Posts from ‘November, 2006’

EXTRACT: In mid-November, government environmental inspectors vowed to revoke the licenses of oil giant Royal Dutch Shell Plc to continue work on a Far East oil exploration venture called Sakhalin 2, in which Shell has a 55 percent stake. Iskyan says the government’s motive is to win a controlling stake in the project for itself.

Browder doesn’t think any amount of scandal will deter investors so long as Russia’s oil billions keep flowing. “People will ignore my visa, people will ignore Kozlov’s assassination, people will ignore Shell’s problems as long as the money supply is going up, as long as asset prices are going up,” Browder says.

THE ARTICLE

By James Brooke

Nov. 30 (Bloomberg) — In central Moscow, construction cranes loom over the Kremlin, as hotel and office towers rise up to accommodate Russia’s newly minted companies and the flood of foreign business visitors. Downtown apartments that cost $100,000 a few years ago now cost $1 million.

On weekends, shoppers by the thousands line up behind cash registers at the 150,000-square-meter Tyoply Stan suburban mall, loading up on home furnishings, televisions and cell phones. Stockholm-based Ikea, which owns the mall, reported that it received 52 million shoppers in 2005, making it the most-visited shopping center in Europe.

Moscow is adding 100,000 cars to its roads every year, and the congestion is so bad that on Oct. 31, players from Russia’s Spartak soccer team were forced to abandon their bus and take the subway to the stadium, arriving just in time for their Champions League match against Inter Milan. When Spartak lost, 1-0, the coach blamed the traffic.

Across Russia, consumer loans doubled in the first nine months of 2006 to $80 billion. The country has seen eight straight years of economic growth, with expansion for 2006 estimated at 7 percent, according to Economy Minister German Gref. That’s more than three times the rate in the European Union. Bankrupt a decade ago, Russia wrote $23.7 billion of checks on Aug. 21 to repay government debt run up during the 1998 ruble crisis, in which it defaulted on loans and bonds.

Must Diversify

Much of Russia’s new prosperity can be traced to a single source. “Russia’s economy is about oil,” says Natalia Orlova, chief economist at Moscow-based Alfa-Bank. Oil and gas account for 65 percent of Russia’s exports and 60 percent of federal tax receipts. With retail sales, services and construction now fueling Russia’s boom, “consumption is financed by oil revenues,” she says.

Russian President Vladimir Putin is the first to point out that this golden era of energy can’t last. “The main task of the government in the near term is to diversify our economy,” Putin said on Oct. 25 in a three-hour, nationally televised question- and-answer session. He returned repeatedly to this theme, calling it Russia’s “overarching task.”

Putin, 54, wants the country to be a top producer of autos, aircraft and other manufactured goods.

Russia is the world’s largest gas exporter and second- biggest oil exporter, after Saudi Arabia. The 92 percent rise in petroleum prices in the past three years has swelled the coffers of both the big oil and gas companies and the government.

The Kremlin’s hard currency reserves jumped more than 65 percent in the year ended on Nov. 17, to $279 billion, more than the reserves of the entire euro zone. Russia has also profited from high prices for aluminum, gold and copper. Oil, gas and other commodities now account for 80 percent of Russia’s exports.

Disaster: $30 Oil

The price of oil on Nov. 29, at $62, was down 19.5 percent from its Aug. 7 high of $77. “If oil went down into the $30 range, there would be a lot less cash in the economy, a lot less money flowing into equities, and consumer demand would trail off significantly,” says Kim Iskyan, co-head of research at Moscow- based investment house MDM Bank.

The government has tried to protect itself against such an event by setting up an offshore “stabilization fund” that held $77 billion as of Nov. 1, Iskyan says.

Putin says his government is striving to expand job opportunities in manufacturing, technology and other fields. By the end of this decade, Russia’s car production will double to 2 million units a year and up to 70 percent of parts for the cars will be produced in Russia, he predicts.

“Fifteen of the world’s largest manufacturers have announced the beginning of car assembly on our territory,” he said in his October talk.

Government Role

Putin, who says he plans to step down as required by law when his second term ends in May 2008, believes the government has a strong role to play in creating economic diversity. In his national Q and A, he called on the nation’s state- and privately owned aircraft makers to unite into one state-owned holding company.

One week later, the company he proposed, OAO United Aircraft Corp., was established in Moscow.

Putin’s government has also sought to cement a dominant role in the gas and oil industries for state-controlled gas giant OAO Gazprom and OAO Rosneft Oil Co. State-aligned companies in steel, aluminum and other commodities have received similar support.

In mid-November, government environmental inspectors vowed to revoke the licenses of oil giant Royal Dutch Shell Plc to continue work on a Far East oil exploration venture called Sakhalin 2, in which Shell has a 55 percent stake. Iskyan says the government’s motive is to win a controlling stake in the project for itself.

Greenspan Criticism

First Deputy Prosecutor General Alexander Buksman told the press in a November interview that preserving nature on Sakhalin Island is a real concern. “No one here is allowed to damage the environment with impunity,” he said. “The law will demand harsh repercussions for that.”

In mid-October, former U.S. Federal Reserve Chairman Alan Greenspan criticized Russia’s swing back to big state companies. “National champions, by definition, are those that don’t maximize profitability,” Greenspan, 80, told an annual investors’ conference in New York sponsored by Moscow-based investment bank Renaissance Capital. “Competition is critical.”

Elections could further swell the government’s outsized role in the economy. A parliamentary vote is scheduled for December 2007, and a presidential poll for March 2008.

Vladimir Gersamia, a fixed-income strategist and Russia expert at Merrill Lynch & Co. in London, says that while the two pro-Putin parties that control the Duma, the 450-seat legislature, are seen as easy winners in the parliamentary vote, the Kremlin is taking no chances. It’s pushing through a 26 percent increase in the federal budget for 2007.

High-Speed Trains

Among planned projects: a $2 billion highway linking Moscow and St. Petersburg and $24 billion in rail improvements, including the purchase of eight German-built high-speed trains.

“Russian fiscal discipline has been exemplary in recent years,” Gersamia says. “Now, with elections coming up, the general political impetus is to spend this money.”

According to the Federal State Statistics Service, Russia now has 1.5 million civil servants, about twice the number it had during the waning years of the Soviet Union.

Consumers are spending as prodigiously as the government. And they are increasingly buying imports. Russia was on track in mid-November to import $150 billion of foreign goods in 2006, double the amount in 2003. East of Siberia’s Lake Baikal, the foreign goods usually say Made in China. West of the lake, they originate in the U.S. or Europe.

Consumer Gold Rush

Andrew Somers, president of the American Chamber of Commerce in Russia, has a front-row seat for the gold rush. “I am briefing a substantial American company at least once a week,” he says.

Sales growth rates for consumer products produced by American companies such as Altria Group Inc. and Procter & Gamble, he says, “are a minimum 25 percent and often at 80-120 percent.”

The chamber of commerce, which has 800 member companies, says American companies have invested a total of $75 billion in Russia in the past 15 years. On Nov. 8, International Business Machines Corp. announced plans to expand from its Moscow base to an additional 20 Russian cities.

“Opportunities continue in almost every sector other than energy production,” Somers says. In energy services, companies such as Halliburton Co. and Schlumberger Ltd., both Houston based, “are doing fine,” he says.

There are so many foreign businessmen visiting Moscow that hotel space is at a premium. By 2010, Moscow will have 248 new hotels with 90,000 rooms, according to Grigori Antyufeyev, the city’s tourism director.

Five Star Face Off

The Kremlin’s north redbrick wall will be the backdrop for a five-star hotel duel. In March, the Ritz-Carlton Moscow, with 337 rooms, is scheduled to open on the site of an old Intourist hotel, with rooms starting at 650 euros ($830). In 2008, the Four Seasons Moscow will launch across the street from the Ritz.

U.S. investors still feel constrained by Russian trade barriers. In late October, executives at Chicago-based aircraft maker Boeing Co.; Dearborn, Michigan-based Ford Motor Co.; and 12 other companies sent a letter to Putin and U.S. President George W. Bush urging them to speed up Russia’s entry into the World Trade Organization so that tariffs on both sides could be reduced.

WTO Promise

In November, Bush and Putin announced an agreement on the terms under which the U.S. would approve Russia’s WTO entry, which must be sanctioned by every current member.

As the new Democratic-controlled Congress prepares to take office, it is unclear whether it will vote to lift cold war restrictions on trade with Russia. So even if Russia joins the WTO, American companies may not be able to take full advantage of lowered import tariffs.

Russia’s business image among foreign investors was dented in 2006 by several events. In the spring, William Browder, the largest single foreign investor in Russia, was denied a visa. Then, in September, Andrei Kozlov, first deputy chairman of Russia’s central bank, was gunned down while exiting a soccer game.

In October, award-winning journalist Anna Politkovskaya, who uncovered abuses against civilians in Chechnya, was killed in her Moscow apartment building. And in November, Alexander Litvinenko, a defector from Russia’s spy agency and an opponent of Putin, died in London, apparently killed by a rare poison, radioactive polonium 210. Investigations continue into the three murders.

Ignoring Scandal

Browder, a British citizen who’s chief executive officer of Moscow-based hedge fund firm Hermitage Capital Management, now runs his company’s $3.2 billion portfolio from London while he seeks a reversal of the Russian government’s unexplained decision not to renew his visa. Investigations continue into the Kozlov and Politkovskaya murders.

Browder doesn’t think any amount of scandal will deter investors so long as Russia’s oil billions keep flowing. “People will ignore my visa, people will ignore Kozlov’s assassination, people will ignore Shell’s problems as long as the money supply is going up, as long as asset prices are going up,” Browder says.

As of Oct. 1, 2006 incomes had increased by 17 percent, construction was up 15 percent and retail sales jumped 13.5 percent from a year earlier.

Russia’s oil bonanza has created a burgeoning middle class. Average annual per-capita income has increased 4.5 times during Putin’s seven years of running Russia, to $4,214 as of November, according to MDM Bank.

Conspicuous Consumption

Visitors to Russia are impressed by the conspicuous consumption in the tonier neighborhoods of Moscow and St. Petersburg. “Everyone is spending like crazy,” Gersamia says. “Moscow is like the Gulf emirates. People are spending huge amounts of money. Real estate is bizarrely expensive.”

Sales of Bentley autos, a luxury division of Volkswagen AG, were up 71 percent in the first seven months of 2006, according to Hermitage, helped by a glistening dealership a block from the Kremlin. DaimlerChrysler AG’s Mercedes-Benz sales jumped 91 percent in the same period, while sales of Bayerische Motoren Werke AG cars were up 225 percent.

Executives at BMW Russland Trading, which assembles the German automaker’s luxury cars in Russia, aren’t worried. “We tripled our sales in the last three years,” Christian Kremer, the company’s president, says. “We are quite optimistic about the future.”

Millionaire Fair

Moscow features a stream of consumer shows directed at millionaires. At one October exposition, called Extravaganza, Russia’s new rich inspected prospectuses for private jets, apartments in Dubai and townhouses in Knightsbridge, London.

“Our Russian clients could have 10 to 20 homes around the world,” said Shirley Humphrey, sales director for real estate firm Harrods Estates Ltd. “But many want to be in London because their children are going to university there.”

Humphrey was dressed in conservative clothes as she greeted prospective clients. Nearby, three models in leopard-skin bikinis pranced through the fair, advertising luxury safaris to Kenya.

It’s not just the oil and gas executives and entrepreneurs who are prospering in oil-soaked Russia. Federal prosecutor Buksman says corruption among public officials is rampant.

“By some expert estimates, the volume of corruption in our country is comparable to federal budget revenue and is worth $240 billion and more,” Buksman said on Nov. 7. “The size of bribes has reached such a level that, in a year, an ‘average’ corrupt civil servant can buy an apartment with a floor space of 200 square meters.”

Gusher Runs Dry?

An apartment of that size in Moscow would cost about $830,000, according to irn.ru, a real estate Web site.

Even as Moscow parties on, Anders Aslund, a Russia specialist at the Peter G. Peterson Institute for International Economics in Washington, is predicting that the gusher will run dry.

One reason, according to Aslund: the government’s failure to invest in the very sector that has created its new wealth. Only 8 percent of total national investment is in gas and oil, Aslund says. With petroleum income above $25 a barrel taxed at 90 percent, he says, the oil companies themselves have no incentive to invest in new production. To raise gas production Russian Energy Minister Viktor Khristenko said Nov. 29 that he wants to raise now subsidized domestic gas prices to international export levels by the end of this decade.

Leaping sales of Beemers and Bentleys do not make a diversified economy. In his office-in-exile in London, Browder pulls out graphs showing that the rise in the price of Moscow real estate, along with the growth in the sales of art and other luxury goods, closely tracks the growth in Russia’s money supply, which is in turn driven by export revenues that come overwhelmingly from sales of gas and oil.

Clearly, he says, if the petroleum boom ends, so will the good times for much of Russia.

To contact the reporter on this story: James Brooke at

jbrooke2@bloomberg.net .

Last Updated: November 30, 2006 01:55 EST

(Leon Aron, resident scholar at AEI.)
  
EXTRACT: Putin’s statist ideology has also been felt by the main foreign investors in Russia’s oil sector. This past fall, the Kremlin halted or threatened to halt operations by Royal Dutch Shell, ExxonMobil, France’s Total, and the Russian-British TNK-BP. Notwithstanding official explanations for this move–from environmental violations to cost overruns to disappointing output–it is an open secret in Moscow that the government’s prime motive is to pressure the companies into either surrendering a share of production to the state or handing back their development licenses.
 
By Leon Aron
Publication Date: November 29, 2006
Leon Aron is a resident scholar at AEI.
 
“Is Russia Going Backward?” That was the question posed by the title of an article that I completed in late August 2004 and published in the October 2004 Commentary. My qualified answer was no. Having supported Russia’s democratic, free-market revolution at every critical juncture during more than a decade of upheaval–from the election of Boris Yeltsin as president of what was still Soviet Russia in June 1991 and the rejection of the hard-line coup two months later, to the referendum in March 1993, Yeltsin’s re-election in 1996, and the toppling of the Communist-led plurality in the Duma in 1999–the Russian people, I argued, were not turning their backs on the reforms they had stoically sustained. They were simply ready at last for the new Russian state to be strong enough to help them.

The answer to their wishes was Vladimir Putin (as well as skyrocketing oil revenues). Putin, who became President of Russia in 2000, seemed to embody the hope of combining liberty and order, democracy and prosperity. Young, athletic, hard-working, intelligent, reportedly a teetotaler, he was the opposite in many respects of the by-then exhausted, very sick, and sometimes embarrassingly incoherent Yeltsin. With an astute politician’s sense for his country’s mood, Putin appeared to grasp the duality of its mandate to him. While deploring the things that most Russians detested about the 1990’s–the vulgarity and corruption of the newly enriched “oligarchs,” the arbitrariness of provincial governors, the erosion of law and order, and the delays in the payment of salaries and pensions to millions of current and retired state employees–he also recognized the achievements of the post-Soviet era. In his annual “state-of-Russia” addresses to the Duma and the nation, he extolled the virtues of democracy, the free market, and private initiative.

Nor did Putin just pay lip service to this core legacy of the revolution. As I wrote two years ago, his actions, by and large, had continued to affirm the national consensus: elections as the only legitimate way of choosing leaders, private property as the central fact of the economy, and a foreign policy based on Russia as a non-belligerent, non-imperial nation-state, something it had never been before. These were the factors that I weighed against the more troubling aspects of Putin’s presidency, particularly his campaign to reassert the power of the state and to extend its control over the media and society at large. In the end, the case I made was for vigilance but not full-scale alarm, for concern but not yet disappointment.

By now, however, it has become evident that Putin is taking Russia in a direction not only unmistakably different from the one pursued by Yeltsin but, in many regards, its opposite. For the United States no less than for the Russian people, this turn of events carries profoundly unsettling implications. Not only is the survival of Russian democracy at stake, but so too is Russia’s reliability as a key oil producer and as an actor in the world.

The ideology behind the Putin restoration rests in the first place on a distinct interpretation of recent Russian history. When Putin came into office, the fall of the Soviet Union and the reforms of the late 1980’s and 90’s were generally accepted as the consequences of a free, if imperfectly implemented, choice of the Russian people. Today, that crucial decade-and-a-half is seen in a very different light. Many key policies from that time are now viewed as shameful mistakes, deeply harmful to the country’s interests and committed by leaders who were at best naïve and weak, at worst venal and perfidious–if not, in fact, participants in a vast plot perpetrated by outsiders intent on weakening the Soviet (and then Russian) state. As Putin himself famously declared, the collapse of the Soviet Union was “the greatest geopolitical catastrophe of the 20th century.”

Key postulates of Russian national political culture–so magnificently and, many of us thought, permanently banished by Mikhail Gorbachev and Boris Yeltsin–have now returned in force. It is once again respectable to say that the glory of Russia is the state, that what is good for the state is necessarily good for the country, and that the strengthening of the state is society’s primary objective. Hence, the state functionary (naturally conceived as a model of enlightenment, probity, and public spirit) is today considered a far more effective agent of progress than a free press (so sensationalist and profit-seeking), the voter (so uneducated and fickle), the judge (a bribe-taker), or, heaven forbid, the private entrepreneur.

In a 2005 book, Will Democracy Take in Russia?, Yevgeny Yasin–one of the earliest and most influential theorists of the Russian economic revolution, the mentor of those who led it, and minister of the economy between 1994 and 1997–has described the difference between the 1990’s and today as a clash between two starkly alternative visions of progress. The strategy followed by Yeltsin, he observes, was “modernization from below.” Its engine was private initiative, with big business in the lead, and minimal limitations on civil liberties and political rights. Putin, by contrast, is dedicated to “modernization from above,” with the state as the most powerful actor, the agenda-setter in economic matters as well as in politics.

This has many precedents in Russian history, of course. Epitomized most clearly by Peter the Great and Stalin, “modernization from above” has been pursued, mutatis mutandis, by virtually all Russian leaders, the two most notable exceptions being Czar Alexander II (1855-1881) and Boris Yeltsin. Today, as during previous eras, the implementation of this policy has been accompanied by the loosening of restraints on the state so that it can better mold society to its ends. The executive once again dominates the legislature and the judiciary. Moscow’s control has been re-asserted over formerly self-governing provinces. The national mass media, especially television, also largely bow to the Kremlin. The police, the security services, and servile courts have become policy tools.

The gradual accumulation of executive power under Putin abruptly accelerated in September 2004 after Chechnya-based terrorists seized a school in the south Russian town of Beslan. In a botched operation, the school was stormed by Russian troops; more than 300 people, most of them children, were killed in the resulting carnage. Just days later, Putin announced political “reforms” ostensibly designed to help protect Russia against the dark forces behind the Chechen rebels.

The docile Duma quickly rubber-stamped Putin’s “proposals.” Under them, the election of provincial governors was replaced by “nomination”–in effect, appointment by the Kremlin. Where heretofore half of the deputies in the Duma had been elected by simple local majorities, now the entire Duma would be chosen from national party lists. At the same time, the threshold for parties seeking to enter the legislature was raised from 5 to 7 percent of the national vote; party blocs, which had helped smaller groups win office, were prohibited.

The effect of these “reforms” has been, as intended, to limit and control political competition. At the local and national level, running for office is now far more expensive and cumbersome than hitherto. More important, it is vulnerable as never before to interference from state and federal authorities, who can manufacture dozens of bureaucratic rationales for striking from the ballot virtually any political party or movement the Kremlin deems dangerous. Similar techniques are now being used to stifle the local activities of foreign nongovernmental organizations (NGO’s) like Human Rights Watch and the National Endowment for Democracy.

A similar reversal has occurred in the economic realm. Among the signal accomplishments of the 1990’s was the forging of market institutions from the detritus of the Soviet system. Private property was reintroduced after an absence of almost seven decades, and price controls on most items were eliminated. Russians had been used to spending hours each day in food lines; those now disappeared, along with the once ubiquitous shortages in basic material goods.

The key to these achievements, to cite Yasin again, was the “separation of state power and property”–that is, the wresting of most of the economy from the grip of the bureaucracy. For Russia, where political power had for centuries been virtually synonymous with control over (or outright possession of) the economy under czars or the Communist party, this was a bold departure from the “patrimonial” system.

The Putin restoration has brought about a partial return to the national model. Yasin rightly calls it the “revenge of the bureaucracy.” Since 2002, the Kremlin has put a gradual freeze on liberalizing reforms while committing itself to a (similarly gradual) retaking of the “commanding heights” of the economy. This trend has been especially noteworthy in the oil and gas industry, the sector that matters most to the United States and to the rest of the developed world.

In the late USSR, oil production had beautifully embodied the point of the old Soviet joke that, after 70 years of socialism in Africa, the Sahara would have run out of sand. By the 1980’s, many experts were predicting that the Soviet Union, despite its enormous reserves, would become a net importer of oil. When new, private owners–many of them Kremlin-connected entrepreneurs who had won rigged auctions–took possession of the fields in the mid-1990’s, they found a sullen work force that had often gone unpaid for months, along with worn-out and antiquated equipment.

The economic revolutionaries in Moscow who presided over the privatization of the Russian oil industry had no illusions about these independent owners, but clearly preferred them to the bureaucratic nomenklatura, who, as it were, had nearly run the oil industry back into the ground. As the privatization “czar” Anatoly Chubais reportedly said of Russia’s new oil barons: “One does not steal from oneself.”

Few economic quips have been vindicated faster or more vividly. Despite “expert” warnings, parroted ad nauseam by American newspaper columnists, to the effect that the new owners would quickly strip their assets and flee abroad with the loot, between 1999 and 2004 the young tycoons (all of whom, to be sure, became fabulously rich) invested an estimated 88 percent of their profits, some $26 billion, in modern technology and new exploration. Gradually, the top oil firms also became more transparent, disclosing their asset and management structures and adopting Western accounting practices. Trillions of rubles were paid in taxes to the state and, for the first time in post-Soviet history, to shareholders. More important, during those six years, private oil production increased by 47 percent, as compared with 14 percent in the state-owned sector.

Then came the re-nationalization of the oil industry. It started with an assault on Yukos, Russia’s largest private company, through a series of blatantly manipulated trials that began in 2004. In one instance, a judge ruled for the prosecution after spending only three days “examining” several hundred volumes of tax materials. In another, Yukos was assessed for tax liabilities that exceeded its income for the period in question. In 2005, Mikhail Khodorkovsky–the company’s founder and, at the time, Russia’s richest man–ended two years of incarceration to begin a nine-year sentence in a prison camp in eastern Siberia, on the Chinese border, three thousand miles from Moscow.

Yukos was bankrupted. Its largest production unit was quickly sold to a front company that, in a matter of days, resold it to Rosneft, a stagnant, poorly managed state-owned firm controlled by Igor Sechin, a Putin confidant and deputy chief of staff, who had taken over as chairman of the board in 2004, the same year Yukos was put on trial. Today Rosneft is the second-largest oil company in Russia; yet even after robbing Yukos, it is weighed down by debts of over $11 billion.

Late in 2005, Sibneft, another leading private oil company, was bought by the state-controlled natural-gas monopoly Gazprom, which is chaired by another of Putin’s top aides, the former Kremlin chief of staff and today first deputy prime minister Dmitry Medvedev. Deeply in debt, and notoriously one of the country’s worst-managed companies, Gazprom has increased production by only 2 to 3 percent a year since 2000, despite booming natural-gas prices. It is widely assumed that one of the firm’s key functions is to serve as a piggy-bank for the Kremlin, which can take from it hundreds of millions of dollars for all manner of political and economic “projects” without a trace of accountability.

Putin’s statist ideology has also been felt by the main foreign investors in Russia’s oil sector. This past fall, the Kremlin halted or threatened to halt operations by Royal Dutch Shell, ExxonMobil, France’s Total, and the Russian-British TNK-BP. Notwithstanding official explanations for this move–from environmental violations to cost overruns to disappointing output–it is an open secret in Moscow that the government’s prime motive is to pressure the companies into either surrendering a share of production to the state or handing back their development licenses.

In its relentless extension of state ownership or control, the Kremlin has vetoed private funding for desperately needed new pipeline construction, despite the inability of Transneft, the state monopoly, to maintain the existing infrastructure, much less to lay new pipes. The administration also now appears to be examining its next target for nationalization. Lukoil, the country’s largest remaining private oil company, was recently charged with “improper utilization” of some two dozen licenses and threatened with cancellation of its development rights.

By shifting ownership so decisively to state-run companies, with their wastefulness and shabby yields, the Putin restoration has squandered the impressive gains achieved by privatization. It also now runs the serious risk of scaring off badly needed investment. With the most likely sources of innovation and productivity inside Russia expropriated or cowed, foreign oil “majors” have begun to think twice about putting billions of dollars into projects in the country’s far north and east, where most of its oil and gas are located. In jeopardy is Russia’s future as a dependable, long-term supplier to the world market.

In 2005, for the first time since 1999, Russian oil exports decreased in absolute terms. Thinking only of the short term, as most restorationist regimes have always done, the Kremlin has begun to poison the goose that lays the golden eggs.

Recent changes in Russian foreign policy have stemmed from the same change in ideology. In establishing a generally pro-Western profile, Gorbachev and Yeltsin had emphasized shared interests; they were inspired by the idea of finding “a path to the common European home” and a place for Russia in the “civilized world.” Such goals are dismissed now as the rhetoric of weakness, concessions brought about by the collapse of the Soviet Union. No longer is the integration of Russia into the family of Western capitalist democracies held to be a goal, even a distant one.

This is not to suggest that Putin has sought to re-create Soviet foreign policy outright. Despite the muscular rhetoric emanating from the Kremlin, Russia is not a “revisionist” power like the Soviet Union or present-day China. It is not intent on reshaping in its favor the regional or global balance of forces. In the geopolitical competition, Moscow may complain about the score, but it is unlikely to take the risks associated with changing the rules of the game.

Nor is Russia willing to commit the resources needed to sustain any such endeavor–unlike China, for instance, whose defense appropriations have grown annually by double-digit percentages over the past twenty years. Even in today’s Russia, flush with petrodollars, the share of the GDP devoted to defense–just 2.9 percent in 2005–is at least ten times smaller than during the days of the Soviet Union.

Nevertheless, although Russian foreign policy today is supremely pragmatic, it is conducted in a way that points to looming trouble. Putin has tried to win the greatest possible freedom of action for Russia by positioning the country above the international fray. To achieve this maneuverability, he has refused to bind himself to formerly important tenets like “democracy,” “human rights,” and “Western civilization,” rejecting alliances based on these precepts in favor of “working directly,” one on one, with a range of countries, many of them very unsavory. Without regard to the substantive merits of individual cases, Moscow is seeking to arrogate to itself a crucial role in today’s international process, collecting the attendant dividends as it goes along.

A chief element in this realpolitik has been the Kremlin’s readiness to leverage key Russian assets in the form of conventional arms, nuclear technology, and energy resources. Thus, Moscow saw its delivery of tactical air-defense missiles to Syria in 2005 as a means of restoring its influence in the Middle East. Similarly, earlier this year the Kremlin played host to the leaders of Hamas in an attempt at diplomatic arbitrage, hoping to obtain concessions (like the recognition of Israel’s right to exist) and to emerge thereby as an indispensable mediator between East and West.

The locus classicus of Putin’s new foreign strategy has been, of course, Moscow’s relations with Tehran. Russia has almost finished the Islamic Republic’s $1-billion nuclear power plant at Bushehr, and continues to oppose any effective sanctions aimed at forcing the regime to halt its march toward nuclear enrichment (a march that Moscow staunchly defends as the “peaceful development of nuclear energy”). Despite insistent requests by Washington, Russia has also resumed arms sales to Tehran, suspended by Yeltsin in 1995. The most recent deal, signed in December 2005, will provide mobile air-defense missile systems, MIG fighter jets, Su-24 bombers, T-72 tanks, and patrol boats.

With the country’s gold and currency reserves approaching $300 billion, Moscow’s motive in cultivating Iran is not primarily financial; the controversial agreements are worth just a few billion dollars. Nor is Putin driven by ideological opposition to American “imperialism” or to the American alliance with Israel. Indeed, last April a Russian rocket, launched from a cosmodrome in the Far East, carried into orbit an Israeli spy satellite that undoubtedly will be used to monitor Iran’s “peaceful” nuclear program.

Instead, for the Kremlin, Iran presents another opportunity for advancing the overarching objective of enhancing Russia’s role in the world. As one leading Russian expert has put it, the situation presents “a unique and historic chance to return to the world arena once again as a key player and as a reborn superpower.” The longer Moscow can postpone the moment when it will have to choose sides between Iran and the West, the higher it will be able to bid up the value of its diplomatic support.

A preview of things to come was on display in Russia’s handling of the U.S.-sponsored UN Security Council resolution in the wake of North Korea’s recent nuclear test. At the twelfth hour, Moscow’s representative managed both to dilute several key sanctions and, in a quid pro quo, to win American support for a resolution censuring Georgia, with which Russia is in an increasingly ugly spat.

At a different moment in world politics, Putin’s gamesmanship might not have caused serious complications in Russia’s relations with the United States. After all, Washington eventually accustomed itself to the cold-war diplomacy of France, which tried to compensate for the loss of its superpower status after World War II by practicing a similar policy of arbitrage in its dealings with the U.S. and the Soviet Union. But the times are different–and so too are the guiding principles of the White House under George W. Bush.

For the Bush administration, few things have been more crucial to determining a country’s place in U.S. foreign policy than the character of its internal politics. In the fall of 2001, as Washington assessed its situation after the attacks of 9/11, Russia still looked like a potential friend: a country with a range of personal and social freedoms, a genuine democratic opposition, and a steady stream of free-market reforms. The moment seemed right for a long-term strategic partnership, perhaps even an alliance.

Yet America’s current foreign policy, which sees the promotion of liberty and democracy as the key strategic means of ensuring U.S. security, cannot but be at odds with the Kremlin’s post-imperial restoration, the essence of which is political and economic re-centralization at home and an omnivorous realpolitik abroad. Even on the territory of the former Soviet Union, where under different circumstances the U.S. might have been more inclined to indulge Russian interests, Moscow has found itself at loggerheads with Washington.

Reformist governments in Georgia and Ukraine, which embodied the Bush administration’s push for democracy and liberalization, have been viewed by the Kremlin as inherently anti-Russian. (Profoundly cynical, as restorationist regimes usually are, the Kremlin appears incapable of imagining a mass popular protest that is not engineered and paid for “from outside.”) At the same time, Russia’s support for repressive regimes in Belarus and Uzbekistan has inevitably caused serious friction with the United States. Though a new cold war is hardly afoot, the tension is palpable and growing, and is unlikely to be relaxed any time soon.

Russians have not been the first people–nor will they be the last–to be tempted to exchange a measure of liberty for the promise of stability, prosperity, or national glory. (Recall Tocqueville’s lament over the “mistakes and misjudgments which led Frenchmen to abandon their original ideal and, turning their backs on freedom, to acquiesce in an equality of servitude under the master of all Europe,” Napoleon.) So when Putin declared that “order, stability, and the implementation of the economic policy must not become the price [paid for] democratic procedures,” millions of his countrymen agreed. Many have continued to support him in forging and maintaining “managed democracy,” as the Kremlin ideologists have labeled the restoration.

Yet in the end the price may prove too high. Even as salaries and inflation-adjusted incomes have continued to grow–thus forming the mainstays of Putin’s popularity–the Russian economy as a whole has failed even to keep up with the rising prices of oil and gas. From an average rate of growth of almost 7 percent between 2000 and 2004, the GDP expanded by just 5.5 percent in 2005. Yevgeny Yasin suggests that this downturn be studied as “a textbook case of how a state’s pressure can damage a national economy.”

The Kremlin’s intimidation of Russia’s wealthy elite has also translated into far less political accountability. Without substantial private capital, neither serious political competition nor free mass media can exist in today’s Russia. Opposition parties are forced to choose: either toe the Kremlin line (thus gaining a presence in the Duma) or find themselves in the political wilderness, excluded from the national debate.

One entirely predictable consequence of Russian society’s weakened control of government has been corruption so brazen, so pervasive, and involving sums so huge that it makes the graft of the 1990’s look like child’s play. In a recent World Bank survey, more Russian enterprises now report having to pay bribes to licensing authorities, tax services, militias, and courts than in 2002–a trend opposite to the one in virtually every other post-Communist nation.

At the same time, Russian politics has become more brittle. Without elected intermediaries at the local level, or a responsible national opposition, the center of political gravity has shifted to the very top. If popular dissatisfaction escalates–as the result, say, of a sharp drop in oil prices, a major terrorist act, or some spectacular public blunder–there will be no one to blame but the Kremlin. Having been devised to strengthen the Russian state, Putin’s post-imperial restoration runs the risk of dramatically destabilizing it.

Russia’s recent history is a reminder that modern capitalist democracy has two fundamental requirements. The first is that citizens be able to tolerate the perennial antagonisms and uncertainties inherent in free political contests and free-market competition. The second is that they trust themselves to manage and contain such unruly collisions. Even mature democracies occasionally strain to meet these demands. In younger and poorer republics, they are tested every day. Post-Soviet Russia has been tried in both respects and, with the help of Vladimir Putin, found wanting.

By the time the Soviet Union collapsed, seven decades of totalitarian rule had largely extirpated civil society in Russia. Local networks no longer existed for inculcating the habits of personal and civic responsibility. Professional and religious associations–the preparatory schools for democratic participation on the national level–did not exist. The result was a moral void. When the ancien régime fell, together with its state-enforced system of sanctions and rewards, the breakdown was complete.

Thus, contrary to many finger-wagging critics of post-Communist Russia, the real choice for Russians in the 1990’s was never between a “good,” “clean” liberal-democratic capitalism (which, these same critics alleged, Russians did not know how to build or had deliberately spurned) and the vulgar, corrupt kind that Marx called “primitive capitalism.” Rather, it was a choice between the latter and a return to state control of the economy and politics.

One might usefully see this as a choice between a jungle occupied by several large predators (a/k/a “oligarchs”) and one ruled by a single all-powerful beast. In the first case, the predators are mostly concerned with challenging one another, leaving space for smaller animals to develop and grow. In the second, the king of the jungle imposes a semblance of order while gradually destroying most of the rest of the fauna.

Throughout the 1990’s, Russians opted for economic and political liberty, no matter how unattractively incarnated. But once the threat of a Communist revival receded, so too did their tolerance for conflict, disorder, and inequality, along with their faith in the promise of self-rule. As Isaiah Berlin wrote years ago: “Liberty is liberty, not equality or fairness or justice or culture or human happiness or quiet conscience.” When liberty failed quickly to bring about sufficient quantities of those other desirable things, Russia was ready to give the beast a chance.

Russians have yet to accept what might be called the Magna Carta rule: that when barons, tycoons, moguls, and “oligarchs” are secure in their own liberty and property, they increase, almost despite themselves, the probability of liberty, property, and fairness for all. Democracy is full of such paradoxes. Learning to live with them requires wisdom, strength, and–above all–time. Unfortunately, there is no telling when Russians will again see that a measure of chaos is the price of freedom, and that no one will relieve them of the burden of responsibility for themselves and their country without exacting a cost they will bitterly rue having agreed to pay.

Leon Aron is a resident scholar at AEI.
 
http://www.aei.org/publications/filter.all,pubID.25204/pub_detail.asp

Thu, Nov. 30, 2006

FLORIDA BUSINESS BRIEFS
From Miami Herald Staff and Wire Services

The European Commission fined five oil refiners and chemical producers about $682 million, saying they fixed the price of synthetic rubber used to make tires. A sixth company that had alerted authorities escaped a fine.

It was the second-largest fine ever in an EU cartel case. Italy’s Eni was ordered to pay the largest fine — $357.6 million — while Royal Dutch Shell was fined $211 million. Their fines were hiked by half for it being a repeat offense.

Last Word

Published: Nov 30, 2006

SAKHALIN Energy has tightened its own security, apparently in a bid to prevent Russian secret services from infiltrating the organisation that is developing oil and gas fields off the nation’s east coast.

The Shell-led consortium has added new computer technology by installing spyware to protect laptops and office computers from the Big Brother state services.

Sources told Last Word that Sakhalin Energy employees fear they are being followed. Considering the government’s environmental agency is stepping up its investigation into the Sakhalin II project, many believe their concerns are not too far from the truth.

Russia’s special services are involved in the investigation, led by Oleg Mitvol, deputy head of the environmental agency, as Sakhalin Energy continues to show it is meeting conditions of its production sharing contract.

Mr Mitvol claims Shell is wrecking the environment as it builds oil and gas pipelines across the island to link processing facilities with a liquefied natural gas plant and tanker terminal.

lastword@lloydslist.com

By: Conor Lally, Irish Times
Published: Nov 30, 2006

The senior Garda officer in charge of policing the protest at Shell’s Corrib gas pipeline has said some protesters had established checkpoints on roadways in parts of Mayo at which they “interrogated” local people for up to 45 minutes before refusing passage to some.

Supt Joe Gannon also said gardaI have been assaulted by protesters and filmed on cameras while they have been out socialising with friends and family.

A “co-ordinated campaign of intimidation” had in many cases been directed at people with no involvement in the Shell project.

In an interview with Garda Review, the Garda Representative Association’s magazine, he said that a number of investigations were under way into some cases of assault and intimidation.

Supt Gannon, the district officer for Belmullet, said he was confident the protesters had been “stood down”. “It is a cat-and-mouse game; they adopt guerrilla-type tactics and they are watching to see when I will stand down resources.”

Policing at the protest last month took a controversial turn when protesters were baton- charged. However, Supt Gannon said the protest had been a serious one for a long time.

“The [ site] entrance was blocked for a year and a half. Local people had a veto on who went in and out of the site; it was out of that situation that the current operation was born.

“Down around Rossport as well there were jeeps – either Shell jeeps or innocent people going about their business – that would be surrounded by these locals and their cars and questioned for anything up to three-quarters of an hour.”

One man was cornered in his vehicle with his four-year-old son after some protesters mistakenly believed he was working for Shell. He was “interrogated” for 45 minutes, during which time his son was “traumatised”. The victim filmed some of the incident on his mobile phone. Four people have been arrested and a file is being prepared for the DPP.

Some 150 gardaI were drafted in from around the country. A Garda protest removal team was established, with members undergoing training on the removal of people obstructing roadways. A tactical adviser was assigned and the Garda press office sent a representative.

The team was in place for October 3rd, when work on the project restarted and the physical confrontations began.Supt Gannon said while the protest had been “fairly rough on [ some] days” arrests had only taken place on one day.

On that occasion, he said: “One of the central figures in the protest – not one of the Rossport Five – bonded scrum-like with his son and his son’s friends and propelled the two lads forward into a sergeant who was distracted.”

He said the sergeant in question was caught by surprise and was “rammed” into a “deep drain”, breaking his thumb and sustaining ligament damage.

Two other officers were assaulted in a follow-up scuffle.

He added the assault on the sergeant was filmed on a garda camera leading to the arrest of three people and preparation of a file for the DPP. He said outside influences such as “eco warriors” had also used cameras “trying to agitate and get a reaction”. This filming had continued when gardaI were off duty.

A lot of intimidation locally had gone unreported, he added.

Published: November 30 2006 02:00 | Last updated: November 30 2006 02:00

Nov 27 2006ASM International: Break-up vote by rebel shareholders is defeated.

Nov 14 2006 Stork refuses to implement shareholder-backed break-up of company.

Nov 6 2006 Ahold unveils own growth strategy, having spurned rebel investors’ break-up plan.

Sept 29 2006 Philips spins off semi-conductor unit after investor pressure.

Aug 23 2006 TNT sells logistics business after investor pressure. Nov 17 2005 VNU’s takeover of IMS Health foiled by investors, CEO goes.

Oct 28 2004 Royal Dutch Shell overhauls corporate governance after reserves scandal and investor agitation.

Copyright The Financial Times Limited 2006

EXTRACT: …Royal Dutch Shell, the Anglo-Dutch energy group, acknowledged that investor unrest was key to its decision to unwind its cumbersome century-old dual-headed governance structure.

THE ARTICLE

By Ian Bickerton in Amsterdam: Published: November 30 2006 02:00 | Last updated: November 30 2006 02:00

Activist investors have chalked up more than their share of triumphs in forcing change at Dutch companies in recent times. But now there are clues that the clog may be on the other foot.

The defeat this week of a shareholder motion to break up ASM International, a semiconductor group, came as management at both Stork, the industrial conglomerate, and Ahold, the food retailer, continued to dig their heels in to resist similar investor demands.

The mood in Dutch boardrooms has toughened, said a senior adviser to several supervisory and management boards. “It is a question of mindset,” he said. “What you hear time and again from chief executives is that they will stand up and fight, and be very aggressive.”

Last year VNU shareholders forced the abandonment of a $7bn acquisition, the resignation of the Dutch business information group’s chief executive and managed to increase the value of a private equity takeover bid.

Earlier Royal Dutch Shell, the Anglo-Dutch energy group, acknowledged that investor unrest was key to its decision to unwind its cumbersome century-old dual-headed governance structure.

Behind the scenes at Philips, the technology company, and TNT, the mail group, shareholder anxiety over problem operations was instrumental in asset sales, people familiar with the companies said.

But while the battles at ASMI, Stork and Ahold are far from over – with investors continuing to insist that they would be worth more broken up – management is standing its ground. “Investors have underestimated the power that is clearly evident in boardrooms,” said the adviser.

The turning point was VNU, he said. “That was a wake-up call. Every time I am in a board meeting and investor activism or M&A issues are being discussed, the VNU case is referred to.”

The 2004 Tabaksblat Code addressed failings in Dutch corporate governance and gave shareholders a voice. While it did not tamper with the authority of management to determine strategy, some believe the pendulum swung too far towards investors. “Boards are determined to show that they run companies,” the adviser said.

The rejection by Stork management of a “non-binding” shareholder vote last month to break up the company – in spite of approval by 86.5 per cent of shareholders – underlined that point, as did Ahold’s initial refusal to meet activist shareholders calling for a possible break- up.

While Centaurus Capital of the UK and Paulson & Co of the US, which own more than 32 per cent of Stork, have called for another meeting to dismiss the company’s supervisory board, the company may refuse to recognise any vote there too, potentially forcing legal action.

The investors argue that without further agitation, many companies will continue to suffer from a “Dutch discount” of typically 10 per cent compared with peers abroad due to governance structures.

Yet Stork management cites a 950 per cent improvement in shareholder value in four years. And Ahold and ASMI have also claimed a strong grasp of strategy to improve profitability.

There are signs that such performance is persuading shareholders to start lining up behind management. At a recent Stork meeting, Peter Paul de Vries, director of VEB, the Dutch shareholders’ Association that has traditionally been a thorn in the side of management, grilled Centaurus and Paulson about their intentions for the company.

At that same meeting Henry Blackie, managing director of Arlington Capital Investors, a self-proclaimed activist, warned that agitation threatened only “chaos and disorder”. And that is only counter-productive, said one adviser. “The truth is that no one wants a fight.”

Copyright The Financial Times Limited 2006

By Tobias Buck in Brussels: Published: November 30 2006 02:00 | Last updated: November 30 2006 02:00

Chemical and energy groups including Shell, Dow, Eni and Bayer were yesterday punished for operating a price-fixing cartel in the market for synthetic rubber, a ruling that triggered the second highest fine yet imposed by the European Commission.

The six members of the cartel were fined a total of €519.1m ($682.4m), a sum bettered only by the €790.5m fine imposed on a vitamins cartel more than five years ago. Yesterday’s decision means 2006 will be a record year for cartel fines imposed by the Brussels regulator, taking the total to €1.84bn.

Fines in cartel cases have risen dramatically in recent years, especially for repeat offenders and companies that fail to co-operate fully with investigators.

Neelie Kroes, the European Union competition commissioner, has been keen to deter future offenders by ramping up the financial pain for cartel members.

“The Commission has imposed high fines in this case but if companies continue to indulge in cartel activities, then they can expect their fines to be even higher still,” she said.

Eni, the Italian energy group, was hit hardest, receiving a fine of €272.3m, followed by Shell with €160.9m and Dow, the US group, with €64.6m. Czech group Unipetrol was ordered to pay €17.6m, and Trade-Stomil of Poland €3.8m.

Bayer received immunity from punishment for blowing the whistle on the agreement, escaping what the Commission said would have been a fine worth €204.2m.

The Commission said the cartel lasted at least from 1996 to 2002 and covered two types of synthetic rubber – butadine rubber and emulsion styrene butadiene rubber. The materials are used for producing tyres and a range of consumer goods.

The regulator added that the cartel agreements were struck before or after meetings of an industry association in cities across the EU. “During these meetings the participants agreed prices and exchanged information about key customers and the amounts of synthetic rubber supplied to them,” the Commission said.

Eni said it rejected the Commission’s allegations, and reserved its right to appeal. The Italian group said the fines were “entirely disproportionate and unjustified” since the cartel had not harmed consumers.

Company officials at Unipetrol and Trade Stomil also rejected the ruling, according to Reuters news agency.

Copyright The Financial Times Limited 2006

By Rebecca Bream in London and Arkady Ostrovsky in Moscow: Published: November 30 2006 02:00 | Last updated: November 30 2006 02:00

Shares in Peter Hambro Mining, the London-listed, Russia-based gold producer, fell 14 per cent yesterday after a Russian government environmental watchdog threatened to revoke some of its mining licences.

Oleg Mitvol, deputy head of Rosprirodnadzor, the Russian natural resources ministry’s environmental watchdog, said he would check PHM’s gold production against its declared resources, as part of a crackdown on companies that do not develop projects fast enough.

Mr Mitvol, who is seen by some commentators as a maverick and publicity-seeker, also said he had filed to have five of the group’s mining licences revoked.

PHM said that it had not yet been contacted by the Russian government and that it was confident that conditions at its mines met Russian environmental and safety standards. It also said its resources figures were accurate.

The company said it no longer owned three of the cited licences and that the remaining two gold licences, for exploration projects, were not a major part of PHM’s business plan.

PHM is listed on London’s Aim market, but produces all of its gold from mines in the far east of Russia. This year it expects to produce 250,000 ounces of gold, and aims to produce 1m ounces by 2009.

The sharp drop in PHM shares, which fell as much as 19.2 per cent before closing 13.9 per cent down at £10.25, indicated how concerned investors are about Russian political risk.

The threat to withdraw licences from PHM is likely to be seen as the latest action by the Russian government against a foreign project in the natural resources sector.

In September, Mr Mitvol led threats to withdraw a key permit from the Royal Dutch Shell-led Sakhalin-2 project in eastern Russia because of alleged environmental breaches.

That provoked widespread concern among international energy groups.

The government has also warned ExxonMobil, the operator of the Sakhalin 1 project, of more inspections and threatened to cancel a key licence of TNK-BP, the Anglo-Russian oil venture.

But it is not just foreign companies that are the focus of Russian government pressure.

Last month, the natural resources ministry threatened to revoke 19 licences belonging to Lukoil, Russia’s biggest oil producer, because of a failure to to develop fields fast enough.

PHM said Mr Mitvol’s comments came “out of the blue”, but that it welcomed any official inspection of its operations.

“We are not aware of any material violations,” said Peter Hambro, executive chairman of PHM.

The group said more information would surface tomorrow, when Russia’s natural resources minister was due to return to Moscow.

Copyright The Financial Times Limited 2006

By James Politi in New York Published: November 30 2006 02:00 | Last updated: November 30 2006 02:00

Western Oil Sands, the Canadian energy company, may be looking for a downstream partner to help it better exploit its main asset, a 20 per cent stake in the $5bn Athabasca oil-sands venture.

Western said it had hired engineering advisers and bankers at TD Securities and Goldman Sachs to help weigh “various initiatives and options, including downstream integration of Western’s oil sands resources”.

However, the company sought to damp speculation that it was interested in a takeover by Shell Canada or Chevron, the other partners in Athabasca.

“Western has not received an offer for the company and is currently not in any discussions with respect to any such transaction,” it said.

Instead, Western might be looking to strike a deal similar to rival EnCana’s move last month to create a $10.7bn joint venture with ConocoPhillips. The transaction was aimed at providing EnCana with a partner to provide it with the refining capacity it needs to turn its heavy oil into petrol and other products for the US market.

Canada’s oil sands, mainly located in the western province of Alberta, have experienced a boom as the cost of extracting the heavy oil finally became palatable because of high oil prices.

In addition to Athabasca, Western is also seeking exploration and production opportunities in northern Iraq.

Copyright The Financial Times Limited 2006