the European Voice

THURSDAY, 28 APRIL 2011 A paid supplement from Rossiyskaya Gazeta (Moscow, Russia), which takes sole responsibility for the contents

HealthRussian doctors and their patients wonder if new state money willfinally deliver badly neededimprovements

PAGE 8

Arkady Dvorko-vich, economic adviser to the president, explains why reforms are progressing so slowly

PAGE 4

Economy

An executive activist is born

BP-Rosneft swap clinging to life

Officials out of business

COMMENT

Medvedev has ordered top officials to leave state-owned companies’ boards. Who will replace them?

SEE PAGE 6

company. The police seemed to think they were taking what was theirs by right.Yakovleva, young and prin-cipled, refused to pay up. That brave move got her ar-rested and thrown in jail. Before she knew it, she was teaching exercise classes to down-and-out women in a female detention centre.“Some government officials consider businesspeople in Russia to be criminals fi rst of all,” she said. “They can approach anyone, open a criminal case and begin ex-torting money. And the en-trepreneur should under-stand that they will have to fi ght the bureaucratic ma-chine to the death.”Now 39, Yakovleva spent seven months in jail await-ing trial.

In 2006, Yana Yakovleva was an ambitious co-owner of a chemicals company called Sofex. By all accounts a savvy executive, she was no neophyte to the ways of Russian business. Still, she was shocked when a spe-cial police drugs unit came to her office with a scheme to get kickbacks from her

In a highly symbolic ges-ture, President Dmitry Medvedev travelled east last month, to the steel city of Magnitogorsk in the Ural Mountains. There he deliv-ered what some experts have dubbed the ‘Ten Com-mandments of Investing’, designed to help keep in-vestors and their money safe in Russia.While Russia’s needs have always been mammoth and manifold, Medvedev singled out lingering wariness about Russia as a safe place to invest as the greatest ob-stacle and challenge to his modernisation project. “We need technology, we need money ... We need the confi dence and interest of domestic and foreign inves-tors,” Medvedev said, ac-cording to an official tran-script. “Unfortunately, Rus-

A last-minute reprieve grant-ed by the Stockholm Arbi-tration Court to BP in its struggle to push through a $16 billion (€11.2bn) share swap with Russia’s Rosneft state oil corporation has dra-matically fi red up the saga of the year’s biggest oil deal. With the extension to 16 May of the deadline to resolve the

VLADIMIR RUVINSKIYRUSSIA NOW

TAI ADELAJARUSSIA PROFILE

OLGA SENINA SPECIAL TO RN

Yana Yakovleva’s company was raided and she went to jail. She is now fighting corruption on behalf of vulnerable private businesses.

Shunning rhetoric, President Medvedev outlines ten priorities to build trust and improve the investment climate.

The UK and Russian oil majors are still hopeful of saving their planned alliance as a consortium keeps raising its price to sell out.

Corruption A public-private alliance against graft

Economy Medvedev’s plan aims to curb corruption and sell off state-owned enterprises

Energy Deal of the year on the rocks

Distributed with European Voice

EVERY LAST THURSDAY IN EUROPEAN VOICE

RBTH.RUPolitics, economics, business, comment and analysis

VladimirRuvinsky

EDITOR

It is now three years since Pres ident Dmitry Medvedev declared a

crusade against corrup-tion. Up to that point, cor-ruption had been viewed as one of Russia’s ‘growing pains’. In an inefficient sys-tem of public administra-tion, corruption served as a substitute for the absent rule of law and, conse-quently, boosted economic growth.However, with the state’s increased presence in the economy and public life, corruption has become systemic, a feature of eve-ryday life, to the point where officials refuse to implement laws without a bribe. The interests of the bureaucracy have become more important than the interests of the state.Medvedev’s corruption-fighting plan counts on taking the bureaucracy down a notch. Naturally, the bureaucrats are not happy about this. As a re-sult, the steps he has taken against corruption are far from radical, and even those limited measures have been resisted by many officials. The success of the president's anti-corruption battle will depend on whether he is able to se-cure broad public support on this issue.

EDITORIAL

Time to grow up

Yakovleva spent many

months in jail on fabricated

charges.

Deputy Prime Minister Igor Sechin has obeyed a presidential order and stepped down as

chairman of Rosneft. Energy Minister Sergei Shmatko (left) may also relinquish posts.

CONTINUED ON PAGE 2 CONTINUED ON PAGE 4

CONTINUED ON PAGE 4

The Kremlin is open for business

26 MAY

MONTHLY SUPPLEMENT ABOUT MODERN RUSSIA

BEN ARIS

dispute with Russian part-ners in the TNK-BP joint oil venture, the pressure is on to fi nd a solution. The AAR partnership, a consortium of Alfa, Access and the Renova Group, successfully argued that the share swap breach-es the TNK-BP shareholder agreement. And with AAR effectively now having these giants over an oil barrel, Ros-neft President Eduard Khudainatov had little more to say after the deadline ex-tension than that he was “hopeful of a quick resolu-tion to the arguments”.

sia is experiencing a lack of trust, and money is con-tinuing to fl ow out of the economy.”Medvedev said that in order to achieve his wide-ranging modernisation goals, it is essential to increase the fl ow of investment “multiple times”. But due to rampant corrup-tion, he said, not everyone believes that a hitch-free business undertaking is possible in Russia. The president has made the fi ght against corruption one of his top priorities since assuming office three years ago. He said corruption re-mains a factor that infl u-ences the entire economic situation. “Corruption’s grip is not weakening, it has the whole economy by the throat,” Medvedev said. “Until we make our country attractive to business and private in-vestment, we will not solve the main problem: we will not be able to change the quality of people’s lives.”

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28 APRIL 201128 APRIL 2011Politics and Society

Executive activist takes on official crime

The Moscow native lan-guished behind bars, she told Russia Now, because she refused to take part in the scheme. “I could not be-lieve what was happening to me. Everything I worked for, my reputation, every-thing was suddenly threat-ened. Instead, I sat in a de-tention centre. I have never been so frightened in my life.”She lived in a women’s cen-tre where conditions were rough. “There was no show-er, no refrigerator; we kept groceries on the window-sill, boiled water on a heat-er and made a TV antenna out of it,” Yakovleva said. Her case drew the attention of human-rights activists in and outside of Russia, as well as the attention of President Dmitry Medvedev. The police had tried to ex-tort her on the basis that the industrial solvent her company manufac-tured could be consid-ered a controlled sub-stance, according to Yakovleva. The charges were dropped when a court struck down the rule that had made it a con-trolled substance. Yako-vleva fi led a complaint, but the police denied wrongdoing.

Fighting backFive years later, Ya-kovleva is probably the most prominent business activist working against corruption; she co-operates with start-up busi-nesses and works with the Russian parliament. There are tens of thousands of people in pre-trial deten-tion charged with white-collar crimes, according to activists; no official statis-tics are maintained. Few are acquitted.

It is not only foreign inves-tors who worry about rogue police and officials de-manding bribes, arresting executives without cause, and taking over businesses. According to recent re-search conducted by the Russian government, cor-ruption is one reason why 17% of Russian business-men intend to emigrate. Even the possibility of such an exodus jeopardises the president’s plans to mod-ernise the country. Medvedev has repeatedly said that business must be support-ed to boost the economy, move away from depend-ence on raw materials and create new jobs.Instead of leaving Russia altogether, Yakovleva chose a bold course of action. She

created her own organisa-tion called Business Soli-darity to support entrepre-neurs who suffer as a result of the illegal actions of of-fi cials and law enforcement agencies.Recently, Yakovleva was asked to co-chair a centre set up by Delovaya Rossiya (Business Russia), the coun-try’s largest public associ-ation of non-oil and gas companies, to aid entrepre-neurs in the fi ght against bureaucratic raids.“This is a union of two forc-es – those authorities that are against corruption and business,” said Delovaya Rossiya head Boris Titov, who chairs the centre joint-ly with Yakovleva.

A company taken awayOne of the fi rst cases the centre took on involved Galina and Yevgeny Kono-valov, husband and wife en-trepreneurs from Krasn-odar whose company was taken away by local offi-cials.“In 2008, we learned that the company’s owner had been mysteriously replaced and, when we went to court,

my husband was illegally arrested on fabricated criminal charges,” Galina Konovalov said.The lawyers told her

the case was hopeless but this year the couple

won two major victories: one court ruled in Febru-ary that there had been sev-eral breaches in the crimi-nal case against Yevgeny, while another court in March returned the com-pany to the Konovalovs. The case against Yevgeny, how-ever, has not been closed, and the real estate belong-ing to their company was sold during the court pro-ceedings.

“This is an instance of typ-ical raiding and we are try-ing to help them get their property back now,” Yako-vleva said.Titov says the centre is the fi rst real attempt by busi-nesses to fi ght corruption,

A security forces commander, Major Alexander Hodych, 34, was arrested in November 2010 in southern Russia on

charges of banditry and extortion. He has been released on bail of €350,000.

populationof Russia

jailedfor ‘economic’

crimes

0.4 m

peoplein prison

0.9 m

Doing time for eco-nomic crime

Statistics on ‘economic’ pris-oners are not public. State Duma deputy Yevgeny Fy-odorov says they number 444,000, or half of those behind bars.

142 m

INTERVIEW KREMLIN OMBUDSMAN

What sort of document are you going to send to the pres-ident?It should be a massive pro-gramme for creating the right conditions to develop civil society and human rights safeguards. The meas-ures should help create the mental outlook required for the country’s modernisation, which is impossible without modernisation of civic con-sciousness, social relations and behaviour patterns.The [pre-1991] totalitarian state produced certain types of behaviour refl ecting peo-ple’s dependence on govern-ment. Can a person with such a mindset become a moderniser? Of course not. The Soviet system collapsed 20 years ago, but these ster-eotypes did not go away.

What recommendations will you make?It is important for people to, fi rst, have access to genuine

The Kremlin’s Human Rights Council, headed by Mikhail Fedotov, is due to submit a programme for building civil society to Russia's president.

People power is key to civil reforms

VYACHESLAV KOZLOVMOSKOVSKIE NOVOSTI

Read full version atwww.rbth.ru/12667

Mikhail Fedotov, the head

of the Kremlin’s Human

Rights Council.

a threat whose grip, as Medvedev stated on 30 March, “is not weakening and has the entire econo-my by the throat”.“Each year approximately 70,000 enterprises through-out the country are targets of raider attacks. Up to 10% of a business’s expenses go towards meeting the corrupt requests of officials. It is ef-fectively a fully developed racket on a government-wide scale,” Titov said.Yakovleva says that crimi-nal law is currently the main channel for seizing businesses. “It used to be arbitration courts, but the quality and independence of the judges increased there,” she said.

Enforcing the new lawsMore amendments to the criminal code, effectively softening the penalties for economic crimes, took ef-fect last month. “A lot of good laws have been passed, but the problem until now has been enforcing them,” Yakovleva said, citing the Konovalov case as an ex-ample.

“The amendments are ef-fective and create the pre-requisites for improving the investment climate, but more work is needed, in particular the introduction of rules under which a criminal case would only be pursued at the request of the victim,” said Andrei Nazarov, the deputy chair-man of the legislation com-mittee in the State Duma.In reply to a request from Nazarov, the interior min-istry said the number of criminal cases brought on economic charges declined by 35% in 2010. The Krem-lin is currently preparing the third and most radical revision of the legislation on economic crime. It is ex-pected that the majority of economic crimes will be made punishable by a fi ne instead of prison time.These days, Yakovleva keeps a diverse set of confi dantes, from oil CEOs to Soviet-era dissident Lyudmila Alexeyeva. “Before my ar-rest I didn’t think that busi-ness should have societal obligations, or that it shouldn’t keep silent, like most people,” she said.

60thousandpotential corrup-tion cases were in-vestigated by pros-ecutors in 2010, up 42% from 2009

80 percentdrop in crimi-nal cases for the most serious mon-ey laundering of-fenses

270 percentrise in average amount of bribes in 2011, police say. The typical bribe is now €1,500.

THE NUMBERS

justice; second, to know the truth about what is happen-ing around them; and third, to feel themselves to be free. An awareness of justice, truth and freedom is essen-tial, because sometimes a person simply does not un-derstand that he is free, has no sense of this and is un-able to escape from the lab-yrinth of unwritten taboos.

How quickly do you hope to be able to eradicate the stere-otypes that have taken shape over centuries?Actually, the Bolsheviks managed to do it very quick-ly. Behaviour stereotypes in tsarist Russia were very dif-

ferent from those that pre-vailed in the fi rst 20 years of Soviet rule. Now we have to restructure public aware-ness just as drastically while offering it a totally different moral content, methods and goals. We should not herd people into the kind of democratic, social, law-governed state that our constitution de-scribes. We should instill in them self-discipline, self-or-ganisation, a readiness to act rather than sit around idly.

Are you sure that Russian so-ciety seeks such independ-ence?Sponging is still strong in society. All around you can hear “give us money”, “give us houses”. We want to see a change of motivation and, consequently, in the nature of the demands. What is needed is freedom of initia-tive, resources for independ-ent provision of social serv-ices and responsibility for the quality and scope of such services. It is important to encourage people to come forward and assume man-agement in the running of society, and only ask from the state what they cannot obtain by themselves.

CONTINUED FROM PAGE 1

Originally published inMoskovskie Novosti

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03RUSSIA NOW WWW.RBTH.RUSECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA

28 APRIL 2011 Politics and Society

MAX SEDDONRUSSIA NOW

It is clear that young Russians want to work outside Russia, but how many of them will come back?

Young Russians are leaving the country for ‘breath of fresh air’

Migration Russia has experienced many waves of emigration since the Bolshevik Revolution. This time, it’s different

Although he is already a manager at a major oil company’s Moscow head-quarters – a position he ad-mits it would take him years to reach in a Western country – Anton, 25, is con-sidering taking a lesser-paying job or continuing his education in London. “Russia is just so depress-ing sometimes, especially in winter,” he says.For many educated young Russians, Western countries seem to have an indelible allure, whether because of work opportunities, a bet-ter educational system or simply nicer weather. While this last reason may seem trivial, many students are beginning to wonder if the grass truly is greener on the other side.“Each year, I ask my mas-ter’s students where they see themselves three or four

free, self-sufficient person to breathe in Putin’s Rus-sia. There’s no place pro-vided for him here.”It is far from clear, though, what is creating this mood: In a poll accompanying Oreshkin’s article, 62.5% of readers chose “all of the above” from a list of rea-sons explaining the in-crease in emigration. Live-Journal, a blogging site enormously popular with Russians, has a community called ‘Time to go?’ where users keen to emigrate seek advice from the like-mind-ed.However, some profession-als have suggested that spending time abroad makes it easier to advance in their careers once back home. Anna, 32, a senior cu-rator at a major Moscow art institution, has appren-ticed at several prestigious organisations in Europe, but ascribes her success to her return to Russia once and for all.“Paradoxically, there are more possibilities for a ca-reer here, as long as you’ve got the desire to have a ca-reer,” she says. “The fact that leaving Russia for a period of time is unambiguously helpful, in terms of getting some fresh air, is another matter entirely – but then, in the majority of cases it’s worth coming back.”

lution. Since then, Russians have left the country in droves whenever circum-stances forced them. Some did so to avoid state-spon-sored persecution, as dur-ing Stalin’s purges or the anti-religious campaigns in the 1960s and 1970s. Others, particularly in the last two decades of the So-viet Union, left in search of civil liberties in Europe, Israel or the United States. Most, however, did so in search of better material conditions, as with the ‘sausage emigration’ that accompanied production shortages during perestroi-ka, or the 6 million Rus-sians who left in the tur-bulent 1990s.Conditions now are quite different, and that is what has many worried about the current trend. Indeed, Russia is coming off a dec-ade of unprecedented growth. During Vladimir Putin’s presidency, GDP in-creased six times, poverty was halved, and the econ-omy grew by an average 7% a year.Instead, many liberal com-mentators see the change as something primarily at-mospheric. Journalist Dmitry Oreshkin wrote in a recent article for the op-position-minded newspa-per Novaya Gazeta, “It’s harder and harder for a

years from now,” Moscow State University econom-ics professor Alexander Auzan said recently at a conference. “In September 2010 roughly half said they envisaged themselves work-ing abroad: not just any-where but quite specifi cal-ly in Germany, Britain, Ireland or Argentina.”Uncomfortable truths are part of any world leader’s job, but few could have

been more sobering than the one facing Russian President Dmitry Medvedev before his fi rst G8 summit in July 2008. Just as he was about to start his ambitious program of economic ‘mod-ernisation’, the white-col-lar professionals so crucial to it were prepared to jump ship – a staggering 57% of them, according to a Le-vada Centre survey.Medvedev’s response was characteristic of the opti-mistic Western-style rhet-oric he has employed throughout his presidency. “We have to create favour-able conditions for our cit-izens,” he said. “When there’s a lack of such con-ditions, people want to go somewhere else.”But Russian professionals remain unconvinced. At least, that’s the conclusion it is possible to draw from the latest migration fi gures: More than 1.25 million Rus-sians have left the country in the last few years.At fi rst, this seems the lat-est in a long line of emi-gration waves stretching back to the October Revo-

The number of would-be Russian emigrants has not risen since 2000, Levada Centre data shows. But twice as many under-35s now seek to leave. Fewer respondents cite career opportunities and higher pay as the main rea-sons for wanting to emigrate, while more stress culture and a better life overall.

“Would I leave forever?”PUBLIC OPINION SURVEYS SHOW THAT FOUR IN FIVE RUSSIANS PLAN

TO STAY AT HOME

THE POLLS

ARTEM ZAGORODNOVRUSSIA NOW

In North Ossetia, efforts to make this diverse area attractive to local and foreign visitors may yet pay off.

Tourism where terror struckSociety Building the tourism industry is seen as crucial for the north Causasus economy

The road from the airport into Vladikavkaz, the capi-tal of North Ossetia, passes by the graveyard in the vil-lage of Beslan and the mon-ument to over 330 people, most of them children, killed during the tragic 2004 school siege that shocked the world. “A horrible tragedy, several of my relatives are buried here,” said Oleg Karsanov, the 43-year-old local min-ister of tourism, walking by the graves on a misty after-noon. Yet Karsanov, who earned his MBA in London, is de-termined to re-imagine his native North Ossetia and turn the mountainous re-public into a magnet for tourists despite some deep scepticism that the turbu-lent region can attract large numbers of visitors. Karsa-nov, an amiable but some-what stoic character, has been cultivating tourism for four years, long before the federal government’s recent involvement in the region’s tourism.“We have gone from under 30,000 tourists a year to

about 100,000 a year, thanks to the work that’s been done,” he said. Soon his initiatives will be supported by an ambitious federal development plan revolving around Mamison, a €700 million ski resort about two hours southwest of Vladikavkaz that is cur-rently under construction. The resort will have more than 100 kilometres of slopes of all difficulty levels at al-titudes between 2,000 and 3,000 metres.“Mamison will offer our countrymen the opportuni-ty to experience world-class skiing without leaving the country,” said Karsanov, who noted that the government also plans to build hiking trails through the surround-ing mountains, which offer dramatic beauty.The ski resort is part of a broad €10 billion federal programme to develop re-sorts across the north Cau-casus, an effort that has drawn a few raised eye-brows because of the threat of terrorism in the region. Russian officials hope the 2014 Winter Olympic Games in Sochi, which lies to the west, will revitalise this area of Russia as a ski destina-tion, both for Russians and foreigners. But terrorism is still a threat. In 1999, an ex-plosion that killed 62 peo-

Regional observers agree that building up tourism is a legitimate way of inject-ing money into the local economy and boosting other sectors such as construction and services. “But it won’t resolve the problems it’s de-signed to fi x,” said Nikolai Petrov, a scholar in resi-dence at the Carnegie Mos-cow Centre. “Even if jobs are created, they most like-ly won’t be suited for the local population,” he added. Most people in the region do not have the experience to provide high-quality services, according to Petrov, which most likely means much of the talent may have to be imported. An alternative is to open a school for tourism and hos-pitality to train local youth, analysts have suggested.In North Ossetia, it falls to Karsanov to get the word out and people in. He is re-lying not just on mega-projects but on small-scale tourism efforts centred on the local population.With the average salary at around €350 a month, lo-cals do not mind the oppor-tunity to make extra cash. “I’d be happy to open a guest house or shop right along the road here,” said Elbrus Elkanov, 51, a farm-er who does construction work on the side. Elkanov lives along the valley road outside the village of Fiag-don, about an hour’s drive west from Vladikavkaz. “But right now there are too few incoming tourists,” he said.

ple rocked Vladikavkaz’s central market. In 2010, a smaller attack hit the city. The region’s reputation as a tourist destination re-mains damaged.“It all sounds a little uto-pian to me,” Galina Go ka-shna vili, a teacher in Vladikavkaz, said of the tourism development.

A local resident near the abandoned medieval village of Tsemeti.

Officials are aware of the degree of difficulty they face. “When people look at a map and see we’re only millimetres away from plac-es like Chechnya, they are discouraged,” said Oleg Ka-layev, first deputy prime minister of North Ossetia. “But when we had Western experts examine the loca-tion ... they said the poten-tial was there.”Indeed, several new hotels are under construction, the infrastructure has im-proved, and some Russians are already coming to ski and take in the local hos-

pitality.“It’s been fun,” said Alyona, who came as part of a tour group from St Petersburg. That kind of endorsement is priceless, local leaders say.“We have to change the image of the north Cauca-sus in the long term,” said Taymuraz Mamsurov, pres-ident of North Ossetia. “We can’t do this through a bar-rage of advertising. That will only have the opposite effect. What we need is for people to come, have a good time, and recommend it to their friends.”

“What we need is for people to come, have a good time, and recommend it to their friends.”

THE NUMBERS

192 thousand: number of immigrants

to Russia in 2010, primarily from CIS countries. 33,500: emigrants in the same pe-riod, mostly to the West. Source: Federal Statistics Service.

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28 APRIL 2011Economy 28 APRIL 2011

Dmitry Medvedev speaks in Magnitogorsk.

Maybe the biggest com-plaint about Russia is the high level of corruption. Has any progress been made in the anti-corrup-tion drive?There has been a positive change, but it will not be finished in a year. Bribes are going up, but that is part-ly because the people that take bribes can see that it is not going to last too long. They want to catch the last train. But this is a systemic issue, as this is not just a bunch of criminals. Corruption exists at all lev-els and comes back to the state’s involvement in the economy: If we can reduce this, then the potential for corruption will also fall. Cor-ruption is connected to the preferential treatment state-owned companies receive.

There is a lot of talk about reforms, but why are they going so slowly? The reform drive has slowed because there is a lack of fo-cus. This is such a big system that if people know there is a political focus on an issue they follow up on it, but if not then they go back to doing the same things they did before the reform. We have made progress in cutting red tape, but there is not enough focus. The prob-lem is made more difficult be-cause we have to try to com-bine the federal initiative with active participation by regional administrations if we are to im-prove the investment climate. A huge responsibility rests on the governors and mayors. We need to introduce best practic-es across Russia, but we can-not impose this from the top down. One of the main problems we face is that people don’t realise that we are already compet-ing globally, but now – after the crisis – people are start-ing to understand this more and more. They realise that we can’t rely on our own market.

EXCLUSIVE INTERVIEW ARKADY DVORKOVICH

“We are competing globally”

Read full version athttp://rbth.ru/12684

Arkady Dvorkovich is an

economic adviser to

President Medvedev.

Prepared byBen Aris

The Kremlin is open for businessEconomy Government ministers are to leave corporate boards by June

chairman of state-owned gas monopoly Gazprom, si-multaneously serving as deputy prime minister.Another practical an-nouncement by the presi-dent was his decision to give the Ministry of Economic Development the authority to quash any regulations that could hamper the con-duct of business. “The min-istry will be given the au-thority to present proposals to the justice ministry for removing administrative regulations that, without justifi cation, make it diffi-cult for business and invest-ment operations,” Medvedev said.The president also called for equitable treatment of minority shareholders in public companies by giving them more access to vital

The president said he wants government ministers out of the corporate boards of state-owned companies by June, a move some experts say is tantamount to unrav-elling part of the power ver-tical put in place by his predecessor, Russian Prime Minister Vladimir Putin.After successfully wresting control of the government from the oligarchs in the early 2000s, then-President Putin established tighter state control over the econ-omy through the appoint-ment of state ministers that serve as the ‘eyes and ears’ of the government on the boards of large state cor-porations. Before his elec-tion as president in 2008, Medvedev served as the

company information. “If the minority shareholders are not provided with in-formation, this means one thing: It means that there is something to hide,” he said.Medvedev reaffirmed Rus-sia’s commitment to priva-tising state stakes in key companies, and said the government must publish

a timetable for the privati-sation of large stakes in state-owned companies over the next three years. He reiterated the intention to open a direct investment fund this autumn, with an initial capital of $2 billion (€1.4bn), that would allow the government to co-invest with foreign funds into the Russian economy.


billion: net outflow of capital from Russia since the global economic crisis began

billion: foreign investment in the Russian economy in 2010, up 40% year on year

€179 €79THE NUMBERS

BP-Rosneft deal hanging by a threadEnergy Russian shareholders ebullient in struggle against BP plan to swap shares worth $16bn with Rosneft

“Together with Rosneft we made a fair offer,” BP’s CEO, Robert Dudley, said at the company’s annual general meeting in London. Sources close to BP say the sum offered for 50% of TNK-BP was $27bn (€18.8bn). Sources close to AAR called this offer – in terms of both price and as-sets – “not serious”, and raised the stakes.At fi rst the private Russian owners were ready to sell their share to BP for $30bn (€20bn), then for $35bn (€24bn). Now they are talk-ing about $40bn (€28bn), though on the Russian stock exchange the whole of TNK-BP is worth only 1.3 trillion roubles (€32bn). Officials at Rosneft are in-censed by the demands, which they slammed as “market speculation”. BP stands to lose the most if the conflict is not re-solved, analysts say: Rus-sia accounts for a quarter of BP’s oil reserves, so it must remain there at all costs to avoid being swal-lowed by competitors. Meanwhile, there are signs that Rosneft is keeping its options open in its quest to form a strategic alliance and realise its ambition of becoming one of the world’s top five oil and gas con-cerns. Speaking on condi-

tion of anonymity, sources close to Rosneft’s board said another foreign com-pany might be found to re-place BP.But if anyone is keen to explore Arctic oil deposits as BP aims to do, “they are not banging down Ros-neft’s doors to swap shares”, Valery Nesterov, an analyst at Troika Dialog, said.The BP-Rosneft alliance was to be effected in two stages. By 14 April, the companies were due to have finalised the share swap of 9.53% of Rosneft and 5% of BP. The second stage envisages the joint

exploration of three areas on Russia’s Arctic shelf. Cue AAR, which, fronted by such formidable fi gures as Alfa Group’s tycoon chairman Mikhail Frid-man, successfully blocked the way. Aside from causing palpi-tations in boardrooms, the share-swap saga under-mines a widespread notion about doing big business in Russia. The history of the planned alliance arguably shows that the infl uence of politicians over private business is greatly exagger-ated. Neither the presence of Prime Minister Vladimir

Putin at the signing of the co-operation agreement, nor the support of Presi-dent Dmitry Medvedev and the chairmanship (until re-cently) of Rosneft by the powerful deputy prime minister, Igor Sechin, could save the deal from the claims of the Russian shareholders: in February, the High Court in London imposed an injunction on the deal. The optimal solution to the confl ict was allowed to slip away, observers say: “At the very beginning of the con-frontation, there was hope that the sides would settle

BP’s Robert Dudley was in sombre mood after the arbitration ruling, while Mikhail Frid-

man and his AAR partners were ecstatic.

BP stands to lose the most if the conflict with Russian investors is not resolved.


BP CEO Robert Dudley ar-rived in Moscow on 15 April and held a two-minute meeting with Prime Minister Vladimir Putin. Dudley ap-parently did not use his trip as an opportunity to meet with the Russian sharehold-ers in BP’s TNK-BP joint venture or top officials at Rosneft. Government press secretary Dmitry Peskov said that Dudley and Pu-tin “talked about business”, but declined further com-ment. According to finan-cial analyst Valery Nesterov,

Dudley probably wanted to ask the prime minister about a more detailed dis-cussion of the proposed share swap with Rosneft. The Russian authorities, however, have already made it clear that relations between BP and the Rus-sian shareholders in TNK-BP constitute a corporate con-flict in which they do not intend to interfere. Dudley should not expect any ad-ministrative support from the Kremlin, Gazprombank’s Alexander Nazarov said.

THE FACTS

A brief chat with the premier

out of court,” Nesterov said. “TNK-BP’s Russian share-holders would receive some form of compensation – money or assets – in ex-change for withdrawing their objections to the deal.”AAR has long wanted to enter foreign markets, but the variants proposed by BP (including Arctic ex-ploration) did not suit the consortium. TNK-BP can now either buy back the Russian part-ners’ stake for cash or shares, or sell theirs. BP might be able to fi nd $40bn – at the end of last year it

had $18.5bn (€12.7bn) on its accounts, while Rosneft had $4.1bn (€2.8bn), said Boris Denisov, an analyst at the Bank of Moscow. But it now has to sell assets to pay compensation for last year’s oil spill in the Gulf of Mexico. Shareholders are unlikely to appreciate such sacrifi ces. BP was not planning to offer “large” amounts or significant shareholdings to AAR, Dudley said in a bid to calm BP’s British share-holders. What happens in May could show whether they are still keen on the Rosneft alliance.

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28 APRIL 2011 Business

Equities Exchange-traded funds attract overseas cash but increase volatility in already jittery markets

Emerging markets are hot – partially because they rebounded strongly from the global market meltdown in 2008.

ETFs bring mixed blessings to Russia’s rising market

BEN ARISBUSINESS NEW EUROPE

After ignoring the rise of the fastest-growing economies for much of the 1990s, main-stream investors have woken up to the huge gains that can be earned in relatively quick-ly from these markets, and have turned to the exchange-traded fund (ETF) as their vehicle of choice. However, long-term inves-tors into the biggest emerg-ing markets warn that these funds are effectively ‘hot money’ and can destabilise the fastest-growing stock markets. Russia’s stock mar-ket has been the star per-

money – highly speculative investments looking for short-term gains. The point was brought home in the middle of March when stock markets in emerging markets experienced a sell-off as de-veloped markets started to show signs of revival. “The Russian market is cur-rently standing apart from this trend. As a difficult EM [emerging market], Russia received a disproportionate-ly low share of the portfolio investment that fl ed the West following the credit crunch. Having absorbed much less Western hot money, Russia has been less susceptible to the profit-taking and the more general sentiment shift away from EM and back to-wards the developed world,” said Liam Halligan, chief economist at Prosperity Cap-ital Management, a dedicat-ed Russia fund. “ETF infl ows [to Russia] re-fl ect the fact that Russia is now being increasingly cited among mainstream profes-sional investors as a market with good prospects during 2011 and beyond,” Halligan said. In the meantime, however, investors are expecting a choppy ride as worries over

turmoil in the Arab world and, subsequently, interna-tional oil prices dog fund managers. If the ETFs take fright, their collective exit could cause a sharp correc-tion in Russian share pric-es. “These fund fl ows are very sensitive to oil and other commodity price trends. That sustains a positive backdrop for Russia and Brazil for now, but increases the risk of greater market volatility when commodity prices sta-bilize or fall,” Weafer said. In a worrying early sign, the Market Vectors Russia fund, the biggest US-listed Rus-sian ETF, sharply increased its short selling of Russian funds at the end of Febru-ary.Other investors point to the still-cheap valuations: Rus-sian stock valuations on a price-to-earnings base are the lowest among 21 major emerging markets, accord-ing to Bloomberg. “Russia is in pretty good shape at the moment,” said Julian Mayo, a London-based money man-ager who helps oversee about €2.4bn in developing nations at Charlemagne Capital Ltd. “I think it will continue to outperform.”

Equity market swings, February-March

former this year, but as the economy is increasingly de-pendent on oil, analysts worry that the increased im-portance of ETFs means any correction could be sudden and sharp. The appeal of ETFs is that, unlike a mutual fund, these funds are traded on an ex-change and can be traded like a stock. But, like a mu-tual fund, ETFs are based on a basket of stocks that give the diversity that is the cor-nerstone of any long-term investment into a risky asset class.“In many ways, the parallel development of exchange-traded funds and the invest-ment case for emerging mar-kets has been a happy coincidence,” said Chris Weafer, head of strategy at UralSib in Moscow. “ETFs

have enjoyed a huge wave of interest from investors want-ing to tap into high-growth markets.”Emerging-market invest-ments have done very well over the past two years as developed markets buried themselves in a deep debt hole, and Russia’s market has been one of the best-per-forming in the world, up about 150% in 2009 and 22% in 2010. The leading RTS index passed the psychologically important 2000 mark in March as the valuation of Russian stocks overtook their pre-crisis highs for the fi rst time in two years; the RTS is expected to pass its all-time high of 2487.92 later this year. Russia is now attracting con-siderable overseas cash, and

fund tracker EPFR Global says fl ows of new money into Russia-focused funds in the last week of March amount-ed to $486 million (€340m), up from $139m the week be-fore. By the end of March, assets under management in Russia-dedicated funds hit a new all-time high, breach-ing the $20 billion (€14bn) mark, according to UralSib. Half of this is now in ETFs. “ETF investors continue to increase exposure to Russia. Notably, almost all infl ows into Russia funds came from country ETFs, which is a continuation of the trend of large inflows into country ETFs which began late last year,” Weafer said.However, thanks to the stock-like nature of ETFs, fund managers say they add to the volatility by acting like hot

ETFs now account for around half of the €14bn tied up in Russia-dedicated funds.

Energy Pipeline troubles strengthen the case for LNG projects in the east, north and south of Russia

Russia to add new liquidity to global gas market

Canned to go: a sample of

liquefied natural gas.

As prices of fossil fuels have surged due to recent events in north Africa and Japan, Russia is moving to strengthen its export oper-ations with construction of new facilities to produce liquefied natural gas (LNG). Transported by special freezer ships, LNG has the potential, if used in large enough quantities, to free both producer and purchas-er from the tangled politics involved in building per-manent pipelines. Russia already has one LNG plant on the far eastern island of Sakhalin that sells much of

Russia is ramping up the development of liquefied natural gas as an alternative supply option to politically sensitive pipelines.

BEN ARIS BUSINESS NEW EUROPE

its output to Japan. In March, the Kremlin an-nounced plans for a simi-lar processing plant on Rus-sia’s northern coast. Building an LNG plant on the Yamal Peninsula, which taps into the vast reserves of western Siberia, is an al-ternative to supplying nat-ural gas to Europe via pipe-lines. But it also underpins prospects for Russia’s South Stream pipeline project to southern Europe by broad-ening supply options, ac-cording to Energy Minister Sergei Shmatko. “Russia does not face a bottleneck in its obligations under the South Stream project, but has several alternatives,” Shmatko told Prime Min-ister Vladimir Putin in a re-cent report.Uniting Russia’s semi-state gas giant Gazprom with Germany’s BASF and Eni

of Italy, South Stream would pipe Siberian gas to southern Europe. But the project is ranged against the rival Nabucco pipeline promoted by the European Union, which, if built, would skirt Russian terri-tory and link Europe di-rectly to the gas reserves of the Caucasus and central Asia. Recent revolutions in north Africa have bolstered South Stream by raising fears of the unrest spread-ing east, but both pipelines have been embroiled in ge-opolitical wrangling by countries along their routes. The planned LNG process-ing plant on the Yamal Pe-ninsula would break the deadlock, as liquefi ed gas can be shipped to anywhere that has a port and facili-ties to offload it. Overall, exports of LNG from Yamal,

Sakhalin and the Shtok-man gas fi eld in the Bar-ents Sea should move up to 85 billion cubic metres of gas annually to Europe and Asia, Shmatko said last November. Putin also ordered the en-

ergy minister to study the possibility of building an LNG plant on the Black Sea coast, close to Russia’s main oil export ports and the planned undersea route of the South Stream pipe-line, which will come ashore in Bulgaria or Romania. Gas is coming back into focus after oil prices soared

due to the north African po-litical turmoil, plus the im-pact of Japan’s earthquake and tsunami and the ensu-ing nuclear accident. VTB Capital estimates that, with the disruption of oil sup-plies to Europe caused by

the Libyan confl ict, Russian gas exports could this year grow by 10bn-15bn cubic metres, or 7%-10% of Gazprom’s total exports.Prices on European gas spot markets also spiked after the earthquake in Japan. “We believe the increase in the spot price refl ects the market’s anticipation that LNG demand will be sig-nifi cantly more than previ-ously expected, as Japan strives to make up for the loss of nuclear power gen-eration capacity,” VTB an-alyst Lev Snykov said. Meanwhile, leading private gas producer Novatek spent €361 million on a 25.1% op-tion on the planned Yamal LNG plant. Novatek al-ready owns 51% of the project and has a call op-tion on another 23.9% stake, should the plant go ahead.

Russian gas exports are estimated to rise this year by 10bn-15bn cubic metres.

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28 APRIL 2011

Prime Minister Vladimir Putin’s comparison of the coalition bombing

of Libya to mediaeval cru-sades has reasonably been criticised as the latest ex-ample of a confused Rus-sian opportunism. It seems rather cynical to bash a co-alition that has been so careful to present the right kind of image. It is also dis-ingenuous given that the Kremlin gave implicit sup-port to the bombing through its abstention from the UN Security Council vote au-thorising the use of force.The critics of Putin’s com-ment might be operating from the moral high ground, but they are also missing the point. Putin did not criti-cise the West because he wishes to side with Muam-

mar Qaddafi or even be-cause he fi nds it amusing to annoy the United States. In-stead, his comments refl ect an evolving pragmatism in foreign policy based on eco-nomic self-interest.After two decades of trying to defi ne itself with regard to the West, Russia is fi nd-ing a role for itself on the international stage. One of the main difficulties that Russia has faced since the Soviet collapse is that the country has been at the bot-tom of several peer groups simultaneously. It has been the defeated superpower, the slow-growth member of BRIC, the odd man out in the Group of Eight and the black sheep of Europe. The foreign policy that has emerged in recent years at-tempts to avoid boxing in Russia to any particular classifi cation. A combina-tion of improved econom-

ics, a period of relative sta-bility at home and the epiphany in 2008 that much of the Western model was not sustainable in the West – and all the more so in Rus-sia – seems to have gener-ated a new strategy, both domestically and abroad.

There are several compo-nents to this strategy.The first component is a golden rule: Make no ene-mies – or at least as few as possible. Russia is building relationships across a wide spectrum. The improve-ments in relations with the

Roland Nash is chief in-vestment strategist at Verno Capital.

Sergei Guriev is rector of the New Economic School in Moscow. Aleh Tsyvinski is professor of economics at Yale University.

CHARTING A PRAGMATIC PATH

Roland NashTHE MOSCOW

TIMES

United States and Europe have tended to attract most of the headlines. Treaties on nuclear weapons reduc-tions, better co-operation with the West on Iran, progress on World Trade Or-ganization negotiations, and providing a steady gas sup-ply into Europe all refl ect signifi cant improvements in relations.The growing ties with the emerging world have been

just as signifi cant. Russia is developing ties across Asia, Africa and South America. Yekaterinburg hosted the fi rst BRIC conference last year. For the fi rst time, the emerging countries are pro-viding a signifi cant propor-tion of new capital being

invested into Russia.In 2010, China became a larger trade partner for Russia than Germany. Com-pare that with trade with the US, which now accounts for less than 4% of Russia’s trade turnover. Asia and the Persian Gulf determine the price of Russia’s major ex-ports. The West is no longer viewed as a reliable source of long-term fi nancing. The 2008 crisis emphasised the need for as diverse a range of investment and fi nance as possible.It is against this backdrop that Putin’s unhelpful com-ments should be taken. Rus-sia has never got very far by defi ning itself as either pro- or anti-Western. It is now attempting to be more pragmatic. It may look cyn-ical in London or Washing-ton, but this might refl ect the recognition in Moscow t h a t t h e wo r l d h a s changed.

Russia has never got very far by defining itself as either pro- or anti-Western.

Comment

MEDVEDEV’S GAME OF MUSICAL CHAIRSAleh Tsyvinski,

Sergei GurievTHE MOSCOW TIMES

cessfully, to change the law to reject shareholder re-quests for information.The most controversial of Medvedev’s measures is the removal of key bureaucrats from corporate boards. His orders list 17 state-owned companies and the power-ful ministers and deputy prime ministers to be re-moved from board chair-manships by 1 July. He promised a longer list by 1 October.The president’s logic is straightforward: A govern-ment official in charge of an oil company or a bank faces an inherent confl ict of interest. The chairman of a board must serve the interests of the company, but a government official

In recent days, President Dmitry Medvedev has moved against some of the

most powerful men in the government, including Dep-uty Prime Minister Igor Sechin, who is perhaps the closest among them to Prime Minister Vladimir Putin — and who until 11 April was chairman of Ros-neft, Russia’s largest oil fi rm. Medvedev signed a decree to strip Sechin and others of their chairmanships of some of Russia’s biggest state-owned companies. The stated purpose of the de-cree was to improve the country’s investment cli-mate, but the purge may re-fl ect other, more important goals.Medvedev has in the past recognised the need to at-tract Russian and foreign investment and criticised the country’s dismal invest-ment climate. But this time, his actions truly matched his rhetoric as he outlined specific measures to be taken and set deadlines for implementing them. And with some of the measures bound to face stiff opposi-tion from powerful inter-est groups, the reforms are set to be a major test of Medvedev’s real strength — and of his plans to run for another term as presi-dent. Even partial success would allow a Medvedev re-election campaign to be built around themes of cor-ruption-fi ghting and trans-parency.Corruption and govern-ment accountability are probably the single most important issues for Medvedev’s electoral base

al legations made by whistleblowers.Medvedev made a simple and convincing argument: Those who fear transpar-ency are those who have something to hide. This is not an abstract accusation. Navalny’s repeated requests for the minutes of several state-owned companies’ board meetings generated huge resistance. Two com-panies even tried, unsuc-

among the country’s rising middle class and ‘protest voters’. The ruling United Russia party’s recent poor performance in regional elections shows that the electorate is fed up with the status quo and is ready to vote for an alternative.The success of leading an-ti-corruption activist Alex-ei Navalny is another wake-up call for Medvedev. Notably, many of the meas-ures proposed by the pres-ident are similar to those recommended by Navalny: removing government of-fi cials from the boards of state-owned companies, ensuring access to corpo-rate documents for minor-ity shareholders and devel-oping a way to respond to

must pursue the public in-terest, which includes pre-serving a competitive en-vironment in the oil or banking sector.Removing officials from state-owned companies’ boards has been an impor-tant aim for Medvedev for several years. He intro-duced the idea in his pres-idential campaign speech in Krasnoyarsk in 2008 and has made certain that doz-ens of independent direc-tors have been appointed to the boards of state-owned companies.Yet board chairmanships remain the domain of the bureaucracy. Not a single state-owned company has an independent chairman. And the chairmanship is a vital position, as its occu-pant sets the agenda and controls discussions.It is difficult to talk about standards of corporate gov-ernance in Russia’s state-owned companies since most do not even have reg-ularly scheduled board meetings, owing to the un-predictability of govern-ment officials’ schedules. This may seem little more than an annoyance, but it has a key implication: when there is no regular sched-ule for board meetings, many independent direc-tors – especially foreigners – often cannot attend. If the board chairman is not a government official and can commit to an annual schedule, highly skilled in-dependent directors from around the world could be attracted.As usual with such initia-tives, implementation mat-ters. First, it is not clear who will replace the bureaucrats as board chairs. Given their importance, the new chairs

must have the necessary skills and integrity. It is often said that Medvedev does not have his own team, but his appointees to these positions will show wheth-er that is true.Second, it is uncertain whether the new board chairs will actually run the companies. Russia’s legal system is imperfect, and even serious violations of corporate governance are difficult to punish. It is not unthinkable that manage-ment will simply ignore the boards.Finally, while some board members are truly inde-pendent, others receive ‘di-rectives’ from the govern-ment on certain issues. Therefore, it matters wheth-er the new board chairs run their boards independent-ly or according to the Kremlin’s orders. In the lat-ter case, the new – and quite expensive – chairs would be treated as gov-ernment proxies, making a mockery of the entire ex-ercise. The good news is that Medvedev’s chief eco-nomic adviser, Arkady Dvorkovich, has said that government directives “will be reformed” as well.Whether these improve-ments in corporate govern-ance are actually imple-mented will be clear to all. We will know soon – cer-tainly before 1 July – whether Medvedev can im-plement even a part of his agenda and whether he is willing and able to build his own power base in the process.

We are going to see a major test of Medvedev’s real strength – and of his plans.

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28 APRIL 2011 Opinion

ATTACKING THE ENTRENCHEDCULTURE OF CORRUPTION

EU ENERGY PACKAGE: LET THE GAS BUYER BEWARE

been carried out to meet the new challenges facing the country. To all intents and purposes we have today a Soviet-style bureaucracy, only still more bloated, un-scrupulous, greedy, crimi-nalised and uncontrolled.Corruption in Russia began to inflate rapidly in the early 1990s, during the pri-vatisation period.If one of the main forces that keeps corruption at bay is political competition, then in this view the devel-opment of Russia’s politi-cal environment was dwarfed by the take-off of corruption.A tangible blow was dealt to political competition during the 1996 presiden-tial elections, which led to an increase in the bureauc-racy’s impact on all spheres of society and state admin-istration. The parliamenta-ry system began to grow weaker and the courts

Russia’s ubiquitous cor-ruption is not a nov-elty that arose at the

dawn of the Vladimir Putin era in 2000, as some experts and politicians claim. Cor-ruption was already a seri-ous problem in the Soviet Union’s waning years, when personal enrichment be-came the main ideology for part of the political and eco-nomic elite.Post-Soviet Russia, lacking a well-grounded sense of social and moral values, still cannot grasp the impor-tance of reputation, includ-ing one’s public reputation. Based on this, bureaucrats have made personal enrich-ment their one and only goal.A contributing factor is that since the early 1990s no real administrative reform has

Russians and society as a whole are generally content with being mere onlookers. Fear and lack of confi dence stemming from centuries of suppression prevail in peo-ple’s minds. Public debate has been eliminated, includ-ing in parliament. Any real action against corruption is seen as a challenge to the authorities. The corrupt elite are trying to mitigate as much as pos-sible the harm anti-corrup-tion initiatives can cause them. And yet change, in-cluding in the public con-sciousness, is possible, even within the next year or two.President Medvedev is no corruption-fi ghting version of Don Quixote; he is a man who is skilfully and care-fully building up his anti-corruption strategy, prepar-ing the legal tools that may in due course take on prac-tical relevance. But for that to happen, several condi-tions need to be in place, the main one being the pub-lic’s trust and support.

In 2008, President Dmitry Medvedev became practi-cally the fi rst leader to give an objective assessment of corruption in Russia. He spoke about government posts being bought, corrup-tion in the judicial system, and the state and law-en-forcement authorities being used as mercenaries to seize businesses. He publicly de-fined corruption as the main threat to Russia’s de-velopment and went on to submit legislation and a national strategy to sup-press it.A number of practical measures have been taken to amend criminal law and administrative rules. Work has begun to reform the ju-diciary and law-enforce-ment bodies. In addition to legal measures, important as they are, the president underlined the need to re-store and develop real po-litical competition and transparency. He is using new methods and in some ways is independently es-tablishing a dialogue with society. But why are all these ini-tiatives stymied? The rea-son has been stated above:

began to be less and less independent. In 2000, with members of the security agencies being brought into the executive and legislative branches of power, the situation wors-ened. Meanwhile, a major-ity of the population had

been duped into a false sense of stability with a wave of material goods. At this point, the interests of most of the bureaucracy and of society coincided on a number of points, such as a lack of interest in socially active inde-pendent media (which are the basis for fi ghting cor-

ruption) and in political competition. The bureaucracy’s strength, which in such a system was gradually increasing, led to society’s deteriora-tion. As a result, we got a government in which cor-ruption is essentially dif-ferent from its Western counterpart in that it is stirred up by bureaucracy and the conditions it cre-ates. New kinds of corrupt shadow corporations have emerged, for instance. They are practically uncon-trolled because they are represented by the law-en-forcement, supervisory and judiciary bodies. The corruption market in Russia is estimated at €210 billion a year, embezzlement of public funds stands at about 30% and kickbacks at €25bn. In other words, corruption is the most lu-crative and best-organised business in Russia.

Corruption is the most lucrative and best-organised business in Russia.

Freeing up gas owners’ access to the system will not ensure increased supply.

KirillKabanov

EXPERT

Konstantin Simonov

EXPERT

Kirill Kabanov is head of the National Anti-Corrup-tion Committee.

Konstantin Simonov is the head of the National Ener-gy Security Foundation.

The European Union pins particular hopes on the so-called third

energy package. After ini-tial approval in 2007, fi erce debate with national gov-ernments and especially with European energy con-cerns delayed full approval of the package of legislation until September 2009. It fi -nally came into force in March.The European Commission is promoting the package as a cure-all for the union’s energy problems. It is sup-posed to bring competition to the European gas mar-ket and consequently send prices down. This in turn is supposed to goad gas pro-ducers into vying with each other for the European buyer, resorting to aggres-sive cost-cutting and mak-ing do with small profit margins. However, although the package would liberalise natural-gas owners’ access to gas transport infrastruc-ture it does not follow that there will be a lot of gas at the system’s input. Indeed, it does nothing to contrib-ute towards that end. The third package may help the European buyer, but only if supply exceeds demand in the market. The trouble is that the package does nothing to stimulate sup-ply.The core of the legislation is unbundling different

types of activities within the vertically integrated natu-ral-gas companies. The ex-tracting or marketing struc-tures would either forfeit ownership of the gas trans-port and distribution infra-structure (including storage facilities and liquefi ed nat-ural gas terminals) or re-nounce control over their infrastructure and even any say in decision-making con-cerning their activities. As a result, the gas trans-mission infrastructure would be run by independ-ent companies. In addition, the EU intends to increase the number of gas pipelines; at present, in terms of the length of the transmission network, it lags far behind the United States, which liberalised its market long ago.All well and good, except

for one thing: When supply is short, a liberalised mar-ket is a very bad market for the buyer, as highlighted by Britain’s experience in the winter of 2005-06 when do-mestic production fell short even as completion of the new Langeled pipeline from Norway was delayed. Over-all, shortfalls in gas supply as a result of redirection to other markets or a drop in production capacity have posed the main risk for Eu-ropean energy policy in re-cent years.

The risks are high, with at least four factors playing against European consum-ers. The fi rst is the decline of domestic production. Where in 2000, the EU im-ported half of the gas it con-sumed, by 2010 the share of imports to the enlarged union had risen to 62%. Even the UK, once the EU’s leading gas producer, has become a net importer. Ger-many and Italy depend on imports for over 90% of their needs. Production in the UK keeps falling; Den-mark, for now still a net ex-porter, is expected to see its reserves depleted within two or three years. Then there is the Fukushi-ma factor. The EU will now have to shut down some of its nuclear plants. Germa-ny has already declared it will do so. The only envi-

ronment-friendly alterna-tive is natural gas. The shut-ting down of nuclear plants in Germany alone could in-crease gas consumption by 35 billion cubic metres. The third factor is the po-litical turmoil in the Arab world; this could dramati-cally reduce alternative sources of natural gas. The fourth is Qatar, which will hit peak production this year. Much of its abundant gas will be claimed by Japan to make up for the loss of Fukushima. Qatar has declared a moratorium until 2014 on the building of new capacity through de-velopment of the North Dome gas fi eld, the world’s biggest.If there is not enough gas input, the third package will favour the gas owner for one simple reason. He would be able to sell directly to the buyer while the transmis-sion system owner will just offer transit services with-out any claim to owning the gas. So, given a shortage of gas, Russia will do well with this package. Gazprom will be able to sell gas to con-sumers without investing in the development of the Eu-ropean infrastructure. Provided, of course, the EU plays by the rules. Theoret-ically, the third package permits exceptions. A gas system operator may deny third parties access to the pipeline, storage facility or terminal in the absence of free capacity if necessary to meet the operator’s social obligations or if the com-pany could sustain fi nan-cial losses under ‘take or pay’ gas supply contracts. But the main exceptions to the rules may have to do with the new infrastructure. The legislation says that in-terconnector pipelines, LNG terminals and storage fa-

cilities may be excluded from regulation. As a result, the system will be much more liberal for some gas producers than for others. The biggest long-term risk of the package is if invest-ments in the development of the market infrastructure are suspended. Given lib-eralised access to transmis-sion, it is unclear who will invest in the development of the gas transport system. True, the Commission in-serted provisions that make it mandatory for transport system owners and opera-tors to invest. This is part of the ten-year development goals of the package. But it is still unclear what these goals are, whether they will be fulfilled and how they will be fi nanced. The UK's experience shows that a lib-eralised market does not al-ways react to market chang-es in a timely and efficient manner, because gas trans-port projects are so costly and the payback period so long that market mecha-nisms perform poorly. The rules of free access can re-coup the project cost only in very liquid markets with a large number of suppli-ers, and that is something few European markets can boast. Thus, the new rules create additional risks for Euro-pean gas consumers, while paradoxically providing new opportunities for Rus-sia. The EU is painting it-self into a corner because it does not understand that liberalisation alone is not enough to bring prices down. What is needed is a serious gas supply surplus, something this energy pack-age is unable to deliver.

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28 APRIL 2011

The insurance industry is predicting double-digit growth in the next few years.Some Russians say they save for three things: money to keep their sons out of the army, money in case any-one in their family is arrest-ed, and money to pay the doctor if they get sick. These are not considered bribes so much as unofficial fees for underpaid people doing a favour. As Zoya found out, it is standard practice to pay this unwritten tax that has no price list and no official recognition. “The minute you arrive you pay everyone. You pay nurs-es, the people who clean the floor. The doctor and the surgeon. The only way you know how much to pay is by asking the people around you,” Lipman said, empha-sising the informality of the process.The reforms will raise doc-tors’ salaries by up to 30%, but with wages so low, the medical profession is not yet impressed with that, said Kirill Danishevsky, an independent health ex-pert.Pushkar, the urology chief, said that part of the solu-tion is moral as well as fi -nancial.“It’s impossible to reform in a month or a year but we can start by saying that there are good doctors and bad doctors,” Pushkar said. “We should provide the good with total support.”

Health Care

GALINA MASTEROVASPECIAL TO RUSSIA NOW

Russian doctors and their patients wonder if new reforms will finally help them get the medical infrastructure and health care they deserve.

When Yevgeniya Ivanovna’s mother went into the hos-pital recently, her daughter, Zoya, knew intuitively that she should pay the nurse something extra in cash – even though the hospital is not private.She handed over 500 rou-bles (€12). It is not the size of the ‘fee’ that is the prob-lem, sociologists say. It is the nature of it.On paper Russians have a health system that is free. That paper is the Russian constitution, written in 1993, which states that free health care is the right of all Russian citizens.In reality, Russia has a split system with a mix of pri-vate medical care and a state system that lags far behind. Years of underfund-ing have left the healthcare system in a precarious state with decrepit hospitals staffed by demoralised and woefully underpaid staff.

Doctors expect a daily struggleDmitry Pushkar, 47, is Rus-sia’s chief urologist and an

Medical care you can live withHealth Doctors and nurses are badly underpaid, while public hospitals lag far behind the private sector

experienced surgeon with a worldwide reputation. He could be practising any-where, and there must be days he wishes he was an-ywhere but here.“Are you prepared for a daily fight to be a high-quality doctor? I fi ght for my equipment. I fi ght to fi x the leaking walls in my op-erating theatre. I fi ght for everything! Society itself must deliver a message,” Pushkar said. “What does it mean to be a doctor? So-ciety means everyone, the president, the prime minis-ter, workers. A united soci-ety must say that we un-

derstand what it means to be a good doctor and how important it is.” The Russian government is embarking on a huge reform which will see an infl ux of cash, 300 billion roubles (€7bn), to outfi t the coun-try’s hospitals with new hi-tech equipment, better sal-aries and, it is hoped, improved care.The dire state of Russian health care and its precar-ious mortality rate have acted as catalysts. “Russia has a birth rate character-istic of developed countries – low; and a death rate of a developing country –

Staff at the St. Petersburg Cancer Hospital check equipment.

EMMA BURROWSRUSSIA NOW

A new collaboration between Russian and American NGOs hopes to improve the health of babies.

Over the past few years, Russia has experienced a baby boomlet, thanks in part to the 2007 legislation introducing the ‘mother’s capital’ – a cash payment to women who have more than one child. Prime Minister Vladimir Putin recently an-nounced an initiative to modernise medical facilities – including maternity hos-pitals. It is clear that en-couraging more births is an important part of the gov-ernment’s plan to combat

Improving health, text by textHealth Russian health professionals are recognising the urgent need to communicate

the falling population.What happens, however, when the baby comes home?Enter Text4Baby. This pro-gramme, pioneered in the United States, targets women who might other-wise not have access to the

best healthcare information. Mothers who sign up for the text message service receive three texts per week con-taining information on top-ics such as pre-natal care, immunisation and car-seat safety.In September, Text4Baby

will start operating in Rus-sia in a bilateral collabora-tion that staff hope will rep-licate the project’s great success in the US, where over 135,000 subscribers signed up in the fi rst year alone. Russia could prove to be fertile ground for the programme, as it has some of the highest levels of mo-bile-phone penetration in the world. And, important-ly, the project has attracted strong support from the Russian government. Ex-perts from the health min-istry will take a leading role in order to address the most pressing health issues fac-ing Russian mothers.Judy Twigg, an expert on health care in Russia and a professor at Virginia Com-

Can cell phones help solve Russia’s population decline?

high,” Masha Lipman, an analyst at the Carnegie Cen-tre in Moscow, said. “There are several causes for the death rate, and one of them is an inferior quality of health care.” The most dire warnings by demographers predict that Russia’s popu-lation could drop from 142 million to 100m by 2050.But no trend is irreversible: Russians who anticipate longer and healthier lives may be inclined to have more children.The government is build-ing a series of health cen-tres around the country with a focus on cardiovas-cular disease and cancer. The reforms will place an emphаsis on preventative care and will include the retraining of doctors, the health minister, Tatyana Golikova, stated in a gov-ernment report.The Soviet system, which was free for everyone, con-centrated on specialist and hospital care, ignoring pre-ventative care. In Russia, cancer is still often diag-nosed when the disease has spread to a late stage, Go-likova said.

Growth in private insuranceRussians have little confi -dence in the existing health-care system, and some are opting for private insurance.

monwealth University in Richmond, Virginia, said that in Russia, “Public-health in-formation, education and communication are the crit-ical things – important, if not more important, than just changing the health-care system in isolation.”Naturally, there are chal-lenges facing the implemen-tation of the programme. Co-ordinating the involve-ment of governmental, non-governmental and profes-sional organisations has been difficult. Language ex-perts were also needed to reduce long and complicat-ed Russian phrases into short, but coherent, text messages.Perhaps the biggest chal-lenge, though, has been try-ing to get Russian doctors and their patients to rethink how health-care services should be provided to moth-ers and babies.

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2015 target year set by the

government to halt the pop-ulation decline. By 2025 the population could rebound to 145m.

THE NUMBERS

51.6 % of Rus-sians die of car-

diovascular diseases, 24.4% from cancer, 10.2% from ac-cidents, murder or alcohol.

Read more atwww.rbth.ru/12692

The Russian government is finally getting serious about controversial adoptions of Russian children by foreign-ers. A milestone will be the scheduled signing in May of a bilateral agreement be-tween Russia and the United States. But monitoring inter-national adoptions is only part of the solution: chang-ing the system within Russia is also essential.

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