BRICS Business Magazine English Edition No.3

brics business magazine · #3 · 2013

The World and BRAZIL · RUSSIA · INDIA · CHINA · SOUTH AFRICA

BUSINESS MAGAZINE

decoding

ru s s i a

www.bricsmagazine.com

Those who return home after an extensive residence abroad can be invaluable sources of insight into a foreign country. More often than not, they are able to provide an altogether more thorough and wellrounded account of a place than what is typically found on TV or in the pages of newspapers. After all, the sum total of relationships and interaction, understanding of a country’s inner workings, as well as experiences of success and failure all bring forth a deeper understanding of a nation, where it has been and where it may be going.

While a sojourn abroad may not be practical for everyone, it is our aim to foster a curiosity for the authentic and a willingness to look beyond the common clichés and stereotypes. Nothing can be as frustrating as encountering the same unfortunate misconceptions of a place you know well, trotted out time and again. As much as anything, such superficiality stunts opportunity for collaboration and growth. My experience has shown that both at home and abroad, the five BRICS nations are often perceived through the lens of an array of clichés. The time has come to shatter this deeply-entrenched, if rather useless tradition. In our newest issue, the task at hand is to present Russia not as the “riddle wrapped up in an enigma” it has been said to be, but as an approachable and understandable country whose future development can be–in fact must be–influenced.

Ruben Vardanian, Chairman of the Editorial Board of BRICS Business Magazine

2

Index BUSINESS MAGA ZINE

Chairman of the Editorial Board Ruben Vardanian

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The persons/companies are referenced with the first page number of the article they are mentioned in the issue.

Managing Editor Evgeny Arabkin Creative Director Igor Borisenko Publisher Arman Jilavian Business Development Director Alexei Medvedev Senior Editors Vladimir Volkov Tatiana Tkachuk

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Nabiullina, Elvira 88 Naryshkin, Sergei 88 Nazarbaev, Nursultan 88 Nell, Jacob 88 Nesis, Alexander 63 Nikolaev, Konstantin 63 Obama, Barack 102 Obama, Malik 102 Obama, Michelle 102 O’Neill, Jim 28, 88 Pandit, Vikram 88 Patini, Gabriel 76 Prokhorov, Mikhail 88 Putin, Vladimir 46, 63, 88 Raja, Andimuthu 46 Rogozin, Dmitry 46 Rushdie, Salman 106 Salzberg, Barry 88 Sarkozy, Nicolas 88 Schmidt, Eric 88 Scorsese, Martin 106 Sechin, Igor 63, 88 Shamolin, Mikhail 46 Sievers, Gerd 38 Slyngstad, Yngve 88 Stoffels, Paul 30 Tata, Ratan 38 Thomas, P. J. 46 Timchenko, Gennady 63 Tinkov, Oleg 63 Tong, Mao 38 Tricoire, Jean-Pascal 30 Tsotsi, Zola 30 Tsuge, Toshiyuki 76 Ulyukaev, Alexey 88 Vardanian, Ruben 88 Vazquez, Karin Costa 98 Vekselberg, Viktor 30 Volozh, Arkady 63, 88 Vyugin, Oleg 88 Xia, Li 76 Zapatero, José Luis Rodriguez 88

A123 Systems 38 Addax Petroleum 38 Alcoa 38 Anheuser-Busch 38 Bank of England 24 Bank of Japan 24 Baring Vostok Capital Partners 54 Berkshire Hathaway 38 Bharti Airtel 38 BlackRock 50 Bosco di Ciliegi 63 Burger King 38 Cartesian Group 50 Central Bank 54, 88 Centre of Financial Technologies 54 Chevron 38 China Investment Corporation (CIC) 50 China National Offshore Oil Corp. (CNOOC) 38 Chinalco 38 Citigroup 88 CNPC 78 Conforama 38 Corus 38 СТС Media 54 Cummins 63 Daimler 63 Deloitte Touche Tohmatsu 88 Denizbank 38, 63 Dexia 63 East European Gas Analysis 78 ЕМС 54 ENEL 30 Energias de Portugal 38 Enforta 54 Ernst & Young 38, 58, 112 ER-Telecom 54 Eskom Holdings 30 Etisalat 46 Eurasia Center 18 European Central Bank (ECB) 24 Europlan 54 Federal Reserve Chairman 24 Ford Motor 38 Frontier Strategy Group 18 Gallery Group 54 Gartner 84 Gazprom 63, 78, 84 General Motors 112 Global Research 88 Golden Telecom 54 Goldman Sachs 22, 28, 88

Google 88 H.J. Heinz Co. 38 Henan Coal-Bed Methane Co 78 Hindalco 38 Hitachi Ltd. 76 HP 38 IBM 38 IdeaCellular 46 InBev 38 InBrev 63 Infosys 30 Institute of Energy Strategy (IES) 78 Institute of International and Development Studies 12 IST Group 63 Jaguar Land Rover 38, 76 Jinxian 76 Johnson & Johnson 30 KAMAZ Group 63 Karo 54 Kaspi Bank 54 Kedaara Capital 34 Kotak Investment Banking 38 L’Etoile 63 Lenovo 38 Loop 46 Magnit 63 McKinsey & Company 88 MD Medical Group Investments (MDMG) 63 MDM Bank 88 Mercedes-Benz 63 Millward Brown Optimor 63 Ministry of Economic Development of Russia 84 Moody’s 38 Morgan Stanley Russia 88 Mother and Child 50, 63 Nexen 38 NOMOS Bank 63 Norges Bank Investment Management 88 Novatek 63 Novelis 38 Novomet 54 N-Trans Group 63 ONEXIM Group 88 Orient Express Bank 54 Ozon 54 PetroKazakhstan 38 PIMCO Europe 16 Prognoz 84

Promsvyazbank 28 REN (Redes Energeticas Nacionais) 38 Renova Group 30 Reuters 78 Rio Tinto 38 Rive Gauche 63 Roland Berger Strategy Consultants 38 Rosneft 63, 88 RUSAL 88 RusEnergy 78 RUSNANO 88, 96 Russian Partners 50 Russian Railways OJSC 16 Sberbank 24, 38, 63, 88 Schneider Electric 30 Severstal 63 Severstaltrans 63 Sibur 63 Siguler Guff 50 Sinopec 38, 78 Sistema Shyam Teleservices Ltd 46 SKOLKOVO Business School’s Institute for Emerging Market Studies 112 Squire Sanders 38 Standard & Poor’s 20 State Federal Property Management Agency of Russia 46 Tata Motors 38 Tata Steel 38 TataTelecom 46 Temasek Holdings 34 The European Bank for Reconstruction and Development (EBRD) 50 The World Bank 84 Tinkoff Credit Systems 63 Total 63 Troika Dialog 38, 63, 88 Uninor 46 Unocal 38 Videocon 46 Vnesheconombank 84, 88 Volga Gas 54 VTB Bank 88 Wanxiang Group 38 X5 Retail Group 63 Yandex 54, 63, 88 Zahnrad Fabrik 63 Zain 38 Zhaikmunai 54 3G Capital 38

EXPERTS AND CONTRIBUTORS

MANISH KEJRIWAL

KIRILL DMITRIEV

Founder and managing partner

CEO of the Russian Direct Investment

of Kedaara Capital

Fund (RDIF) and a member of the BRICS Business Council

MICHAEL CALVEY

EVGENY GAVRILENKOV

Senior partner and co-founder,

Chief Economist of Sberbank CIB

Baring Vostok Capital Partners

ROBERTO MANGABEIRA UNGER

ARTEM KONSTANDYAN

Harvard Law School Roscoe Pound

President and Chairman of the Board at

Professor of Law, Ex-Minister of Strategic

Promsvyazbank

Affairs of Brazil

NIKOLAI NIKOLAICHUK

CHARLES WYPLOSZ

Head of the Tomsk City Administration

Professor of International Economics at the Graduate Institute of International and Development Studies in Geneva

MASHA GORDON

JEAN-MICHEL SIX

Executive Vice President,

Managing Director and Chief Economist

PIMCO Europe

for Europe, the Middle East, and Africa at Standard & Poor’s

VSEVOLOD ROZANOV

ELIZABETH SADOVA

President and CEO of Sistema Shyam

Academic Director of Executive

TeleServices Ltd.

Education Programmes, SKOLKOVO Moscow School of Management

MIKKAL HERBERG

SERGEY SHESTAKOV

Research Director on Energy Security

Deputy Business Development Director

at the U.S. National Bureau of Asian

at Prognoz

GEORGY TOLORAYA

OLEG PREKSIN

Executive Director of the National

Executive Vice President of the Russian

Committee on BRICS Research, Russia

Union of Industrialists and Entrepreneurs (RSPP), Russia’s Sherpa in the B20

8

© RIA Novosti

Research (NBR)

CONTENTS

The Chinese banks are very big but they are state-owned. This is a problem. Why? Because everywhere in history, if you look at how state banks behave, you see they don’t behave well.

The 2008 crisis in the United States occurred because the large US banks believed that they would be bailed out by the taxpayers if they failed. What do you think the large Chinese banks believe? They are a part of the government, so they cannot go bankrupt.

Thus they can make many, many mistakes.

OPINION

12 16 18

Voluntarily Loved Nothing Personal Beyond the BRICS

PRO ET CONTRA

20 22

An ‘Expired’Concept The Third Scenario

MACRO

24 28

Long-Term Uncertainty New Game, Old Rules

STRATEGY

30 None of the fundamental drivers of the BRICS have changed. They remain large demand centers, and are high-growth economies. So I believe the foreign direct investment (FDI) flow in India – and in all BRICS economies – will definitely pick up in the next few years.

Gearing Up for a New Global Order

INVESTMENTS

34

Drivers Unchanged

TREND

38

B20 №3, 2013

44

Acquired by BRICS The Great Financial Construction Site

CONFLICT

46 48 Many foreign investors prefer to structure their contracts so that any investment or business dispute comes under the jurisdiction of international arbitration in London, Stockholm, Paris or New York. While this reflects that people feel there is a risk attached to investing in Russia, reality and perception can differ.

Dancing Shiva with a Phone Doing Business in India. Alien’s Guide

RUSSIA SPECIAL

50 54 58 63 74 76 78 84

Reality and Perception Can Differ A View from Inside Russia: Facts and Figures 12 Most Admired Five Tips for Investors Business or Personal?

Big Politics Driven by Gas Three Out of Five

POWER

96

On Six Hills

PRACTICE

98 I would describe my relationship with Barack is a normal brotherly one, except that he’s got a country to run. And I think he’s doing a very good job on that score.

Knowledge Exporter

PORTRAIT

102 106

My Little Brother Barack Obama Midnight’s Children

10

OPINION

Voluntarily Loved Charles Wyplosz To make the renminbi a global currency, the Chinese should not force people into loving it, but rather take on the building of a true financial system.

and effectiveness. And I do believe that the U.S. dollar will remain the main global currency in the foreseeable future. Which currency can challenge the domination of the U.S. and the greenback?

The alternative might be a global currency. I believe that one day there will be a world currency, but even if you are a young man you are not going to see it. There is one country that is a potential challenger down the road: China. When the GDP per capita in China becomes similar to what it is in the West, it will be the biggest economy in the world, and its currency – the renminbi – has the potential to become a global currency.

For a currency to be global it has to be trustworthy. And it has to offer people who hold it the means of changing it very easily, and under the best conditions. There are not that many worthy currencies in the world and, despite all economic vows, the greenback still remains unchallenged.

You can ask whether the dollar will remain trustworthy but, so far, it is. There is no financial market in the world that can match the U.S. in terms of size Charles Wyplosz is Professor of International Economics at the Graduate Institute of International and Development Studies in Geneva.

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OPINION

The Chinese are still in the state planning frame of mind when they attempt to force people to hold and trade in the renminbi. If you want to do business with China these days, you have to settle in their currency, even though you might not want to. I believe that, in forcing people to use the renminbi, China is going in exactly the wrong direction. The Chinese have a long, long, way to go to understand that a currency becomes international because people love it, not because they are forced to hold it. At least, personally, I am not a believer in forced love

But does Beijing really want the renminbi to fly globally? My answer is definitely yes. The Chinese see themselves as the next world power, so they want all the status symbols that go with that – be it a huge navy, a manned space program, or an international currency.

The government has a lot of work to do to realize this dream, and actually they have already started. They have explicitly adopted the objective of ‘internationalizing’ the renminbi. They have developed procedures to increase the amount of trade conducted in the currency. So yes, it is happening, but it is happening on a very small scale.

And, importantly, it is not happening completely voluntarily.

That makes for a big difference between the U.S. dollar and the renminbi. You see, people hold dollars not because they are forced to hold dollars by the U.S. government, but because they want to hold dollars. In contrast, the Chinese are still in the state planning frame of mind when they attempt to force people to hold and trade in the renminbi. If you want to do business with China these days, you have to settle in their currency, even though you might not want to. I believe that, in forcing people to use the renminbi, China is going in exactly the wrong direction.

The Chinese have a long, long, way to go to understand that a currency becomes international because people love it, not because they are forced to hold it. At least, personally, I am not a believer in forced love.

But, for that to happen, several conditions must be met beforehand. Firstly, a global currency must be a trustworthy currency, which means a low-inflation currency. But China doesn’t have low inflation, and seems unable to operate at regularly low inflation rates.

Secondly, to be an issuer of a global currency, you need a true financial system in the background, with an appropriate banking system in particular.

Beijing, however, doesn’t have one yet. The Chinese banks are very big but they are state-owned.

This is a problem. Why? Because everywhere in history, if you look at how state banks behave, you see they don’t behave well. The 2008 crisis in the United States occurred because the large U.S. banks believed that they would be bailed out by the taxpayers if they failed. What do you think the large Chinese banks believe? They are a part of the government, so they cannot go bankrupt. Thus they can make many, many mistakes.

In addition, China does not have a world-class financial market. There is one in Shanghai, but it is still a local market; it is not a global market in any way.

And finally, China still imposes widespread capital controls. As long as you cannot bring money in and out freely, the renminbi cannot be an international currency. Only once the Chinese remove capital controls, once they allow the emergence of a truly private banking system that is well regulated and supervised, and once their capital market becomes globally integrated, will the renminbi get the chance to become a global currency.

14

OPINION

Nothing Personal Masha Gordon If the government wants to make Russian companies more attractive to foreign investors, it does not have to give up its stake in their shareholdings. Rather, it is critical that politics are taken out of the corporate management equation.

been chronically undervalued in a major way, compared not only to securities markets in the developed countries, but also to those in many developing countries – including the BRIC nations. For instance, in early second quarter, the P/E multiplier (price to earnings ratio per share) for Russia’s main MICEX index remained a mere 5.9, compared to 8.4 for the Brazilian Bovespa, 14.4 for the Shanghai Securities Exchange, and 16.6 for the Indian BSE SENSEX. In other words, compared to the other BRIC countries, Russian securities are traded at a discount rate roughly ranging from 40% to 280%.

What could account for such a massive difference? Generally, the notorious Russian investment climate is the primary root cause. It probably makes no sense to provide a detailed list of all of the aspects where Russia is still lagging far behind best international practices – everyone knows them full well. It would, however, behove me to mention one thing: the low quality of corporate management, which is often associated with the excessive presence of the government in the Russian economy.

But is this presence really excessive? Everyone knows that this issue is constantly debated in Russia. However, in my opinion, the answer to this question varies radically depending on which economic entity one is talking about.

It is not entirely unreasonable to have the government as a shareholder if a company is operating in a competitive market and its primary objective is to maximise profits. It is a completely

Few countries in the post-crisis world would be able to match Russia’s macroeconomic track record. The country ranks among the most sustainable economies in the world, as shown by a number of key indicators such as foreign debt to GDP ratio (around 10%), budget deficit (0.4% in the first quarter of this year), and gold and foreign exchange reserves (in excess of $500 billion).

Global investors have certainly taken notice and appreciate that aspect, as can be seen from the situation around the Russian sovereign and corporate debt market, which undoubtedly has become one of the most attractive in the world today. Take a look at the spread of corporate bonds in Russia compared to companies in other countries: it has contracted significantly over the last two to three years, which goes to show that the value of Russian companies today is not discounted in any way, at least not in terms of their solvency. For instance, Russian corporate bonds are currently traded on a par with those of Brazil, and their average yield is higher than that of U.S. corporate bonds by a mere 100 basis points. However, by and large, even this difference bears no significance.

While there is certainly nothing wrong with foreign investors’ attitude to Russian bonds, with demand remaining consistently high, that is clearly not the case in the domestic securities market. It is an open secret that it has Masha Gordon is Executive Vice President of PIMCO Europe.

16

Nothing Personal

In early second quarter, the P/E multiplier (price to earnings ratio per share) for Russia’s main MICEX index remained a mere 5.9, compared to 8.4 for the Brazilian Bovespa, 14.4 for the Shanghai Securities Exchange, and 16.6 for the Indian BSE SENSEX. What could account for such a massive difference? Generally, the notorious Russian investment climate is the primary root cause

employed only when these corporations do not have any shareholders who are pursuing different social objectives or other non-business agendas.

In other words, such issues should be dealt with by ‘specialised’ institutions that are government agencies. Other companies should operate in the market based on a common set of rules.

At the same time, the government does not have to fully give up its stake in companies operating on the free market to significantly boost their efficiency and ultimately make them more attractive to investors. Instead, what is critical is that politics are taken out of the corporate management equation to the maximum possible extent.

To achieve this objective one needs to create an environment in which key decisions taken by such companies are predicated solely on business requirements. It is equally important to make sure that such decision-making processes are governed by a clear set of formalised criteria. This would enable them to move away from the widespread practice of ‘manual management’ and its consequential errors, as well as to significantly reduce the risk of corruption in the Russian economy.

Apart from the difficult psychological transition to this new management paradigm, such a move would require long and tedious efforts that seem anything but glamorous. However, if the country fails to overcome this hurdle, it will miss out on an opportunity to realistically improve the quality of its economy, and foreign investors will continue to demand that the country’s assets be sold at a considerable discount.

different game if the corporation in question pursues strategic objectives or performs social functions.

In the latter case, the fact that the government is listed among such a corporation’s shareholders is hardly an impediment; on the contrary, it is often a requirement.

Which companies could one put in this category? Examples would include the so-called ‘natural’ monopolies, such as Russian Railways OJSC. In addition to generating profit, they are required to assume the burden of developing the country’s transport infrastructure. That requires colossal investments, which no ‘market’ company would be able to stomach. Another example would be the Russian Agricultural Bank JSC, which essentially plays the role of government financial agent, providing soft loans to finance the domestic agricultural complex. Obviously, companies of this sort would find it difficult to compete successfully in a ‘pure’ market environment.

The problem lies in the fact that the same companies in Russia, and especially those with a large government involvement, often play both roles at the same time. This is precisely what drives the widespread phenomenon of the ‘socialisation of shareholder value,’ i.e. when corporate funds are used to further the government’s social objectives.

I would like to emphasise that there is nothing wrong with the corporate sector playing a specific role in pursuing social objectives per se. Otherwise, Russia could regress into the Stone Age, with everyone running around with spears killing each other. However, such an approach should be №3, 2013

17

OPINION

Beyond the BRICS Martina Bozadzhieva The role that the BRICS play in multinationals’ market portfolios is changing, with the five countries increasingly seen as new hubs for expansion into the next layer of frontier emerging economies.

local players and Western businesses is accelerating, and exceptionally fast growth upon market entry has given way to a more modest pace, as certain industries in these markets mature.

As a result, the BRICS can no longer provide guaranteed high growth with relatively limited investment. To maintain high growth levels in the BRICS and to fully capitalize on the opportunity that these markets present, multinationals increasingly need to make larger, more sophisticated investments that position them as leading players in these markets, while responding to the changing needs of their local customers. This results in two main strategy shifts that many of our clients are pursuing across the BRICS.

Multinationals are under pressure to deliver high growth and profitability in emerging markets. To do so, they are using the BRICS as hubs to expand into countries on their periphery.

They are also deepening their presence in the BRICS themselves by entering new regions outside of major cities.

A recent conference, Doing Business with the BRICS, organized by the Eurasia Center in Washington, D.C., discussed the growing importance of the BRICS and the need for closer trade relations between these countries and the United States. Given the slow growth seen across developed markets, seizing business opportunities in emerging and frontier markets remains as important a challenge as ever for businesses.

The role that the BRICS play in multinationals’ market portfolios is changing. The first stage of emerging-markets expansion by multinationals naturally focused on the five countries. Companies were attracted by their fast growth, and the large size of their largely untapped markets. Today, multinationals are facing a different environment – economic growth across the BRICS is slowing, competition from both

Leveraging expansion

As growth in the BRICS slows, multinationals are increasingly looking to smaller but faster-growing markets on the BRICS’ periphery. They then use their established presence in the BRICS to accelerate access to such peripheral markets. For example, multinationals with a presence in South Africa are looking to use the relationships they have

Martina Bozadzhieva is Practice Leader for Central and Eastern Europe at Frontier Strategy Group.

18

Beyond the BRICS

to deliver robust growth, given that these are its most populated, prosperous regions, contributing a combined total of more than 70% of overall GDP. However, multinationals are also looking to grow in lesser-penetrated states in the Northeast and the West.

In Russia, 82% of the population live in cities outside of Saint Petersburg and Moscow. Our clients are looking for ways to tap into the growth potential of Russia’s numerous regions. One senior executive client running Europe, the Middle East and Africa (EMEA) for a large consumer durables multinational says, “I was in Russia recently and visited Novosibirsk. The city struck me as welldeveloped and large. Back in Moscow, I asked my local staff and our distributor about it, and they all said, ‘There’s no market outside of Moscow.’ Surely there must be demand in a city like Novosibirsk for our products, but how do I find out?”

in that market, the local teams they have built, and the distributor partnerships they have formed, to expand into the wider region.

Something similar is happening with Russia, where multinationals are increasingly leveraging their local teams to manage distributor relationships and market entry into markets in the Caucasus and Central Asia.

In Brazil, companies are leveraging their regional presence to engage consumers in upcoming markets such as Peru.

These new markets, which are peripheral for the time being, are often too small to warrant a fullfledged local presence, but are difficult to navigate and to manage from Europe or the United States.

Cultural similarities, geographic proximity, local management talent, and established investment all support the case for using the BRICS as hubs for regional expansion into the next layer of frontier emerging markets. Over time, this trend could result in multinationals having more diffused centers of power, with much of their center of gravity shifted to emerging markets and concentrated in the BRICS. This would be the business version of the multi-polar world vision the BRICS governments are so actively promoting.

Setting new questions

In response to these challenges, multinationals are increasingly looking for ways to expand into new provinces and regions in markets like Russia, China, and Brazil. This process, short of being a simple question of adding a few distributors to cover new geographies, poses a whole new set of strategic decisions for executives. How do we reach customers in a cost-effective way given high transportation costs in Russia? Do we invest proactively in expansion into Brazil’s northeast even if the market opportunity there has not fully developed? Do we need to produce locally to reduce transportation and logistics costs and to take advantage of government incentives? These are just a few of the questions that regional expansion raises for multinationals.

In the end, expanding within the BRICS and into markets on their periphery requires longterm commitment and a willingness to invest significant resources even though the return on the investment could take as long as five or more years to realize. This calls for significant risk-taking both by multinationals and the executives who have to make these decisions – but the alternative is stagnation.

Just being in the BRICS is no longer enough.

Companies that take advantage of this trend will shape not only tomorrow’s emerging markets landscape, but also the very definition of what it means to be a global multinational.

Deepening presence

The other trend, parallel with a rapid expansion into emerging markets on the periphery of the BRICS, is that of multinationals’ deepening presence within the BRICS themselves. True opportunity within the five countries lies not only in the capital cities or the top two or three richest regions.

For companies to fully realize the potential of the BRICS markets, they need to reach a wide range of potential customers, including those with more limited purchasing power. Not only is this true for consumer goods companies, but also for multinationals selling to local businesses and even to governments.

Having picked the low-hanging fruit of opportunity in the main cities in the BRICS, multinationals need to increasingly regionalize their presence in these markets to gain market share, maintain strong growth, and establish themselves as key market players. Otherwise, they risk plateauing growth and a weakening market position.

In Brazil, multinationals have historically relied on the country’s South and Southeast regions №3, 2013

19

PRO ET CONTRA

An ‘Expired’ Concept Jean-Michel Six There may be a number of things that the BRICS countries have in common, but a shared economic model is definitely not one of them. And in other ways, Brazil, Russia, India, China and South Africa are too different to be able to pursue a successful common policy.

Just about the only thing that the members of this club do have in common is that they are all developing markets. Their cultures are radically different, their political systems are at the opposite ends of the spectrum, and their economic structures are obviously dissimilar. The BRICS club is a fine concept, but it has long expired. It would be difficult to identify one country that could be called the weakest link. What seems doubtful is whether these links of different calibres might be capable of forming a single chain. The state machineries of the five BRICS countries pursue economic models that develop in parallel. That is precisely why their development paths are highly unlikely to cross in the next 20 years.

However, they do have one reason to stick together: their desire to restore global equilibrium. The BRICS countries stand a better chance of winning more independence from the West, and of gaining more economic clout, if they remain a political alliance. As the summit in South Africa demonstrated, the BRICS countries have truly learned to talk to one another, and even take independent decisions. It remains to be seen, however, whether this approach will bear fruit, since the political problems faced by these countries are as diverse as their economic structures.

Preserving the alliance offers an interesting experience, and probably makes a certain sense – after all, the club is only 13 years old. In my view, however, we should not pin our hopes on it. It will be crucial for each country to continue to implement their domestic reforms separately. It is not a bad idea to look to your neighbours, allies and maybe even friends – but it hardly makes any sense if you do not back it up with your own competitive edge.

There are two schools of thought when it comes to the BRICS phenomenon. Some believe that this group of countries represents a new economic power that follows in the footsteps of what is commonly known as the Western World. They call it a veritable developing bloc of powerful economies with fast-growing populations, or use many other catchy phrases – which beyond any doubt are true.

Many encouraging statements were also heard at the recent BRICS summit in South Africa, where new plans to create a BRICS bank, and a common foreign exchange reserve, were unveiled. All of the above go to show that developing markets are striving to find new ways to restore their independence in their relations with the West.

This is probably the BRICS countries’ only ‘claim to fame’ today. Members of the club possess different traits, which can be somewhat misleading. You are referring to the BRICS countries as a promising joint project? But what do Russia, India and China really have in common? Russia’s economy, with its excessive dependence on oil and gas, is still mostly driven by its commodities market; India still lives off its agriculture; and China continues to accelerate its economic development while still offering very little in the way of raw commodities. If you retort by pointing out that these countries are characterised by high productivity growth, you should bear in mind how much the structure of this growth varies from country to country. These differences were particularly salient during the crisis period. Russia continued to follow the commodities markets, Brazil’s growth slowed down considerably, while South Africa managed to survive only thanks to China’s high demand for metals and other minerals.

Jean-Michel Six is Managing Director and Chief Economist for Europe, the Middle East, and Africa at Standard & Poor’s.

20

PRO ET CONTRA

The Third Scenario Georgy Tolor aya Turning BRICS into a powerful and effective international organisation with realistic leverage on a global scale will require a long-term development strategy – with institution building being the first order of the day.

equitable, order. This interpretation, which I happen to share, emphasises one important aspect – namely, that the BRICS is an inter-civilisational alliance made up of the leading regional powers in the developing world. Importantly, this alliance pursues a policy of cooperation and collaboration with the West, and not one of confrontation.

According to the second school of thought, the BRICS is first and foremost a club made up of countries that for various reasons never formed part of any other influential alliance in the world.

In other words it is a non-aligned movement whose main objective is to elicit concessions from the existing ‘masters of the world’ who call the shots globally and, in particular, to strengthen the role of these five developing nations in the modern world.

Today no one would argue that the BRICS bloc has not long transcended the stage when it was merely a clever – if not slightly cerebral – acronym coined by economists from Goldman Sachs. Nowadays it has transformed itself into a real international player capable of vying for a leading role on the global political and economic stage. However, to realise its potential, the BRICS club will have to address a fundamental issue: how to identify itself and its aspirations as a new and rising global power.

There are two general schools of thought as to what the BRICS phenomenon is all about. According to the first school, this alliance is a new factor in international relations. It is a means and an end in and of itself, which could be used to rebuild the world – starting with the global financial and economic architecture – to establish a new, more

This article is based on Georgy Talarya’s presentation at the Third International Conference, BRICS and Africa: Cooperation for Development, Moscow, May 2013.

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The Third Scenario

The above scenarios raise one important question: how, and at what pace, is this club going to develop its institutional framework? This is an area that I believe BRICS should focus on today. As BRICS institutions continue to develop, the organisation’s functions should be clarified and expanded in parallel. Our recent experience shows that if such institutions are not set up in a timely manner, these key functions may be lost and the entire project could fail. Therefore it is critical to start building the BRICS’ institutional mechanism today.

We might even postulate that a mechanism of this sort could ensure that the BRICS club will stay around, and vice versa. To this end it would be vital to set up a BRICS development bank. The idea was first expressed during the organisation’s summit in New Delhi in March 2012, and later discussed as an agenda item during the Durban summit by the five heads of state. However, it has not been translated into an actual signed accord.

Why is it that the significance of such a banking institution cannot be emphasised too much?

The answer lies in the fact that, in addition to being a financial institution, such a bank would also act as an analytical and research organisation. It would be able to evaluate the macroeconomic and political situation in the member nations, as well as identify and describe lucrative investment projects. In addition, the bank would help to coordinate the economic policies of the member states, which is exceedingly important.

This is precisely why, in my view, setting up a development bank is one of the most critical BRICS projects in the years to come. One should bear in mind, however, that this would merely be one step in the long journey to creating a full-fledged and comprehensive body, responsible for greater integration and interaction inside the organisation, and transforming it into a powerful international political and economic club.

However, as they say, one should not underestimate the power of bureaucracy: it is perfectly capable of nullifying any initiative, no matter how noble. In this sense, in my opinion, it would be critical to adopt a long-term strategic development project for the BRICS countries. I believe that the BRICS summit that took place in Durban this March already set the tone for that endeavour.

Now it is incumbent upon these countries not to lose the momentum.

Georgy Toloraya is Executive Director of the National Committee on BRICS Research, Russia

All of the BRICS countries, including Russia, obviously favour the first school of thought and are fully determined to develop the alliance precisely along these lines. The ‘Southern Wing,’ on the other hand, tends to overrate the club’s ability to act as a singular representative of the developing world. However, it does not seem that the future development of the BRICS as a new international mechanism will follow a straightforward blueprint. In fact it may best be described with three different scenarios.

The first scenario, which at this stage seems rather probable, promises a certain degree of stabilisation, if not stagnation, for the BRICS club.

The current level and range of cooperation will remain, while the member countries will coordinate their financial and economic policies to a limited extent only. This would be the preferred option for the West, which views the BRICS alliance as a competitor.

The second scenario would probably make the West even happier. It entails a gradual erosion of the values underpinning cooperation between the BRICS countries, reducing it to periodic summits and other formal events. Admittedly, this second scenario does seem highly possible as well, because contradictions between the members of the club do exist, and no mechanisms have yet been found to overcome them.

The third scenario, which in my view Russia should pursue, would see the BRICS club gradually transform itself into an instrument of global political and economic cooperation, a platform for discussing key global political and economic issues. However, that would clearly mean the club becoming more of a military and political alliance. №3, 2013

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MACRO

Long-Term Uncertainty In April, The Russia Forum 2013 was held in Moscow, organized by Sberbank and devoted to discussing the key trends in the global economy and investment in Russia. Chief Economist of Sberbank CIB, Evgeny Gavrilenkov, continues the discussion of the place of Russia and the BRICS countries in the global economic paradigm.

from 83% of GDP in the case of Germany, to 236% for Japan. Several small economies such as Cyprus and Iceland, as well as a number of less prosperous countries, can be added to the list of big debtors.

The short-term growth prospects for most of these countries aren’t terribly optimistic. Longer-term forecasts, however, are rosier if rather uncertain.

Regardless of how much Japan’s economy can grow

According to initial estimates, global GDP reached $71.3 trillion last year. More than half of this total came from twelve developed countries: the United States, the United Kingdom, Belgium, Germany, Japan, France, Canada, Greece, Ireland, Portugal, Spain, and Italy. But as is well known, all of these nations are burdened with significant external debt, with the amount varying 24

Long-Term Uncertainty

economic axioms are sometimes inappropriate and incorrect.

Two good examples of this are Cyprus today and Argentina ten years ago. When Argentina defaulted on its sovereign debt at the end of 2001, the global financial community (and Argentina’s creditors in particular) weren’t too thrilled. Leading up to the default, the Argentine government had applied the standard set of measures – the same ones recently employed by Cyprus: freezing dollardenominated bank accounts for a year and limiting withdrawals. If creditors were none too pleased by the actions of Argentina’s government then, they now, however, generally support the measures being taken by the Cypriot authorities. Another case in point is the recent restructuring of Greece’s debt (in essence a managed default), which didn’t encounter any serious objections from creditors – basically the same creditors who were lending to Argentina over a decade ago. Clearly, the various forms of quantitative easing in use aren’t among the traditional recipes of economic policy.

Argentina, Greece and Cyprus have something else in common: not one of these countries ran its own monetary policy. The pegging of the Argentine peso to the U.S. dollar in the 1990s was one of the main reasons for the excessive flow of capital into the country and high (by the standards of the day) debt-to-GDP ratio. (In 2001, Argentina’s ratio of government debt-to-GDP was 53.6%, with moderate budget and current account deficits.)

The transition to a single currency in Europe allowed the region’s weaker economies to more actively attract capital, including debt capital.

But this significantly increased these countries’ indebtedness. The difference between Argentina and the outlying European countries is that, following its default and the nearly four-fold devaluation of the peso in the first half of 2002, the Argentine economy began to grow again in 2003 and experienced growth ranging from 8% to 9% per year until 2007. In 2008, Argentina’s growth slowed a bit, as was the case around the world. However, in 2009, unlike many countries, Argentina managed to avoid a downturn. In 20102011, the nation’s economy was again showing 9% growth. Although growth slowed in 2012, it nevertheless remained positive and will remain so through year’s end thanks to a gradual weakening of the peso. This partially compensates for high

this year following announcements of a new round of economic stimulus, its debt-to-GDP ratio will continue to increase on account of the country’s budget deficit – which may again surpass 9% of GDP. The U.S. and U.K. will also be faced with a large budget deficit (compared to growth rates), as will practically all of the above-listed countries except Germany and resource-rich Canada. Furthermore, it’s clear that some economies, such as several in southern Europe, will continue contracting this year. As a result, the debt burden – at least for the countries constituting half of the world’s economy – will increase this year. This means that a tightening of fiscal policy in the largest debtor economies – the U.S. and eurozone in particular – is not likely any time soon. In terms of the U.S., Federal Reserve Chairman Ben Bernanke made that quite clear at the end of May. Soft monetary policy with the aim of supporting low bond yields amid growing debt-to-GDP ratios (specific policy may vary country to country) is expected not just from the Fed, but also from the European Central Bank (ECB) and the central banks of Japan and the U.K. Economic theory doesn’t give a clear answer to the question of what’s going to happen next, or how and when to curtail quantitative easing programs, nor is it clear what the consequences of such an action would be, or whether debt-laden economies can even return to a trajectory of growth. By the same token, it’s hard to anticipate exactly how the economies of developed countries, and the financial markets, will in the future react to a continuation of quantitative easing.

Perhaps due to this uncertainty, the term ‘contrary to forecasts’ has been appearing more and more in research reports and commentaries in recent years – either growth or inflation keeps ending up above or below forecasts.

At any rate, it seems that the monetary authorities of developed countries will continue to manipulate the government debt markets. This will for the time being support stock markets, but will by no means guarantee stable economic growth or even stability in the markets themselves – at least in certain countries. Financial markets will likely continue to be volatile.

One of the problems is that economic systems develop faster than the economic theory that is supposed to describe them. As such, recommendations based on widely accepted №3, 2013

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the goods-producing sectors of these countries are comparatively small and uncompetitive.

In general, it appears that the economic situation in the eurozone will not improve significantly. In certain respects, the eurozone is reminiscent of the Soviet Union. As is well known, during the Soviet era Russia directed enormous funds towards subsidizing the outlying southern republics. This was indirectly a consequence of the extremely distorted price structure for domestic goods: Moscow supplied the republics with cheap energy while purchasing goods at inflated prices. It’s not surprising that after the collapse of the U.S.S.R. the per capita GDP of Russia became one of the highest in the region. It’s currently comparable to that of the Baltic states, although Russia’s foreign debt is one of the lowest, while debt levels in the Baltic nations are fairly high. As for the eurozone, it’s no secret who is subsidizing the weaker countries, providing them with loans, and it’s also clear what risks this entails.

It’s hard to predict how things in the eurozone are going to play out, and whether European political unity will strengthen. Right now, however, it’s more or less clear: the economic situation is such that different countries in the currency union are operating with different levels of economic efficiency, and the use of a single currency combined with the lack of independent control over monetary policy among the weaker countries will continue to suppress growth in the eurozone.

The artificial support of the exchange rate presents a serious threat to the economies of countries such as Ukraine, Kazakhstan, and Belarus. Russia, meanwhile, despite slowing growth and having economic institutions in need of improvement, has an essentially floating exchange rate and is favorably positioned relative to many countries in the region.

Its economic policy, however, has suffered due to one serious mistake – the budget rule†, which officially takes effect this year but actually partially began to be applied last year. This year, however, it appears to be dying a quiet death.

The excessive, unnecessary, and expensive debt obligations that the Russian government has taken on with the goal of raising funds to replenish the Reserve Fund ended up forcing other players out of the market and limiting the potential for economic growth last year. This policy led to liquidity

inflation. Although now having a weaker currency, Argentina’s per capita GDP was $11,600 last year, which is significantly higher than the pre-crisis maximum of $8,500 in 1998. The debt-to-GDP ratio last year came in at around 45%.

Despite economic institutions that are far from ideal, Argentina’s economy continues to grow. (This year growth is expected at 3–4%, which is on a par with the entire South American region.) Meanwhile, Greece and Cyprus, which have higher-quality economic institutions, but do not control their own monetary policy and are under the pressure of a massive debt burden, have found themselves unable to cope. It’s unlikely that in the current macroeconomic environment these countries will be able to demonstrate noticeable growth rates in the near future. Despite the austerity measures and recession, the per capita GDP of both countries remains relatively high: approximately $22,000 for Greece and $25,000 for Cyprus in 2012. As a result, †

Restrictions on government spending depend that on the average price of oil over a certain period.

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Long-Term Uncertainty

problems which the government planned to solve this year by converting rubles, raised through the domestic debt, directly into foreign currency on the open market, which would then go into the Reserve Fund. Theoretically, this could facilitate a return of liquidity to the system and a lowering of interest rates, although ultimately it may lead to excessive volatility in the currency market and an increase in speculation, due to the fact that through such transactions the government will essentially be driving capital out of the country. However, this will probably not come to pass, and the budget rule will likely be quietly forgotten, as it was never completely applied in a strict manner anyway. The planned budget expenses for this year turned out significantly higher than the rule requires and, despite relatively high oil prices, no money was transferred to the Reserve Fund for the first four months of the year.

Fairly sensible economic policy had been a relative strength of Russia’s, which partially compensated for the well-known institutional problems. But the worsening of economic policy last year quickly affected growth, and this year Russia may end up being the slowest-growing country in the BRICS bloc.

In terms of longer-term prospects, economic growth in Russia and the BRICS countries is either completely unhindered by debt constraints, or at least such constraints are lower than in the above-mentioned developed countries. The ratio of government debt-to-GDP in Russia is just a bit over 10%. In China it’s around 22%, whereas in Brazil and India debt represents between 60% and 70% of GDP. Due to this, the latter two countries could face substantially more problems if, for whatever reason, interest rates across the globe rise, thus raising the cost of servicing debt.

Interest rate growth may occur in the future not only due to a gradual moving away from quantitative easing, but for other reasons, for example if China’s economy expands and its financial markets are liberalized.

Last year, Chinese economic output came in at 52% of that of the U.S. (the GDP of the two countries was $8.2 trillion and $15.7 trillion respectively). If the Chinese economy maintains last year’s growth rates of about a trillion dollars annually (or even a little less), in a few years it will be on par in terms of size with the U.S. economy.

And this may happen even quicker if the Chinese №3, 2013

Despite economic institutions that are far from ideal, Argentina’s economy continues to grow. (This year growth is expected at 3–4%, which is on a par with the entire South American region.) Meanwhile, Greece and Cyprus, which have higher-quality economic institutions, but do not control their own monetary policy and are under the pressure of a massive debt burden, have found themselves unable to cope

authorities remove barriers to capital flows and allow the yuan to float freely, a move that is bound to occur sooner or later. If this does take place, the direction of global capital flows may change.

In addition to flows of foreign direct investment, China (and perhaps other fast-growing Asian countries) are experiencing a strong inflow of investment into financial markets, first and foremost in the government and corporate bond markets, where yields will be a lot higher than in developed countries and the risks will drop; theoretically this could happen with Russia as well. Interest rates for debt instruments in developed countries will start rising and the bubble that has formed in the sovereign debt markets of developed countries will start to subside or perhaps even burst.

At this point, it’s difficult to anticipate the effects of this, but a transition to a freely floating currency would likely boost the attractiveness of the Chinese currency, which may make it the third most popular reserve currency after the dollar and euro. China’s model of economic growth is starting to change even more quickly.

To the extent to which its economy grows and the financial markets are opened up, the country will become an increasingly popular destination for investment in financial assets. If among the BRICS countries economic ties are strengthened and trade within the bloc grows, the other members of the group will also benefit.

Right now we can separate three regions that are roughly equivalent in terms of economic scale: the U.S. (GDP in 2012 $15.7 trillion), the eurozone ($16.6 trillion), and the BRICS ($15 trillion). But there are only two primary reserve currencies. The emergence of a third one, and the overhaul of the global financial markets, is only a matter of time.

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New Game, Old Rules Artem Konstandyan This alliance between five developing countries with very little in common raises difficult questions – but also opens up great opportunities. If the leaders of the BRICS manage to overcome the intrinsic systemic contradictions, they stand a chance of transforming their group from a club of like-minded nations into a major player setting the global agenda.

countries have been successful in pursuing this mission. A more difficult question is whether this club should remain closed – or is it about time to invite new members? It is often said that Indonesia would make a fine addition to the club, with Turkey and Mexico trailing slightly behind. To be perfectly honest, greater internal contradictions would not make the club’s job any easier. After all, from a structural viewpoint, we are talking about very different economies, national histories, and regional perspectives.

I liked the BRIC idea from the very beginning.

The new BRICS format also seems like a very promising project. However, before the five countries admit further members, they need to develop a common platform, learn to interact, and become a tighter-knit economic alliance.

The only thing that really matters to the market is the success or failure of domestic economies.

Indeed, finances have become increasingly mobile and their flows spur on technological development, but no club of countries can have anything to do

At the time when Jim O’Neill, then chief economist at Goldman Sachs, coined the acronym ‘BRIC,’ he never envisaged that these countries would form a political alliance. The acronym merely referred to four nations that showed a great deal of economic growth potential. As time went by, the BRIC club gained some ideological weight and was joined by South Africa, but the BRIC nations themselves were drifting apart. The situation was further exacerbated by the fact that none of the five nations had an open economy, which is exceedingly important for any alliance of countries.

On the other hand, the fact that 12 years later the BRICS group is still around means that the idea caught the investor community’s fancy. Today it continues to develop not as a fully-fledged alliance, but rather as a club of like-minded nations with a clear-cut mission – to provide a counterweight to the developed countries; to enable the emerging markets to speak with one voice that will be heard by the dominant powers and, primarily, the United States and Europe. So far the BRICS 28

New Game, Old Rules

all votes. This illustrates well who really takes the critical decisions.

Therefore, merely feeling or even stating the obvious truth that the world order is about to change is not enough. The BRICS countries have yet to form a monolithic fist that can tear down that wall of injustice. There was an idea once popular in the Soviet Union that the U.S.S.R. should merge with China. According to its proponents, such a supranational alliance would ensure global victory for the socialist system. Most likely that would have been the case, but the obvious differences between the two countries outweighed whatever they had in common. But, truth be told, the U.S.S.R. and China had a lot more in common than the current members of the BRICS do.

Today the club clearly lacks its own global institutions. The BRICS development bank could really help in this regard without infringing upon the mandate of local institutions. It could be made sufficiently powerful – what with the deep pockets of the donor countries – and be put in charge of integration projects, the support of mutual trade and investments, and the provision of independent analytical data and consulting services. Such a bank should be more independent than the large international organisations dominated by Western countries.

Usually, development banks are proportionate to the size of the economies or foreign-exchange reserves of the countries that create them. Based on this criterion, such an institution for the BRICS would be dominated by China. It still remains unclear what could be done in this regard. One could try to find another option based on parity, but this would entail difficult negotiations and compromise. In other words, it would once again bring to the fore the contradiction that is deeply embedded in the BRICS. But the exercise would still be worth the effort.

Another popular question today is where this bank should have its headquarters. Objectively speaking, Hong Kong would be the best choice, being the only global financial centre located in a BRICS country. However, this decision is likely to be political. Therefore, there is a good chance that the headquarters could be in Moscow, which would further the city’s ambition of becoming an international financial centre, or in St. Petersburg, which has historically played the role of a bridge between the East and the West.

Artem Konstandyan is President and Chairman of the Board at Promsvyazbank

with this: these processes are governed by objective market laws. The U.S. financial market still remains the primary recipient of such flows, with the Dow Jones index being a fine case in point. Another critical area would be the fixed-income securities from developing countries. This boom may lead to yet another bubble. Geographically, the main centre of gravity is shifting to Southeast Asia, and especially Hong Kong and Singapore.

However, we still live by rules written years go by the global power players. To an extent, the BRICS group’s agenda is to change these rules, and help countries whose pleas fall on deaf ears to make sure their voices are heard. However, we can only talk about it in hypothetical terms. Recall the notso-distant past, when Western companies were moving production to Southeast Asia. At the time it seemed that the region was growing stronger and stronger, that it was about to embark upon a new era. However, these corporations’ brain trusts and headquarters stayed where they were – and now the tables have turned, with the United States and other countries heading for re-industrialisation. What is more, even if we dislike the old rules of the game, it doesn’t mean they are about to change. Before such a change can occur, all of the accumulated contradictions have to reach a critical mass.

I would cite a simple example to illustrate my point. To change the geographic distribution of seats at the International Monetary Fund (IMF), the question would have to be put to a vote. The IMF’s financial resources are made up of contributions provided by its member countries, and members’ voting power in turn depends on a formula based on the relative size of their economies. A change in the geographic distribution would require at least 85% support, and the United States has 16.75% of №3, 2013

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Gearing Up for a New Global Order Roberto Mangabeir a Unger Revision of the current global order must be a major ambition of the BRIC countries, so it is time to pool their resources and efforts.

I propose to approach the task before the BRIC countries from two complementary angles. One perspective is that of their internal projects, and the other is the perspective of the revision of the global order. The most widely professed goal in the world today is the organization of socially inclusive economic growth, economic growth which is anchored in a sustained broadening of economic and educational opportunity, capable of providing equipment to the mass of ordinary men and women.

Today this goal must be pursued in a particular context. The context is the emergence throughout the world of the new style of production, a style

The world is restless under the yolk of the dictatorship of no alternatives. The BRIC countries and their movement offer one of the best prospects we have in the world today for the overthrow of this dictatorship. In the creation of alternatives of interest to all humanity the BRIC countries include four of the five largest and most significant countries in the world. Each of them is a potential source of resistance to the now prevailing orthodoxies. Each of them has the spiritual and practical resources to imagine itself as a different world. If the BRIC countries make common cause they can do immense benefit not only to themselves but to the whole world.

This article is based on an address to BRICS business captains delivered during the deliberations of the B20 task force entitled ‘Innovation and Development as a Global Priority,’ at the BRICS Summit in Durban, South Africa, on 27 March 2013.

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Gearing Up for a New Global Order

with the instruments of access to the advanced forms of production, we would create an inclusive productiveness; we would bring about a revolution in the broadening of economic opportunity.

This new industrial policy which our countries can help create and disseminate throughout the world must have as its primary addressees not the traditional big businesses but the small and medium-sized firms.

The method should not be the subsidization of credit, but rather the opening of access to credit, technology, knowledge and advanced practice. It is a project that cannot advance unless we begin to innovate in the institutional arrangements that shape the relations between governments and firms, as well as the relations among firms.

Roberto Mangabeira Unger is Harvard Law School Roscoe Pound Professor of Law, Ex-Minister of Strategic Affairs of Brazil

that lies beyond the limits of traditional mass production. This new form of production is characterized not simply by the accumulation of technology, capital and knowledge, but also and above all by a new set of practices of production.

It attenuates the contrast between the supervision and the execution of productive tasks. It mixes cooperation and competition in the same domains, and it transforms all productive activity into a form of permanent innovation in such a way that the best firms become more like the best schools.

The problem is that this new economy, as we sometimes call it, or post-Fordist style of production (as it comes after mass production), is characteristically isolated in narrow productive vanguards, weakly linked to the remainder of our national economies. The vast majority of the labor force in the richer countries, as well as in the major developing countries, remains excluded from these advanced sectors of production, and this exclusion has become a vast source of inequality in the world.

The traditional devices for the moderation of this inequality, such as compensatory redistribution through tax and transfer, and the defense of small business against big business, are inadequate to the task. What we need is to open the gateways of access to these new advanced sectors of production and in this way get practical content to the goal of socially inclusive economic growth. That means today in our countries, in the major BRIC economies, a reinvention of industrial policy. The most important agents in our economies are the multitude of small and medium-sized firms that are responsible for the preponderance of output, and the great majority of jobs. If we could equip even some of these firms №3, 2013

The Third Model

There are today in the world two main models of relations between states and businesses. There is the American model of arm’s-length regulation of business by government, and there is the Northeast Asian model of the formulation of a unitary trade and industrial policy imposed top-down by the bureaucratic apparatus of the state. What we need is a third model – a form of strategic coordination between governments and firms that is decentralized, pluralistic, participatory and experimental, to the end of disseminating the practices of the new economy through large sectors of the society.

This decentralized strategic coordination must have as its counterpart support for regimes of cooperative competition among the small and medium-sized firms, so that they can continue to compete against one another but at the same time pool certain commercial, technological, or financial resources, and through this pooling achieve economies of scale. On this basis we can begin to give an example to the world of how the new economy can become the fugleman of a new style of socially inclusive economic growth.

Now, such a domestic project – a project to be carried out within our countries – has as its counterpart a revision of the global order, and such a revision must be a major ambition of the movement of the BRIC countries. Ever since the Second World War what has prevailed in the world has been an overarching project attempting to impose on all of humanity a certain institutional blueprint as a condition of access to global public goods, or political security, and economic openness. What we 31

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B20’s Recipe of Constant Transformation

development. The Taskforce’s core priorities are as follows: Simplifying the transfer of technologies to stimulate growth and overcome imbalances in the global economy as well as providing an enabling environment to foster fair competition and cooperation on the global level.

At an expanded session of the working group that took place during the International Economic Forum in January 2013, members of the group decided to continue their discussions during the BRICS Summit in Durban that they were invited to attend by Zola Tsotsi, Chairman of the Board at Eskom Holdings – South Africa’s largest energy company.

The international institutional order should be transformed taking into account the interests of the BRICS countries and the rest of the developing world and not just those of the developed Western nations.

During a meeting that took place behind closed doors in London on 26 April this premise was supported by the co-chairs of the working group. “Transition” is the operative word and concept that was identified as top priority for the group of CEOs representing leading international companies. The term refers to a process of constant transformation in key innovative sectors of the economy in all parts of the globe.

“Members of our group are developing a set of measures that would not only meet the interests of all nations but also help to bridge the gap between the developed and the developing world. What is more, this process should be primarily driven by a global enabling environment fostering economic growth in developing countries through constant innovations and not by some mundane redistribution of resources,” noted President of the Skolkovo Fund Viktor Vekselberg.

Roberto Magabeira Unger, Professor at Harvard Law School, is the academic leader of the B20 Taskforce “Innovation and development as a global priority”. The Business 20 (B20) group is an informal gathering of business associations that joined their efforts to maintain a constant dialogue between the business communities, the governments of the G20 countries and international institutions.

In 2012, Viktor Vekselberg, President of the Skolkovo Fund and Chairman of the Board of the Renova group of companies, was invited to put together and chair a taskforce that would focus on innovation and development as a top priority.

His co-chairs are the founder and Chairman of the Board at Infosys Chris Gopalakrishnan, President and CEO of Schneider Electric Jean-Pascal Tricoire, Head of the Research Programmes at Johnson & Johnson and Company Group Chairman of Global Pharmaceuticals Paul Stoffels and the CEO of ENEL Fulvio Conti.

Igor Drozdov, Senior Vice President and Chief Legal Counsel at the Skolkovo Fund, and Alexey Ivanov, Director of the Fund’s Legal Policy and Public Development Department, joined the Taskforce as sherpas. The group that is currently made up of 40 leading international companies opened its inaugural session on 12 December 2012 with Professor Unger invited as a guest of honour.

It was thanks to the consultations held with the professor that the group participants managed to develop a unique agenda and draft recommendations for the G20 political leaders in three different dimensions: Energy, biotechnologies (including food production) and information and communication technologies – all in the context of innovation and

Woods system in 1971. Where the project has been implemented most vigorously is in the regime of world trade. The world trade regime established under the WTO treaties is the most consummate expression of this attempt to impose a blueprint on the world. A generative principle of this world trade regime, which we should resist, is the attempt to define free trade as an end in itself, the maximization of free trade. But free trade is not an end in itself; free trade is simply a means to an end.

want in the BRIC countries is a new global order that is more hospitable to alternatives, to divergence, to experiments, to heresies.

This overarching project has been realized very unequally in different domains. It has been less successfully implemented in the domain of political security. It has been implemented in a very limited fashion in the international monetary arrangements for which there is now no generally accepted regime, ever since the collapse of the original Bretton 32

Gearing Up for a New Global Order

In the second place, South Africa can show how this structural transformation can touch the future of agriculture. There is no reason to distinguish family agriculture and entrepreneurial; familyscale agriculture can acquire entrepreneurial characteristics. South Africa can demonstrate how to avoid the contrast between an empty countryside and cities full of workers without jobs, by promoting a form of rural industrialization that attenuates the contrast between town and country.

In the third place, South Africa is now focused on the educational imperative. What we want in our countries – an inclusive productivism – cannot be brought about without a radical transformation in how students learn and teachers teach. We need a form of education that is analytic, questioning, cooperative and dialectical, rather than informational, authoritarian and dogmatic. We need to place an analytical general education on a continuum with a new form of vocational training that emphasizes generic, practical and conceptual capabilities, rather than job-specific and machinespecific skills. And South Africa is one of the most promising terrains in which to demonstrate the potential of this educational revolution.

A fourth area in which South Africa can make a huge difference is the organization of a new form of democratic politics. What we now mainly have in the rich North Atlantic world is a kind of sleepy democracy, a democracy that is organized to make change depend on crisis. And what we want is a high-energy democratic politics that does not need trauma as the condition of transformation.

A series of constitutional innovations is already being debated in South Africa that would heighten the level of popular engagement in public life; that would create constitutional mechanisms rapidly to overcome impasse between the political branches of government; and that would exploit the potential of federalism to create counter-models for the future. The country can take a decisive path, but at the same time allow certain sectors or places to hedge their bets and show a different way into the national future.

This is the South Africa that we want and need, and this is the South Africa that can arise in the near future – the South Africa that exemplifies for Africa and for the world the path of an inclusive productivism, and a deepened energetic democracy.

The shared position that begins to emerge today among the BRIC countries is that the goal should be defined as the creation of an open world economy that is hospitable to the coexistence of different national strategies of development and different experiences of civilization, a form of economic openness that allows divergence rather than imposing a compulsive convergence in institutions and practices.

Similarly, the established world trade regime is now being designed under the aegis of the principle of institutional maximalism. It requires adherence not just to the market economy, but to a particular version of the market economy. It wants to outlaw, under the label ‘subsidies,’ all the forms of strategic coordination between governments and businesses that the countries now rich used to become rich.

And it wants to incorporate into the rules of free trade the intellectual property regime established at the end of the 19th century that leaves many of the technological innovations of greatest interest to humanity in the control of a handful of big private multinational businesses.

We should want a revision of this order, a pluralistic globalism, a globalism that allows each of our countries to engage the world economy on terms that are favorable to our national construction so that two parts of this BRIC agenda, the domestic part and the global part, are just the reverse side of each other and together they will allow us to overthrow the dictatorship of no alternatives, to the benefit of humanity.

South Africa and the World

With its immense dynamism and its diversified economic structure, South Africa can make a vital contribution to the movement of the BRICS. Not only can it disseminate progressive alternatives on the African continent, but it can exemplify for Africa and for the world many of the alternatives that are of greatest interest to us.

I think especially of four domains in which South Africa has the materials with which to make a distinctive contribution: first, in helping to equip millions of small entrepreneurs and would-be entrepreneurs who are struggling to open and to maintain small businesses in the country. If some of these people can be given the requisite economic and educational equipment, South Africa can bring about a productivist revolution that will serve as an example to Africa and to humanity. №3, 2013

33

INVESTMENTS

Drivers Unchanged Vladimir Volkov Having spent almost a decade managing over $5 billion at Temasek Holdings and leading the Singaporean state-owned private equity giant’s investments in India, Africa and Russia, the founder and managing partner of Kedaara Capital, Manish Kejriwal, is now focused primarily on his homeland. Still, it doesn’t prevent him from spotting new investment opportunities in other BRICS countries, which he says are trying their best to improve their somewhat tarnished images as ‘investment destinations.’

are funds which try to acquire controlling stakes in assets they consider ‘strategic,’ or would ‘simply like to own’ – for example buying into select European retail brand names, or niche investment banks.

These are more ‘active’ in nature, and tend to exert direct control over their investments, unlike the passive investments mentioned above.

There are many examples. There are Norwegian and Chinese funds which are investing their capital surpluses to generate returns for their governments and people for the future, like the Chinese Investment Corporation (CIC). There are other funds within China which are specifically funded by the government to help Chinese companies acquire interests overseas (e.g. mineral assets in Africa, or stakes in foreign banks). They may not give returns to the shareholders in the near or immediate future, but they fulfill a strategic need for the longer term.

What type of sovereign fund is prevailing?

The majority of sovereign funds are more around the former type, where the funds want to maximize returns. In such cases, the first question which revolves around these fund managers is how they should do the asset allocation; in particular, how the capital should be allocated between debt and equity, and local and foreign assets. And if it is foreign, the question is whether they want a balanced portfolio, or only developed markets, or higher-growth emerging markets, and so on. All those sorts of questions need to be thought of by

Sovereign investment funds are a pretty new phenomenon, but are playing an increasingly important role in the global economic scene.

Could you explain their purpose?

Broadly, there are two types of sovereign funds.

First, funds which are essentially set up to maximize returns for their shareholders (which in most cases is the government) from their current budget surplus. A government contributes capital to sovereign funds in the years when there is a budget surplus and hopes that their managers can yield good returns in order to help future generations. These are more ‘passive’ in nature, with the primary aim to enhance investment returns.

The goal for this type of fund is to minimize the volatility in a country’s economy and extend the benefit of its resources to future generations. Many of these countries are highly dependent on the extraction and export of natural resources like oil and minerals. Given that these countries have significant revenues in excess of their expenditures, a select number of these countries ‘save’ the excessive amount of revenue in any year to build up massive capital reserves, which are then deployed in a productive manner so as to benefit the country, especially in the years when the resources are no longer available or in short supply.

The second type of sovereign funds are more strategic in nature and essentially carry out a country’s or its leaders’ strategic objectives. These 34

Drivers Unchanged

rates so as to allow them to compete for talent with respect to the private sector. Generally speaking, the more the fund is run by the independent professional team, the more qualified the team is, the better will be the returns.

What essentially is the role of the owners or shareholders?

The role of the shareholders is to define the objectives and the mandate of the fund. They could potentially put some rules on the dos and don’ts for the team. But then they should – let me stress it again – leave the independent investment decisions to the management team. That is how you create the highest level of efficiency. It is inefficient when the team is actually made to go to the shareholders to get approval for each and every investment or hiring decision.

the CEOs and managers of the sovereign funds who are trying to maximize returns.

Do you believe such funds – of either type – can really work effectively, given that they are not wholly independent?

I do think that the effectiveness really varies by player. The most effective ones are those which have a firm mandate, and where the board has given a clear direction to the fund managers. It also helps if the fund managers are professional, and are incentivized to perform.

Most importantly, I believe the effectiveness truly depends on what sort of team the owners of the funds hire, and how their long-term incentives are structured. I have not done a study, but I would venture to say that the more professional and stronger the team is, and the more independent they are of their owner, the better they perform in terms of returns. Independent investment teams, which have a longer-term vision, provide a higher longterm return versus those which have to seek the approval of their shareholders for every investment decision they take. Look at the Canadian pension funds as an example. They have some of the most professional and best teams that you can find in the industry – and the incentives are in line with the best in class in the private sector.

So my overall point is that the performance of a sovereign fund is dependent on two things. One is the level of governance and the level of independence the team has from the fund’s shareholders. Another is the quality of the management team and their incentives – whether they are being paid at market №3, 2013

BRICS in Focus

It looks like investors are getting wary of the BRICS, both as a concept and as an investment destination. Why? I do not think it is a long-term trend. BRICS economies and their respective markets are cyclical in nature, like those of the developed market economies. Investors have only seen one complete cycle (2003-2012) and many of them invested in the downturn and lost money. For example, of the total ~$70 billion invested by private equity funds in India in the 2000-2012 period, over 70% came in just three years (2006-2008), which were bad vintage years and gave poor returns. Investors faced a similar experience in other BRICS countries, like Russia 35

INVESTMENTS

BRICS economies and their respective markets are cyclical in nature, like those of the developed market economies. Investors have only seen one complete cycle (2003-2012) and many of them invested in the downturn and lost money. However, none of the fundamental drivers of the BRICS have changed. They remain large demand centers, and are high-growth economies. So I believe the foreign direct investment (FDI) flow in India – and in all BRICS economies – will definitely pick up in the next few years

India’s regulators, policy-makers and private sector cannot remain silent on these challenges.

This is exactly in line with your previous question.

India consists of over a billion people but, in addition to a large and attractive market, the investment climate and regulatory consistency are equally important in attracting foreign capital to the country.

I continue to believe that India still remains a very, very attractive destination because the underlying growth is there, and there is a significant upside possible for investors who come here. However, India has to go a long way to minimize the risks, especially around the regulatory and infrastructure areas.

It looks like Russia is facing the same challenges.

Based on your long experience as an investor in Russia, what is your evaluation of the country as an investment destination, and what would you advise the government to do to improve the climate?

Before I start you should promise me that whatever I say will not be used against me as grounds for denying me a Russian visa!

Please take it for granted.

Seriously speaking, in terms of the positives, I would like to mention the people who evaluated Russia as an investment destination in the middle of the last decade (around 2004-2006). They saw that the country was opening up for foreigners and that there was a significant investment coming in, especially in areas like banking, the financial sector, telecoms, retail, etc. Comparing the potential and the wealth in the country, they saw a huge opportunity in Russia, and wanted to introduce financial instruments and products to satisfy both corporate and retail clients.

and China, at the same time. All this has made them a little bit cautious about investing in BRICS. However, none of the fundamental drivers of the BRICS have changed. They remain large demand centers, and are high-growth economies.

So I believe the foreign direct investment (FDI) flow in India – and in all BRICS economies – will definitely pick up in the next few years.

Note that the BRICS governments are also introducing various reforms to increase the attractiveness of these countries as investment destinations. Take India as an example. In the last few months the cabinet has made efforts to bring the investors back. FDI caps in a lot of sectors of the Indian economy – including insurance, retail, and aviation – have been relaxed, and many regulatory policies have been streamlined.

Earlier this year you were quoted as saying that the world does not revolve around India. What did you mean?

That was partially said in jest. My point was that any country cannot take foreign investors for granted, and India is no exception.

International and global investors go where they believe they get the best risk-adjusted returns. So while they will go to growth markets, they will also penalize the country which has high levels of risk. In India, which is a very attractive and large growth market, the attractiveness is balanced by significant levels of risk in the regulatory area, and a mixed level of corporate governance. Hence, the government and the private sector should not take international investors for granted, and should strive to provide both regulatory clarity as well as good levels of corporate governance.

This is a necessity if India is to attract the levels of foreign investment required to realize its full potential.

36

Drivers Unchanged

in a number of very attractive, though specific, investment themes. That is why we do not invest beyond India, even though we consider it attractive to invest in other BRICS countries. The focus of this team will be very much restricted to India in order to maximize the risk-adjusted returns that our investors seek from this fund.

OK. But as a seasoned international investor, could you talk about which BRICS – and maybe not only BRICS – countries seem to be attractive destinations for a longer-term investment?

I think the BRICS countries will continue to be very attractive investment destinations for a wide variety of reasons.

Firstly, I believe their economies are still at the early stages of development, and there is still a significant need for capital for many sectors and industries to realize their full potential.

Secondly, countries like India and China are also seeing a dramatic increase in their population.

Countries like Russia and Brazil are seeing not only significant discoveries in natural resources, but also huge growth in consumer demand in diverse industries, such as retail and financial services. Countries like South Africa will provide a great window to deploy capital in the rest of the continent and in some of the mining resources in the country itself.

So I do think, as an investor, I would put more money in emerging markets – especially in the BRICS. But there is also another country I like, which is Indonesia. Again it benefits from a large population, very good demographics, and lots of economic growth. I also used to like Turkey a lot, but it looks like the country has already got quite a lot of capital and is getting expensive.

Finally, I think another country that one cannot ignore is the United States. Historically the U.S. has always reinvented itself, attracted new talent, and done new things. What has made the story even more interesting today has been the dramatic increase in the country’s competitiveness, not least due to the shale-gas revolution. Thanks to the shale, the cost of energy in America has come down dramatically.

This has not only helped lower the cost structure of various industries further downstream, such as petrochemicals, but has also made the U.S. economy a lot more competitive. It has also allowed the country to lower its dependence on foreign sources of energy. As a result of this, I actually see a lot of manufacturing going back to the United States.

Many global investors were very excited by Russian investment opportunities.

What happened then? In what way has the attitude changed?

I see two big issues as an international investor evaluating Russia as an investment destination.

First are the underlying demographics of the Russian economy. When compared to markets like India or China, the demographics are working against the country. China and India are states with a substantially growing population. If you look at the population pyramid, the majority of the people in India are still below 30 years old. That has changed quite dramatically in Russia, where the average age in the population pyramid has moved to a much higher age group.

In addition to that, the reality is that the Russian population is actually declining every year. This is very different from the growth in the other BRICS countries, which are benefiting from their ‘population dividend.’ In many of these states the large growth in population is driving the underlying growth in the GDP. Global investors are looking to see what level of GDP growth will be sustainable. An underlying worry is that if the population itself is falling in absolute numbers then, despite the increase in wealth, will the country eventually grow, or will you actually see demand destruction in the years ahead? In this sense Russia is not in a favorable situation compared with other BRICS countries.

Second, there is still a perception of the ‘invisible hand’ that influences decisions in Russia.

This is especially the case with large multinationals whose investments in Russia have seen different challenges. There is a perception that certain large business houses have a significant advantage given their proximity to the state, and that their interests would always be protected, even if it is at the expense of the international investor. This may just be a perception, but in our world perception becomes reality, and the international investor tends to see that as an area of significant risk.

Beyond India

Is Kedaara Capital looking to invest in Russia or other BRICS countries beyond India?

Kedaara Capital was set up for a very specific purpose, which is to allow global investors to deploy capital and get an exposure to India №3, 2013

37

TREND

Acquired by BRICS Anna Kim Ten years ago one could hardly imagine that companies from the BRICS countries would become key players in global mergers and acquisitions transactions, capable of investing hundreds of millions – even billions – of dollars into various assets around the world. Now transactions of this magnitude are performed on a routine basis.

bid was strongly rejected, and Unocal was later bought by another U.S. international, Chevron, despite the fact that the latter offered a lower bid.

When China National Offshore Oil Corporation (CNOOC) offered $18.5 billion for Unocal in 2005, the news sent shockwaves through the political establishment and business community in the United States, and the broader American public was simply appalled. As if uprooting U.S. producers was not enough for the Chinese, this time a company controlled by the country’s communist government was about to get a foot in the door in an industry that had strategic significance. CNOOC’s

Powers of Persuasion

Confucius teaches us that our greatest glory is not in never falling, but in picking ourselves up every time we fall. CNOOC learned two lessons of patience from this defeat. First of all, making small steps toward a big goal is always better. Instead 38

Acquired by BRICS

According to Ruben Israelyan, Director of Transaction Advisory Services for Russia and the C.I.S. at Ernst & Young, the situation has changed dramatically compared to the early and mid2000s: The West is trying to overcome a number of challenges, with economic growth remaining low or even negative.

“On the one hand Western companies need some serious cash and investments; on the other hand investors from the BRIC countries have much to offer. What is more,” he points out, “the latter countries managed to reduce the gap in many areas including technologies and corporate management.”

In Europe in particular, the financial crisis made the Old Continent more amenable to accepting buyers from the BRICS countries. For instance, Chinese companies participated aggressively in the privatization of electrical power grids in Portugal.

They managed to acquire large shareholdings in Energias de Portugal (EDP) and Redes Energéticas Nacionais (REN) without making much noise at all, which used to be hard to even imagine in the old days.

of chasing another major ‘trophy,’ and running the risk of losing it again, the company started collecting relatively minor assets in different regions of the world, including North America.

Secondly, mega-deals in such sectors as oil and gas cannot be pulled off if you just show up with big money. They require careful groundwork and detailed discussions with core politicians. Having learned the lesson well, CNOOC turned into a ‘straight-A student,’ and its recent acquisition of the Canadian company Nexen, completed this February, seems to confirm that premise. An investment to the tune of $15.1 billion had to be agreed not only with Canadian authorities, but also with the U.S. government. The acquisition became the largest international deal ever to be closed by a company from China.

Investors from the People’s Republic are honing their mergers and acquisitions (M&A) skills not just in the oil and gas industry, but also in other politically sensitive sectors. Their readiness to engage in a constructive dialogue and agree to a reasonable compromise tends to be viewed positively by the host countries. For instance, this January the U.S. government approved a bid put forward by Wanxiang Group – a manufacturer of automotive components – to acquire A123 Systems – a bankrupted manufacturer of batteries – in spite of the fact that dozens of members of Congress spoke out against the deal.

“In part the Chinese buyers got what they wanted because the deal was thoroughly structured: Any assets relating to dual-use technologies were taken out of the equation,” says Mao Tong, a partner at the law firm Squire Sanders, who consults on international M&A. “As for the Nexen acquisition, CNOOC had to give up control of its assets in a Canadian company operating in the Gulf of Mexico – otherwise, the American government would not agree to hand them over to a Chinese investor. Each of these deals had a number of intrinsic difficulties, but the fact that both were successfully closed goes to show that the appetite for such agreements is improving.” According to Mao, this trend is likely to persist, and not only because buyers are getting more experienced. Authorities in Europe and the United States are developing more consistent and transparent regulations setting out criteria that outlaw specific transactions on grounds of national security. №3, 2013

Good Things Catch On

It is widely believed that transborder M&A deals rarely meet investors’ expectations. In 2008, when the Indian company Tata Motors acquired the UK-based Jaguar and Land Rover (JLR) from Ford for $2.3 billion, few people believed that this venture would be a success. Both brands were already sustaining heavy losses, and the global financial crisis that ensued six months later reduced their chances to succeed even further, making this exercise nearly futile. Skeptics chanted that Ratan Tata had once again paid too much for yet another European ‘toy’ – hinting at the colossal deal in the steel sector between Tata Steel and the BritishDutch company Corus. However, the arrival of a new investor worked in the case of Jaguar Land Rover. Tata Motors invested billions of dollars in the newly acquired luxury brand, and JLR managed to drastically cut costs and focus on emerging markets such as China. As a result of these efforts the company became a veritable gold mine for the Indians. According to the credit rating agency Moody’s, in the fiscal year that ended in March 2012, the JLR Division yielded Tata Motors nearly two thirds of its consolidated income, maintaining 39

TREND

High-profile M&A deals involving BRICS investors

billions of dollars

2013

CNOOC (China)

15.1

Nexen (Canada)

Oil and gas

2004

Lenovo (China)

1.75

PC-making division of IBM (U.S.)

Computer hardware

8.8

Addax Petroleum (Switzerland)

Oil

7.1

40% of Brazil assets of Repsol (Spain)

Oil

14.0

12% stake in Rio Tinto (U.K., Australia)

Mining

CNPC (China)

4.2

PetroKazakhstan (Canada, assets in Kazakhstan)

Oil and gas

Motors 2008 Tata (India)

2.3

Tata Steel 2007 (India)

13.1

Corus (U.K., Netherlands)

Steel

Bharti Airtel 2010 (India)

9.0

African assets of Zain (Kuwait)

Telecommunications

Hindalco 2007 (India)

6.2

Novelis (U.S.)

Non-ferrous metallurgy

Berkshire Hathaway 2013 (U.S.) with 3G Capital (Brazil)

28.0

H.J. Heinz Company (U.S.)

Food

3G Capital 2010 (Brazil)

3.26

Burger King (U.S.)

Fast-food restaurants

2008 InBev (Belgium)

52.0

Anheuser-Busch (U.S.)

2012 Sberbank (Russia) Standard Bank 2009 (South Africa) Steinhoff 2011 International (South Africa)

3.5

Denizbank (Turkey)

Banking

0.3

36.4% stake in Troika Dialog Investment Company (Russia)

Financial

1.7

Conforama (France)

Retail

2009 Sinopec (China) 2010

Sinopec (China)

Alcoa 2008 (U.S.) with Chinalco (China) 2005

Jaguar Land Rover (U.K.), from Ford (U.S.)

40

Automotive

Brewing Hostile takeover organized by Brazilians Jorge Paulo Lemann and InBev CEO Carlos Alves de Brito

Stake sold to Sberbank (Russia) in 2012

Acquired by BRICS

On the one hand Western companies need some serious cash and investments; on the other hand investors from the BRIC countries have much to offer

earnings before interest, taxes, depreciation and amortization (EBITDA) at more than 70%.

“Despite the fact that over the last 24 months M&A activities have slowed down across the globe, companies from the BRICS countries have increased their overall share in mergers and acquisitions in Europe and the United States,” says Gerd Sievers, partner at Roland Berger Strategy Consultants. “In many cases investors from the BRICS succeeded in implementing their long-term strategies with respect to businesses they acquired, and now they are perceived on a par with investors from other regions.”

Another classic example is the acquisition of IBM’s PC-making division by the Chinese company Lenovo. Prior to closing the deal, the buyer enjoyed but a marginal share on the global market and was virtually unknown outside its country of origin.

Today Lenovo is recognized all over the world and is responsible for nearly 15% of all PCs sold globally, second only to HP. What is more, in this very tough market, dominated by five leading companies, Lenovo remains the only one that has managed to maintain its sales at a stable level.

Brazil also contributed to the pool of high-profile M&A deals raising the status of the BRICS countries in the world of global investments. Every time the average American buys a Budweiser to wash down a sandwich purchased at Burger King, he or she unwittingly works to enrich Brazilian Jorge Paulo Lemann, the man behind the famous 2008 merger of beer giants InBev and Anheuser-Busch. InBev paid an astronomical $52 billion for Anheuser-Busch, and Lemann now owns the controlling interest №3, 2013

in the merged company. He also single-handedly arranged the 2010 deal to buy Burger King, for $4 billion. Then, this February, 3G Capital – a direct investments foundation headed up by Lemann – partnered with Warren Buffet to acquire the famous ketchup manufacturer Heinz (price tag: $28 billion).

It is also worth noting that every year, apart from these mega-deals, companies from the BRICS countries take part in small and medium-size M&A transactions. The difficult situation that the world economy finds itself in seems to be here to stay, and that forces buyers to tread with caution and act more selectively than before the crisis.

“Interestingly, apart from acquisitions in the raw commodities sector (which still remain large-scale), Indian corporations are starting to focus more on small and medium-size assets,” notes Sourav Mallik, Senior Executive Director of the M&A Division at Indian-based Kotak Investment Banking. “We expect that this trend will continue because, as a rule, deals of this sort are strategic in nature and rarely involve large-scale debt financing.”

It is hardly a surprise, therefore, that in many countries attitudes toward the ‘new investors’ are becoming more even-keeled. From exotic newcomers, they have transformed themselves into a permanent fixture. Contrary to expectations, they take what they deem to be theirs, falling back on their great number, and their skills.

41

TREND

China Learning the Ropes Mikkal Herberg, Research Director on Energy Security at the U.S. National Bureau of Asian Research (NBR).

would still be very controversial. Much would depend on how the NOC handled the attempt, but the atmosphere on Capitol Hill remains very skeptical. The Canadian policy decision that approved the Nexen deal made very clear that future acquisitions of this type would be generally unlikely to succeed. Apparently, similar concerns exist in places like Australia when it comes to resource acquisitions. There is a certain ambivalence on the part of local authorities over how to manage the scale of potential Chinese resource investment and still maintain national control over resource development. In the U.S. it is not so much about the potential scale, since the U.S. oil and gas industry is huge. It is more about the overlay of strategic distrust that feeds suspicion about the role of Chinese state companies, especially in energy and resources.

I expect that the Chinese resource acquisition spree is likely to continue. China will continue to need more oil and gas, as well as other resources, and the available capital to make these large investments is huge and very low-cost. Moreover, the NOCs are willing to pay very large premiums for their acquisitions that are hard for the international oil companies (IOCs) to compete with. The NOCs do not have shareholders demanding strong market returns for their investments, as the IOCs do.

NOCs are seeking to become increasingly sophisticated in order to compete effectively in a very challenging global oil industry: they are rapidly moving up the skill and technology curve as they become more experienced; they are increasingly looking for value in their acquisitions, targeting key areas for investments, and are not just buying anything that might be available – as was the case in the past; and they are deal-making to get into global liquefied natural gas (LNG), shale oil, shale gas, deep-water exploration and production – all of the areas where the majors have critical competitive advantages.

The attitude toward Chinese investments is gradually improving in the West. The attempted CNOOC-Unocal deal was very uncoordinated and poorly planned, which played into the highly charged atmosphere with respect to the issue in Washington, D.C. CNOOC bid late after the Chevron offer, it did not discuss the possible offer with key people in the U.S. capital ahead of time, and it did not have a proactive strategy for addressing concerns that would inevitably have been raised. After all, it was a first attempt, which was doomed to be controversial.

CNOOC learned those lessons and applied them in the Nexen case. They quietly discussed the potential offer with both Canadian and U.S. officials. The Chinese offered to maintain the company HQ in Canada, and keep the management and staff in place. Moreover, Nexen had existing well-known management problems, and challenges with their oil-sands projects that needed new capital investment.

Importantly, the investor offered a very strong premium price that made shareholders quite happy. In other words, the Chinese anticipated concerns and addressed them right up front in the offer.

I think the atmosphere is also improving as Asian oil companies invest in minority shares as partners in numerous shale gas and oil projects that do not attract the same concerns as before, and gradually some comfort is developed based on the knowledge that these companies are not behaving any differently from other international oil companies.

That being said, there is still very serious sensitivity to large investments from stateowned oil companies. Fundamentally, there remains deep suspicion that they are potentially instruments of Beijing’s strategic intentions – stalking horses for Chinese state policy.

In the U.S., I would argue that any attempt by a Chinese national oil company (NOC) to acquire a medium-size American oil company 42

B20

The Great Financial Construction Site Oleg Preksin Since the BRICS’ very inception, financial topics have been central to the agenda during the regular meetings of the five heads of state. This April’s summit in Durban, South Africa, continued the tradition – laying an important foundation for the five countries to further develop their own financial infrastructure and institutions.

enormous market, the BRICS countries account for nearly 30% of gross world product (GWP), and their aggregate growth in 2012 reached 4%, compared to 0.7% in the G7 countries. This factor alone provides justification enough for the five countries to set up their own financial infrastructure to complement existing global and regional structures. However, to a certain extent, the decision taken by the BRICS countries to set up their own development bank and foreignexchange reserve may be explained by the reluctance on the part of some ‘mature’ markets to recognise new global realities and give up the vestiges of the Bretton Woods agreements underlying the activities of the International Monetary Fund, World Bank, and other institutions.

The BRICS show a readiness to embrace cooperation on an equal footing, through the

Four decisions seem to stand out from all others in the eThekwini Declaration and eThekwini Action Plan, adopted in Durban by the five BRICS this year: firstly, to set up a new development bank; secondly, to develop a financial ‘safety net’ for members in the form of a self-managed foreignexchange reserve to respond to emergency situations, initially totalling $100 billion; thirdly, the decision to approve the agreement between BRICS export/ import banks and development assistance banks on cooperation and co-financing of sustainable development projects; and lastly, the decision to expand mutual settlements in national currencies.

With their vast natural resources, diverse industrial base, unique human capital, and Oleg Preksin is Executive Vice President of the Russian Union of Industrialists and Entrepreneurs (RSPP), and Russia’s Sherpa in the B20.

44

The Great Financial Construction Site

The growing cooperation between the BRICS within the G20 format, and their joint positions on key issues which echo the positions taken by many other countries, serve to benefit gradual global development. The consolidated position taken by the business communities of the Business 20 (B20) plays a special role facilitating joint recommendations on how to address the most topical financial and economic challenges, and engage in a productive dialogue with global leaders.

Leading business organisations in the BRICS countries have become reliable partners of the Russian Union of Industrialists and Entrepreneurs (RSPP), which is spearheading the B20 during Russia’s G20 presidency this year. Draft recommendations formulated by the business community for the G20 heads of state and governments have been submitted for open discussion at the B20 Summit, held during the St. Petersburg International Economic Forum (SPIEF) in June. The recommendations will be presented to the G20 Summit in Strelna, 5–6 September 2013, in the form of a ‘White Book.’

Preliminary consultations between the BRICS leaders on global agenda issues, held on the margins of G20 summits, have long been a tradition.

Notably, when it came to such concerted actions as the initiative to create a new development bank and sign an agreement on a foreign-exchange reserve, the five leaders agreed in Durban to review their progress in Strelna.

Today it would be difficult to implement virtually any important decision in the world of international finance without first taking on board the position of the BRICS countries.

Therefore the proposal by the U.K., as 2013 president of the G8, to include taxation – along with trade and transparency – on the agenda of the G8 meeting, where Russia will be the only BRICS country present, will hardly result in any ultimate solutions. They will be equally hard to find during Russia’s G8 presidency in 2014 as well, even though greater opportunities to engage in proactive consultations with other nations should arise. It would be equally difficult to expect any holistic solutions from the BRICS countries. Even the G20 – sometimes referred to as the ‘world government’ – does not command sufficient legitimacy to adopt global decisions.

newly established financial structures and international institutions, in projects of common interest; to expand the number of participating countries; and to spread their area of influence far beyond their borders. The BRICS financial structures may become a prototype and catalyst for the development of a new financial world order, championed both by developing and developed countries.

The decision to set up a Business Council became an important step towards enhancing political interaction between the BRICS countries. Having identified trade and investment as the “main pillars” of future cooperation and development, the Council declared that its minimum goal was to ensure that the trade turnover between the five countries reaches $500 billion by 2015. Since the BRICS Business Council includes quite a few professional financiers, there is little doubt that the increased turnover will enjoy the financial support it requires.

The BRICS nations interact with other countries and groups of countries in many areas, with the G20 format playing perhaps the most pivotal role. Having supported the key G20 objectives proposed by the Russian government in 2013, BRICS leaders spoke out in favour of strengthening financial stability, expanding investment financing, and stabilising sovereign debts to ensure strong, sustainable, comprehensive and balanced growth.

The five BRICS countries remain concerned that certain negative consequences of the anticrisis measures taken in Europe, the United States, and Japan are being ‘exported’ abroad, which may bring about greater volatility in capital flows, foreign exchange rates, and commodity prices – with developing economies suffering the most.

Calling for the reform of international financial institutions and the global currency system, the BRICS leaders have noted the important role of ensuring reliable, sufficient and predictable access to long-term financing for developing countries: for real production enterprises, for small and medium-sized businesses, and for innovation-driven development. They have called for concerted international efforts in this area to address the questions of trade, investment, finance and technology – jointly, and in the context of global growth prospects. №3, 2013

45

CONFLICT

Dancing Shiva with a Phone Evgeny Pakhomov Last year’s scandal in India, caused by the sudden blanket termination of 122 mobile communication licenses held by several Indian and international companies – including a powerful local subsidiary of Russia’s Sistema JSFC – once again highlighted the specific risks of doing business in the country. It did not, however, undermine the appeal of the Indian telecoms market, where far more people have access to a mobile phone than to a private toilet.

46

Dancing Shiva with a Phone

the misappropriation of funds and padded budgets during the preparations for the 2010 Commonwealth Games, which cost several high-ranking state sports officials their jobs. Another case in point was the sacking of Chief Vigilance Commissioner P. J. Thomas, also initiated by the Supreme Court. This public official was appointed to combat corruption but ended up being implicated in corruption-related proceedings.

The telecommunications scandal turned out to be the most high-profile case, however, since its ramifications went far beyond India’s borders.

The 2G license termination affected a number of influential Indian and foreign companies, including Etisalat, Loop Mobile, Videocon, Idea Cellular (in which Malaysia’s Axiata has a stake), Tata DOCOMO (a joint venture between Tata Teleservices and Japan’s NTT DOCOMO), and Uninor (a joint venture between India’s Unitech Group and Telenor of Norway). Sistema Shyam TeleServices Ltd. (SSTL) – the company behind the MTS brand in India – also suffered the consequences, losing 21 of its 22 mobile licenses in India.

A Symbol of Divine Status

Telecommunications in India has long enjoyed the reputation of a market that is both highly promising and too prone to scandals. In the late 2000s the number of mobile phone users in this vast country was growing at an unprecedented rate: in some months local mobile operators would sign up 20 million new subscribers. For the country’s young people (more than half of the population is under 30 years of age), a mobile phone has become the equivalent of a sports car to their European and American counterparts – in other words, a status symbol.

The Indian press even wrote playfully that mobile phones should be added to the list of accoutrements that the multi-armed Indian deities traditionally hold in their hands, such as discs, clubs, shells and lotus flowers, positing a premise that not even Gods could do without a mobile phone – let alone mere mortals. That is why the debacle was so high-profile when, in February 2012, India’s Supreme Court terminated 122 2G mobile communication licenses that had been awarded back in 2008. In justifying its ruling, the court stated that the licenses had been issued in a “completely arbitrary and unconstitutional manner.”

Andimuthu Raja, who at the time held the office of India’s Minister of Telecommunications, found himself in the middle of a scandal, accused of the “unlawful” and “illegal” allocation of the 2G spectrum. According to investigators, the public servant had sold telecommunications licenses at too low a price, causing the Indian budget to sustain losses totaling nearly $40 billion. The Minister denied all the allegations, but eventually resigned, and was arrested in February 2011. Soon after, one of his aides committed suicide, and several months later the Supreme Court issued the notorious ruling canceling the licenses in question.

Most local observers believed that internal politics was to blame for the scandal. They claimed that the opposition had constantly accused the government of being corrupt, and had persistently called for ‘ritual sacrifices’ to reshuffle public offices. At the time, India was going through a daisy chain of different scandals, including the infamous case of №3, 2013

Dream Market

The numerous efforts undertaken by the affected operators to appeal the ruling proved to be in vain: all motions to appeal submitted to the Supreme Court were denied. The only thing they managed to achieve was the right to continue their work until a new auction to allocate the spectrum could take place.

SSTL exhausted every avenue in trying to recover the lost licenses, and even escalated the issue to the highest level. The topic was discussed in October 2012 during an official visit by Dmitry Rogozin, Deputy Prime Minister of Russia and co-chair of the Russian-Indian Intergovernmental Commission. In making his case Rogozin noted that, “over the years that the company operated in India, Russia invested nearly $3.2 billion through Sistema JSFC and the State Federal Property Management Agency, turning SSTL into a flagship of bi-lateral cooperation between the two countries in the civilian sector.” He also added that the Russian 47

CONFLICT

strategy in giving up the spectrum without a fight in those regions where the number of subscribers remained at a minimum level. Their loss will not have any critical bearing on the company’s business.

Focusing its efforts on priority areas will enable it to improve its competitive edge in a market where unbridled growth has become a thing of the past. It has already managed to capture the main consumer pool residing in cities and many rural areas, so the industry will not see the same dynamic development as it did in the middle of the last decade.

In spite of it all, India’s telecommunications market remains one of the most attractive in the world, as borne out by one curious detail: today, more Indians have access to a mobile phone than to a private toilet. Their numbers are 930 million and 638 million respectively, from a total population of 1.2 billion people. This market, therefore, will predictably see some intense competition – despite the fact that not just politicians, but Indian gods themselves, may interfere at any given moment.

government was “deeply concerned” by the recent turn of events. According to the Indian press, the issue of the MTS licenses was also discussed during President Putin’s official visit to New Delhi in December last year.

But once again, all arguments and complaints fell on deaf ears. Eventually, however, India did hold a series of new auctions, in March 2013, and SSTL turned up as the only participant. It was awarded licenses in eight telecommunications districts: Delhi, Calcutta, Gujarat, Karnataka, Tamil Nadu, Kerala, Western Uttar Pradesh and West Bengal, at a total price of nearly $665 million.

“SSTL’s operations will now focus on the most prospective regions, servicing 40% of the country’s population, amounting to over 60% of the data market whilst also maintaining 75% of the company’s revenues,” said Sistema’s President, Mikhail Shamolin, in a statement following the auction.

Experts interviewed by BRICS Business Magazine remain convinced that SSTL chose the right

Doing Business in India, alien’s guide Vsevolod Rozanov Honest intentions and a full set of the requisite permits are not sufficient to guarantee that operations in India will go off without a hitch. Sistema Shyam TeleServices Limited learned this the hard way when, along with a number of other companies, it lost its mobile communications licenses last year. But that is not the only lesson the company has taken from its four years’ experience in India.

When Sistema Shyam TeleServices Limited (SSTL) launched its operations in India in March 2009, the local mobile communications market was peaking: more than 20 million new mobile subscribers were being added every month.

The intense competition, involving more than a dozen serious market players, including several other large international telecoms companies, was one of the most

significant factors contributing to the exponential growth of mobile communication services in the country. The hearts and minds of Indian consumers proved to be exceedingly sensitive to the cost of the product on offer, which forced providers to aggressively reduce their prices and expand their geographic coverage. As a result, rates for telecommunication services in India became

Vsevolod Rozanov is President and CEO of Sistema Shyam TeleServices Ltd., a subsidiary of Russia’s Sistema JSFC in India.

48

some of the lowest in the world, with hundreds of millions of local residents covered by mobile telephony and millions enjoying wireless internet access.

SSTL didn’t miss its chance to jump on the bandwagon. In particular, we managed to offer local consumers several concurrent, innovative, products. These included the ‘half a paisa per second’ rate (a paisa is one hundredth of a rupee – approximately 0.016 cents); prepaid broadband mobile data services; unlimited access to pop-

Doing Business in India, Alien’s Guide

ular social networks; and many other services. In 2009 SSTL also launched a broadband service in India under the MBlaze brand, and quickly expanded the service to cover 350 Indian cities. As to the question of how popular this move was, statistics tend to speak louder than words: during our first three years in India the number of SSTL subscribers went from zero to 1.8 million, while the company’s market share exceeded 20%.

Our competitors, however, were not far behind. And then, at a time when the country’s telecommunications industry was going through a period of unprecedented growth, on 2 February 2012 the Supreme Court of India issued a ruling terminating 122 mobile communication licenses that had been issued in 2008, including 21 of the 22 licenses held by SSTL. This came as a shock to all the market participants, who were clearly not ready to deal with such a turn of events. SSTL was no exception, even though we were confident that we had not broken any laws. The company had come to India with the best intentions, and obtained an official license issued by the country’s government after having completed all of the requisite formalities. None other than the Indian government had ratified our investments in full compliance with the country’s legislation.

Be that as it may, neither the petition to re-try the case nor the appeal to reinstate the license, submitted by SSTL, succeeded in reversing the February verdict.

Pursuant to a ruling by the Supreme Court, and after having been rescheduled several times, the new auction – for both GSM and CDMA spectrum bands – finally took place in November 2012. In №3, 2013

The multitude of problems that companies often have to face in virtually every emerging market tend to be particularly salient in India. Therefore it is critical for any business operating in the country to maintain an optimal cost structure. That is not, however, how it works in practice: given the Indian market’s vast scale and diverse nature, many companies often plan for a quick expansion, which tends to result in excessive costs

essence it proved to be a flop: because of the unreasonably high initial price, almost no CDMA operators took part in the event, including SSTL. Our company participated in the second round only after the Indian authorities agreed to halve the baseline license fee. As a result, we were awarded spectrum licenses in eight telecommunications districts in addition to the one license we still had. As a result, SSTL services today cover an area that is home to 40% of India’s population, making the company one of the top three players in the country’s telecommunications market, which we still genuinely believe to hold a great deal of promise.

Flexibility and innovation

Despite our various troubles and trepidations, there is one important lesson to be learned from our efforts to acquire mobile licenses: if you want to operate in India, you should always be prepared to face the unexpected. After four years in the local market, we now know that any successful business here is predicated on a great deal of attention to the specific customs and characteristics of this vast and diverse country.

For instance, one should always bear in mind that the multitude of problems that companies often have to face in virtually every emerging market tend to be particularly salient in India, especially 49

against the backdrop of its lowquality infrastructure, tough competition, and growing deficit of qualified human resources. Therefore it is critical for any business operating in the country to maintain an optimal cost structure. That is not, however, how it works in practice: given the Indian market’s vast scale and diverse nature, many companies often plan for a quick expansion, which tends to result in excessive costs.

Another typically Indian challenge is the volatile nature of the local legislative framework, which always remains a ‘work in progress.’ Any company operating in India should take this factor into account in preparing its business plans.

Moreover, given the high level of competition in the Indian market, revenues can hardly grow without innovative business models. This is not a whim; it is a bare necessity.

Placing more emphasis on variable costs models in every business segment will considerably improve your efficiency.

Finally, it is equally vital to maintain maximum flexibility in pursuing your business plans. Bear in mind one thing: whatever enables you to succeed in other markets will not necessarily work in India. In other words, here you must think globally and act locally, taking into consideration the enormous size of this country as well as its diverse and ‘patchy’ population.

RUSSIA SPECIAL

Reality and Perception Can Differ Kirill Dmitriev Even though the country offers significant opportunities for international investors, many still believe Russia is not an attractive investment destination. However, the reality is better than it may at first seem, and investors overestimate the problems they will face in Russia.

show, almost 70% of existing international investors are highly satisfied, and continue to invest in Russia.

There is a second group of investors who have not yet invested in Russia but who are now considering doing so. Like investors from the first group, they are knowledgeable about the country. They know that Russia has one of the best-performing economies in the world; that the middle class has tripled in the last five years; and that the stock market has grown 20 times, and banking system assets increased 40 times, in the last 12 years. They are looking for very specific opportunities. For example, private equity funds specializing in chemi-

Russia’s image as an investment destination is far from clear-cut globally. Although many international investors are increasingly regarding Russia as a tremendous opportunity to do business, there are still many who take a different view. Why? I think a part of the answer is a sort of myth building around the country.

Generally speaking, investors and their perceptions of Russia can be divided into three different groups. The first one is made up of businesses and funds who have already invested in the country. They are quite knowledgeable about Russia and know that there are solutions to all of the issues raised by other people. As our surveys 50

© ITAR-TASS

Reality and Perception Can Differ

experience no problems with contracts, although many foreign investors prefer to structure their contracts so that any investment or business dispute Kirill Dmitriev comes under the jurisdiction of international arbiis CEO of the tration in London, Stockholm, Paris or New York.

Russian Direct While this reflects that people feel there is a risk Investment Fund attached to investing in Russia, reality and percep(RDIF) and a tion can differ. Part of our job at the Russian Direct member of the Investment Fund (RDIF) is to allay these fears, and BRICS Business we do this through ongoing discussions with invesCouncil tors and careful due diligence when selecting and structuring projects.

We seek to allow investors in Russia to be ‘no-excuse investors.’ To this end we are lobbying the govcals or infrastructure are focused on investment ernment to think about giving at least some form opportunities in the sectors and industries they of guarantee, and to offer support for some infraunderstand best. They also recognize the imporstructure projects, to make their economic profile tance of a local partner, understanding it is essenmore attractive for an international investor. We tial when entering new markets. are working hard to minFinally, there is a big imize the perception of group of investors who About the RDIF risk surrounding Russia are very poorly informed which, while still high, about Russia. All too ofThe Russian Direct Investment Fund (RDIF) is is declining – and the ten their knowledge is a $10 billion fund established by the Russian co-investment approach built on what they have government to make equity investments primarily is very convincing, as read or heard in the mein the Russian economy. The RDIF was created in foreign investors see that dia, and this leads to 2011, under the leadership of both the President any risks are shared. dramatic misconceptions and the Prime Minister of Russia, to co-invest In our first year, the about the country. It is alongside top global investors, acting as a catalyst RDIF invested $500 these myths about Rusfor direct investment in Russia. million, and attracted sia which stop them from In just over a year the fund had arranged $1.9 billion of foreign investing – and the most investments totaling over $2 billion, of which $500 investments into Russia. significant of these myths million was invested by RDIF itself, and $1.8 billion by In 2012 we invested $50 is that Russia is not an co-investors. The RDIF also attracted a further $2.5 million in the initial attractive investment opbillion of foreign capital into the Russian economy public offering (IPO) portunity. through long-term strategic partnerships. of Mother and Child, a These potential invesleading Russian chain of tors do believe that Rusprenatal clinics and a private provider of healthsia’s economy is growing and opening up opportucare for mothers and children. We brought in nities, but they see bureaucracy and corruption as Russian Partners – a subsidiary of Siguler Guff, major obstacles to investing. However, bureaucracy a U.S. multi-strategy private equity investment and corruption are not the problems they should firm with more than $10 billion under managereally fear. For the last ten years the government’s ment – as co-investors. Thanks to the rapid exobjective has been to attract foreign investors, and pansion of the Russian middle class, the business there has not been a single instance where a fund is growing fast and the Mother and Child stock or a large private investor from outside Russia has is already up around 45% since the IPO. encountered a major problem.

Another example of this approach is our inOne more common myth is that contracts or vestment of $80 million in the Moscow Stock Exother obligations are not properly honored or accuchange’s IPO earlier this year, where we attracted rately fulfilled in Russia. This is simply not the case. people like China Investment Corporation (CIC), Most Western companies doing business in Russia №3, 2013

51

RUSSIA SPECIAL

Russia is the world’s sixth largest economy by GDP (purchasing power parity).

Russia has one of the lowest levels of public debt of any major economy: 11% of GDP for 2012, and approximately 9% for 2013.

The country’s economy is expected to grow from $2 trillion in 2011 to over $3.2 trillion in 2017.

Russia has one of the largest domestic markets in the world, ranking 9th among 142 countries.

GDP per capita is the highest among BRIC countries ($17,698).

Why Invest in Russia?

The country’s middle class population tripled in the last five years, and disposable income grew 53% from $4,850 per head in 2008 to $7,430 per head in 2012.

The country has the world’s third-largest foreign reserves, totaling $538 billion.

Russia has a low unemployment rate: 5.5%.

Russian GDP per capita increased compared to that of the USA from 1/20 in 2000 to 1/3 in 2012.

Source: RDIF

the European Bank for Reconstruction and Development (EBRD), Cartesian Capital Group, and BlackRock, as co-investors. We believe the Moscow Stock Exchange has huge potential and will deliver considerable profits to investors in the future.

The main vehicle to promote mutually beneficial investment relations among the five emerging economies will be the BRICS Business Council, announced at the BRICS summit in Durban, South Africa, in March. As a Russian member of the Council, I believe that it will be a very important opportunity to strengthen our links and increase mutual investments. We have already met with nearly all of our counterparts on the Council, all of whom are very influential people in their home countries.

It doesn’t mean that the BRICS countries are only looking to do business amongst ourselves.

If we have a project or an idea, because we have already established relationships, we can use these channels of communication effectively to get practical things done. It is also very good that there are just five members from each country on the BRICS Business Council, as it allows for very easy dialogue and makes the whole structure manageable.

I’d like to stress we are very much focused on practical results and outcomes to accelerate the investment process, as well as on BRICS relationships as a whole. So far this approach has already borne fruit in the short term, and we predict a dramatic increase in investment inflows into Russia, as well as to the other BRICS economies.

Planning a Future with the BRICS

The presence of internationally acclaimed names is also very helpful in persuading people to invest in Russia. Potential investors become much more open-minded when markets leaders such as CIC, or the Japan Bank for International Cooperation (JBIC) – which agreed in April to invest $1 billion in a new Russian-Japanese investment platform together with the RDIF – show commitment and say, “Yes, we want to invest in Russia,” and, “Yes, we believe in Russia,” especially when some of the key people also sit on our advisory board.

As a part of our strategy we are building partnerships with countries such as Japan and China which contribute to an array of lower-level partnerships, which allow us to reach out to all the investors and companies in those countries. For example, we expect to announce soon a major partnership with an Arab fund, building on some of those relations.

And of course we see huge potential in the BRICS, as both source and destination for foreign direct investment.

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Adve Ad Adv A dverti d rtis rt tissem ti emen eme e men me m en e nt

RUSSIA SPECIAL

A View from Inside Michael Calvey The volume of strategic investment in Russia in some recent years has reached $50 billion per year. This is a few times larger than the amount that Russian public companies raise every year via stock exchanges – another reason why it doesn’t make sense to judge the country based only on its capital markets. The real investment potential lies more in private companies.

The opinion of foreign investors about Russia to a large extent depends on which field the investor plays. Portfolio equity investors have a more negative opinion than others, since many Russian listed companies are either in industry sectors that are not growing rapidly or the companies are not being managed to maximize value for all shareholders. Fixed income investors, however, have a more positive outlook on Russia, since the macro­ economic situation is favorable and the record of Russian companies paying their debts is relatively good. Strategic investors also have a favorable view because they experience faster growth and higher profit margins in Russia than in most other countries, especially compared to Europe and the Uni­ ted States.

In comparison with these other segments, global investors in private equity funds don’t know much about Russia at all, since the industry is very small here, with only about 10 firms operating actively in Russia compared to 600 in India and 1500 in China.

Image and Figures

Information about Russia in the global press focuses mainly on political and foreign policy issues, but there is another Russia which receives much less attention. The Russia we show to the investors is the one seen through the eyes of the portfolio companies, and this is completely different from what people see in the international media. It is a country which is growing rapidly, with a lot of young, smart and energetic people, who have a similar outlook to their peers in Western companies, and often even more creative. If you look beyond the media headlines, there are a lot of facts which are more positive than negative. For serious investors, facts, and not just words, shape the investment climate.

As an American, it would seem really strange and inappropriate to me if a Chinese investor in the U.S.A. publicly commented on their opinions about elections or domestic politics in the United States. They are interested only in the investment climate, economic potential, and what return they 54

A View from Inside

companies, including state companies. Investors are concerned that it isn’t a level playing field, and that state companies benefit from unfair advantages. For example, in natural resources sectors, state companies have privileged access to the best licenses, and in the banking sector, state banks have access to much cheaper deposits and financing than private companies.

Foreign investors are also concerned about legal and regulatory issues, although I think this is a global problem, and not just a Russian problem. In Europe and the U.S.A., regulations and taxes are often far more anti-business and antientrepreneur than in Russia, but at least the rules there are usually fairly and objectively enforced.

In Russia, most laws on paper are more favorable for business and entrepreneurs than in developed markets – for example minority shareholder rights, the ability to hire and fire employees, and taxes – but the laws are often arbitrarily enforced by officials, and this creates uncertainty and risk.

The point is not that Russia is better than everywhere else, but that most countries have real legal and regulatory risks.

Still, there are a lot of attractions to Russia which are not widely appreciated. One is the human resources, which are some of the best in the world when properly incentivized. Russia has been already for several decades a largely urban society, and the parents of today’s young employees were mostly not rural farmers but rather engineers, scientists, teachers. The intellectual potential and consumption behavior of the young generation are some of the main drivers of Russia’s GDP, and for most strategic investors in the country, the education and productivity of their young employees is one of the factors most often cited as the reason for the success of their investments.

For some other emerging markets like India or China, there is a different type of transition ongoing. There, the grandfathers and grandmothers of many of today’s young generation were living in rural villages or working in farming, the parents moved to a city to work in a factory, and all the hopes and savings of these two generations are aimed at making the next generation the first to go to university and work in an office. This is a transition from ‘developing’ to ‘developed’ and it will drive their growth over several decades.

Michael Calvey is senior partner and co-founder of Baring Vostok Capital Partners

can achieve on their investments. Foreign investors in all other countries should take the same approach, and we do the same in Russia.

People with concerns about the investment climate in Russia can usually be divided into two groups: those who worked in Russia in the 1990s and continue here today, and those who have come here only recently. Many foreigners (and even some young Russians) don’t see how the country has changed dynamically over time, and don’t remember how it was, looking in the rearview mirror. For me, it is difficult to forget the 1990s in Russia, when there was hyperinflation and the Central Bank’s reserves nearly ran out, when most real money circulated only offshore, when there were massive oligarchic wars, frequent corporate conflicts, and scandalous privatization schemes facilitated by corrupt officials. Our fund experienced firsthand some hostile raider attacks on its portfolio companies.

Coming to Russia in 1994, I saw complete chaos and also a lot of opportunity. Back then, it was impossible to imagine that so many things would change over 15-20 years, that the government for example would accumulate vast reserves, that most privatizations would be auctions with a highly competitive final price, or that oligarchic disputes would mostly be settled in international courts rather than via ‘mask shows’ in Moscow. Some investors (including locals) still have a feeling today that everything in Russia is bad, even though they really can’t argue the fact that Russia’s economy has become much more transparent and civilized since the 1990s, even if it is still far from perfect.

Myths and facts

One of the justifiable concerns about investment in Russia is the increasing competition from huge №3, 2013

55

RUSSIA SPECIAL

the underlying growth is still around 15% per anCompared to these and other countries, Russia num, and the best companies in these sectors often doesn’t really closely resemble either ‘developed’ grow two times faster than the industry overall. If or ‘developing’ countries, but seems more a ‘misyou invest in a company with this type of growth, developed’ country. The good news is that the proyou can experience several problems and still make cess of correcting this mis-development in Russia is a good profit on your investment. But if you inhappening naturally over one to two generations, vest in a company with as highly educated young no growth, it sometimes people make their choicAbout Baring Vostok only takes one problem es in life driven by marBaring Vostok is one of the leading private equity to cause your investment ket considerations. firms operating in Russia and the C.I.S. Baring to go to zero. For examOne area where Russia Vostok private equity funds have invested over $1.8 ple, a company which has is clearly weaker than othbillion in more than 60 companies since 1994, and high levels of debt can er BRICS is the developcurrently have committed capital of $3.7 billion. pay off the debt easily if ment of local institutional The funds’ portfolios have been diversified among its revenue doubles over investment capital. Due financial services, oil and gas, consumer products, a few years, while a highly to their earlier stage and telecommunications, and media sectors, including leveraged company with relative immaturity, RusСТС Media, Golden Telecom, Yandex, Ozon, Gallery no growth will often go sian pension funds, insurGroup, Centre of Financial Technologies (CFT), bankrupt. ance companies and muEnforta, ER-Telecom, 1C, Burren Energy, Volga But despite the good tual funds are very small Gas, Zhaikmunai, Novomet, Kaspi Bank, Orient growth, Russia is a small compared to their peers Express Bank, Europlan, Karo, EMC, and others. market for global private in other BRIC countries.

The investment advisor of the funds, Baring Vostok equity investors, so few In India and Brazil, forCapital Partners (Guernsey) (BVCP), has several of them make it a prioreign portfolio investors times since 2005 been voted ‘Russian Private Equity ity and devote the time fled the countries in 2008.

Firm of the Year’ by the readers of Private Equity to really understand it.

Similarly to Russia and International and Private Equity Online. The subRussia is a country where other emerging markets, advisor of BVCP has a branch office in Moscow with foreign private equity init caused a 50% drop in loa team of 30 experienced investment professionals. vestors have made and cal stock markets, but loBaring Vostok is a member of Baring Private Equity can continue to make cal investors didn’t leave – International, a global private equity group with good profits, but due to and this created a stronger more than $12 billion of capital under management its smaller size it can be foundation for share price by affiliates in the C.I.S., Asia, India, Europe and ignored without causing recovery. In Russia, where Latin America. damage to your overall the stock market is still global private equity portheavily influenced by forfolio. China is already so big in terms of GDP, and its eign investor flows, share prices fell by more than growth potential is still so huge, that no global inves75% in 2008 and still haven’t recovered to anywhere tor can afford to ignore it. This is why the number close to peak levels, despite the fact that net profits of of private equity funds in China is a hundred times listed companies have grown by about 50% over the greater than in Russia. same period.

Compared to both portfolio equity investment and private equity investment, strategic investment Russia is not a high priority from foreign companies offers the highest multiplier The main thing we aim to demonstrate to new impact on the economy, not just creating jobs but repotential investors in Russia is that there is still sulting in an exchange of knowledge and skills. It is strong consumer demand here, and this is driving necessary for the Russian government to constantly strong growth. And we don’t focus mainly on GDP show that the country is open to foreign investment or other macro-indicators, but on the underlying and to make it easier for foreign investors to choose growth story in key industry sectors where our to invest in Russia. Other countries do this more acfunds invest: internet and software, financial sertively and professionally than Russia does. vices, consumer goods and retail. In these sectors 56

RUSSIA SPECIAL

Russia: Facts and Figures total number of projects funded through FDI in Russia from 2007 to 2011. Foreign investors are also quickly getting a foothold in the Kaluga and Nizhny Novgorod ‘oblasts’ (provinces), as well as in the cities of Kazan and Yekaterinburg. Other traditional centers of gravity include areas, such as the Sakhalin and Arkhangelsk oblasts, which are rich in natural resources.

However, if we look at the overall investment activities picture, there will be a lot more bright spots on Russia’s map. BRICS Business Magazine finds

By the end of last year, capital investments in Russia were up 6.6% – nearly double the country’s economic growth rate. Foreign direct investments (FDI), on the other hand, have only gone up 1.4%.

The lion’s share of these investments is funneled to just a few areas, primarily the Moscow agglomeration, St. Petersburg, and adjacent areas.

They understandably attract investors with their own markets, well-educated workforce, and developed infrastructure. According to Ernst & Young, the two cities accounted for 42% of the 58

Russia: Facts and Figures

But it also shows that foreign investors are missing out on an opportunity to beat their Russian counterparts to the punch. What is more, even in the areas that have already seen considerable interest from foreign investors (such as Tatarstan, Nizhny Novgorod, Siberia and Primorye), their presence could have been even greater considering the overall level of business activities. It would behoove foreign investors to start thinking about expanding their horizons: there is a great deal of potential waiting to be tapped in the Russian hinterland.

that the Belgorod, Voronezh, Tambov, Astrakhan and Orenburg oblasts, as well as selected other regions, show positive capital investment indicators on a per capita basis. At the same time, the level of per capita FDI in these places remains relatively low compared to the average statistics across the larger federal districts and Russia as a whole. This goes to show that Russian entrepreneurs are gaining more confidence exploring new territories, capitalizing on advantages such as a relatively inexpensive workforce, promising markets, and interested local authorities.

Russian Federation Central Federal District (CFD) CFD without Moscow Belgorod Oblast Voronezh Oblast Ryazan Oblast Smolensk Oblast Tambov Oblast Tver Oblast Northwestern Federal District Arkhangelsk Oblast Kaliningrad Oblast Southern Federal District Krasnodar Krai Astrakhan Oblast Volga Federal District Republic of Mordovia Republic of Tatarstan Nizhny Novgorod Oblast Orenburg Oblast Ulyanovsk Oblast Siberian Federal District Krasnoyarsk Krai Kemerovo Oblast Tomsk Oblast Far Eastern Federal District Primorsky Krai Khabarovsk Krai

160,803 95,000 12,710 154 501 83 220 23 178 20,719 428 167 2,265 1348 42 5,155 10 726 980 216 108 4,302 1,275 1,070 413 7,529 565 75

†

№3, 2013

d ve $ ei a, ec pit I r ca FD er p

Region / Federal district†

, 12 .

20 ln in $ m

. ln m n, tio la pu Po

high FDI potential

ts en , $ m ta st pi ve ca l in er ita p ap C , % 2 % 01 00 ,2 1 ts 1 = en 1 m 20 st ve l in ita ap C

Regions with

d ve ei ec Ir FD

1

143.2 38.6 26.7 1.5 2.3 1.1 1.0 1.1 1.3 13.7 1.2 1.0 13.9 5.3 1.0 29.8 0.8 3.8 3.3 2.0 1.3 19.3 2.8 2.7 1.1 6.3 1.9 1.3

1,122.9 2,460.6 476.2 100.1 214.9 72.4 225.0 21.3 133.0 1,513.6 354.3 175.6 163.0 254.0 41.4 173.0 12.2 190.4 297.6 106.9 84.5 223.3 448.6 389.6 389.3 1,203.0 289.9 55.9

106.6 102.6 111.0 100.9 111.1 121.2 86.8 116.2 80.9 101.5 101.8 106.3 105.4 102.2 114.7 108.1 101.4 108.7 106.1 125.0 117.3 108.5 115.5 114.0 100.3 85.2 59.0 88.7

Data on Federal Districts and the Russian Federation have been cited for the purposes of comparison.

Sources: Ernst & Young; Russian Federal State Statistics Service; BRICS Business Magazine.

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2,822.2 2,240.0 2,029.0 2,846.5 2,482.9 1,861.3 1,853.6 2,460.3 1,930.2 3,404.0 3,984.2 2,426.0 2,851.0 4,833.2 2,587.6 2,137.7 1,935.9 3,919.5 2,520.6 2,407.2 1,832.8 2,363.8 4,254.4 3,095.7 3,270.9 4,830.0 3,148.6 4,032.5

RUSSIA SPECIAL

Moscow and Beyond Russian regions. Where the investments go

FDI received per capita, 2012, $  Belgorod Oblast 100.1  Bryansk Oblast 23.0  Vladimir Oblast 259.3  Voronezh Oblast 214.9  Ivanovo Oblast 6.7  Kaluga Oblast 929.6  Kostroma Oblast 611.8  Kursk Oblast 144.6  Lipetsk Oblast 979.3  Moscow Oblast 1,055.9  Orel Oblast 244.0  Ryazan Oblast 72.4  Smolensk Oblast 225.0  Tambov Oblast 21.3  Tver Oblast 133.0  Tula Oblast 74.7  Yaroslavl Oblast 634.0  Moscow 6,904.7  Republic of Karelia 58.0  Komi Republic 428.1  Nenets Autonomous Okrug 0.0  Arkhangelsk Oblast 354.3  Vologda Oblast 3,155.2  Kaliningrad Oblast 175.6  Leningrad Oblast 1,499.6  Murmansk Oblast 35.7  Novgorod Oblast 780.5  Pskov Oblast 72.3  St. Petersburg 2,554.8  Republic of Adygea 88.0  Republic of Kalmykia 7.0  Krasnodar Krai 254.0  Astrakhan Oblast 41.4  Volgograd Oblast 60.3  Rostov Oblast 159.2  Republic of Dagestan 10.6  Republic of Ingushetia 4.6  Republic of Kabardino-Balkaria 1.2  Republic of Karachay-Cherkessia 0.0  Republic of North Ossetia-Alania 5.7  Chechen Republic 0.8  Stavropol Krai 37.6

 Republic of Bashkortostan  Mari El Republic  Republic of Mordovia  Republic of Tatarstan  Udmurt Republic  Chuvash Republic  Perm Krai  Kirov Oblast  Nizhny Novgorod Oblast  Orenburg Oblast  Penza Oblast  Samara Oblast  Saratov Oblast  Ulyanovsk Oblast

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42.1 50.6 12.2 190.4 443.4 15.3 338.0 13.6 297.6 106.9 73.6 361.0 19.6 84.5

Russia: Facts and Figures

 Khanty-Mansi Autonomous Okrug – Yugra 0.0  Yamalo-Nenets Autonomous Okrug 1,011.0  Kurgan Oblast 10.1  Sverdlovsk Oblast 1,196.0  Tyumen Oblast 4,560.9  Chelyabinsk Oblast 464.3  Altai Republic 0.0  Republic of Buryatia 5.1  Republic of Tyva 1,058.4  Republic of Khakassia 3.8  Altai Krai 6.2  Zabaykalsky Krai 220.5  Krasnoyarsk Krai 448.6

№3, 2013

 Irkutsk Oblast  Kemerovo Oblast  Novosibirsk Oblast  Omsk Oblast  Tomsk Oblast  Republic of Sakha (Yakutia)  Kamchatka Krai  Primorsky Krai  Khabarovsk Krai  Chukotka Autonomous Okrug  Amur Oblast  Magadan Oblast  Sakhalin Oblast  Jewish Autonomous Oblast

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102.8 389.6 233.9 35.5 389.3 1,441.8 53.1 289.9 55.9 1,572.2 883.7 176.0 9,430.5 5.8

RUSSIA SPECIAL

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MOST ADMIRED Their reputations, their success stories - even their mere names - are sufficient for foreign investors to commit their money, entrusting millions of dollars to these men. They know how to play a game of attrition, how to surround themselves with the best of the best, and how to run companies in the most difficult of times. BRICS Business Magazine offers readers its list of the entrepreneurs who best characterize modern Russia. â„–3, 2013

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Sergei Galitsky Magnit, CEO

To command a net worth of $8.5 billion in today’s Russia you do not have to have your own oilrig or high-ranking patrons - you do not even have to be living in Moscow. Sergei Galitsky is the living proof. The 45 year-old founder and majority shareholder of a retail food chain called Magnit built his entire career around that premise.

Galitsky started out by selling household chemicals and food products on a small scale, opening his first store in the remote provincial town of Krasnodar in the middle of the economic crisis in 1998. A former banker, for decade and a half he toiled tirelessly to build his empire despite the economic slowdown and formidable competition from the capital.

His achievements are impressive. Last year his company opened 1,575 new stores operating in various formats under the Magnit brand, bringing their total number to 6,884. No other company in Russia could boast the same results, making it the undisputed leader in the country’s manufacturing and retail sector in terms of business efficiency.

Following the first quarter of 2013, the company became the industry’s ‘supreme champion,’ leaving its main competitor – X5 Retail Group – far behind in terms of revenues: 131.2 billion rubles ($4.2 billion) – up 30% from last year – compared to X5’s 126.3 billion rubles ($4 billion).

These latest achievements might help Magnit overcome its “provincial inferiority complex” from being “always in second place,” which Galitsky described in a Forbes interview in March, not least because the company, despite its enormous size, continues to develop at a fast pace, finding new niches and expanding its food stores; the number of new stores expected to open in 2013 is at least the same as last year. Magnit is also aggressively pursuing a different line of business – cosmetics. In 2010, the company launched a new chain, Magnit Cosmetic, which today operates 706 stores. Late

Last year his company opened 1,575 new stores operating in various formats under the “Magnit” brand bringing their total number to 6,884 (no other company in Russia could boast the same results), remaining the undisputed leader in the country’s manufacturing and retail sector in terms of business efficiency

last year, Galitsky also launched Rouge, a new chain which he hopes will soon become a force to be reckoned with in the luxury perfume market, putting competitive pressure on current market leaders L’Etoile and Rive Gauche.

This spring, Galitsky celebrated another famous victory: FC Kuban, the Krasnodar football team he helps to finance, won a place in the Europa League for the first time, following a heated season in the Russian Premier League.

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© RIA Novosti

United States, China, Korea or Japan. These are highly competitive markets and I do not think it would make any sense to try our luck there.

Anything else, including Europe, Latin America, Africa, the Antarctic, the Moon or the Mars hold a great deal of potential for us”, Volozh told RIA Novosti in an interview in July 2012.

However, it remains unclear what role the founder of Yandex is going to play in pursuing these plans. Following the company’s triumphant NASDAQ initial public offering (IPO) in May 2011, 130 employees of the company became millionaires overnight, while Volozh himself earned over a billion dollars. Forbes magazine estimates his net worth at $1.5 billion. The 49 year-old CEO told GQ that he had recently felt like an old man in his company, where the average employee is 28 years old. In March, Volozh sold 5.14 million of his Yandex shares for $ 117 million. However, few people believe that he is truly about to retire.

Arkady Volozh Yandex, CEO

Yandex founding father Arkady Volozh says he simply “collects” the people responsible for most of his company’s successes, remaining very modest when it comes to his own role. “One might think that I built the whole of Yandex. Of course not,” he told GQ Russia when it featured him as Man of the Year 2012.

But modesty is clearly not appropriate when it comes to Yandex’s achievements. Set up virtually in a garage in 1997, its first assets were three servers costing $10,000, with a total hard disk capacity of one megabyte. The company went on to become the largest player in the Russian internet search engine market. According to LiveInternet.ru, between February and April 2013 Yandex was responsible for generating 61.9% of all search traffic in the .ru domain, leaving the competition far behind.

Even though the company aggressively pursues other avenues, the search engine remains its bread and butter, leading to revenues which in the first quarter of 2013 totaled 7.8 billion rubles ($246.8 million). Promoting the search engine in overseas markets is most likely to become the company’s main objective in the near future.

[Yandex takes interest in] “any country where there is no competition on the market for search engines. In other words, any place other than the №3, 2013

Modesty is clearly not the best of virtues when it comes to Yandex’s achievements. Set up virtually in a garage in 1997 (its first assets were three servers costing $10,000 with a total hard disk capacity of one megabyte). The company went on to become the largest player in the Russian internet search engine market

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© ITAR-TASS

Leonid Mikhelson Novatek, Chairman of the Board

In late January last year, Russian stock exchange traders were excited to discuss the latest rumor that Leonid Mikhelson, CEO of Novatek – Russia’s largest independent gas company – was on his way to replace Alexei Miller as Gazprom CEO. The way the market reacted to this ‘news,’ which proved to be a hoax, spoke volumes about what such a reshuffle could mean for both companies. Shares in Novatek – one of the most popular companies on the Russian stock exchange – went into dark red, while Gazprom’s securities, which had been steadily falling, suddenly shot up.

Mikhelson himself was anything but pleased to see the market’s reaction to the news of his ‘appointment.’ “Novatek shares are falling.

Personally, I do not like it. I generally don’t like rumors or conjectures about myself,” he stated in an interview with the Vedomosti newspaper in December.

There has always been plenty of talk and speculation about the 57 year-old CEO. One story has something to do with Gennady Timchenko, Mikhelson’s partner at Novatek and another petrochemical company called Sibur, who owns the largest Russian energy trader Gunvor and is rumored to be friends with President Vladimir Putin and Rosneft CEO Igor Sechin.

These efforts are intended to significantly boost Novatek’s market capitalization.

Mikhelson believes that his company’s true value is at least $100 billion, which is approximately double its current market capitalization or on a par with Gazprom’s current value.

Many argue that it is these people’s lobbying efforts that have led to Novatek’s recent successes, including the quick development of mega-ambitious gas field project Yamal LNG, which Mikhelson’s company runs jointly with French company Total.

The gas produced at this field is intended to be liquefied and exported abroad. That is why Novatek is now taking proactive measures to challenge Gazprom’s export monopoly, putting pressure to bear on Miller’s company in the domestic gas market.

These efforts are intended to significantly boost Novatek’s market capitalization. Mikhelson believes that his company’s true value is at least $100 billion, which is approximately double its current market capitalization or on a par with Gazprom’s current value.

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It is certainly no coincidence that it was Gref who called upon the people of Russia to take responsibility for their own well-being and not pin their hopes on the government – a rare move for a public servant, even a former one

would,” he said in April at The Russia Forum 2013, organized by Sberbank.

According to Gref who firmly believes in the principle of Kaizen, transforming the mentality of his employees and trying to get them to focus more on the clients and at the same time implement lean technologies, was the most difficult part of his program to reform Sberbank, launched five years ago. On the strategic level the reform was to turn the Russian retail banking giant into one of the most diversified international banking groups in terms of efficiency, geography, assets and profits.

In January 2012, Sberbank closed a deal to buy Russia’s largest investment company, Troika Dialog (rebranded as Sberbank CIB), for $1.25 billion.

Last year it also acquired DenizBank, a Turkish subsidiary of the European Dexia, for $3.5 billion – the largest deal in Sberbank’s corporate history.

This policy has yielded some very tangible results: as early as in 2011 consulting company Millward Brown Optimor for the first time included Sberbank among its top one hundred global brands (ranked 99th), putting its value at $8.5 billion. The 2013 rankings saw the bank’s brand value increase to $12.7 billion, moving it up to 70th place. And there is yet time to press on, as the 49-year-old CEO’s contract will only lapse in late 2015.

Herman Gref Sberbank of Russia, CEO and Chairman of the Board

After taking the helm at Sberbank in November 2007, this former Russian Minister for Economic Development and Trade didn’t give up his prominent public profile. Herman Gref has widely commented on a broad range of topics, from measures to stimulate the Russian economy and liberalizing the Central Bank’s interest rate policy, to reducing insurance contributions for small and medium-sized businesses. He is one of the few public servants who can truly afford to criticize the government, and he has done so quite vociferously in recent years.

It is certainly no coincidence that it was Gref who called upon the people of Russia to take responsibility for their own well-being and not pin their hopes on the government – a rare move for a public servant, even a former one.

“What is typical for us is to expect something that should not be expected at all. We expect that the federal or regional government would solve all of our problems. We expect that the employer would somehow make our lives better; we constantly count on someone else to do the job for us. I think it is high time we put an end to all these expectations. We should come to realize one simple truth that our entire life is in our hands. If we don’t make a difference in our life, nobody else №3, 2013

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Mark Kurtser Chief Obstetrician and Gynaecologist of the City of Moscow, Chairman of the Board of Directors at MD Medical Group Investments (MDMG)

© RIA Novosti

A billionaire doctor who owns a large public medical company listed at the London Stock Exchange? Who could imagine a story like that in Russia even a couple of years ago? Today, however, the precedent has been set and the name of the man who managed to pull it off is Mark Kurtser.

In October 2012, the Cyprus-based MD Medical Group (MDMG), which operates a chain of perinatal clinics in Russia under the brand ‘Mother and Child,’ launched an initial public offering (IPO) on the London Stock Exchange, managing to sell 35% of its equity for $311 million. In the five months following the IPO, which also caught the attention of the Russian Direct Investment Fund (RDIF), MDMG’s market capitalization went up by more than 40%. By March 2013, the 56-year-old Kurtser, who owns a 62% stake in the company, had officially become a billionaire.

The goodwill demonstrated by investors toward the company, which currently operates 12 medical centers in five cities across Russia including the perinatal centre in Moscow, is hardly a coincidence. In 2012, Mother and Child’s net profit internationally went up by 66.4% to reach 1.5 billion rubles ($48.7 million). But this is hardly the end of the line for the company, considering that it continues to invest its IPO-generated funds to further its development.

However, despite these significant business achievements, Kurtser, who is described by his

“Every day of my life I have been a doctor. Every day at 7 a.m. I am in the surgery, at night I am delivering babies. Even now when my business has grown large I still spend most of my time performing my medical duties”

friends as a “genius but a tough doctor who is not easy to deal with,” still considers himself primarily a medical doctor. He said in an interview with Kommersant late last year, “Every day of my life I have been a doctor. Every day at 7 a.m. I am in the surgery, at night I am delivering babies. Even now when my business has grown large I still spend most of my time performing my medical duties.”

Sometimes coincidences do happen, and some of them produce such wonderful companies as MDMG along with thousands of beautiful babies.

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© ITAR-TASS, © ITAR-TASS, © RIA Novosti

12 Most Admired

Nikita Mishin

Andrei Filatov

Konstantin Nikolaev

Commercial Director, Executive Director and Director General at N-Trans Group.

How does one go about turning a smalltime shipping company into the largest transport and logistics conglomerate in Russia, the C.I.S. and the Baltic region with over two billion dollars in annual turnover? “It is not that difficult,” says Andrei Filatov, Executive Director at the N-Trans Holding.

In 1996, Filatov, 42, together with Nikita Mishin, 43, and Konstantin Nikolaev, 43 – his shipping business partners – incorporated a company called Severstaltrans. Their idea was to create a business capable of offering consignors the full spectrum of solutions. Financial support came from Alexey Mordashov, owner of Severstal, a metallurgical giant.

Following Russia’s default and currency depreciation in 1998, logistical services went on the rise, revitalizing Russian exports. Coupled with reforms launched by the Ministry of Transport, the partners had a rare chance to capitalize on the situation.

They opted to invest their profits in development, manufacturing locomotives and acquiring train cars, seaports and other transport infrastructure.

The strategy paid off. In just several years N-Trans №3, 2013

Following Russia’s default and currency depreciation in 1998, logistical services went on the rise, revitalising Russian exports.

Coupled with reforms launched by the Ministry of Transport, the partners had a rare chance to capitalize on the situation

(the name the company was given in 2007 when the partners bought out Mordashov’s 50% stake) became one of Russia’s leading transport operators, specializing in terminal container handling and railway freight transport.

Today, N-Trans is a group that consists of more than two dozen different enterprises, including public companies such as railway group Globaltrans and port operator Global Ports, with revenues reaching 68.6 billion rubles in 2012.

What is next? The owners of N-Trans plan to make further investments to develop their business along with Russia’s transport system with a greater emphasis on infrastructure. In May last year, Filatov told Russian newspaper RBC Daily, “I think that the railway sector is one of the best things that the infrastructure market in Russia, and in the world, has got to offer. After all, Russia is a country that has a vast railway infrastructure.”

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© RIA Novosti

Mikhail Kusnirovich Bosco di Ciliegi, Supervisory Board Chairman

Mikhail Kusnirovich admittedly likes to make people happy. In the process he claims to derive a great deal of pleasure too. It is no coincidence, therefore, that the same festive spirit and joie de vivre lie at the heart of Bosco di Ciliegi.

The group manages two hundred shops and boutiques selling some of the world’s most famous brands of clothing, accessories, watches, perfume, cosmetics and jewelry. It also has beauty parlors, a dental clinic, and even its own restaurant operating under its Bosco brand. Many of these outlets are located in the Moscow GUM mall also controlled by the group.

However, there is no doubt that the 47-year-old entrepreneur’s core interests and business talents lie in the world of sports: Bosco is also a manufacturer and purveyor of sportswear collections. Since 2001, the company has been the official apparel supplier and regular sponsor of the Russian Olympic Team, as well as partner of the Russian National Olympic Committee.

The kind of money that Bosco seems to be ready to part with to achieve these objectives has been particularly impressive of late. According to

Bosco is also a manufacturer and purveyor of sportswear collections. Since 2001, the company has been the official apparel supplier and regular sponsor of the Russian Olympic Team, as well as partner of the Russian National Olympic Committee

Kusnirovich, the company’s sponsorship contract with the Sochi 2014 Olympic Games is valued around $100 million an amount Bosco is going to recover with interest in net profits from the preGames “mega sales” (with the total volume expected to reach at least $1 billion). Kusnirovich hopes that the company will acquire a massive production and distribution base as an added bonus thanks to its participation in the Olympic festivities.

Considering the company’s ambitions, a bit of global publicity would definitely not hurt.

“We would like to make sure that our brand goes international. You know, the very word ‘Russia’ is a brand in and of itself. I think we can and should successfully promote it,” Kusnirovich told Kommersant newspaper in March 2012. So far Kusnirovich has left no room for anybody to ever doubt his lucky star.

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© RIA Novosti

Russia’s banking market leaders, specializing in credit cards and deposits. In the meantime, TCS continues to grow as a business at an unbelievable rate: in 2012 the value of the bank’s assets increased 2.4-fold, reaching $2.2 billion, with net profit up 78% to $122 million.

So when should potential strategic investors expect the long-awaited public offering? In September 2005, in an interview with the Vedomosti newspaper, Tinkov admitted that his dream was to make a billion dollars. “When I leaf through Forbes magazine, I think it is unfair that my name is not on this list of billionaires. I need to correct this mistake. I read that all billionaires are outrageously sexy.”

In May 2013, the 46-year-old entrepreneur finally made it into the Forbes list of the richest Russians – the magazine estimates his net worth at $700 million. Considering the rate at which TCS has been growing lately, he might not have to wait much longer.

Oleg Tinkov Tinkoff Credit Systems (TCS Bank), Chairman of the Board

Oleg Tinkov’s name has long been a brand in its own right – it has become synonymous with his flamboyant style, ability to think out of the box and the inevitability of his success. Throughout his entire career Tinkov has always been guided by an algorithm, which he mastered to perfection: first build a company and a brand, then sell it at a profit and invest the proceeds into a new project of a larger scale.

This strategy was used with electronics chain Teknoshok, which Tinkov sold for $7 million in 1997; with dumpling-producing company Daria, sold in 2001 to Roman Abramovich; and ultimately with the brewing company Tinkoff. In a $201 million deal in 2003, Tinkoff was acquired by Belgium-based InBev, and Tinkov himself walked away with $80 million in net profit.

It seems that his current project – the TCS internet bank that he created in 2006 in the image of the U.S. Capital One bank – is also likely to change hands sooner or later. Since its inception, the company has transformed itself into one of №3, 2013

In 2005, Tinkov admitted that his dream was to make a billion dollars. “When I leaf through Forbes magazine, I think it is unfair that my name is not on this list of billionaires. I need to correct this mistake. I read that all billionaires are outrageously sexy”

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Alexander Nesis IST Group, President

51-year-old Alexander Nesis is the owner of one of Russia’s largest private investment and industry holding companies. IST Group manages finances, extracts precious metals, builds transport engineering capabilities, provides industrial engineering solutions and develops commercial and industrial property, and it is worth nearly $8 billion. Nesis claims his job is not unlike that of a developer. There is one minor difference, however.

Rather than buildings, he constructs companies to the highest of standards and then sells them to security market players or strategic investors.

“IST’s MO is to look for ideas, lay the foundation, put together a team, see the idea take shape and then sell the product. We consider ourselves developers in the broadest sense of the word. I do not just come to work to manage some current business processes, I come to look for an idea that may radically change the asset’s quality and price,” said Nesis in an interview with Vedomosti in November 2005. “My product is not gold, it is not some ship, it is an enterprise.”

A looming merger between the IST Group’s very own NOMOS Bank (with assets valued at 640 billion rubles or $20.3 billion, ranked 11th in Russia)

“IST’s MO is to look for ideas, lay the foundation, put together a team, see the idea take shape and then sell the product. We consider ourselves developers in the broadest sense of the word”

and Otkrytie Bank (240 billion rubles or $7.6 billion, ranked 32nd) may well become another high profile and potentially very lucrative project for IST, likely to produce Russia’s second-largest private banking group.

News leaked in April that the intricate and complex deal agreed last year and slated to be closed in 2014 was likely to flop. However, experts believe that it is just a temporary hiccup. Merging the two companies’ banking assets under a single brand would produce a significant synergetic effect, taking efficient management of these assets to a new high and ultimately raising their value. This is precisely the sort of transaction that Alexander Nesis has built his success on as a ‘developer’.

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In April, during the Russia Forum 2013, Kogogin presented his “gas attack” concept: converting vehicles in Russia to run on a more efficient and environmentally friendly fuel – natural gas

from the U.S. Kogogin and his team can certainly take the credit for the fact that these partners have already set up joint ventures with KAMAZ to produce Mercedes-Benz heavy-duty trucks, gear boxes and engines.

Kogogin hopes that all of these efforts will raise the automotive giant’s game to a revolutionary technical level, enabling the company to start mass production of a new line of trucks capable of competing with imported models by 2015-2016. In December 2012, he told Vedomosti, “We want to reach the upper part of the medium price segment and the lower part of the premium segment. Kamaz has never seen such a large-scale project that would entail a full production overhaul to manufacture a brand new model range.

Now we are in the midst of an evolutionary phaseshift.”

The KAMAZ chief has lately been toying with yet another unconventional idea that is likely to yield his company and its shareholders significant dividends.

In April, during the Russia Forum 2013, Kogogin presented his “gas attack” concept: Converting vehicles in Russia to run on a more efficient and environmentally friendly fuel – natural gas. Having invested heavily in various gas technologies, in late May, KAMAZ signed an agreement with Gazprom enabling it to use gas as a motor fuel. Needless to say that Kogogin’s company is not about to let any competitors take over this new market that he is personally helping to build.

Sergey Kogogin Kamaz, CEO

In late May, the KAMAZ board of directors recommended that the general shareholders’ meeting vote in favor of paying out dividends – for the first time in 20 years – from one tenth of last year’s net profit, which was up 72.4fold reaching 4.9 billion rubles ($155.1 million). A nice chunk of this, totaling 25 million rubles, is payable to Sergey Kogogin, who owns roughly 5% of the automotive giant and has been at the helm of KAMAZ for 20 continuous years.

Having skillfully steered his company out of the recent crisis, the 55-year-old Kogogin now focuses on long-term prospects, trying to significantly boost the company’s efficiency and the quality of its products, laying the groundwork for future success.

In 2012, KAMAZ completed a major costoptimization exercise. At roughly the same time it launched a five-year upgrade program which, according to Kogogin, will cost nearly $2 billion.

Several overseas partners will also get on board, including the Germany-based Daimler, which already owns an 11% stake in KAMAZ, and Zahnradfabrik, as well as Cummins Corporation №3, 2013

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Five Tips for Investors Elizabeth Sadova Practical guidelines for those who plan on doing business in Russia.

So, you have made your decision and are about to invest a certain amount of money in a Russian asset? Naturally, you have been trying to find out more about the intricacies of doing business in Russia, the local mentality and so forth. You certainly have already formed some sort of impression – a patchwork of various notions and images such as the mysterious Russian soul, corruption, crime and bureaucracy, natural resources, the high intellectual level of the population, and the enormous potential to develop and grow many business areas.

But what are you going to see on the ground?

Russian people like to talk a lot about their country’s unique and distinctive culture. But how does it affect the business environment? The laws and regulations that are customary in other countries, especially in the developed nations of the West, are often misunderstood and rejected in Russia.

The first thing you are likely to hear in response to your proposal is, “No.” What is more, there will be no apparent reason for this reply. It might simply mean, “We disagree with that approach, it will not work, we will not do it, we live by our own set of laws.” Rules are a difficult thing; they are always subject to change depending on who does the inter­ preting. Here we are about to touch upon a critical aspect: trying to understand who calls the shots and who you should negotiate with.

Russia has always been ruled by some sort of a supre­me power, be it the tsar or some other leader, who is perceived as the father of all people – tough but fair. Russia’s dominant religion – Orthodox Christianity – also recognises and accepts the notion of supreme power. Business communities are built based on the same principle, with the

chief executive reigning supreme and topping the pyramid, and the rest filling different positions in the hierarchy and unconditionally accepting all decisions taken at the top.

Hence, Tip No. 1

If you want to secure a favourable decision to further your objectives, you should find out in advance who will take the decision, where this person’s inte­rests lie, and who you will have to talk to. A strict hierarchy means that all important decisions can only be taken subject to management’s approval and consent, even if you have done all the groundwork with another specialist who deals with your particular field. The boss will always have the final say. However, there is a caveat: if your proposal is not appealing, the news will be relayed to you by the person in charge of your particular question, and more often than not this person will not be the boss. Your objective is to keep the relationship going in case you might need to deal with these people in the future. It could be critical to win the support 74

Five Tips for Investors

kept quiet and unadmitted. It is always better to try and resolve such disagreements through the good offices of third parties and not to get involved personally; see Tip No. 1.

Relationships are important. However, if a conflict is out in the open it will be resolved by a decision taken by the principal and everyone else will have to accept it. Russians tend to react emotionally in conflict situations and are often unable to compartmentalise the problem and the individuals involved. Therefore, it is always difficult to find someone who would willingly agree to deliver bad news to the boss.

Elizabeth Sadova is Academic Director of Executive Education Programmes, SKOLKOVO Moscow School of Management

of the influential people acting as aides to the chief executive, who could confirm that your proposal is important and valuable.

Tip No. 4.

Never forget about formalities

The term ‘manual management’ took root in Russia following the crisis of 2008. It means that the chief executive decides on all key issues, and the rest have to comply. The difficulty here lies in the fact that any activity can only be planned for a short period of time, because in the longer run things may change unexpectedly. In planning your activities in Russia, try to formalise certain aspects of your cooperation.

It is great if you have advisors who can sort out all of the contested issues well in advance. But it is equally important to understand who is really at the helm, navigating the ship in this ‘manual mode.’

Tip No. 2.

Who you should talk to, and how

Russia is a country where ‘context’ matters a lot, with information often communicated in a nonverbal manner. Therefore, it matters who delivers this information – their status, as well as their formal and informal role. Those who informally communicate with the principal person tend to exercise a lot more influence than the principal’s direct subordinates.

Information is not always available to everyone.

Very often different employees have access to different pieces of information. Therefore, it always makes sense to hear several versions and try to run through the different possible scenarios. It behoves you to verify the information as well: part of it may simply be based on assumption.

Tip No. 5.

Never stray from your objective

It is not at all easy to quickly understand and accept another culture. Therefore, it will be best if you start your business with reliable partners who share your interests and objectives, who can explain to you all of the intricacies and controversial nuances.

It will be a tremendous benefit if you are willing to learn the language and understand the country.

Even if you are not going to stay in Russia forever, you will still have a chance to come into contact with another culture – and in the process get to know yourself better.

In conclusion I would like to recall a famous quote attributed to Anton Chekhov: “Each of us is full of too many wheels, screws and valves to permit us to judge one another on a first impression or by two or three external signs.”

Do not jump to conclusions based on first impressions, and continue to strive to achieve your objective.

Tip No. 3.

What to do in conflict situations

You have a disagreement with your Russian partners. How can you find a way out of this situation? Conflicts are managed in Russia in a different manner compared to what is commonly accepted in the West. For the most part, conflict management techniques are a function of the information communication discourse addressed above. Since personal relationships play a vital role in finding solutions to various problems, conflicts are rarely resolved in a head-on direct manner based on an objective picture of what is going on. More often than not, the very existence of a conflict is №3, 2013

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Business or Personal?

They came to Russia from Japan, China and Brazil to do business here and to manage large companies. BRICS Business Magazine asked three expats for their opinions about Russia, its people, its business climate – and the weather.

Toshiyuki Tsuge Toshiyuki Tsuge is Head of the Hitachi representative office in Russia and has been living in Russia for 20 years.

The numerous smokers. As if smoking itself is not bad enough, people for some reason have no scruples whatsoever about throwing their cigarette butts everywhere.

Muscovites tend to like Japan and the Japanese people. The Chinese and South Koreans, for example, are in for a cooler treatment.

Russian nature. Even in the city it seems somehow pristine, wild and beautiful. Naturally, Japan also has many beautiful – or I would even say beautifully landscaped – parks.

The television. The television often shows films with scenes of violence and programs about murder and cruelty. I realize that life is what it is, but this is too much.

Russian classical music, which I love very much – especially Tchaikovsky and Rachmaninoff. I often go the Tchaikovsky Concert Hall and the Bolshoi Theater.

The overinflated prices. I can tell by looking at Japanese products: here they are three times as expensive. Naturally, the price includes transportation – after all, Japan is far away from here – but still the sellers’ margins are too high.

My hobby: I sing in a Russian choir. Rehearsals, performances, talking to other choir singers – all of these things make me happy.

The nasty driving habits of Russian drivers.

They never yield. I think this is one of the causes of Moscow’s long traffic jams.

The talented and well-trained staff.

The bureaucracy.

Van Chen The Chinese entrepreneur Van Chen came to Russia over 30 years ago. His café, Jinxian, was the first private catering establishment in Chita Oblast, in southeastern Siberia. Today Van Chen’s family owns an entire chain of ethnic cuisine cafés. His daughter Li Xia recalls that even 15 years ago business development in Russia held a great deal more potential than in communist China. Now the tables have turned. That is why Vera, who represents the family’s third generation, plans to build her business in China.

The bureaucracy and the consequential difficulty of doing business.

The people. If we compare the approach to teaching children, for instance, I have to say that teachers in Russia are a lot more warmhearted. If you do not pay a Chinese teacher for extra lessons with your child, the teacher’s attitude instantly changes.

The specific requirements for hiring foreigners.

Today this process is rife with many difficulties.

This year I did not even manage to make the quota.

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The discrimination against foreign workers, with the gradual rise of income tax for foreign nationals working in Russia. Today the rate of income tax for foreign nationals has reached 30%. Ten years ago Chinese construction workers, finishers and cooks would gladly come to Russia to earn money. Today the Chinese economy enables them to earn more at home.

The cost savings. The fact that the Trans-Baikal region is located near the border enables me to hire qualified Chinese workers.

The service. As strange as it may sound, services offered at Russian hospitals and restaurants are much more agreeable, the reason again being that the employees tend to be more humane, and are often ready to offer selfless help.

The laziness and drinking problems plaguing Russian workers. Your waitress may go on a binge drinking spree at the height of the New Year festivities, or just to celebrate her salary. On the day when our café opened, my daughter had to work the cloakroom because the woman we had hired never showed up for work, without any warning.

Russian nature. I am really impressed by Russian natural forests and bodies of water.

Beloved friends.

The freezing cold.

Gabriel Patini Gabriel Patini, a native of Brazil, heads up the Marketing Division at Jaguar Land Rover. He came to Russia two years ago and is still struggling to come to grips with Moscow’s traffic jams and the harsh Russian winter.

The exhausting traffic jams in Moscow.

The size. Russia is the second-largest market in Europe, offering all of the business advantages intrinsic to that.

The high prices. The cost of living in Moscow is higher than in the countries where I had a chance to live before. It is true that Moscow is a very expensive city, but not to the extent it is often believed to be. When it comes to excessively high prices, the city’s reputation is slightly exaggerated.

The dynamism. No matter what we are talking about – business or leisure – everything is happening at a very fast pace in Moscow.

The potential. Working in Russia holds a great deal of promise.

The regulation. The mass media market is very different from Europe, but I see it as another challenge and an issue you have to be able to resolve.

The smart consumers. Since the fall of the iron curtain, when people suddenly were free to travel to England, America and Germany, they have become more aware and sophisticated.

They are constantly discovering new brands and their demands are growing.

The long Russian winter. In winter the temperature here drops very low. But still it is not as sleety as in England, for example, where I lived for several years.

The cultural life in the capital. There are many theatres, galleries, exhibitions and good restaurants in Moscow, making for highly charged leisure time.

The architectural contrasts. This was the first thing that struck me when I first came to Russia.

Lovely pre-Revolution buildings, unique Soviet-era architecture, and post-Soviet buildings of rather questionable artistic value seem to co-exist next to very beautiful churches. But I like the contrasts a lot. №3, 2013

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Big Politics Driven by Gas Osip Shor After nearly two decades of gas export negotiations with China that have yielded little result, Russia is coming closer than ever to sealing the coveted deal. However, for this dream to come true and to capitalize on the prospects offered by the Chinese gas market, Moscow will have to take a political decision and agree to sell gas to its eastern neighbor at a below-cost price.

At that time the city administration had to step in and take decisive measures to alleviate the dire environmental situation. All industrial facilities located inside the city limits were told to reduce their atmospheric emissions by a third. At the same time the official mass media were doing their best to calm a perturbed public: they said that the ‘fog’ (the word ‘smog’ was banned at the time) was not caused by human activity, but was rather a result of a natural anomaly which was quite common in other countries.

Regardless of what the official Chinese propaganda might say, the sheer scale and extent of the environmental problems faced by China have long been an open secret. Suffice it to recall that in 2008, one week prior to the official opening of the Olympic Games in Beijing, the authorities had to shut down all industrial facilities in the city to improve the air quality.

It is well accepted that China is paying this heavy cost as a result of its colossal industrial development successes in the last two decades, and of a fuel consumption heavily dominated by coal.

If your first visit to Beijing happened to take place late last year, you were most likely struck by what you saw: city streets, parks and buildings barely visible behind a thick milky fog; cars slowly crawling along, their headlights unable to penetrate the murky haze; the people in the street – pedestrians, bicyclists, waste collectors, or local residents caught in the midst of their Wushu practice – their faces covered by gauze masks and bearing a look of intense concentration.

No, you guessed wrong, the Chinese capital had not been the target of a terrorist attack or suffered a massive chemical explosion. Mother Nature simply played a mean practical joke on Beijing. In December the weather is damp and windless in more than thirty cities across the north and east, and for several weeks one third of the country’s territory ends up covered by smog. By mid-January this year air pollution in Beijing had reached the fifth (and penultimate) severity level, and the level of the tiny pollution particles known as PM2.5 came close to 1000 micrograms per cubic meter – 40 times higher than the norm. Local hospitals were unable to cope with the influx of patients with respiratory and heart problems.

“To add insult to injury, as if the smog is not enough, we have a sand storm coming. I can’t even open my eyes or my mouth,” a local resident was quoted as saying by Reuters in early February. “I am already used to seeing the smog where the sky is supposed to be, but now with the sand storm on its way I get the feeling that the situation is getting from bad to worse.”

Not All Quiet on the Gas Front

According to the Russian Institute of Energy Strategy (IES), coal accounts for 68% of China’s total energy mix, with environmentally friendlier gas hovering at around 4.5%, compared to 25.6% in EU countries and 27.2% in the United States. This imbalance seems to persist regardless of China’s efforts throughout the last decade to quickly increase gas production levels. According to China’s National Development and Reform 78

Big Politics Driven by Gas

agreement to increase imports through the pipeline by an additional 25 billion cubic meters per year.

It is an open secret that, all this time, Moscow has been watching with envy the fruitful cooperation between Ashkhabad and Beijing in the gas sector. After all, Russia has been trying unsuccessfully for a long time to seal the deal and penetrate the lucrative gas market in China, which according to a number of experts is expected to reach 350 billion cubic meters per year by 2035. ( 1, 2) Gazprom began to ‘put out feelers’ and look into shipping gas to China through a pipeline as early as 2004, when the company signed an agreement on strategic cooperation with the China National Petroleum Corporation (CNPC). In October 2009 Gazprom signed a framework agreement spelling out the key terms and conditions of gas exports, whereby up to 68 billion cubic meters of Russian

Commission, in 2000 the country produced as little as 27 billion cubic meters of gas, but in 2012 production levels jumped to 107.7 billion cubic meters (up 6.5% compared to the previous year).

Given the country’s aggregate consumption of 147.1 billion cubic meters (+13%), China had to import 42.5 billion cubic meters of gas (including liquefied natural gas) – 31.1% more than the year before.

The lion’s share of gas was imported from Turkmenistan. Beijing and Ashkhabad signed a 30-year contract to export 30 billion cubic meters of Turkmen gas per year as early as 2006, in addition to some 10 billion cubic meters imported under contracts with Uzbekistan and Kazakhstan. China even financed the construction of a $20 billion pipeline commissioned in late 2009 to transport gas from Turkmenistan. In November 2011 China reached an №3, 2013

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1

EIA 2011

IEA 2010

IEA 2011

China’s Gas Import Forecast, Billion m3

IEA 2011 Golden Gas

IEA 2012 Low Unconventional

IEA 2012 Golden Rules

CERA 2012

350 300 250 200 150 100 50 0 2015

2020

2030

2035

Sources: EIA, IEA, CERA, the Ministry of Land and Resources of China

According to the man at the helm of the Russian monopoly, the deal on the table was to potentially start shipping up to 38 billion cubic meters’ worth of Russian gas through the ‘Power of Siberia’ pipeline as early as 2018, and subsequently increase the volume to 60 billion cubic meters per year. Under this agreement all legally binding documents are to be signed in June. The partners are even planning to seal a long-term gas export deal by the end of the year. Gazprom hopes that by that time the issue of the baseline price will finally be resolved. Miller added that Gazprom’s Chinese counterparts were even willing to prepay future gas shipments and commit to co-financing the construction of a new gas pipeline estimated at $25 billion.

pipeline gas could be shipped to China on a yearly basis. However, the new-found partners never managed to translate any of these agreements into concrete action.

In particular, the parties could never reach an accommodation as to which route should be used to transport Russian gas – the western ‘Altai’ pipeline, or the ‘Eastern’ (‘Power of Siberia’) pipeline, from Yakutia to Vladivostok – but most importantly they could not agree on the price.

“China wants to buy Russian gas as cheap as possible – their estimated asking price ranges from $150 to $250 per one thousand cubic meters,” explains Alexei Belogoriev, Head of the Expert and Analysis Department at the IES. “Russia would prefer to sell its gas at the ‘European’ price – that is, between $350 and $400 per thousand cubic meters.”

It was only in early 2013 that the two partners finally managed to achieve some semblance of success in their gas negotiations. In late March – as soon as the smog over Beijing had dissipated – representatives of Gazprom and CNPC signed in Moscow yet another memorandum of understanding and cooperation in the gas sector.

“The recently signed document is strategic and long-term in nature. It sets out parameters for shipping Russian natural gas to China along the ‘Eastern’ route and lays the foundation for a 30-year contract to export gas from Russia to PRC,” said Alexey Miller, Gazprom CEO, commenting on the document in question.

Gas Instead of Coal

It seemed that the celebratory coverage of the agreements reached in March left no doubt as to how this event should be regarded: the protracted bilateral gas negotiations were about to culminate in a long-awaited deal. However, it may well be another case of wishful thinking on the part of the Russian negotiators.

“The signing of the Moscow memorandum was presented in Russia as if it were the final agreement, but CNPC did not even report this event on its official website,” Mikhail Kroutikhin, a partner in the RusEnergy consulting agency, tells BRICS Business Magazine. “To put it in other words, the 80

Big Politics Driven by Gas

2

In fact, as it stands today, Beijing has no shortage of gas and can certainly afford to put the negotiations with Gazprom on a slower track. Moreover, time is on their side.

“Some five years ago Beijing was much more amenable to reaching a compromise on the price.

However, much has changed since then,” says Maria Belova, Senior Analyst at the Skolkovo Business School Energy Centre.

“In the first place,” she explains, “Beijing has alternative sources of gas. Apart from the relatively inexpensive Turkmen option, China may well import up to 13 billion cubic meters of gas from Myanmar through a new pipeline completed just last spring, which is slated to reach its full operational capacity in 2016. Another option may come in the form of liquefied natural gas that Chinese companies buy today under various contracts at a price significantly lower than that offered by Gazprom – that is, starting at $100 per thousand cubic meters.”

Secondly, China would always have its coal to fall back on to replace the more expensive imported blue-burning fuel.

“Considering the extent to which the state controls the economy in China, if gas becomes de facto too expensive to import, the government may simply legislatively put a stop to domestic consumption growth despite the environmental concerns. This in turn would most likely lead to gas import restrictions,” Belova notes.

According to Belova, data coming directly from Chinese companies confirms the premise that expectations of rapid gas consumption growth in China, resulting in increased imports, may never be fulfilled: “In forecasting their gas consumption for the next twenty years they operate based on widely varying indicators, ranging from 390 to 500 billion cubic meters. However, they also presume that the share of imported gas would remain stable and would not exceed 200 billion cubic meters per year.” ( 3) The main driver of domestic market growth should come in the form of increased production of unconventional shale gas: China’s shale gas reserves are estimated to be the largest in the world, reaching nearly 36 trillion cubic meters.

“Gas demand in China will be predicated on the country’s ability to produce unconventional fuel,” Belova argues.

Given a favorable combination of circumstances, in the next twenty years it may rise from 50 to 150

China’s Gas Production Forecast, Billion m3

300 Historical values Forecast 2008 Forecast 2010 200

100

2030

2020

2010

2000

1990

1980

1970

1960

0

Chinese understand very well that this is yet another declaration of intent that is not binding in any way is unlikely to lead to any tangible result in the future.”

There is an easy explanation for this skepticism that is fully shared by the expert community: despite reaching an agreement on the transportation route for Russian gas, there is little prospect of resolving the main issue – agreeing on the price. After all, the figure that Gazprom has in mind is still roughly three times higher than that expected by CNPC. Both sides can resort to objective economic reasoning to back their respective positions. Due to the fact that the net cost of gas production and transportation along the agreed route (Yakutia – Khabarovsk – Vladivostok) remains high, Gazprom is unable to offer China much of a discount without exporting gas to its Chinese neighbors at a loss.

“Theoretically, Gazprom could sell gas to China at a profit if the product came from the company’s Sakhalin projects. In that case Gazprom would be able to ship gas to the Chinese border and still bank a small margin,” explains Kroutikhin. “However, if they choose to transport gas to China all the way from Yakutia along the agreed ‘Eastern’ route, its net cost is likely to reach $360 per one thousand cubic meters, according to current estimates. This price would be too high for China – they would not agree to pay that much for gas.” №3, 2013

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billion cubic meters. Last year, China’s Ministry of Land and Resources held its first auctions for the rights to explore shale deposits. The data obtained from exploratory drilling shows that these expectations are likely to be met.

“The recently published flow rate data for various wells gives us plenty of reasons to hope that production volumes would be high,” Mikhail Korchemkin tells BRICS Business Magazine. Korchemkin is Manag­ing Director of East European Gas Analysis, an in­dependent US-based energy consultancy.

Following in America’s Footsteps

With the largest shale gas reserves in the world – estimated at 36 billion cubic meters – China is about to embark upon its own shale gas revolution.

In accordance with the 12 th Five-Year Plan (20112015), by the middle of the next decade shale gas production in the PRC should reach 6.5 billion cubic meters. To achieve this objective the country plans to drill some 50 exploration wells and 150 production wells within that period.

The first auction, selling exploration licenses for four blocks, was held in summer 2011 for Chinese companies only – with Sinopec and Henan CBM ending up as the successful bidders. In autumn 2012, the rights to explore 19 additional blocks were sold to 16 corporations whose aggregate investments into these projects were expected to reach $2 billion.

It was reported that the first exploration well, Qianye-1, completed by Sinopec in early 2012, showed a high production yield. By spring 2013 a total of 39 wells had been completed in China, however only nine of them demonstrated sufficient gas influx. Moreover, the development of shale deposits was reported to be lagging significantly behind the original schedule.

In March 2012, in his address to the 12 th Session of the National People’s Congress, China’s then Premier, Wen Jiabao, virtually admitted to having encountered difficulties, promising that the Chinese government “would take more proactive steps to address key issues relating to shale gas exploration and production.”

Be that as it may, experts still believe that the prospects of a shale gas revolution in China are real.

In its January report BP predicted that by 2030 the People’s Republic of China would become the most successful country besides North America in developing shale gas deposits.

A Political Decision

The likely growth of domestic production is not the only factor that in the long run may drastically reduce the imported share of gas in China.

There is another aspect that is clearly underestimated by potential exporters blinded by the Chinese gas market growth dynamics of recent years: the Chinese government is increasingly weary of the economy’s growing dependency on imported energy resources.

“The fast-developing gas demand in China that we saw over the last decade was not dictated by an economic necessity – to a greater extent it came as a function of politically-driven efforts to diversify the country’s fuel and energy portfolio,” notes Alex­ei Belogoriev from IES. “Therefore, it would be strange to presume that in the future political considerations would play a less significant role in determining the gas demand dynamics than they do today. From the political perspective, one of the key threats to China’s economic development in the future is the rapidly growing share of imports in the domestic consumption.”

According to Belogoriev, by 2020 China is likely to reach the so-called ‘resource pause’ phase, when the rate of energy consumption growth is expected to slow down drastically. As a result, by the beginning of the next decade, China may no longer need Russian gas at all.

All of these developments mean that Gazprom has very little time left to reach an agreement. The experts are certain that to do that the Russian company would have to find a way to reduce the cost of its gas but that, at the end of the day, it does have a certain leeway to be able to do this.

“For example, a major breakthrough could be achieved in the gas negotiations if the Russian side 82

Big Politics Driven by Gas

3

Unconventional gas production growth will lead to increased consumption

and will not affect the domestic market’s share of imports.

Gas consumption (Maximum, 2030 – CNPC), Billion m3

Gas consumption (baseline, 2030), Billion m3 500

500

400

400

150

50

300

300 150

200

150

390

200

390

100

190

100

0

200

0 Demand

Production Production unconventional conventional gas gas

Import

Demand

Production Production unconventional conventional gas gas

Import

Source: CNPC, SINOPEC, Skolkovo Business School Energy Centre

“Today the Russian government’s perception is that if we are about to lose the European gas market, where exports have been falling in recent years, we need to find a way to commit ourselves to shipping gas to Asia,” she says. “We need to commit to the Chinese market, which in this case certainly appears to be the lesser evil, even if we initially would have to export at a loss. There is a certain rationale behind this position, after all. Therefore, I would not go as far as saying that should such a political decision be taken it would necessarily be bad. However, I do hope that it would not come to that.”

There is yet another development that may well force Russia’s hand in making concessions to China. In late November 2012 Gazprom took the final decision to invest in the development of the Chayandinskoye field and build the ‘Eastern’ cross-country gas pipeline from Yakutia, via Khabarovsk, to Vladivostok. The Russian gas monopoly really has nowhere else to retreat.

It is still an open question as to when the longawaited agreement will be signed. However, when it happens, both Russia and China will undoubtedly feel relieved. Moscow will finally be able to ‘take a breather,’ and Beijing too will be able to breathe more freely.

would hire Chinese contractors to build the Yakutia – Khabarovsk – Vladivostok pipeline. After all, they charge three times less per one kilometer of pipeline than Gazprom’s Russian partners. Furthermore, the Russian government may well exempt the gas exported to China from any taxes and duties. In that case the price of gas shipped from Yakutia to the Chinese border could become acceptable,” suggests Korchemkin.

However, not all experts believe that this more ‘economical’ option is viable. For instance, Mikhail Kroutikhin from RusEnergy is convinced that the contracts to build the ‘Eastern’ pipeline will be awarded to Gazprom’s Russian partners. Given this scenario, the real cost of the pipeline could reach $60 billion at a minimum – a figure that is 2.5 times higher than the current official estimate.

According to Kroutikhin, the only realistic option to sell Russian gas to China is to agree to reduce the price to the ‘Chinese’ level – that is, to sell it below cost.

“It would be an embarrassment for Russia. However, it may well be the case that a political decision will be taken to address this issue,” he notes.

Maria Belova believes that the Russian government may indeed take such a political decision. №3, 2013

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Three Out of Five Vladimir Volkov It all started with several government and banking projects and now, ten years later, Prognoz – a Perm-based corporation – has managed to become a leading business analytics systems developer in Russia. What is more, it is one of the country’s few tech firms to maintain a presence in a number of overseas markets. This company from the Urals now has a foothold in three out of the five BRICS countries.

as to make forecasts as to how the situation in various economic sectors or markets was likely to evolve.

In 1992 the company came up with the first version of the Prognoz Platform (which at the time was called the Prognoz Analytical Suite) – a platform designed to create turnkey analytical business applications. It went on to become the foundation for most of the templates or customized products and solutions developed by Prognoz.

“It was at this stage that the company came up with its own set of tools, enabling us to go where our interests lay, and monitor, simulate, and forecast economic process,” explains Shestakov.

Soon Prognoz found its first high-profile customer: the Ministry of Economic Development.

Projects with the President’s Administration, the Office of the Government, and the Central Bank of Russia, were quick to follow. Company management could hardly be accused of underestimating the importance of the experience gained through these projects.

“Gradually we came to realize who our target audience was; we came to understand their interests and requirements,” remembers Sergei Shestakov.

Subsequently, the gradual increase in demand for BI products and solutions in the commercial sector brought other high-profile corporate clients. For instance, in 1999, the company launched its first projects with Gazprom. Just two years later the gas giant adopted the Prognoz Platform as

The headquarters of Prognoz are located in the foothills of the Ural Mountains, in Perm, fifteen hundred kilometers from the Russian capital. And its numerous offices and research centers are now present in nine countries including the United States, China, Belgium, Zambia, and several C.I.S. republics. In late January Prognoz opened another representative office in Vancouver.

These days companies of this kind – that have nothing to do with production or raw materials exports – are few and far between in Russia. From the very outset Prognoz put a great deal of emphasis on developing in-house software, which only made it logical that the company eventually ventured into overseas markets.

Follow the Customer

The story of Prognoz starts in 1991, when a team of scientists from the Perm State University Computational Economics Department and the Russian Academy of Sciences Urals Institute of Economics incorporated a commercial enterprise.

“It happened at the time when information technologies were not that widespread. Back then Prognoz was one of the first companies, not just in Perm but in the entire country, to develop what they now call ‘business analytics’ or Business Intelligence (BI) solutions,” says Shestakov.

This software was designed to analyze large volumes of statistical data, perform simulations, and trace the outcome of managerial decisions, as well 84

Three Out of Five

In the West, Prognoz successfully used traditional marketing approaches such as distribution, direct sales and other similar methods, whereas working with Chinese customers required different tactics and a lot of patience.

“China favors a more personalized sales approach such as seminars, where one can have the luxury of holding lengthy meetings to gradually convince potential clients that they really need the product and that it fits their requirements”

to develop a forecasting model for commodity flows commissioned by BNSF – one of America’s leading railroad operators. That same year Prognoz opened its first office outside of Russia, in the United States. The second overseas representative office was inaugurated in China almost at the same time.

In the space of several years the company implemented a host of projects for various agencies and international organizations. Another major breakthrough came in 2008 when it won a bid to develop data collection and processing software for the International Monetary Fund (IMF), to be used for the World Economic Outlook – one of the Fund’s key publications. Other orders from the World Bank and the World Health Organization were quick to follow.

Shestakov admits, however, that while the company’s expansion into the United States and Europe went relatively smoothly, similar efforts in the East brought about some rather unusual challenges. “Objectively speaking, China proved to be a very peculiar and complicated market. There we faced significant linguistic and cultural problems. We had no idea how we were supposed to operate there.”

For instance, in the West, Prognoz successfully used traditional marketing approaches such as distribution, direct sales and other similar methods, whereas working with Chinese customers required different tactics and a lot of patience.

“China favors a more personalized sales approach such as seminars, where one can have the luxury of holding lengthy meetings to gradually convince potential clients that they really need

a template solution for developing analytical applications.

In an effort to bridge the geographic divide with its key customers, in 2002 Prognoz opened an office in Moscow. At the same time the company successfully completed several projects commissioned by various ministries and agencies responsible for the economic sector in the Russian Government, regional administrations, and a number of large banks and corporations. In 2005 Prognoz launched joint projects with the Ministry of Finance and the Bank for Development and Foreign Economic Affairs.

By the middle of the last decade Prognoz had reached an entirely new stage in its development: having implemented its solutions in government agencies and corporations, the Permbased company made a proactive move to take part in the largest industry expos and conferences abroad.

“We had two main objectives in mind. First of all, we wanted to see the level of our competition. Once we benchmarked it against our own, we knew that we were able to compete in the global marketplace.

Secondly, we wanted to gauge how much potential appetite other organizations outside of Russia would have for our analytical platform designed to develop BI applications,” Shestakov explains. “It turned out that there was a great deal of interest in our products, solutions, industry expertise, and our track record of providing tailor-made solutions to government agencies, regulators and various businesses.”

A Tailor-Made Approach

At around the same time, Prognoz came up with the idea of ‘going international.’ Shortly after, in spring 2006, the company signed its first contract №3, 2013

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the product and that it fits their requirements,” explains Shestakov.

According to him, the Chinese tend to be much more conservative, and take their time deciding whether to start cooperation or not. One can only succeed with local consumers if they believe that your company is ‘one of their own.’

In that sense the fact that Prognoz was originally from Russia offered no tangible advantage, even though the Chinese tend to respond well to Russians.

“Being a Russian company in China does play a certain positive role. Overall, the older generation is friendly toward Russia and Russian businesses.

However, they would still prioritize Chinese companies over ours,” says Shestakov.

To overcome this hurdle, one year later Prognoz incorporated a subsidiary in China. “Parenthetically, the American and European markets have a different attitude when it comes to the company’s image and origin: what counts there is that you are a modern company in sync with market requirements,” he adds.

From that moment, Prognoz gained a great deal of traction in its international expansion efforts.

Responding to requests from potential clients or replicating expertise and know-how, the company kept on opening new offices – in Brussels, Kiev, Astana, and Minsk.

“It has been the easiest for us to operate here in the C.I.S. – there are no language barriers, we are dealing with a familiar mind set, and there is geographic proximity,” Shestakov admits.

MAGIC QUADRANT

In 2011, Gartner (an American information technology research and advisory company) for the first time included a solution developed by Prognoz in its Magic Quadrant for Business Intelligence and Analytics Platforms – the most reputable global industry ranking in this sector. In 2012 the company was included in the Quadrant again and even ended up higher in the rankings.

Out of all factors that enabled Prognoz to significantly improve its ranking compared to the previous year (apart from the successful expansion in Africa), analysts from Gartner singled out the following: that the company’s products are highly functional and simple to use, while the quality and availability of its services remain high.

“The ability to build specific analytical applications for customers, based on a platform developed in-house, enabled Prognoz to come up with a unique market penetration strategy and to win over important clients including the IMF and the World Bank,” the analysts said in their report. “Moreover, many applications developed

by Prognoz were custom-made for specific clients and augmented with data from third-party sources. Prognoz happens to be ranked number one in this category.”

However, analysts from Gartner also believe there may be a number of reasons to be concerned. For instance, only 20% of those polled by the agency for the purposes of the ranking referred to the Prognoz platform as their technological BI standard. Several respondents pointed out that even though the products offered by the company could be used to perform specific tasks, such as econometric analyses, they were not particularly well suited for broader business applications.

Furthermore, according to Gartner, the company’s existing customers complain that the Prognoz platform is too complicated to create applications. According to analysts, this is the main challenge that eats into the company’s competitive edge on the market for BI platforms.

Finally, Gartner analysts identified one more weakness.

Despite the strong performance in Russia, Asia and now in Africa, Prognoz products are still underrepresented on the U.S. market and in Western Europe, which means that it could take the Russian company some time to replicate its home successes in other markets.

Africa Across the Board

Incidentally, it was the customer-oriented approach that paved the way for Prognoz to reach out to Africa. Its first encounter with the local market took place in 2009 during a conference hosted by the International Statistical Institute (ISI). One year later, during the StatCom II conference held in the Ethiopian capital Addis Ababa, the company met with representatives of the African Development Bank (ADB).

“ADB representatives showed a great deal of interest in our company’s statistical data collection and analytical solutions,” recalls Shestakov.

In spring 2011 Prognoz completed its first project commissioned by ADB – a web portal (shown above) to be used by the bank’s Sta86

Three Out of Five

tistical Department, capable of displaying and processing large volumes of socio-economic development data for all African countries. This resource was made available to the broader public on the bank’s website.

The first successful experience with ADB turned out to be an excellent ‘reference’ for Prognoz, and opened many doors to other countries on the continent.

“Today we continue our cooperation with the African bank and are concurrently launching projects in many African countries,” Shestakov says.

In 2012 the company won an ADB bid to develop portals for national statistical organizations in Africa. Today such portals have gone live in 10 African countries, and in one international organization – the African Union. Prognoz plans to deploy its solutions in every African country and in 16 other international institutions.

Systems developed by Prognoz are now used by more than 350 organizations in 35 countries worldwide. However, the company’s global expansion is far from over. It certainly appears that Prog№3, 2013

We had two main objectives in mind: firstly, we wanted to see the level of our competition.

Secondly, we wanted to gauge how much potential appetite other organisations outside of Russia would have for our analytical platform designed to develop BI applications, how much interest there would be in our products, solutions, and industry expertise

noz has found a key to success, without making a secret of it.

“What matters most to our foreign customers is the quality of the products they commission. In developing our solutions we use an in-depth methodological approach, which enables us to win many bids in Europe, America, Asia and Africa,” explains Shestakov.

His advice for those who would like to see these successes replicated elsewhere is to focus primarily on product quality, bearing in mind localization requirements. If you achieve that, there is no reason to worry about risks.

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Š ITAR-TASS

The Petersburg Text BRICS Business Magazine presents a chronicle of the most important statements and predictions made during three consecutive international economic forums in St. Petersburg between 2010 and 2012. Join us in a walk down memory lane looking at what was said back then and comparing it to what has taken place.

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Dmitry Medvedev, then President of the Russian Federation: “Obviously, investment activities are a factor when it comes to innovative development and the successful modernization of our economy. Russia needs a veritable investment boom. Creating an enabling environment for investors is essentially our most important objective. However, today we make this objective a cornerstone of our actions.”

Source: kremlin.ru

2010 Nicolas Sarkozy, then President of France: “Why is it that the world is confronted with the most difficult and far-reaching crisis in this century? Because we do not have a management system that could meet the requirements of the 21st century, because we do not have a system that could enable us to adapt to globalization. The world has transformed itself into a village, the economy has gone global, but the regulations remain national.”

Christine Lagarde, then Minister of Finance, France:: “I would say that we are in the middle of the beginning of the end [of the financial crisis].”

6,0% 8,3% 6,7%

Jim O’Neill, then Head of Global Research at Goldman Sachs: “According to the projections that we have, in this decade, China’s GDP in dollar terms will increase to about $7 trillion. China will create two other Chinas and, in fact, that increase, if we are in the slightest bit right, will be about the same as the increase in the United States and the other three BRIC countries put together. In fact, if you would link it all, by specifically 2018, so eight years from today, the combined GDP of the four BRIC countries of which China will be half, will be as big as the U.S. So, by 2020, it seems to me pretty preposterous that the dollar will be as dominant for the world as it is today.”

What happened: In the three years that have passed since that time, five countries in the eurozone have required help: Ireland, Portugal, Spain (loans have been extended to Spanish banks), Greece (for the second time), and Cyprus. In 2012 the eurozone’s economy contracted 0.6%. №3, 2013

What happened: In 2010 capital investments in Russia went up 6%.

In 2011 the figure increased 8.3%, dropping to 6.7% in 2012.

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Alexei Kudrin, then Deputy Prime Minister and Minister of Finance of the Russian Federation: “I think the way out of the crisis will be very protracted. This year, in 2010, it would seem to everyone that the economy was jump-started and went back up again, but mostly because we fell down so bad. Even if one part of production goes back to normal it would seem like decent growth.

However, any further growth post-2010 will be more and more difficult to achieve.”

What happened: GDP growth in Russia slowed down from 4.5% in 2010 to 4.3% in 2011, and 3.4% in 2012.

4,5% 4,3% 3,4%

Source: RIA Novosti

Yngve Slyngstad, Andrew C. Kuchins, CEO of Norges Bank Director and Senior Fellow of the Investment Management Russia and Eurasia Program at the Center for Strategic and International (NBIM), part of the Central Bank of Norway: Studies (CSIS), U.S.A.: “We have 40% of the “There is really the beginning portfolio in bonds. If of Eurasia right now, and this is you look at the currency the point I want to make. And it allocation there, it is began with the end of the Cold mostly U.S. dollars, euro, War and the breaking down of pounds, yen, et cetera. the Berlin Wall. It began with And of course, we would the opening of borders further like to have a significant east, and it is being affected portion of that in the now by the rapid development BRIC currencies.” of particularly the Chinese and the Indian economies and other economies. What is happening to Eurasia is actually it is getting reconnected east and west, it is getting reconnected north and south, and this is one of the most fundamental things going on from a standpoint of economic development as well as security challenges we face.”

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Sergei Naryshkin, then Head of the Presidential Administration of the Russian Federation: “In my view, today it is exceedingly important to stimulate settlements and pricing in several currencies backed by issuers that meet international requirements and standards. I would ask you not to interpret my statement as a desire to weaken the dollar or the euro, and definitely not as an attempt to undermine the established global foreign exchange mechanisms.

“Countries whose currencies dominate international settlements are not fully responsible for conducting an efficient macroeconomic regulation policy. At the same time, the influence of new regional currencies is on the rise in the global economy.”

Herman Gref, CEO and Chairman of the Board at Sberbank, Russia: “The Stone Age ended not because people ran out of stones but because they learned how to make metal. It is not a given that countries that are rich in gas will stay rich in the 21st century.

However, if there is a ‘sine qua non’ it would be our ability to predict an apocalypse caused by the shortage of hydrocarbon reserves. I believe we are heading for a century of hydrocarbon-free energy at a much faster pace than our oil and gas companies would like to believe. We should bear in mind that new knowledge brings new technologies, and this apocalypse caused by the shortage of hydrocarbons would not necessarily mean that the world and all energy in it are going to end.”

Dmitry Medvedev, then President of the Russian Federation: “To further the development of Moscow as a metropolis and a financial hub and to simply make the lives of an enormous number of people better, the question of expanding Moscow’s borders may be addressed. In other words, it is a question of turning the capital into a federal district that reaches beyond Moscow’s traditional borders. This would also mean that a significant part of the administrative functions at the federal level, and by extension many government agencies, would have to be moved beyond these borders too.”

What happened: The decision to expand Moscow’s borders came into force on 1 July 2012.

“We will lower the barriers for foreign investments and are hoping to complete the process of Russia’s accession to the WTO and then the OECD. As far as the WTO is concerned, I believe we can realistically complete our work this year, unless new political games begin again.”

What happened: Russia joined the WTO on 22 August 2012.

Nursultan Nazarbaev, President of the Republic of Kazakhstan: “It is becoming obvious that yesterday’s policy of printing extra money would hardly be able to contain new economic turbulence in the long term. This approach will not be able to prevent social explosions caused by internal imbalances in the economic development in a number of countries with a high jobless rate, significant budget deficit, and a high level of government and private debt.”

Source: kremlin.ru

2011

Mikhail Prokhorov, then President of ONEXIM Group, Russia: “Even when we initiate an important change, we stop half way through and then, to add insult to injury, change the rules of the game. One could cite many examples: the energy sector reform, the education reform, the labor market reform… Reforms have to be seen through to the end and if that’s the case I am certain we will do well in terms of acquiring a competitive edge.”

Source: Forbes

José Luis Rodriguez Zapatero then Prime Minister of Spain: “Europe will solve Greece’s problem. We have not been able to learn how to do it yet because when we switched to the euro nobody thought that a situation would arise where the developed European countries would be confronted with a debt crisis.”

Source: RIA Novosti

What happened: In July 2012 an agreement was reached to extend to Spanish banks €100 billion in loans to bring them out of the crisis.

№3, 2013

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Alexei Kudrin, then Deputy Prime Minister and Minister of Finance of the Russian Federation: “I would say there is a 25% chance that in the next three years we will see a significant contraction; perhaps it will not be a global recession but it will be a recession affecting large portions of the world economy.”

Source: Interfax

What happened: In 2012 the eurozone’s economy contracted 0.6%.

Alexey Ulyukaev, First Deputy Chairman of the Central Bank of Russia: “What do we get from the developing markets? Goods and services. What do we get from the developed economies?

Nothing but headache. The developing countries use the rules, institutions and infrastructures created and adopted by the developed economies. Personally, I am not happy with these rules, institutions and infrastructures at all.”

Dominic Barton, Managing Director of McKinsey & Company, U.S.A.: “To me, one of the key areas of consumption is services. The services sector in Asia is pathetically small. If I were to show you a Yellow Pages of New York, Manhattan, and then compare that to the Yellow Pages of Beijing, or the Yellow Pages of Seoul, or the Yellow Pages of Jakarta, it would be small; there is just not a services sector… So I think we have got to enable more small businesses that actually focus on services, not on the big heavy industry type of things. That is going to be very important.”

Oleg Vyugin, Chairman of the Board of Directors of MDM Bank, Russia: “Obviously, there will be pressure brought to bear on China’s regulatory authorities to reduce their protectionist measures.

China would have to put domestic consumer and household demand on a more proactive track if they want the capacities created by investors in the country to work and continue to produce added value. This would mean that the Chinese people must become richer and their work would cost more. By extension, investors will no longer be able to enjoy the same high margins investing in China.

It certainly does not spell a drama.

It only means that slowly but surely economic growth in China will continue to slow down until it reaches a more or less reasonable level.”

Barry Salzberg, CEO of Deloitte: “India has got strong, educated, young, English-speaking talent that is, in volumes, significant… the median age, by the way, in India is 25. Compare that to Japan at 43 and to the U.S. at 36, just to pick three economies.

In India right now, the working population is growing faster than the overall population and that has a significant impact, I think, in terms of the overall lesson to be learned from what is actually going on in India.”

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Eric Schmidt, Executive Chairman of Google: “I will say that I think Russia is in a sweet spot. You have around 40%, 45% penetration right now. If you look at European averages, again a modern European country from my perspective – Russia – should be at 70%, 80% fairly quickly.

So that means huge growth. Huge growth in telecommunications, in new companies, new investments, and so forth.”

Vladimir Putin, President of the Russian Federation: “By 2020, 25 million new and existing jobs must be created and brought up to date respectively.

We need to weed out archaic and inefficient employment practices in our nation’s economy.”

Source: kremlin.ru

Herman Gref, CEO and Chairman of the Board at Sberbank, Russia: “Such words as ‘democracy’ or ‘sovereign democracy’ have become junk, devoid of any meaning. We are not used to practicing the rules that we preach.

We say that corruption permeates all levels, everybody and their brother talks about corruption, but no one seems to apply it to themselves.”

Alexei Kudrin, then Dean of the Liberal Arts Department at St. Petersburg State University, Russia: “If the decisions to proceed with consolidation are not taken – and they are exceedingly difficult to take given the crisis in Europe – in two to three years, confidence in the dollar will be significantly undermined.”

2012 Oleg Vyugin, Chairman of the Board of Directors of MDM Bank, Russia: “Russia and other emerging markets such as China, Brazil, India and perhaps Africa have a unique opportunity to obtain a lot of resources and accomplish a quantum leap into the future. The only things that stand in the way are the risks associated with the quality of regulation and government agencies.”

№3, 2013

Elvira Nabiullina, economic adviser to the President of the Russian Federation: “Society is not ready to support the old management model, whereby it delegates a significant portion of issues that affect its life, and votes once a year or once every four, five or six years. It seems to me that this is precisely how the global management model crisis manifests itself.”

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Dominic Barton, Managing Director of McKinsey & Company, U.S.A.: “Our assessment is that we are going to be looking at a long boom cycle in commodities over time. There are 1.2 million people per week moving from rural areas to cities around the world. This is a big force for change in terms of income increases, infrastructure requirements, and so forth. In our view, this is going to continue for at least another 25 years.”

Vikram Pandit, then CEO of Citigroup Inc., U.S.A.: “There is no other industry that is more watched than the banking industry, and that is a good thing. It is watched by regulators; it is watched by markets; it is watched by rating agencies; everybody out there watches it. There is no question: the banking system, I think, en masse and around the world, is a lot stronger than it was three or four years ago.”

Jim O’Neill, then Chairman of Goldman Sachs Asset Management: “As bad as global imbalances are, we have to be careful about the consequences of the correction of them. The notion that banks are now safe is wrong.

They might seem safe because of all these policies that are being put in place, but if all other parts of the world do not function properly, then they cannot.”

“I think that this decade the Chinese consumer will contribute somewhere between $3 trillion and $6 trillion to global GDP. That is much more important than anything going on in Spain or Greece. So, when you ask what the Chinese policy-makers need to do, they need to guard against any risks.”

Vladimir Dmitriev, Chairman of the Board of Vnesheconombank (VEB), Russia: “It is exceedingly important for Russia to be present in foreign markets as a country that exports not just tanks and railcars, which is something everyone is used to seeing, but also high-tech products that require intellectual prowess to build. I see no reason why we could not compete with India, which managed to bring up a generation of talented programmers. I can say with certainty that we also have people of this caliber and they need to be supported.”

Sergei Ivanov, Head of the Presidential Administration of the Russian Federation: “We will continue to consistently do everything we can to improve our investment climate and make Russia’s economy friendlier and more conducive to investments, and reliable of course. Russia is no longer what Winston Churchill once termed ‘a riddle wrapped in mystery inside an enigma.’”

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Oleg Deripaska, CEO and Chairman of the Board of United Company RUSAL, Russia: “It is not the demonstrations in Moscow that are going to bring change to Russia.

The transformation will be driven by new business opportunities in regions, the jobs that small and medium-size enterprises will create, by proper development of the banking sector, financial institutions, capital and debt securities markets.”

Ruben Vardanian, CEO and Chairman of the Board of Troika Dialog, Russia: “Entrepreneurs represent a truly unique category of people who choose to make money the hard way. However, they all share one thing in common: they all have this inner willingness to do what they believe in. This is a very important skill, usually reserved for extraordinary people – to believe in your dream and inspire your team. We are the elite, we are responsible for changing our country and that is why we need to do more and do it better. It will happen; it is just that we need time.”

Jacob Nell, Economist and Executive Director at Morgan Stanley Smith Barney, Russia: “Since we have two very big countries there – Spain and Italy – financing them through official channels will be very difficult. So, I think that we have not yet got to the big crisis moment in Europe, and that will come when those countries can no longer finance themselves on a sustainable basis in the market, because that will force the European nations and leaders to make a final choice about whether they are going to complete the monetary union with some kind of corresponding fiscal powers, or whether there is going to be some other resolution of the situation.”

Arkady Volozh, Founder and CEO of Yandex, Russia: “I think the most difficult thing in the next five to ten years would be proving to the rest of the world that Russian technologies truly exist, to explain what we do, how we work and what we are after.”

Andrey Kostin, President and Chairman of the Board of VTB Bank, Russia: “The WTO accession poses no threat to Russian banks, in the first place because banks have a built-in protection mechanism, but mainly because American banks have already decided on the course of action to pursue in Russia.”

2012 Anatoly Chubais, Chairman of the Executive Board of RUSNANO, Russia: “The WTO accession, new accords with the European Union, OECD membership – all of these events mean that the international community recognized Russia’s return to the civilized economic world that the country left in 1917.

What is more, this recognition is not just political in nature; it has been codified in legal texts. And it is not just the civilized world; it is the civilized world’s elite.”

№3, 2013

Igor Sechin, President and Chairman of the Board at Rosneft, Russia: “By 2030 there will be new oilfields that would account for nearly 40% of the country’s total oil production.”

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Andrey Belousov, Minister of Economic Development of the Russian Federation: “We are about to enter a period when oil output levels are going to stabilize. Domestic oil consumption will grow at a rate of 1–2% a year. Given stable production levels, oil exports will show a decreasing trend. This will be a radically new situation, which means that oil exports will gradually turn from the main driver of our economic growth into an impediment.”

POWER

On Six Hills Nikolai Nikolaichuk Russian universities are less efficient when it comes to their interaction with real sectors of the economy compared to their counterparts in India, China, and Brazil.

That was the conclusion reached at the World Economic Forum. The city of Tomsk saw an opportunity and is now working to change its entire environment – bringing on board both science and business.

spatial development and even its overall strategy.

The Mayor would be a member of the professors’ club – a body that not only holds discussions but also formulates decisions.

Secondly, the university’s economy would be recognised as a major city budget contributor, with many processes rebuilt to match that model.

Finally, development institutes would be built to serve as an efficient platform facilitating interaction between the officials responsible for the city and their counterparts responsible for the university.

This interpretation of the University City idea has become generally accepted across the globe. Perhaps Russia’s system of budget revenues would not allows us to fully meet the second criterion, and our universities would not be able to contribute directly to cover urban development costs, but this does not render the idea entirely obsolete. To put it in simpler

Three years ago we held the first of our ‘investment sessions,’ which are meetings between the city’s business community and its administration.

Both the entrepreneurs and the public servants found the format rather unorthodox, which is perhaps why each of them initially spoke only of their own problems. However, no one was surprised when both sides agreed on one point – that Tomsk will continue to develop as long as students keep coming here. If the city’s universities became less attractive, the entire economy built on small and medium-sized businesses would collapse. This premise brought us closer to our main idea – to build a University City.

The notion has a clear definition. In the first place, the city centre and the university campus are one and the same. They would not be located in different areas, and university management would assume part of the responsibility for the city’s 96

On Six Hills

growth, a figure twice as high as two years ago, which beyond any doubt has a positive effect on the economy.

Even the city’s international relations are predicated on the interests of its universities and the education process itself. For instance, let us take a simple question – how does one select and interact with sister cities? Our students came up with a tip which has become essential – talking with other students from different countries. Our universities now practise exchange programmes which ultimately offer our students a chance to get a double degree. Our good partners include the University of Wrocław, the oldest academic institution in Poland; the famous Henri Poincaré University in Nancy, France – a fine example of a perfectly developed student infrastructure fostering research; and the University of Ulsan, South Korea.

Tomsk has been quite successful in meeting Russia’s demand, and perhaps even the world’s demand, for highly qualified scientists and technical specialists. However, getting a foreign investor to become a permanent resident is a far more daunting task. Hi-tech companies might already be aware that this city has plenty of young professionals with a lot of knowledge and great ambitions. Now it would behove them to learn about the city’s rare infrastructure, with its dual status as special economic zone and industrial park.

Anatoly Chubais, head of RUSNANO, recently noted that science and education in our region are perfectly in sync with the development of its rich fuel and energy complex. Therefore, considering that the timing matches the location perfectly, the only logical choice would be to use the resources of oil and gas companies to finance innovations and development specifically here in Tomsk.

These companies already commission studies at our universities and research facilities for the simple reason that they are ready to implement the results. As always happens in such cases, the results of scientific and technical research tend to transcend one area of application, which makes the city attractive for students specialising in different fields – and of course for various businesses. Things are evolving at a very fast pace. Today, in 2013, Tomsk is not yet the University City it strives to be – but it has a vision, it has capabilities, and it has a clear grasp of what needs to be done to get there.

Nikolai Nikolaichuk is Head of the Tomsk City Administration

terms, what makes a University City stand out? It is the fact that students from other regions would gravitate here. They would be able to spend the five years of their degree not in one building – no matter how well designed – but in an entire city full of students. And they would not worry about how to spend their free time, because a diverse cultural life and intense business activities are part and parcel of a place like that. Oxford perhaps would be the most obvious example of this kind of city.

Today we are working on a project to integrate all six universities into the city environment. The work primarily involves organising transportation flows and pedestrian zones to ensure that student campuses remain open to the city and become closer to one another. This new Tomsk, reminiscent of a traditional campus with its own botanical garden, bicycle lanes and the required support infrastructure, is not just another socially attractive idea: It is a business story that holds a great deal of promise.

Each student should be viewed as a small-scale investor in the local economy. Many of them would take part in developing local businesses not just as consumers, but as bona fide entrepreneurs, opening cafés and shops and offering IT services. We are doing everything we can to foster their ability to convert their knowledge into a commodity that can be sold. Our universities have launched their own business incubators, while local companies have long been prioritising science and education.

Today it has become a common occurrence that students used to Tomsk’s comfortable lifestyle and better opportunities are bringing their parents here from Krasnoyarsk, Omsk and Kemerovo. Last year 15,000 migrants contributed to the city’s population №3, 2013

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PRACTICE

A Knowledge Exporter K arin Costa Vazquez For a number of years, to provide assistance that goes beyond monetary benefits and promotes social inclusion has been the mission statement of Bolsa FamĂ­lia, a conditional cash transfer program that supports 12 million low-income families in Brazil. Now it is successfully implementing technical cooperation initiatives with countries like the Dominican Republic, Guinea Bissau, Ghana and Kenya.

has been able to draw on its own recent achievements to build coalitions with other developing nations and strengthen its leadership overseas.

Technical cooperation is an important instrument of Brazil’s foreign policy, particularly for bilateral South–South relations. Different from tra-

Over the last two decades, Brazil has emerged as an increasingly influential country in international affairs by placing the concept of development at the center both of its domestic and its foreign policies. While it is true that many important social and economic challenges remain, the country

Karin Costa Vazquez is Development Cooperation Specialist for Policy and Programme at the United Nations Development Programme (UNDP).

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A Knowledge Exporter

ditional aid flows, Brazilian technical cooperation is centered in the export of development solutions and on building capacities in other developing states. The Bolsa Família (‘Family Grant’) is the flagship program of Brazil’s technical cooperation, having inspired similar initiatives in more than 14 countries. Exporting a program of such magnitude, however, requires a complex management structure, distribution and banking network which are often limited or nonexistent in many countries.

But to what extent are the success factors of the Bolsa Família informing the design and implementation of Brazilian technical cooperation?

The BOLSA FAMÍLIA depends on robust control and monitoring systems. Benefits are paid to registered families that meet the eligibility requirements of the program, including school enrollment with a minimum attendance of 85% up to age 14, and 75% up to age 17. Another condition is that children get a full set of vaccinations in their first five years, and that mothers attend pre- and post-natal care

By 1999, inflation in Brazil had fallen to 3.12%, the lowest rate recorded since November 1949. The percentage of Brazilians living in poverty also fell from 44.2% in 1990 to 34.9% in 1999. However, in 1999, Brazil still had the highest degree of inequality in the world, with a Gini coefficient of 0.59, and the number of poor people in the country remained at a high level.

Economic stabilization paved the way for the future implementation of the Bolsa Família program. While economic stabilization alone would not suffice to further reduce poverty and inequality in Brazil, stabilizing and leveling were integral parts of the Brazilian strategy to fight poverty, in addition to economic growth policies.

The leadership driver

The first initiatives of direct income transfers to poor families, conditional on fulfillment of specific requirements, began at the local level. In 1995, the governments of the cities of Campinas and Brasília pioneered direct cash payments to families as an incentive to ensure that their children attended school regularly. From these early experiences, a variety of conditional cash transfer or basic income programs burgeoned in various cities and states across Brazil.

In 1998, at least 24 income transfer initiatives were already underway at the subnational level.

These local initiatives had an important demonstration effect and fostered the development of larger conditional cash transfer programs at the federal level. In late 2003, the federal government had at least five cash transfer programs. Each of these programs used similar income transfer tools to achieve different public policy outcomes: employment, health, education, food security, energy, and the eradication of child labor. As the fragmentation of the different programs grew, the causal link between these initiatives and poverty reduction became less clear. President Lula’s administration unified and rationalized the different cash transfer initiatives into one single program, the Bolsa Família, under the new Ministry of Social Development and Fight Against Hunger (MDS).

The technology driver

The third driver of the Bolsa Família is the IT systems created to operate, control and monitor the program. At the operational level, the Cadastro Único (‘Single Registry’) enables targeting and selection, based on socioeconomic data on poor families in more than 5,000 municipalities across Brazil.

Data collection and beneficiary registration are decentralized to the municipalities, while the operation and maintenance of the database are centralized at the federal level. Benefits are paid through the use of a debit card issued by a federal bank. The information in the Cadastro Único is integrated with more than 9,000 social services centers, and the benefits can be cashed in banks, post offices and lottery outlets across the country.

The Bolsa Família also depends on robust control and monitoring systems. Benefits are paid to registered families that meet the eligibility requirements of the program, including school enrollment with a minimum attendance of 85% up to age 14, and 75% up to age 17. Another condition is that children get a full set of vaccinations in their first five years, and

The economic driver

The 1990s are known as the decade of economic stabilization in Brazil, in the same way that the 2000s are called the decade of inequality reduction. After nearly two decades of uninterrupted hyperinflation, the Plano Real (‘Real Plan’) had a positive impact in stabilizing the economy and halting poverty. №3, 2013

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PRACTICE

that mothers attend pre- and post-natal care. Satellite and internet-via-radio allow data exchange with local governments in remote locations. This data is useful to ensure compliance and payment even in regions with limited access to electricity and phone lines.

The drivers embedded

Other countries from the South are keen to emulate the successes of the Bolsa Família programme.

The export of the Bolsa Família program provides interesting examples of how the accumulated knowledge of the program and its drivers can inform the design of cooperation initiatives.

For instance, the incorporation of a satellite and radio-based internet communication system similar to that used in the Bolsa Família will enable the implementation of cash transfer programs in remote areas of the Dominican Republic, where access to electricity and phone lines are limited.

The initiative is part of a broader cooperation program between the Dominican and Brazilian governments that includes support for the rationalization of cash transfer programs through the development of an information management system that integrates data currently dispersed in three government organizations.

In Guinea Bissau, economic and institutional fragility still hinder the adoption of cash transfer programs like the Bolsa Família. Instead, Guinea Bissau and Brazil have been piloting complementary actions such as the development of a universal civil registry that in the future may lay the ground for more complex cash transfer schemes.

Another innovative way to transfer the Bolsa Família experience has been through the creation of knowledge platforms in countries that share similar development patterns and needs.

Ghana and Kenya have started a common social agenda after a joint visit to Brazil in 2008. The two countries experience similar challenges in social protection, and have developed mechanisms for joint support in specific areas related to the implementation of cash transfer programs and other social policies. The same is happening between Ghana and Mozambique.

In the future, these countries are expected to have the capacity in place not only to run their own programs, but also to export their experience to other developing countries.

Socialization à la Brazil The colonial past left a huge social debt in Brazil. Since independence in 1822, and then the abolition of slavery in 1888, no inclusion mechanism had been put in place for indigenous people or descendants of slaves – until recently. As a republic, Brazil had a history of political patronage that characterized its social policies for most of the 20th century. In the 1930s and 1940s, the first social rights were introduced in the form of pensions, maximum working hours, and paid leave. However, these rights were restricted to a few members of urban labor groups who had the power of mobilization and could influence economic activities in a more decisive manner. From the 1960s until the turn of the millennium, the main approach to the alleviation of poverty was based on the belief that economic growth is good for the poor. But as the country grew, the concentration of income worsened.

In 1988, the legal guarantees enshrined in Brazil’s new Constitution finally introduced a wide array of social rights, including the right to health, education, social protection, retirement and housing. The implementation of these social rights, however, made uneven progress. In the 1990s, public policies emphasized structural reforms focused on macroeconomic stabilization, fiscal austerity measures and the privatization of services. Despite controlling rampant inflation, average wages remained stagnant and poverty remained at a very high level. In 2001, according to Brazil’s Institute of Applied Economic Research (IPEA), over 58 million Brazilians lived in poverty, earning less than two dollars per day. Of these, 25 million lived in extreme poverty, surviving on less than one dollar per day. It was during this period that important social programs based on conditional cash transfer schemes were introduced, with an initially limited scope and scale.

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PORTRAIT

My Little Brother Barack Obama Angella Johnson / Daily Mail / The Interview People He’s had 12 wives, is accused of beating one of them, and wants to be President (of Kenya). Meet Obama’s very outspoken sibling

President of the United States, but he is not, Malik suggests, the only member of the family destined for greatness.

For it was drummed into Malik, from a very early age, that he was special and therefore expected to make his mark in this world.

“My father instilled that in all of us,” he says. “He used to say, ‘No matter what, you are the very best,

For the briefest moment, Malik Obama’s eyes reflect resentment through the lenses of his metal-framed glasses.

He is fed up with people criticising him for trying to cash in on his younger half-brother’s famous name. “It’s also my name and my birthright. Let’s not forget that I was born before him,” he says.

Barack may have made history as the first black 102

My Little Brother Barack Obama

because I’m from the best stock. Always keep that in your mind.’

“And, to be honest, sometimes the only thing that has kept me going was the fact that I’m an Obama; therefore I am somebody.”

Last week, the 54-year-old was forced to fall back on this restorative mantra after suffering a crushing defeat in his bid for political power in Kenya.

He stood as an independent candidate for the governorship of Siaya County in the national elections.

As if that humiliating public drubbing wasn’t enough to contend with, Malik – a practising Muslim – also faces allegations that he is a wife-beater and a philanderer who seduced 17-year-old Sheila Anyango with sweet words and a gift of £24, then made her his 12th wife when she was under the age of consent.

She has said: “Marrying him [three years ago] has been the biggest mistake of my life. He beats me, but mostly he’s just nasty and quarrelsome.” She is not the first spouse to accuse him of abuse.

I find Malik licking his wounds at his base at the Barack H Obama Recreation And Rest Area on the outskirts of Kogelo, the dusty, remote village that is the family’s ancestral home.

The squat building complex is empty. Despite its grand-sounding name, it is little more than a highway pit stop aimed at passing trade.

Casually dressed in a loose shirt, jeans and tan polished shoes, Malik lumbers into the main restaurant section. He is 6ft 4in tall, heavy-set, walks with a slight stoop and grips my hand in a statesman-like double handshake.

He and Barack may share the same father but they have no shared physical features. Nor is he, according to those who heard him on the hustings, a good orator.

But the brothers do share a bond, forged from their first meeting, in adulthood, 27 years ago. They were best man at each other’s weddings and remain in regular contact – especially as both now live in Washington, D.C. Malik describes Michelle Obama as a “great First Lady” and says he has visited the White House on numerous occasions, as have other members of the Obama extended family.

“I see my brother privately at least once a year, when I go to visit him in the White House and say hello. It’s like visiting a working national monument, such as the Smithsonian or Buckingham Pal№3, 2013

For all his political inexperience Malik is convinced he is the man to end corruption, rampant poverty and financial mismanagement in Kenya. He says: “Don’t be surprised if, in five years’ time, there is another president with the name Obama.”

ace. But he’s always at the end of a phone line if I want to talk.

“I last saw him on November 19 last year, shortly after the U.S. election. I went to the White House and offered him my congratulations.

“We are close but don’t live in each other’s pockets. I don’t have to be at every big party. I’ve not seen Michelle in a while. I saw her and the children at the last inauguration, but it was very busy, so we didn’t have time to talk. I can’t say that I have a relationship with my nieces.”

An accountant by profession, Malik describes himself as an independent financial adviser for several American and international companies.

He complains that he is maligned and misunderstood because he is a Muslim and a black man.

His voice is deep, with an American twang – he has lived in Washington since 1985 and divides his time between there and Kogelo.

“Having a famous brother has made me a target of hatred, racism and bigotry against my religion,” he says. “I recently asked Barack what advice he could give me about dealing with all the negativity. He just laughed and replied, ‘You’re a big boy.

You’re my elder brother, you can take it. Anyway, it’s only four more years.’”

By then Malik is hoping to have raised enough money to make a bid for the Kenyan presidency, due to be contested in five years.

Some might question his motives, but he says Barack has been encouraging. “Back in 2011, when I told him about my plans, he said to go for it. His only advice was that I should be honest, sincere – and to have a thick skin.”

Malik reveals how he once tried to use his family ties to change the shape of international politics – by pleading with his brother to save Libya’s Colonel Gaddafi after his people turned against him in 2011.

“I went to see my brother and I said look, this is somebody I know and it’s terrible what is going on.

Let’s see if we can talk to him and find some kind of rapprochement. He wasn’t interested.

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Kezia, now 72, later studied in America and lives in Bracknell, Berkshire.

In America, Barack Sr met and married Ann Dunham, an anthropologist from Kansas. But soon after she gave birth to the future U.S. President he abandoned her and returned to Kenya.

There were other women and other children, before he descended into alcoholism after a car crash left him disabled. The President is said to have struggled to come to terms with the fact his eight brothers and sisters have four different mothers.

Malik recalls: “My father came back in 1964 and we lived here in Kogelo, before moving to Nairobi.

He was the senior manager at the Kenya Tourist Development Agency, which was a very good job.

We had the very best of everything – a nice car, a lovely house, and servants.

“He didn’t want to know, which was very disappointing. But he did tell me that he shook Gaddafi’s hand when they met at a conference in Rome.”

Then he chides Barack for not doing enough to help his Kenyan relatives.

“I’m very proud of my brother, but I would like for him to do a little bit more for the family on this side. I would like to say he could send some money.

I give money when asked. That’s what family is for.

We’re not well off, though people think we are.”

He is eager to position himself as patriarch. It is, he says, his right as the first-born Obama sibling.

Malik was just one in 1959 when his father, Barack Obama Senior, left his wife Kezia to take up a scholarship at the University of Hawaii. Malik’s sister Auma, two years younger, appears to have been conceived when his father was home on holiday.

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My Little Brother Barack Obama

“She came to the polling booth with me last Monday and said she still loves me. I’m sure she will be home when she’s ready.”

One local man told me later that it was common knowledge that when any of his wives becomes “troublesome” or demanding she is “let go.”

Malik insists he is a fair man. “There have been 12 wives since my first marriage in 1981, when Barack was my best man. I have done my best with all of them, along with the children.” He won’t, however, say how many he has.

When I ask about the reactions of the President and First Lady to his polygamous life, he shrugs and grins slyly. “They’ve never commented to me about it. They keep their thoughts on such matters to themselves. But they are happy that I’m a proud Muslim.”

And there is indeed some evidence for that. In his memoir, Barack recalls the wedding day, writing: “The person who made me proudest was Roy [the name he uses for Malik]. He converted to Islam, and has sworn off pork and tobacco and alcohol. [His] new lifestyle has left him lean and clear-eyed.

“At the wedding he looked so dignified in his black African gown with white trim and matching cap that some of our guests mistook him for my father.”

Malik says: “Some people go on about me being a Muslim, as if it somehow impacts on my brother’s politics. That is my faith, not his, but he respects it.

“I would describe my relationship with Barack as a normal brotherly one, except that he’s got a country to run. And I think he’s doing a very good job on that score.”

For all his political inexperience Malik is convinced he is the man to end corruption, rampant poverty and financial mismanagement in Kenya.

He says: “The Obama name will help to attract the kind of international investment that would bring industry and jobs.

“I am already showing the way through my foundation. I’m building concrete bridges in the village, putting up power lines, providing homes for widows.”

He hopes his running for governor will have raised his international profile. “I’m not deterred by this initial political setback,” he says.

“Don’t be surprised if, in five years’ time, there is another president with the name Obama.”

“But we lost it all after the accident in 1971 because he couldn’t work. I was going to one of the best private schools, but I suddenly I had to walk ten miles to get there.

“There were times when we didn’t even have money for food. I had to scrounge meals from family members. It was tough to see my father’s disintegration. He died at 46, without ever realising objectives. Just by being alive I’ve already achieved something he didn’t.”

After graduating from the University of Nairobi with a degree in accountancy, Malik worked in Nairobi until 1985, when he moved to America.

“Barack made contact soon after I started living in Washington and flew from Chicago, to meet me,” he says. “I knew about him from the beginning, because my father used to talk about him a lot.”

Malik, who runs a small electronics shop a halfhour’s drive outside Washington, says there is nothing wrong in using his name as a force for change – but he adds that his brother’s family is not involved.

“They’re hands-off,” he said. “They’re not involved in what I’m doing. He’s doing his thing, he’s the President of United States. I am Malik Obama, doing this thing.”

He claims to have raised nearly $100,000 for his foundation, a charity set up to in 2008 to “do good for Kogelo.”

But there have been questions about where the money has gone. A probe was launched over cash owed to the U.S. taxman from his fund-raising activities. Much of the money raised had come from Malik’s Muslim connections in Saudi Arabia, Libya, Sudan and Yemen.

“These people were happy that my brother is the President of the United States,” he says. “So they invited me to conferences. I saw it as a chance to use my name in a good cause.”

He especially liked Gaddafi, whom he met about half a dozen times.

Moving on to the accusations about his domestic life, he vehemently denies the claims against him.

“I don’t beat my wives, as has been alleged. It’s all b******t. I categorically deny the allegations said to have come from my wife,” he says.

“Sheila went back to her mother’s home the other day after she had a row with a co-wife in the family compound. I don’t wish to go into the details, but it was between the two women, nothing to do with me. №3, 2013

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Midnight’s Children R achel Davies / The Interview People “You don’t cry when reading Midnight’s Children, but a lot of people cry when they see the movie, I am happy to say.”

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Midnight’s Children

drove us forward. I knew when I saw the hours and hours of dailies we had the possibility of doing something good. The thing that you can’t ever change is how the film looks and how the actors act.

Once that’s done, it’s done. If it’s not there at that point, you are not going to get it. But it was clear when we went through that long process, the film looked extraordinary. Of course, it all depended on the performances of the actors, and everyone gave 200 percent. I couldn’t see a single weak link in the performances.

You provide the narration in the movie. How did you decide to do that?

I am not a great fan of the voiceover in movies and I really prefer it when the movie just tells the story, but Deepa and I came to feel that given that this film is three generations and there’s so many characters and it takes place across a wide geography, it needed some organizing voice just to hold it together. One thing we agreed, which is the reason why I think it works, is that we would never use the voiceover in an expository way. We always used it to add another layer to the story. It was a very late decision to have the voiceover. I settled down to write it and it was an even later decision for me to do the voiceover, because my view had been to get an actor to do it. Deepa did try to do it with a couple of actors, and then she came back to me and she said, “I just don’t like it. I think you should do it. I had to have my arm twisted, but Deepa is very good at arm-twisting.”

Are you a movie fan?

Yeah, I think anyone who knows me at all knows that I have been a movie addict all my life, so in a sense, it doesn’t feel like a strange world to me.

I grew up in a city obsessed by cinema and where there are cinemas on every street corner. If you just look at the amount of coverage of film in the Indian press, it’s just extraordinary. It makes Hollywood look like a town that’s not interested in the movies.

[Chuckles.]

Do you think you were the only person that could have adapted this?

Well we all know the stories of the books that don’t work [as films], which may be more numerous than the books that do. But I have this part-time visiting professorship at Emory University, and one of the courses I taught there was about the BestCase Scenario adaptation, the moments when it does work. If you look around, there are quite a few examples of that. If you think of, for instance, John

Salman Rushdie is best known as a bestselling author, speaker and educator, but few might guess this intellectual chronicler of the human condition also is a movie buff. Hailing from Mumbai (formerly Bombay), where filmmaking and moviegoing is huge, it shouldn’t come as a surprise.

Having watched a considerable amount of both Indian and Western cinema, the celebrated author figured it was about time – at age 65 – to try his hand at moviemaking. What better way to get involved than to adapt one of his own novels into a screenplay? From his many books, he chose Midnight’s Children, an epic story he wrote early in his career about a pair of boys from opposite social classes, who were born on India’s Independence Day and switched by a justice-seeking nurse at the hospital, to live interesting lives as their young country goes through various political and socioeconomic changes. It follows their lives through adulthood, and eventually their paths intersect once again. This adaptation made the most sense to him for a number of reasons. Firstly, it possessed the necessary elements required of broad cinematic story – romance, war, comedy and tragedy. It also contains a lot of interesting characters and eye-popping landscapes and settings. Also, Rushdie says the work was something he felt comfortable rediscovering after so many years, with a fresh viewpoint and different understanding of life from when he first wrote it.

With his warm British accent, he also narrates the historic fantasy directed by Indian-Canadian filmmaker Deepa Mehta, as the voice of the main character, Saleem, as he looks back on his life’s adventures.

Of course, Rushdie isn’t giving up his day job. He is enjoying the recent success of Joseph Anton: A Memoir, published last fall, which is based on his personal experience living in hiding for a decade after being the subject of an Ayatollah Khomeini-issued fatwa for writing the controversial book The Satanic Verses.

The award-winning scribe is unassuming with his curly hair and scruffy beard, looking very much like the professor/lecturer he is at Emory University, when he’s not authoring books or screenplays.

Can you talk about how the final film turned out?

Was it as you envisioned it when you wrote the screenplay?

Truthfully, I had no idea what the film would look like. Both Deepa and I were aware all the way through of this long process that the chance of screwing it up was very high. There was a possibility that we would not pull it off and that kind of terror №3, 2013

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PORTRAIT

It was born out of a love for India, that’s for sure. When I wrote it, I was living in London. I was worried about distance and becoming detached from the place where I was born and raised. I wrote it as an act of reclamation, actually

Huston’s film of James Joyce’s The Dead, or if you think of Martin Scorsese’s The Age of Innocence. So there is a best-case scenario, where you can start off with a book that is rich and complicated and you can find a way of making a rich and complicated film. So I thought, “If they can film [Tolstoy’s] Anna Karenina, they can film Midnight’s Children.”

[Laughs.]

How was it for you to come back to this material 30 years later and open this up creatively?

Difficult, because I was literally twice the age I was when the book first came out. I finished the book when I was 32 and now I am almost 66. So it literally is half my life ago. I also wrote it at the beginning of my life as a writer. I am not quite the same writer I was then. There are things that you do younger that you would do differently when you are older and vice versa. In many ways, it’s a young man’s book. It reads with the kind of energy and drive of a young man’s book that I kind of admired in my younger self. The only reason I could do it is because I have so much distance from it. If it were a novel I wrote now, I really wouldn’t have thought I was the right person for it. I always thought of it not exactly as an adaptation, but as a thing by itself that would sit well alongside the original. I said to Deepa, “We should not think of it as an adaptation, but as a relative of the book.”

Think of it as a cousin, or a sibling. Hopefully, there is a family resemblance. I think the book is less emotional than the film. With the film, the emotions are much more raw and in front. In the book, they are kind of ironized and seen through comedy. You don’t cry when reading Midnight’s Children, but a lot of people cry when they see the movie, I am happy to say.

Do you see this as a love letter to India?

Deepa says I said that, but I don’t remember.

It was born out of a love for India, that’s for sure.

When I wrote it, I was living in London. I was worried about distance and becoming detached from the place where I was born and raised. I wrote it as an act of reclamation, actually.

Would you like to see the Joseph Anton (his pseudonym while in hiding) memoir adapted?

That seems to be happening, touch wood. We haven’t actually signed anything, but there’s a British production company that wants to do it. I hope it’s going to work out because I’m quite close to it.

Who should play you? Ben Affleck?

Yeah. [Laughs.] In this case I think I will not be as directly involved as I was with Midnight’s Children, because it’s so close to me and it’s about my life. It’s better if somebody else does it that can bring a different point of view. I don’t know who could do it. I made a mistake in Britain when the book was coming out. A British tabloid journalist asked me who I thought should play me and I said what I thought was a joke, “It should obviously be Johnny Depp because of the close physical resemblance.” The next day, the newspapers reported, “Salman Rushdie thinks he looks like Johnny Depp.” So I thought, I’ll never again make jokes to tabloids. So, literally, I don’t know. Maybe we can find a fresh face [to play me] instead of somebody with a lot of baggage. It’s not my problem, thank goodness.

Are you writing another book?

Yes. I’m just starting to go back to my day job.

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SUMMARY

概览 常年在海外生活过的人回到祖国之后便会成为了解国外情况的无价源泉。这些人 的个人经历，交流经验，对别国国内制度的了解，个人成败的故事相比研究报纸和 网络信息更容易使人了解一个国家和她的未来，-- 金砖国家商业杂志编委会主席鲁 边·瓦尔达尼扬这样写道。分享这样的内部信息是本杂志的宗旨。 本期内容的主角是俄罗斯 – 不是未知的土地，而是非常有趣和明了的国家，她的 发展可以并且需要施以影响。 现实比感觉更好 很多国际投资者把俄罗斯看做经商的福地。研究显示，几乎70%的已经投资俄罗 斯项目的公司和基金会对结果表示满意并继续在此工作。然而，持反面观点的人也 不在少数。为什么？俄罗斯直接投资基金会总经理、俄罗斯金砖国家实业委员会委 员基里尔·德米特里耶夫在文章中思考了这个问题，分析了产生不同态度的原因和如 何改善这种态度的方法。 关于俄罗斯存在许多无稽之谈。如此，外国企业家们应当知道，官僚主义和贪污 受贿不是他们实际上应该惧怕的问题。此外，与流行的刻板印象相反，大部分在俄 罗斯的西方国家公司在开展业务过程中并没有遇到任何难题。 俄罗斯直接投资基金会同投资人总会进行不断和全面的谈话。这些谈话主要 是为了帮助投资人在选择和构建项目时进行全面评估，寻找提供保障的可能性同时 促进基础设施项目的实施。上述这些还只是旨在让潜在的国际合作伙伴降低遭受俄 罗斯风险的不完整的措施清单。 内部观点 不是所有时候都能根据基金市场评价一个国家的。现在的投资潜力在于非上市公 司的内部。问题在于国际私人投资玩家们都不了解俄罗斯。不管俄罗斯的市场呈增 长态势，在他们眼里，俄罗斯同印度和中国这样的国家相比始终是个小市场。俄罗 斯能够向投资者提供怎样的无可争议的优势，如何把现实问题同错误陈旧的概念分 隔开来？Baring Vostok Capital Partners联合创始人、高级合伙人麦克尔·卡尔维为您 讲述。 给投资人的五个建议 您打算在俄罗斯做生意，想更多的了解她的商业环境特点吗？实践中等待您的是 什么？如何成功做出需要的决定？如何和与谁交往？冲突情况下怎么办？“斯科尔科 沃”莫斯科管理学校管理教育项目经理伊丽莎白·萨多娃帮您解答这一切。

BRICS Business Magazine thanks chief-correspondent of China Radio International in Moscow Sheng Jingjing for the translation 110

SUMMARY

Sumário Pessoas que têm muitos anos de experiencia vivendo num país estrangeiro tornam-se em uma valiosa fonte de informação e cohnecimentos sobre o país em questão. Uma combinação integral de experiências e contactos pessoais, as possibilidades de conviverem com os habitantes locais, conhecerem melhor as regras culturais que operam na sociedade con todas as suas sutilezas e nuanças, as histórias de sucesso e fracasso – tudo isto ajuda muito a poder compreender melhor as idiossincrasias culturais do país e as suas perspectivas reais no contexto económico, político e social, sendo assim o processo da aprendizagem muito mais intenso e rápido do que o através de jornais e sites de notícias, conforme nota Ruben Vardanyan, Redator-Chefe da revista BRICS Business Magazine. A objetivo principal da nossa revista consiste precisamente em compartilhar estas “informações privilegiadas” com o leitor.

O protagonista desta edição é a Rússia – não como uma terra incognita enigmatica, mas sim como um país muito interessante e compreensível, cujo desenvolvimento pode e deve ser moldado.

A realidade é melhor do que parece Muitos investidores internacionais vêm a Rússia como um ótimo lugar para fazer negócios. Pesquisas mostram que quase 70% das empresas e fundos que já têm investido em projetos na Rússia estão satisfeitos com os resultados obtidos e continuam a trabalhar no país. Mas há também muitos que são ainda de outra opinião. As suas reflexões sobre o por quê de tal variação de opiniões e o quê deve ser feito para melhorar a imagem da Rússia oferece em seu artigo Kirill Dmitriev, Diretor-Geral do Fundo Russo de Investimentos Diretos (FRID), o representante da Rússia no Conselho Empresarial dos BRICS. Com muitos mitos sobre a Rússia em circulação, é preciso que os empresários estrangeiros saibam que a burocracia e a corrupção não serão de modo algum as suas grandes dores de cabeça. Além disso, ao contrário do estereótipo prevalecente, a maioria das empresas estrangeiras que operam na Rússia não experimentam dificuldades com a execução dos contratos.

Um diálogo permanente com os investidores em que está engajado o FRID, um due diligence abrangente que acompanha todos os processos da concepção, seleção e organização de cada projeto a realizar, uma procura minuciosa de cada possibilidade para prover garantias, assim como a prestação de assistência na implementação de projetos de infra-estrutura – esta é apenas uma lista parcial de toda uma série de mecanismos que têm por objetivo a redução dos riscos percebidos por potenciais parceiros internacionais interessados em fazer negócios na Rússia.

Um país visto por dentro.

O estado do mercado bolsista numa ecomonia nao é necessariamente o melhor critério para avaliá-la. São as empresas de private equity que possuem a verdadeira capacidade de investimento. O problema é que os atores-chave globais nos mercados de private equity têm muito pouco conhecimento da Rússia. Mesmo com a economia russa crescendo continuamente, eles continuam a ver nela um mercado ainda muito pequeno em comparação com os da Índia e da China. Michael Calvey, o co-fundador e sócio sênior da Baring Vostok Capital Partners, mostra-nos nas páginas da nossa revista as evidentes vantagens que a Rússia pode oferecer a um investidor estratégico, ajudando o leitor a separar os problemas existentes na realidade das concepções erradas e preconceitos desatualizados.

Cinco dicas para investidores Você quer fazer negócios na Rússia e gostaria de saber mais sobre as peculiaridades do seu atual ambiente de negócios? O que está à sua espera na realidade? Como tomar as decisões certas? Com quem estabelecer contactos e como mantê-los? O que fazer em situações de conflito? Sobre tudo isso conta-nos na sua entrevista a Diretora dos Programas da Educação Executiva da Escola de Gestão de Moscou SKOLKOVO Elizabeth Sadova.

Translation into Portuguese: Victor Bereznoi №3, 2013

Translation into English: Alexandre Ponomarev, Edward Coulson, Alexander Bakaev

111

The New Middle Class According to research conducted by the SKOLKOVO Business School’s Institute for Emerging Market Studies, by 2030 the Asia-Pacific region will account for two thirds of the world’s middle class. The report, prepared jointly with Ernst & Young, says that out of a global total of nearly 4.9 billion people in this income group, soon more than 3.2 billion will be residents of the AsiaPacific, and the aggregate share for Europe and North America is likely to have fallen from 54% in 2009 to 21%.

The researchers proceeded on the premise that the term ‘middle class’ includes those who earn between $10 and $100 per day. Yesterday’s poor are crossing the lower threshold and starting to buy television sets, cars, and the other essential middleclass trappings considered traditional in Western countries. In China alone the number of these consumers is expected to increase from the current 150 million to one billion by 2030. India’s middle class is likely to experience the start of explosive growth at a slightly later stage, in the 2020s.

However, by the end of that decade Indians will be joining the ranks of the middle-class at a much faster pace than China.

In terms of purchasing power, the newborn middle-class of the developing world will match its counterparts from the developed countries.

As a result, the global balance of economic and political power will change radically. But, what is more, it is likely to create a whole host of attractive business opportunities. One example is the Chinese automotive market. During the 2000s the country’s output increased more than tenfold, reaching 10 million cars by 2009. In 2004, for every car General Motors sold in China, it sold 10 in the United States, but by 2009 this ratio had levelled off.

Similar opportunities are opening up for different companies in other sectors, such as financial services and healthcare.

The middle class: size and distribution

2009 2020 2030

global share 18%

Europe

36% 22% 14%

10%

7%

Central and South America

10%

8%

6%

Asia-Pacific

28%

54%

66%

Sub-Saharan Africa

2%

2%

2%

Middle East and North Africa

6%

5%

5%

North America

338

333

322

Europe

664 703 680

Central and South America

181

251

313

Asia-Pacific

525

1,740

3,228

Sub-Saharan Africa

32

57

107

Middle East and North Africa

105

165

234

World

1,845

3,249

4,884

millions of people

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Source: IEMS; Kharas and Gertz, 2010.

North America