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Kommersant (Moscow): Home 2006: A Eulogy

EXTRACTS: The heads of the companies with shares in Sakhalin 2 – Shell, Mitsubishi and Mitsui – sign a protocol on the sale of 50 percent plus one share in the project to Gazprom for $7.45 billion. After the signing, Russian President Vladimir Putin assures the executives that they did so voluntarily and therefore the problems at Sakhalin 2 are behind them. 

And in seventh place is the Sakhalin 2 scandal, in the course of which Gazprom, with the active support of the government, forced its Western partners out of the consortium to develop the deposit.

Jan. 31, 2007

The murder of first deputy chairman of the Central Bank Andrey Kozlov, the end of the myth of perpetual raw materials price growth, the early payment of the Soviet debt to the Paris Club, the fratricidal attempts on the economies of the CIS states through rising natural gas prices – those are the events our experts have identified as the most important for the Russian economy last year.

The events in this rating are evaluated in three categories: Events Influencing the Current Russian Economy, Events Influencing the Russian Economy in the Long Term and Events that Elicited the Greatest Public Reaction. The final rating was calculated from the arithmetic mean of the ratings of the three categories. More than 30 experts – leading economists, government officials, politicians, business figures and scholars – took part in compiling the ratings.

The Most Significant Events of the Fourth Quarter of 2006

Events Influencing the Russian Economy in the Fourth Quarter of 2006

Place in the Rating
Events
Points out of 10

1 Price increases for natural gas for most CIS countries, including Belarus. End of privileged export of oil to Belarus. 6.4

2 Conclusion of practically all bilateral negotiations and passage of practically all legislation necessary for Russia’s admission to the WTO. 5.7

3-5 Annual inflation, according to preliminary calculations, lower than 10 percent (in the 9-percent range) for the first time in 15 years. 5.0

3-5 Real exchange rate of the ruble rises above top pre-crisis rate, according to Finance Minister Alexey Kudrin. 5.0

3-5 Skyrocketing prices for economy-class housing in Moscow (100 percent in two years) halted. Average price for 1 sq. m. in a cement-panel building on the secondary market stands at about $4000. 5.0

6 Pace of investment increases in fourth quarter, which is likely to make up for the crash at the beginning of the year and set a new record for recent years at 12-13 percent growth for the year. 4.9

7 The heads of the companies with shares in Sakhalin 2 – Shell, Mitsubishi and Mitsui – sign a protocol on the sale of 50 percent plus one share in the project to Gazprom for $7.45 billion. After the signing, Russian President Vladimir Putin assures the executives that they did so voluntarily and therefore the problems at Sakhalin 2 are behind them. 4.8

8 The death of President of Turkmenistan Sapamurat Niyazov left both Russia and the West in a complicated situation. His death began a power struggle in Turkmenistan and, more importantly, opened a new chapter in the struggle between Russia, China, the European Union and other for Turkmen gas. Turkmenbashi’s death undermined the agreement between Gazprom and Ashgabat. 4.6

9-10 The passage of the federal budget without significant controversy. Record low funds were reallocated during discussions in the Federal Assembly. 4.4

9-10 The murder of Anna Politkovskaya. 4.4

11-12 The schedule for the gradually liberalization of the power market is confirmed by the government. 4.2

11-12 Putin signs an order making Rosoboronexport the sole arms exporter. Arms producers retain the right to export spare parts. 4.2

13-14 The second reading of a law regulating open-air retail markets is passed. The law reserves up to 50 percent of trading places for local residents. 4.1

13-14 OAO United Aviation Construction Corporation is registered. It will unite all Russian designers and builders of aircraft. Registration was delayed for two months, in which time the state increased the value of its assets by a third. That, in turn caused the quotation on shares of Irkutsk, the largest private Russian aviation corporation, to fall. 4.1

15 The poisoning of Alexander Litvinenko. 3.9

16 Passage of the fourth part of the Civil Code of the Russian Federation. It is assumed that it will create the conditions for protection of intellectual property by world standards. 3.8

17 The successful IPOs for TMK, the Chelyabinsk Zinc Plant and OGK-5 on the Russian stock market in November. 3.7

18 The beginning of exchange trading of natural gas. 3.6

19-20 Russian Rebco oil appears on the New York Commodities Exchange. 3.5

19-20 The Stockman deposit is again open to America. Gazprom’s strategy for liquefying natural gas is based on the use of gas from Stockman and foresees the possibility of supplying gas from the CIS to the United States by 2015. 3.5

Events Influencing the Current Russian Economy

Place in the Rating
Events
Points out of 10

1-2 Price increases for natural gas for most CIS countries, including Belarus. End of privileged export of oil to Belarus. 5.9

1-2 Annual inflation, according to preliminary calculations, lower than 10 percent (in the 9-percent range) for the first time in 15 years. 5.9

3 Real exchange rate of the ruble rises above top pre-crisis rate, according to Finance Minister Alexey Kudrin. 5.4

4-5 The passage of the federal budget without significant controversy. Record low funds were reallocated during discussions in the Federal Assembly. 5.3

4-5 Pace of investment increases in fourth quarter, which is likely to make up for the crash at the beginning of the year and set a new record for recent years at 12-13 percent growth for the year. 5.3

6 Skyrocketing prices for economy-class housing in Moscow (100 percent in two years) halted. Average price for 1 sq. m. in a cement-panel building on the secondary market stands at about $4000. 4.7

7 Conclusion of practically all bilateral negotiations and passage of practically all legislation necessary for Russia’s admission to the WTO. 4.4

8 The death of President of Turkmenistan Sapamurat Niyazov left both Russia and the West in a complicated situation. His death began a power struggle in Turkmenistan and, more importantly, opened a new chapter in the struggle between Russia, China, the European Union and other for Turkmen gas. Turkmenbashi’s death undermined the agreement between Gazprom and Ashgabat. 4.3

9 The successful IPOs for TMK, the Chelyabinsk Zinc Plant and OGK-5 on the Russian stock market in November. 4.0

10 The heads of the companies with shares in Sakhalin 2 – Shell, Mitsubishi and Mitsui – sign a protocol on the sale of 50 percent plus one share in the project to Gazprom for $7.45 billion. After the signing, Russian President Vladimir Putin assures the executives that they did so voluntarily and therefore the problems at Sakhalin 2 are behind them. 3.9

Events Influencing the Russian Economy in the Long Term

Place in the Rating
Events
Points out of 10

1 Conclusion of practically all bilateral negotiations and passage of practically all legislation necessary for Russia’s admission to the WTO. 7.3

2 Price increases for natural gas for most CIS countries, including Belarus. End of privileged export of oil to Belarus. 6.6

3 Pace of investment increases in fourth quarter, which is likely to make up for the crash at the beginning of the year and set a new record for recent years at 12-13 percent growth for the year. 6.3

4-5 Real exchange rate of the ruble rises above top pre-crisis rate, according to Finance Minister Alexey Kudrin. 5.9

4-5 The schedule for the gradually liberalization of the power market is confirmed by the government. 5.9

6 The heads of the companies with shares in Sakhalin 2 – Shell, Mitsubishi and Mitsui – sign a protocol on the sale of 50 percent plus one share in the project to Gazprom for $7.45 billion. After the signing, Russian President Vladimir Putin assures the executives that they did so voluntarily and therefore the problems at Sakhalin 2 are behind them. 5.8

7 Putin signs an order making Rosoboronexport the sole arms exporter. Arms producers retain the right to export spare parts. 5.3

8-9 Annual inflation, according to preliminary calculations, lower than 10 percent (in the 9-percent range) for the first time in 15 years. 5.2

8-9 Passage of the fourth part of the Civil Code of the Russian Federation. It is assumed that it will create the conditions for protection of intellectual property by world standards. 5.2

10 OAO United Aviation Construction Corporation is registered. It will unite all Russian designers and builders of aircraft. Registration was delayed for two months, in which time the state increased the value of its assets by a third. That, in turn caused the quotation on shares of Irkutsk, the largest private Russian aviation corporation, to fall. 5.1

Events that Elicited the Greatest Public Reaction

Place in the Rating
Events
Points out of 10

1 The murder of Anna Politkovskaya. 7.5

2 Price increases for natural gas for most CIS countries, including Belarus. End of privileged export of oil to Belarus. 6.7

3 The poisoning of Alexander Litvinenko. 6.6

4 The second reading of a law regulating open-air retail markets is passed. The law reserves up to 50 percent of trading places for local residents. 6.5

5 Skyrocketing prices for economy-class housing in Moscow (100 percent in two years) halted. Average price for 1 sq. m. in a cement-panel building on the secondary market stands at about $4000. 5.6

6 The death of President of Turkmenistan Sapamurat Niyazov left both Russia and the West in a complicated situation. His death began a power struggle in Turkmenistan and, more importantly, opened a new chapter in the struggle between Russia, China, the European Union and other for Turkmen gas. Turkmenbashi’s death undermined the agreement between Gazprom and Ashgabat. 5.5

7 Conclusion of practically all bilateral negotiations and passage of practically all legislation necessary for Russia’s admission to the WTO. 5.4

8 Amendments to election law come into force canceling a minimum turnout level at elections, prohibiting criticism of opponents in pre-election campaigns and prohibiting registration of candidates found guilty of extremism. 5.1

9-10 Foundation of the Just Russia Party, which claims to be a second party of power. 4.6

9-10 The heads of the companies with shares in Sakhalin 2 – Shell, Mitsubishi and Mitsui – sign a protocol on the sale of 50 percent plus one share in the project to Gazprom for $7.45 billion. After the signing, Russian President Vladimir Putin assures the executives that they did so voluntarily and therefore the problems at Sakhalin 2 are behind them. 4.6

Gas War Two

A year ago, Russia was fighting over natural gas with Ukraine. That conflict occupied the top spots in our rating for two quarters in a row. Now the situation is repeating itself, which the sole difference that the object of Russian state-gas indignation is now Belarus. That conflict, which reached the highest levels, five minutes before the formation of the Union State was, many analysts thought, the main event of the fourth quarter of last year.

Now the Soviet Union has been finished off for good and we can begin a new life. And that’s true, aside from certain details.

The main detail, it seems to us, is that Belarus was trading in energy and customs preferences just before the Russian presidential elections. The appropriate presidential nonaggression pacts existed, but they were unspoken. This year, the Russian president openly stated that more than 40 percent of the Belarusian federal budget came from subsidization by Russia. That is all very good, but it should be understood that Russia has lost a buffer between itself and Europe.

It is probably logical that Russia’s admission to the WTO should take second place in our rating. It does not envisage fraternal relations at all.

And in seventh place is the Sakhalin 2 scandal, in the course of which Gazprom, with the active support of the government, forced its Western partners out of the consortium to develop the deposit.

It should be clearly understood that Russia is thus moving in the direction of isolationism. Not the isolationism of Hitler’s Germany or Pinochet’s Chile, but isolationism close to that of the United States. That’s not so bad – the U.S. is still flourishing – but it is possible that other options would have led to even greater prosperity.

That is all the more so since the first fruits of isolationist policy can already be seen, and that is the death of people and ideas that were unable to survive in the new conditions.

Every Man for Himself

The main event of the fourth quarter of the year in the realm of ideas was the incomparable growth of real estate prices and the first signs of its slowdown.

The fact that a square meter of economy-class living space in Moscow now costs more than $4000 is nonsense. As an American businessman of our acquaintance said, “I have been living in Russia for a long time and encourage my clients to invest money here, but still it’s not central Manhattan.” It is logical that the price growth slowed down, as its position in third place in our rating. When price growth in opt maintained, collapse frequently follows, and the first signs of it can already be observed. According to some data, housing prices in Moscow fell 10 percent in January. That annihilated the unshakable faith of many Russian investors in long-term uninterrupted growth of the value of real estate.

The main accomplishment the government can be proud of is the lose level of inflation. That occupied a respectable 3-5 place in our quarterly rating, the same as the slowdown of housing costs. The experts gave the same ranking to the rising real exchange rate of the ruble, which could, as inflation-fighter Finance Minister Kudrin admitted, lower the ruble’s competitiveness and cause some sectors of Russian industry to wither.

Another withering idea is the formational of the federal budget. Judging by the rankings of our experts, that process has turned into a formality. The State Duma simply rubberstamps the government’s proposals. It is the absence of appropriate discussion that has placed the budget in the Top 10 economic events for the last few years.

But we have strayed from the main topic of this review – death. The fact that the experts placed the death of Turkmenbashi in the Top 10 is significant. It’s more than gas contracts made under personal guarantees. Those can be reconsidered during the lifetime of a ruler-for-life as well (just look at Belarus). The big lesson is that it is risky to depend on any authoritarian regime, which are not as eternal as the statues of their leaders. Who should know that better than Russians? And still we do it…

Post Mortem

The murders cannot be left unmentioned either. It has been a long time since any such events shhok society as deeply.

First deputy chairman of the Central Bank of Russia Andrey Kozlov was shot to death in September. They have supposedly found the contractor for his killing – a banker – and the foreign workers who carried it out, but the whole story still looks a little strange, to put it mildly. The impression arises that any idiot can kill high Russian officials. And only an idiot would do it.

That was followed by the murder of journalist Anna Politkovskaya. The main idea is the same: only an idiot would do it or want it. And then came the poisoning of former special services officer Alexander Litvinenko, who had fled to Great Britain to save himself from his former colleagues. Radioactive poison in the middle of London is great PR for Al Qaeda, although that organization has not stepped forward to take credit for it yet.

Who did it then? Conspiracy fans link all of the murders mentioned and try to find the secret connecting them. Investigatory bodies probably prefer to ignore those connections because they make it look like the investigators are missing something big. The public draws its own conclusions, the main one of which is that it is dangerous to be alive. Here is a simple example. Last week, one of the authors of this article was traveling in the Metro, when it was announced over the loudspeaker that one station was closed “for technical reasons.” It later came to light that a fire had occurred in that station. Is there any need to tell the reader what the passengers stuck in the station behind it thought was going on?

The Most Significant Events of 2006

Place in the Rating
Events
Points out of 10
Quarter

1 Murder of first deputy chairman of the Central Bank of Russia Andrey Kozlov. 7.7 III

2 Serious reduction in the prices for oil and metals. 6.9 III

3 The early repayment of the Soviet debt to the Paris Club. 6.5 III

4 Price increases for natural gas for most CIS countries, including Belarus. End of privileged export of oil to Belarus. 6.4 IV

5 G8 summit in St. Petersburg. 6.3 III

6-7 The president’s address to the Federal Assembly, at which two main task were identified for the government: solving demographic problems and strengthening the army. 6.0 II

6-7 Final approval of the plan to reform the electricity industry and issue stock for regional and territorial generating companies. 6.0 III

8 A steady influx of capital was recorded in Russia in the first half of 2006 for the first time in its history. 5.8 III

9-10 Inflation remained significantly over 9 percent annually. 5.7 III

9-10 Conclusion of practically all bilateral negotiations and passage of practically all legislation necessary for Russia’s admission to the WTO. 5.7

11-14 The transfer by presidential order of control over the customs service from the Ministry of Economic Development and Trade to the head of the government. That was followed by dismissals from in the customs service and law enforcement that many media linked to the beginning of a new anticorruption campaign. 5.6 II

11-14 Approval of the general outline of the 2007 federal budget at a meeting of the government. The budget began with a deficit of 170 billion rubles. While it was being drafted, RAO UES of Russia and Gazprom raised their fees by more than the rate of inflation. 5.6 II

11-14 Prosecutor General Vladimir Ustinov is made minister of justice, and Minister of Justice Yury Chaika becomes prosecutor general. 5.6 II

11-14 Government measures restricting access to strategic sectors of the Russian economy may be broader than expected. The media reports that the Ministry of Industry and Energy is preparing amendments to expand restrictions in existing laws. 5.6 II

15-16 The RTS index of the Russian stock market experienced a record fall in May and June. 5.4 II

15-16 Introduction of payment for calling cellular telephones. 5.4 II

17 Gazprom rejects all proposals for it to maintain law prices for natural gas and insists on the introduction of market prices in 2007. 5.3 II

18 Prime Minister Mikhail Fradkov issues an order allowing the Finance Ministry to begin negotiations with the Paris Club on the early repayment of the $12-billion debt of the USSR. The Finance Ministry proposes a $1-billion premium for the early repayment. 5.2 II

19-21 Trading begins in Gazprom stock on all major Russian exchanges. 5.1 I

19-21 Growth of the money mass exceeds 45 percent annually in August. 5.1 III

19-21 The New Wholesale Market for Electric Power and Capacity is launched. 5.1 III

22-26 According to preliminary estimates, annual inflation was held under 10 percent (in the 9 percent range) for the first time in 15 years. 5.0 IV

22-26 The signing of a memorandum on the construction of the Altai pipeline system during a visit by Russian President Vladimir Putin to China. 5.0 I

22-26 For the first time in modern Russian history, a governor in office, Alexey Baranov of the Nenets Autonomous Area, is arrested on charges of embezzlement and extortion. Four senators are expelled from the Federation Council by the speaker. Among them were Alexander Shabadash of the Nenets Autonomous Area for illegal business activities and Levon Chakhmakhchyan of Kalmykia under suspicion of bribery and embezzlement. 5.0 II

22-26 Real exchange rate of the ruble rises above top pre-crisis rate, according to Finance Minister Alexey Kudrin. 5.0 IV

22-26 Skyrocketing prices for economy-class housing in Moscow (100 percent in two years) halted. Average price for 1 sq. m. in a cement-panel building on the secondary market stands at about $4000. 5.0 IV

27-29 The Rosneft IPO begins. 4.9 II

27-29 The merger of Severstal and Arcelor falls through. 4.9 II

27-29 Growth of the investment rate in the IV quarter, which will probably compensate for the crash at the beginning of the year and exceed last year’s record of 12-13 percent annually. 4.9 IV

30-32 The first reading of a draft law on a new system for migration from CIS member states is passed by The State Duma. The procedure for receiving permission to work in Russia is simplified. 4.8 I

30-32 The State Duma passes amendments to reduce military service to a single year beginning in 2008, with cancellation of 9 of the 25 possible draft deferments. 4.8 II

30-32 The heads of the companies with shares in Sakhalin 2 – Shell, Mitsubishi and Mitsui – sign a protocol on the sale of 50 percent plus one share in the project to Gazprom for $7.45 billion. After the signing, Russian President Vladimir Putin assures the executives that they did so voluntarily and therefore the problems at Sakhalin 2 are behind them. 4.8 IV

30-32 The Federal Consumer Rights Protection Supervision Service (Rospotrebnadzor) bans the import of wine, cognac and mineral water from Georgia and Moldova. 4.7 II

33-37 Russian investment funds attract a record volume of funds in May. Open mutual funds reach record indicators in the history of the market in May with 5.3 billion rubles. 4.7 II

33-37 The Arbitration Court of Moscow Region issues the precedent-setting decision that members of the board of directors of bankrupt banks who approved dubious transactions will be held responsible for the payment of the banks’ debts along with its executives. 4.7 II

33-37 The U.S. Federal Reserve Board leaves the refinancing rate unchanged for the first time in two years. 4.7 II

33-37 Passage of the first reading of the 2007 federal budget. 4.7 III

38-41 The death of President of Turkmenistan Sapamurat Niyazov left both Russia and the West in a complicated situation. His death began a power struggle in Turkmenistan and, more importantly, opened a new chapter in the struggle between Russia, China, the European Union and other for Turkmen gas. Turkmenbashi’s death undermined the agreement between Gazprom and Ashgabat. 4.6 IV

38-41 The State Duma passes the first reading of amendments to the law “On State Regulation of the Production and Turnover of Ethyl Alcohol and Alcoholic and Alcohol-Containing Beverages. The amendments foresee transferring excise fees from vodka to ethyl alcohol and the formation of a single company to control alcohol sales in Russia. 4.6 II

38-41 Announcement of the acquisition by structures affiliated with Roman Abramovich of 41 percent of the stock in Evraz Group. 4.6 II

38-41 Amendments to Russian law come into force that are intended to end uncontrolled downloading of book, music and videos from the Internet in mp3 format. 4.6 III

42-44 Bird flu. Autumn hunting season is cancelled. Chief Sanitary Officer Gennady Onishchenko vacillates over the shooting of crows in cities. A special commission on bird flu is set up by the Moscow City government with full discretion over its spending. 4.5 I

42-44 Prime Minister Mikhail Fradkov approves a socio-economic development program for 2006-2009. He personally includes a reduction of the VAT from 18 to 13 percent, in spite of the strenuous opposition of Finance Minister Alexey Kudrin and Economic Minister German Gref. 4.5 I

42-44 On April 24, Prime Minister Mikhail Fradkov signs Government Resolution No. 229 “On the Procedure for the Management of Funds from the Stabilization Fund of the Russian Federation.” 4.5 II

45-47 The Federal Financial Markets Service passes amendments to acts regulating IPOs. Now IPOs in Russia are conducted under the same rules as in the West. 4.4 I

45-47 The passage of the federal budget without significant controversy. Record low funds were reallocated during discussions in the Federal Assembly. 4.4 IV

45-47 The murder of Anna Politkovskaya. 4.4 IV

48-50 Parliamentary elections were held in eight regions on the first Election Day in Russian history. The United Russia Party won in all the elections. Rodina was disqualified almost everywhere. Leftist parties (the Communist Party, Pensioners’ Party, Agrarian Party) did well and democrats (Yabloko and the Union of Right Forces) were defeated. 4.3 I

48-50 Residents of the Moscow satellite neighborhood of Southern Butovo protested their resettlement from wooden houses slated for removal. They refused to move into new buildings in the same neighborhood and resisted special forces and court bailiffs. 4.3 II

48-50 The Federal Antimonopoly Service initiates a case against the Big Three cellular services providers – VimpelCom, MTS and Megafon. 4.3 II

Maria Glushenkova, Petr Rushailo

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