the Presidential Council on Legal Codification went even further, calling for the elimination of state corporations as a legal form altogether, since they have no place in Russia’s civil code.

Then in July and August, the powerful Audit Chamber and the Anti-Monopoly Service joined in the chorus. Both are headed by former members of the liberal Yabloko party, Sergei Stepashin and Igor Artemev, respectively. Perhaps more importantly, they both have little jurisdiction over state corporations and would like to change this.

Thus, a report prepared by the Federal Anti-Monopoly Service (FAS) and leaked to the Kommersant daily named state corporations as one of the main threats to competition in the Russian economy. Writing in Vedomosti about the correct way to go about modernizing the Russian economy, the Head of the Audit Chamber Sergei Stepashin argued that this had to be done by changing legal norms to support and reward innovations, not by Soviet-style “sectoral” corporations, which he said “had failed to justify themselves.”

Finally, Valentin Zavadnikov, the chairman of the Federation Council’s industry committee, put up bitter resistance to a draft bill setting up a state corporation to run Russia’s roads. Back in February of 2008, Zavadnikov authored a damning Federation Council report on state corporations, calling them “the perfect chance to transfer state property to the non-state sector with no financial benefit for the state and at the risk of uncontrolled use and alienation of assets.”

Civiliki vs. siloviki

The Kremlin’s move against state corporations has two targets: the “civiliki’s” concern about the disastrous implications for Russia’s developing civil code of the state corporation anomaly and the desire to eradicate it by converting state corporations into other legal forms provided for in the civil code – such as joint stock companies or government agencies.

Ironically, this might be the easier part. A number of state corporations themselves are headed by liberals who are likely to tow the Kremlin’s new line. Liberal Anatoly Chubais, the head of Rosnanotech, the state corporation for developing nanotechnologies, declared in August that changing the legal form would make no real difference in Rosnanotech’s activities. Sergei Kirienko, a former liberal party colleague of Chubais and now the head of atomic power state corporation Rosatom, is also unlikely to object to a change in form. Nor is Dmitry Kozak, the head of the Olimpstroi State Corporation for constructing the facilities for the Sochi 2014 Olympics and a liberal colleague of Medvedev’s at the St. Petersburg law faculty, likely to kick up a fuss. In fact, Vedomosti recently reported that Olimpstroi is likely to be transformed from a state corporation into a federal target program.

As a sign of the tide turning against state corporations, one planned state corporation to own and run Russia’s roads was scaled down to a state company in July, thanks to the efforts of the above-mentioned Valentin Zavadnikov in the Federation Council. Likewise, there apparently will be no state corporations in the space and rocket industry, Deputy Prime Minister Sergei Ivanov told journalists yesterday. Instead, the country will resort to forming vertically integrated public joint-stock companies.

And in August, Russia’s Finance Ministry abandoned the project of a state corporation for managing Russia’s financial assets. Deputy Prime Minister and Finance Minister Alexei Kudrin, who in 2007 criticized state corporations for de facto privatizing state assets free of charge, said that the state corporation form “was no longer deemed suitable” and another legal form would be found instead to do the same job.

But the big stumbling block will be what to do with the mother of all state corporations – Russian Technologies (RT) – the very first state corporation established in December of 2007. RT was originally based on defense sector exporters and their suppliers, but rapidly snowballed to include companies ranging from metallurgy to carmakers. The corporation is headed by the influential friend of Putin’s Sergei Chemezov. He is the man who single-handedly tailored the state corporation legislation to suit his personal goals, and is not likely to surrender his huge privileges without a major struggle.

Suspicion of Russian Technologies’ activity runs even deeper than suspicion of the legal form of state corporations. Chemezov’s activity as head of RT seems not just to threaten the integrity of the civil code, but the overall primacy of private property in the Russian economy. In contrast to the other state corporations that operate in specific fields of activity, Russian Technologies has acted as a cross-sectoral “Ministry of Deprivatization,” acquiring privately-owned companies and often prompting accusations of behaving semi-legally as a “corporate raider.” RT’s latest major hostile acquisition was the fairly successful engine and turbine producer Saturn, which, as a private company owned by CEO Yuri Lastochkin, developed engines for the Superjet aircraft and a new generation of turbines for gas-fuelled power stations.

According to Kirill Rogov of the Institute of Economy in Transition, “Medvedev’s target is not only state corporations in general, but also one certain corporation in particular: Russian Technologies. Whereas for other state corporations the consequences will be limited to adjusting their status to conform with the Constitution and Russia’s laws, for Russian Technologies this is the beginning of the end of the project itself.”

Halting the Russian Technologies juggernaut would thus finally mark a modest beginning to the project announced by Anton Ivanov in December of 2007 of re-tipping the scales away from the state, and back toward private enterprise.

Legal eagles Obama and Medvedev swap notes

Graham Stack for Russia Profile (www.russiaprofile.org)

The Connection Between the Lawyer Presidents is More Curious than Medvedev Seems to Have Realized

When they first met, Russian President Dmitry Medvedev played up the common legal background he shares with U.S. President Barack Obama. And despite question marks over the veracity of Medvedev’s claim to have studied a “legal reference work” authored by Obama, the influence of the Russian president’s legal schooling is palpable, in his public statements, policies, and above all his appointments. But is his habit of hiring like-minded colleagues really a bid to consolidate the rule of law, or just good old-fashioned nepotism?

Relations between U.S. and Russian presidents are full of paradoxes. Since the collapse of the Soviet Union, each new Russian president has been paired with a new U.S. president – Bill Clinton and Boris Yeltsin, George W. Bush and Vladimir Putin, and now Barack Obama and Dmitry Medvedev. The previous two presidential pairs featured an unlikely personal bond, which nevertheless failed to prevent tensions escalating between the countries.

Obama, after his first meetings with Medvedev, seemed to deliberately avoid any sentimentality, emphasizing that he wants a relationship based on shared national interests, not personalities. In fact, Medvedev’s response to Obama was more personal than vice versa, inspired by his and Obama’s common background as legal scholars.

Following the two presidents’ first meeting at the G20 summit in London in March, Medvedev commented that “we have read the same books.” Following a bilateral meeting at the G8 summit in L’Aquila on July 10, the footnote swapping seemed to have gone one step further: Medvedev said he had previously studied a “legal reference work” co-authored by Obama. “This is curious to say the least,” Medvedev remarked.

The issue is actually even more curious than Medvedev seems to have realized: Obama, as a legal scholar, published nothing, except one research note to the Harvard Law Review as a graduate. Medvedev’s own publication record is far more impressive than Obama’s – having co-authored a standard work on Russia’s civil code in the 1990s.

What publication was Medvedev referring to, then? It could be that he meant the Harvard Law Review. Obama famously edited the prestigious periodical between 1980 and 1990 as its first black editor. These were also the years when Medvedev was completing his doctorate in St. Petersburg.

However, according to a number of sources, it is extremely unlikely that the journal was available at St. Petersburg State University until the late 1990s. Also it is unclear why Harvard Law Review could have been interesting for a Russian legal scholar at that time.

More likely is that Medvedev confused Obama’s editorial position at Harvard Law Review with his later teaching post at University of Chicago. University of Chicago law school publishes the famous journal “Law and Economics.” “Law and Economics” is the flagship journal of the neo-institutional economic school that analyses an economy according to its legal institutional framework, and as such is a key journal in Medvedev’s field of commercial law. Obama’s faculty friend and now top economic advisor, Austan Goolsbee, was lead editor of the journal in the 1990s.

Neo-institutional economics became mainstream in Russia in the second half of the 1990s, as it became clear that macroeconomic stabilization and privatization did not work if an economy lacked efficient laws and institutions. As a result, government economic reforms started to focus on the legal sphere. This shift was embodied by the appointment of legal scholar German Gref as a long-serving economy minister between 2000 and 2007. Gref studied and taught alongside Medvedev in the St. Petersburg law faculty in the early 1990s.

Medvedev must have studied this school of thought – and may (wrongly) think Obama edited its foremost journal when he taught at the University of Chicago. In fact Obama taught constitutional law, and was concerned with issues of race and citizens’ rights quite distant from Medvedev’s scholarly interests.

Civiliki: Network or norms?

Whatever the truth, Medvedev’s response to Obama demonstrates how strong his identity as a civil law scholar remains, despite years of working in the Kremlin and government. This is an identity he shares with other top officials and friends, nicknamed the civiliki, to distinguish them from Vladimir Putin’s ex-KGB network of siloviki.

This identity was underscored last week by a visit to his alma mater, St. Petersburg University’s law faculty, posted on his video blog on the Kremlin website, where Medvedev reminisces about his years studying and teaching there. Ilya Nikiforov, an associate lecturer at the civil law department, pointed out that “Medvedev even contributed a chapter for a civil law textbook, co-authored by members of St. Petersburg Law School, after having become president last year.”

Medvedev’s background in law does not just serve him intellectually, but as a source of personnel appointments. Besides Gref, who now heads Russia’s largest bank, the state-owned Sberbank, the new Minister of Justice Alexander Konovalov also studied and taught alongside Medvedev in Petersburg in the 1990s, where he lectured on Roman and civil law.

From among Medvedev’s undergraduate classmates (class of 87), Konstantin Chuichenko heads the Central Control Directorate in the presidential administration, Nikolai Vinnichenko is presidential envoy to the Urals Federal District, Artur Parfenchikov heads the State Bailiffs Service, Nikolai Gutsan is deputy prosecutor general, and Valeriya Adamova chairs the Moscow Arbitration Court. About a dozen other colleagues and classmates are scattered through the top echelons of the state as well as Gazprom.

Most civil among the civiliki, and the closest to Medvedev, is his longtime friend, former classmate, faculty colleague and textbook co-author, Anton Ivanov. Ivanov was catapulted to head Russia’s Supreme Arbitration Court, the country’s court of final instance in commercial disputes, also with prerogatives in norm setting, in 2005.

Like Medvedev, Ivanov has retained close ties to academia, as scientific director of the law faculty of Moscow’s prestigious Higher School of Economics. According to deputy dean of the faculty, Natalia Rostovtseva, Ivanov’s position is not a formality. “He plays an active role in the life of the faculty,” said Rostovtseva. “He teaches the second year course on the civil code, and examines. Moreover, he insists that students get practical experience by attending sessions of the Supreme Arbitration Court and completing internships there.” Ivanov himself complains that he now only has time for three or four publications per year.

Ivanov is notable for having taken a principled position against siloviki policy in the state sector of the economy. In June he called for a moratorium on the creation of state corporations such as giant defense sector and engineering holding Russian Technologies, headed by leading silovik Sergei Chemezov, a personal friend of Vladimir Putin’s. Ivanov argued that Russia’s civil code does not envisage any such hybrid form of private and state property, and demanded “common norms for all legal entities.”

Likewise, Medvedev’s rhetoric against “legal nihilism” and his calls to strengthen the rule of law obviously draw on his roots in jurisprudence.

On the other hand, the civiliki network might turn into a “jobs for the boys” club, ensuring the loyalty to Medvedev of what are meant to be independent institutions. On July 7, for instance, a former St. Petersburg law faculty member, Sergei Mavrin, was proposed by Medvedev as deputy chairman of the constitutional court. Prior to this, new legal amendments empowered the president to propose candidates, whereas previously judges had voted on new members. Mavrin is now widely tipped to head the constitutional court when current head Valery Zorkin steps down in 2012.

So the crucial test for Medvedev’s presidency could be whether his declared interest in strengthening legal norms is actually implemented, or whether his academic background will simply serve him as a source of cadres, equivalent to Vladimir Putin’s siloviki network.

Similarly in U.S.-Russian relations, a reset will only work if Obama’s and Medvedev’s shared legal background helps them move ahead with strengthening the rule of law in the international sphere. If their legal interest is simply used as a basis to build a personal relationship, the history of the previous two presidential pairs, where personal friendship failed to prevent escalation of Russian-U.S. tension, may be doomed to repeat itself.

Kudrin and Aven sound the alarm on banks

President of Alfa Bank Pyotr Aven yesterday March 26 said the level of overdue loans in the Russian financial system in 2009 could reach 15-20%, and that hundreds of banks could disappear. Deputy Prime Minister Aleksei Kudrin  in separate comments put the current level of non-performing levels at already 10%.

“We can expect that the level of overdue loans for the whole system might reach 15-20 per cent” by the end of the year, Aven told the Financial Times March 26.

“Maybe the 20-30 biggest banks, including Alfa, will receive state support – we’re sure. But the future of hundreds of small banks is under big question … we believe that hundreds of banks will disappear by the end of the year,” the FT quotes Aven as saying.

Royal Bank of Scotland’s emerging market analyst Tim Ash says Aven’s comments meanthat, “we are still far from convinced that we are anywhere near the end of the adjustment process in the bigger picture credit crunch/global de-leveraging/de-globalisation process.” “We would expect a similar feed through from the real economy slowdown to banks/public finances across the CEEMEA region,” adds Ash.

Deputy Prime Minister Alexei Kudrin recently warned that non-performing loans would constitute the ‘third wave’ of the financial crisis in Russia. Yesterday Interfax reported that during a meeting with bankers Kudrin estimated the ‘real’ level of NPLs in the banking system at close to 10%. Although as of end of February, ‘official’ NPLs stood at only 3.4%, Kudrin attributed the difference to banks’ unwillingness to recognise all bad debts as such,including debts subject to restructuring.

According to the newswire, he suggested that such a level of overdue loans might provoke the situation in the sector to deteriorate further in
the near future.

VTB Capital’s Dmitry Dmitriev writes, “we believe Kudrin’s estimate to be realistic if restructured loans are also included in the overdue numbers (which they are not in the CBR’ statistics). Nevertheless, we believe that the official data will converge with Kudrin’s assessment and are reiterating our forecast of 10% NPLs in 2009 and 14% in 2010.”

Alfa president Aven, in his comments to the FT, criticised the Russian central bank for keeping refinancing rates high at 15 to 19 per cent. He said this forced commercial banks to lend on at even higher rates of 25 per cent, making loans expensive.

Aven anticipated bankruptcies hitting the banking system in the third quarter 2009, when loans start to fall due. Aven also anticipated serious changes in the ownership of industrial groups. “When we are at the bottom we shall see some very serious bankruptcies,” the FT quotes him as saying.