Russia 110111 Basic Political Developments

Russian economy faces pre-election uncertainty

http://www.bbc.co.uk/news/business-12151064

By Konstantin Rozhnov Business reporter, BBC News

With Russia's 11-day-long Christmas holiday finally over, the country enters a new economic year, one that could become a period of uncertainty for businesses and investors.

Both parliamentary and presidential election campaigns are set to start in the second half of the year, and for many months to come an important question will remain unanswered.

Russian President Dmitry Medvedev, serving his first term in the post, is eligible for re-election. But many expect his predecessor and the current prime minister, Vladimir Putin, to run for presidency again.

The two men have said that they would consult each other about which of them would run for president in 2012.

Serious concerns over the rule of law in Russia remain among many investors and entrepreneurs, and the figure of the next president could prove crucial to how Russia's investment climate is seen both inside the country and abroad.

Bad investment climate

Mr Putin has been criticised for saying that "a thief belongs in prison" when referring to former oil tycoon Mikhail Khodorkovsky during a televised question-and-answer session in December.

Several days later Khodorkovsky, who had already been serving an eight-year term for tax evasion, was sentenced to six more years in jail for fraud.

When the Khodorkovsky verdict was being read in court, Mr Medvedev chaired a meeting to discuss the Russian economy's performance in 2010, where he said that the investment climate in Russia was "bad".

Meanwhile, the government will need to attract investors in order to sell stakes in a number of state-controlled companies to finance the budget deficit.

And Russian state companies themselves will need investment money to implement ambitious projects.

Deputy Economy Minister Andrey Klepach said in December that his ministry had lowered its investment growth forecast for 2011 from 10% to 9% "or even lower".

Social spending

There are also other factors that could have a huge impact on the state of the Russian economy.

In the past, the state has substantially increased social spending before elections, and there is little evidence to suggest that the situation will be different this time.

Social spending will amount to 28% of the federal budget this year, reaching 3 trillion roubles ($97bn, £63bn), with defence spending at 1.5 trillion roubles.

Experts believe that the figures may prove popular with the electorate, but do little help the economy to develop.

Sergei Guriev, rector of the New Economic School in Moscow, told the BBC's Russian Service that structural reforms were needed, because without them, the country's economy would be growing too slowly for the government to solve Russia's social problems.

Evgeny Yasin, the academic supervisor of the Higher School of Economics and a prominent Russian economist, agrees.

"We do not do anything [to stimulate the economy] that is not done in the West, but our economy requires much more radical and often unpopular measures to be taken, and the government is not ready to do that," he told the BBC's Russian Service.

'The year of waiting'

The Russian economy is thought to have grown by almost 4% in 2010, after contracting by 7.9% during the recession in 2009.

The 2010 growth could have been even higher but for the worst summer drought on record that led to a ban on exports of wheat and other grains from Russia.

Consumer prices have also been growing rapidly since the summer, pushing the annual inflation rate to almost 9%.

For 2011, the government expects prices to grow by 6.5% and the economy to expand by about 4.2%.

A lot will again depend on how high - or low - global oil and gas prices are, as the Russian economy remains heavily dependent on energy exports.

Mr Yasin believes that the economic situation in 2011 will be similar to 2010, "or maybe a little bit worse".

From his point of view, that is not a bad thing, as new economic challenges could finally make the government implement necessary changes and reduce its reliance on oil and gas.

Otherwise, he says, we could go without reforms "indefinitely".

Mikhail Delyagin, head of the Institute Of Globalization Problems, also believes that the economic growth will not accelerate or slow down considerably in 2011, as the economy has some "strength in reserve".

"It will be the year of waiting," he told the BBC's Russian Service.

"Everybody, including businesses, will be sitting [quietly], being afraid of the unknown."

Reforms Back to Square One

http://www.themoscowtimes.com/opinion/article/reforms-back-to-square-one/428097.html
11 January 2011

By James Beadle

Seven years after it began, the Yukos affair remains one of the most contentious and divisive aspects of the Russian investment climate. Pro- and anti-Kremlin agents are armed with clear and often valid arguments and have sufficient funding to get them publicly aired. Unsurprisingly, international investors remain confused about the case and its implications.

The initial convictions of former Yukos CEO Mikhail Khodorkovsky and his business partner, Platon Lebedev, on charges of tax evasion in 2005 came at the outset of one of the most impressive bull markets in post-Soviet history. Many agreed that the lifting of uncertainty, along with strong fundamentals, allowed asset prices to skyrocket.

Equities are rallying again now. The RTS Index rose nearly 11 percent in December, but the motivations of this bull market are quite different.

Russian shares are benefiting from strong fundamentals, sustained global demand and a weakening dollar that is driving commodity prices higher. It is true that the new verdicts have lifted a degree of uncertainty, but the result this time is unlikely to benefit Russian asset prices. Over the long term, the impact of these new sentences will be negative, although completely unquantifiable.

How do the two cases differ, and what should investors learn from recent events?

In 2005, the market rationalized that Khodorkovsky had broken the unwritten but acknowledged rule of staying out of politics, and it understood his punishment in this context. In 2010, there was no such sense of misguided justice.

The only conceivable motivations for the latest convictions are negative: personal vendettas by senior politicians or the fear that release would in some way reverse or undermine Prime Minister Vladimir Putin’s power gains.

Whatever the motivation may be, Putin has used the second Khodorkovsky trial to make clear that he is unwilling to ease his informal authoritarian style, even as Russia seeks a path toward modernization.

Economic development is the innocent victim in this domestic power play. Russia’s business leaders may understand the message, but international investors don’t. They observe a disturbing dichotomy between words and actions. Putin has demonstrated that his arbitrary word is the law and that Russia’s legal system remains feudal.

Fortunately, Russia again finds itself in a positive fundamental position with both prices and demand rising in commodities markets. As was the case during the first Yukos convictions, investors will behave amorally and follow the money. They will not fixate on individuals’ fates. As a result, Russia will continue to enjoy capital inflows.

But once again, Russia’s popularity as a target for investment of all forms will be hindered by insecure political structures. Foreign direct investment will be the biggest victim. Learning from Yukos, as well as Shell, BP and many others, companies will be hesitant to invest in long-term fixed assets as long as the government’s word is the only guarantee that their rights and property will be respected.

It is certainly true that befriending Putin assures investors some kind of protection under the status quo, but most international companies do not operate on such principles. There is no substitute for a transparent, written and inviolable legal structure. In its absence, investors in Russia will at least require higher returns, meaning that they will expect lower entry prices and the ability to extract more value from any operations they establish in the country.

It was always clear that the Yukos affair was untouchable. But in the light of a case where many incumbent and former senior officials vouched for the defendants and where Putin intervened publicly before the trial was completed, the Dec. 30 verdict was a national setback.

From the international investor’s perspective, the campaign to reform Russia has returned to square one. On the upside, however, the financial crisis has increased Russia’s openness. Unlike in 2005-08, the government is actively pursuing international capital and has ceased its acrimonious foreign policy. It will again justify Khodorkovsky’s sentence as an isolated, unrelated issue. This may be true, but it is even less justifiable now than it was in 2005. The Yukos affair shows no sign of ending and continues to highlight the risks associated with investing in Russia.

James Beadle is an independent investment consultant and a founding partner of the financial blog Market Melange Ltd.

Have Russia’s Rich-and-Powerful Become Tired of Mr. Putin?

http://georgiandaily.com/index.php?option=com_content&task=view&id=20803&Itemid=132

January 11, 2011

Pavel K. Baev

In the first week of the New Year Russia started winding down on the vacation period, but Prime Minister, Vladimir Putin, was not shown on any ski slopes and remained in charge of urgent problems.

Putin controlled the rescue operation in the Sea of Okhotsk and called the captains of the ships frozen in the hard ice and the captain of the icebreaker; he also instructed governors and the energy minister to work extra-hard in restoring electricity supplies for villages blacked-out by the icy rain. Putin’s New Year greetings to the Russian people were very short with the rather unusual key point: “I wish all of us to be satisfied with ourselves,” which he obviously is.

This view might not be shared by a growing number of entrepreneurs, intellectuals and even bureaucrats who are tired not only of Putin’s bossy style, but also and perhaps more importantly of the lack of direction in his leadership. For some, the main irritant is the increase of taxation on business, which is certain to have an adverse effect on Russia’s sluggish recovery (Vedomosti, December 27). For others, a major concern is Putin’s damaged reputation in the West where his name is directly associated with the regime of defective democracy polluted by rampant corruption (Vedomosti, December 30). And for remarkably many opinion makers, from popular authors to the veteran of numerous political battles, Anatoly Chubais, the decisive moment was the shockingly harsh sentence for Mikhail Khodorkovsky and Platon Lebedev in the crudely fabricated court case (Ekho Moskvy, January 3). This discontent manifests itself in the rising intensity of street rallies in Moscow, and more clearly in the shift in political fashions, so that among the rich-and-glamorous expressing any sympathy towards Putin has decisively gone out of vogue (Nezavisimaya Gazeta, www.gazeta.ru, December 30).

An obvious alternative to the irksome “national leader” could have been President, Dmitry Medvedev, who positioned himself as a smart modernizer with international connections and a Twitter-blog. On at least three occasions recently, Putin has distinctly undercut Medvedev’s far from inspiring performance. The most severe blow to the credibility of the junior member of the duumvirate was certainly the “guilty-as-charged” verdict for Khodorkovsky and Lebedev, particularly since Medvedev had reprimanded Putin for expressing strong views about the ongoing trial (Novaya Gazeta, December 24). Another putdown was the apprehension of Boris Nemtsov (who was swiftly sentenced to 15 days in jail) after the legitimate opposition rally on December 31 that resembles a “special operation” in response to Medvedev’s acknowledgement of Nemtsov as a “well-known politician” (Ezhednevny Zhurnal, January 8). Finally, Medvedev instructed the chiefs of three central TV channels that their news coverage “should not be strikingly different from what we read on the Internet,” but there was not a word about Nemtsov’s incarceration on TV, while the Russian blogosphere exploded with comments expressing outrage (www.besttoday.ru, January 8).

Besides casually compromising Medvedev’s integrity and authority, Putin now and again steps out of his impenetrable cocoon to rub shoulders with ordinary people; for that matter, he attended a Christmas service in the small church in the village where his parents had been baptized (RIA Novosti, January 7). The point of this PR exercise is not in refreshing the support from the electorate, because the outcome of the current political ambiguity will definitely not be resolved by voting. Putin seeks to demonstrate to the wavering elites that he is the only one who can communicate with and, more importantly, control the mob. This message came out most clearly from his meeting with football fans after the nationalist riot in the Manezhnaya square, which so scared the Moscow glitterati; Putin, however, has managed to discharge the tensions and even traveled by bus in rather unglamorous company to the cemetery where the fan murdered in an after-match brawl was buried (Moskovsky Komsomolets, www.gazeta.ru, December 22).

There is a distinct contradiction between the optimistic official rhetoric on overcoming the crisis and Putin’s skillful exploitation of the fear factor, but the elites know better than to believe in propaganda and are in no doubt that the trickle down of prosperity has dried out because of their own greed. They foresee the need for a “firm hand” but have reasons to doubt whether Putin still has what it takes. Putin’s standing with the military has been undermined by the painful and badly mishandled reform, and the law enforcement system is so rotten by corruption that it can hardly be relied upon to contain the brewing discontent. Even the special services that used to be Putin’s solid support base are now concerned more about their own business interests and seriously discredited by the ridiculous spy scandal in the US (Kommersant, December 27). Putin’s reputation for toughness is now sustained mostly by his trademark blunt remarks, yet the news about palaces constructed outside Moscow and Sochi but abandoned after media coverage tells a rather different story (Vedomosti, December 30).

The trump-card that Putin still holds close to his chest has two words written on it: “Who else?” Medvedev aside, the top echelon of the Russian political hierarchy is indeed hardly a stable of “dark horses.” Sergei Ivanov is forever branded as a loser in the 2007 contest, Aleksandr Khloponin is engaged in a hopeless task of stabilizing the North Caucasus, Sergei Sobyanin has not scored any points as Moscow’s Mayor, and Igor Shuvalov is held responsible for the rising costs in the impossible to reform communal sector (Kommersant, Vedomosti, December 28).

Most importantly, there is a strong disinclination in the bureaucracy to rock the political boat in these troubled waters as the ugly events in Minsk served as a reminder that every “color revolution” was triggered by elections. It means that Putin can shrug off the resentment among the higher middle class and the irritation further up – and manage the reconfiguration of the leadership as he sees fit. It does not mean, however, that he is safe for six years afterwards, because the disposition for easing (or, alternatively, kicking) him out of the picture would only strengthen in the ruling class as the recession continues into the post-election period.

Source: http://www.jamestown.org/programs/edm/

In Makhachkala a pub torched: two people injured

http://top.rbc.ru/incidents/11/01/2011/525621.shtml

GOOGLE TRANSLATION
In Makhachkala unknown perpetrators burned a pub. As a result of the incident two people were injured.
As the press service of the Ministry of Internal Affairs of Dagestan Republic, the incident occurred on the eve of the evening. Masked men entered the pub, fired at the bar, doused with gasoline and set fire to the premises.
As a result, space bar partially burned. Is known about the two victims who were taken to the district hospital in Makhachkala with burns of varying severity.
In fact arson criminal case under Article 167 part 2 (intentional destruction or damage to property) of the Criminal Code.
It is worth noting that over the past few weeks in Dagestan have been several attacks on the grocery stores. There is no information, whether it be criminal or disassembly of the actions of Islamic extremists.
11 January 2011.

An Assessment of Events in Dagestan in 2010: The Year in Review

http://georgiandaily.com/index.php?option=com_content&task=view&id=20806&Itemid=132

January 11, 2011

Valery Dzutsev

Dagestan made the greatest contribution to the general trend of destabilization in the North Caucasus in 2010. Out of 178 deaths in terror attacks in the North Caucasus and Moscow in 2010, 68 occurred in or originated from Dagestan (38 percent). A total of 112 terrorist attacks, including 5 suicide explosions, took place in Dagestan in 2010.

In addition, the two blasts in the Moscow metro that shook Russia on March 29 were widely attributed to Dagestani insurgents (www.kavkaz-uzel.ru, January 7, 2011). Following the attack on the Baksan hydroelectric power plant in Kabardino-Balkaria on July 21, the Irganai hydroelectric plant in Dagestan was attacked on September 7. The Irganai plant’s owner, the Russian monopoly Rusgidro, promised to repair and re-launch the plant sometime in 2011 (www.riadagestan.ru, December 8, 2010).

As a result of intensive fighting, the Islamism-driven insurgency in Dagestan suffered substantial losses, with three of its leaders killed over the last year or so. Umalat Magomedov from the northern Dagestani town of Khasavyurt was killed on December 31, 2009. His wife Dzhannet Abdurakhmanova was, according to official information, one of the two suicide bombers who blew themselves up on the Moscow metro in March 2010. Ibragim Gadzhidadaev, from Dagestan’s mountainous Untsukul district, was killed on July 15, 2010. Finally, Magomedali Vagabov of Gubden, which is also a town in the mountains of Dagestan, was killed on August 21. Vagabov’s wife Mariam Sharipova was named as the second suicide bomber in the March 2010 Moscow metro bombings.

Israpil Velidzhanov, aka Emir Khasan, is believed to have assumed the leadership of the Dagestani insurgency’s leadership in August 2010. Velidzhanov, an ethnic Dargin, comes from Derbent in the southern part of Dagestan. That region is commonly referred to as “Yuzhdag” and has distinct cultural differences from the rest of the republic. Perhaps because of Velidzhanov’s ascension to power, Derbent, which had been relatively quiet in the past, experienced a surge in attacks in 2010.

On February 10, Magomedsalam Magomedov was confirmed as Dagestan’s new president. His predecessor, Mukhu Aliev, an ethnic Avar, was not allowed to stand for the usual second term that most North Caucasian leaders serve (www.prime-tass.ru, February 10, 2010). This pointed to the fact that officials in the Kremlin were apparently unhappy with Aliev’s conduct, presumably because of his reluctance to crack down harshly on the growing insurgency. It is worthy to mention that Aliev often spoke of the unacceptability of using crude force against the insurgency and appears to have been viewed by some in the Kremlin as being stubborn and undiplomatic. By comparison, even Kabardino-Balkaria’s President, Arsen Kanokov, was able to keep his post, despite the fact that his republic suddenly became one of the hottest spots in the North Caucasus in 2010.

In 2010 both Russian President, Dmitry Medvedev, and Prime Minister, Vladimir Putin, paid unprecedented attention to the North Caucasus in general and Dagestan in particular. On December 1, Putin appointed himself the chairman of the government commission on development of the North Caucasus. President Medvedev met the leader of Dagestan at least on four separate occasions and chaired two government meetings on Dagestan and the North Caucasus. Prime Minister Putin chaired at least four government meetings on Dagestan and the North Caucasus and met the republican leader twice in 2010.

2010 also saw the emergence of a new family succession as Magomedsalam Magomedov was appointed head of the beleaguered republic. To observers of affairs in Dagestan the Magomedov family is a familiar one. Magomedov is an ethnic Dargin, and the son of Magomedali Magomedov, the long time Dagestani leader and master of political intrigue who headed the republic from 1994-2006, prior to Mukhu Aliev. By comparison to Aliev, the new government of Magomedsalam Magomedov has taken a much more proactive approach to fighting the Dagestani insurgency or, alternatively, yielded to pressure from Moscow to deploy more forces and act more vigorously against the insurgents than his predecessor. On July 23, 2010, Dagestan’s Vice-Prime Minister, Rizvan Kurbanov, communicated an ultimatum to the insurgents through the republican media: they were given the choice either to surrender or suffer the consequences. Kurbanov stated that the government would “eliminate the supporters of the militants along with the militant themselves,” adding, “within the legal framework, but without any mercy.” From the statement, it also followed that the government had previously attempted – unsuccessfully – to approach the insurgents to make a deal (RIA Novosti, July 23, 2010).

In September 2010, Dagestan experienced a surge of Russian military forces that led some local observers to believe Moscow would impose a counterinsurgency regime across the republic (www.kavkaz-uzel.ru, October 1, 2010). From September 2010 until the present, the pattern of military actions against terrorist suspects significantly changed in Dagestan. The military started to kill suspects in strikingly large groups of up to 10 people at one time. All of those killed are automatically written off as Islamic militants, but there is little information available about who they really are. On November 14, it was announced that the first 300-man battalion to fight the insurgents in the republic had been formed. Eventually there should be 700 interior ministry troops drafted from Dagestan who will be poised to prop up the local police in the republic. Moscow drew on the example of Chechnya where, in a similar fashion, the Sever and Yug battalions were created by the Kadyrov regime. This is just another indication of how unpredictable the situation in Dagestan has become (www.kavkaz-uzel.ru, November 14, 2010).

On December 15, 2010, the government used a large conference in Makhachkala as a tribune to reach out to the insurgents once again to talk them into surrendering (www.riadagestan.ru, December 15). The insurgent leaders, in video addresses, repeatedly turned down such proposals and promised to retaliate for their slain comrades (www.rferl.org, January 6, 2011).

Despite largely failing to improve the security situation in Dagestan, its leadership was successful in lobbying Moscow in regard to appointments to the top positions in the republic. A carefully selected military judge, Vladimir Danilov, was appointed to the position of the chairman of Dagestani Supreme Court, but he unexpectedly quit his post, allegedly under pressure from the region’s leadership, and left the republic in October 2010. Dagestan has been without a Supreme Court chairman since December 2009 (Kommersant, November 2, 2010).

In 2010, 75 percent of Dagestan’s budget was financed by direct cash injections from Moscow. This was less in comparison to 2009, when the number was 82 percent. However, the trend was not caused by a drastic improvement of the Dagestani economy, but rather the fact that Moscow simply cut the subsidies from $1.5 billion in 2009 to $1.1 billion in 2010, while Dagestan’s own revenues increased by a modest $90 million in the same period (http://openbudget.karelia.ru/budnord/russian/north-caucasian/dagestan-republic/resp_dagestan.htm, accessed on January 7, 2011).

In August 2010, President Medvedev openly rebuked the Dagestani leader for failing to make any significant progress in the economic development of the republic. Magomedov, in his turn, complained about instability and fighting preventing new investment into the republican economy (Kommersant, August 12, 2010). Meanwhile, the Dagestani weekly Novoe Delo conducted an online poll in July 2010, in which 91.4 percent of the respondents said corruption was more harmful to the republic than extremism, which received only 8.6 percent votes (http://www.ndelo..ru/voting_archive.php?page=2). In November 2010, the same paper conducted another online poll that showed 80.6 percent of respondents disapproved of the current Dagestani authorities’ policies, while 19.4 percent approved of them (http://www.ndelo.ru/survey.php?qid=271&r=0.19475362145586483).

According to the prominent Dagestani sociologist Enver Kisriev, Dagestan in 2000 had one of the highest income inequality rates in the Russian Federation. Kisriev wrote that approximately 1,000 Dagestani families “own huge wealth and define the system of internal political relations in the republic.” Another 5-7 percent of the people serve as the elites’ supporters, for which they are paid. An additional 20-25 percent of the population, making enormous efforts, earn 2-5 times of the living minimum. Seventy percent of the population lives in poverty (http://www.memoid.ru/node/Terrorizm_v_sovremennom_Dagestane#cite_note-kisriev.ca-c-12). Dagestan in 2010 had the lowest ratio of average salary to the minimum set of goods and services in comparison to other North Caucasian republics. The average salary in Dagestan exceeded the minimum only by one-third (http://www.minregion.ru/north_caucasian/dagestan/).

The government in Dagestan seems simply unable to tackle the situation in the republic as the level of violence increases, the economy continues to show little if any improvement as the Kremlin’s ability to inject more money in the republic declines.

Source: http://www.jamestown.org/programs/edm/