The Wall Street Journal by Russia Beyond

ADVERTISEMENT A p ro d u c t by R U S S I A B E YO N D T H E H E A D L I N E S

www.rbth.ru

This supplement is produced and published by Rossiyskaya Gazeta (Russia) and did not involve the news or editorial departments of The Wall Street Journal (MICEX-RTS, Sent. 27-Nov. 27, 2012)

RTSI

TOP LIQUID STOCKS

Ruble/Dollar

' Skepticism (about Russia) makes assets cheaper. When most people are wrong and you turn out to be right, you can make a lot of money.' RosBusinessConsulting

JIM ROGERS, CHAIRMAN, ROGERS HOLDINGS AND CO-FOUNDER, QUANTUM FUND GETTY IMAGES/FOTOBANK

Distributed with The Wall Street Journal

Saturday, December 8, 2012

IN THIS ISSUE

Energy Gazprom is meeting its major technological threat by expanding to new markets

Shale Gas Gambit

BUSINESS & POLITICS

Low Cost Take-Off Budget Airlines Get the Go-Ahead After All PAGE 3

SPECIAL REPORT

Consumer Credit Boom Loans for TVs, Cars and Homes, but Is There a Bubble Brewing? PAGES 4-5

MONEY & MARKETS

Russian Bonds Flying Off the Shelves Funding Restructuring

PRESS PHOTO

Gas and condensate production was launched from Northern Siberia’s Zapolyarnoye gas field last year.

Gazprom’s traditional business model needs to become more efficient if Russia is to compete with increasingly competitive shale gas coming from the U.S. and elsewhere. VICTOR KUZMIN SPECIAL TO RUSSIAN BUSINESS INSIGHT

Worn out by the endless gas disputes with Ukraine, Moscow has spared no expense on new pipelines to link Russia directly to its main customers in Europe: Nord Stream to Germany, and South Stream to Italy. In mid-November, Finland gave a green light to the construction of an additional two sections of the Nord Stream pipeline and further economic integration between Russia and Europe. One of the two new pipelines will run to Britain. A series of swap deals

has provided Gazprom with enough funds to begin investments in the offshore route, said Konstantin Simonov, head of the National Energy Security Fund. The problem, however, is that for the first time the demand for Russian gas at current prices has come into question, and the culprit is shale gas. At the current rate of production growth, in just 10 years the U.S. could itself become a major exporter of gas to the global market. However, according to the experts at Skolkovo Business School, 1,000 cubic meters of U.S.-produced gas would cost $320 on the European market, significantly lower than the current price of Russian gas. Preliminary estimates also indicate that this would be the production cost of shale gas in Poland. In October, Russian President

Vladimir Putin instructed Gazprom to analyze the market and report back on the company’s export policy, focusing on shale gas. Russia has about 7% of world shale gas reserves, and they are mostly located in easily accessible areas near St Petersburg and the Volga region. “Perhaps in the future, the higher cost of shale gas production will be offset by lower outlays on transportation, and extraction will turn a profit, but a decision on any largescale operations in Russia can only be made after the level of reserves and the cost of production are confirmed. That could take 10-15 years”, says Valery Yazev, head of the Russian Gas Society and a member of the State Duma. As things stand, the main market for Russian gas is Europe, but Moscow is actively searching for al-

ternatives, since the main growth in demand over the coming years is projected to come from Asia. China alone will grow from 150 billion cubic meters to 430-450 million in 2030. Meanwhile, last month Gazprom signed a 20-year contract to supply gas to India’s Gail, plus memoranda of intent with several other energy majors. Beginning in 2019, Gail will receive 2.5 million metric tonnes of liquefied natural gas per year. However, the source of raw materials for these projects will not be new fields in Eastern Siberia, but old reserves in Western Siberia, which calls into question the efficiency of simply reorienting exports toward new markets. SEE COMPETING OPINIONS ON WHAT STRATEGY GAZPROM WILL PURSUE ON PAGE 7.

ITAR-TASS

Tackling Russia’s Pension Shortfall Privatization Revenues and Luxury Taxes Bridge Gap PAGE 6

FEATURE

Bolshoi Abroad... Ratmansky a Hit in America

Macroeconomics Russia’s leading creditors are moving to balance dangerously lopsided loans

Central Bank Leads Moves to Bolster Banks Faced with a slowing economy but a consumer lending boom, Russia moves to shore up its banking sector. BEN ARIS SPECIAL TO RUSSIAN BUSINESS INSIGHT

GETTY IMAGES/FOTOBANK

Capital at Russian banks is shrinking fast and could expose the sector to another crisis, say experts. Squeezed on the one side by whitehot consumer lending and a slowing economy on the other, the Central Bank of Russia (CBR) has sought to shore up the sector with a range of new rules and loans. Analysts are afraid, however, that without more economic growth the sector’s problems may get worse. GDP growth was running at 4%4.4% over the first six months of this year, but fears of a fresh financial storm blowing out of Europe caused managers to sit on their hands and cancel investment projects, driving down GDP

VTB Capital is Russia’s leading investment bank.

growth to 2.8% as of October. The CBR said in September that less than 4% growth could lead to stagnation. On the ground, however, things look very different. Many Russian

consumers have been on a borrowing binge that has driven up consumer loans by a whopping 43% over the first nine months of this year – well into overheating territory and well ahead of deposit

growth, which was up only 10% over the same period. For the first time, consumer loans overtook those made to Russian corporates in October, reaching a total of 1.78 trillion rubles ($57 billion) compared with 1.62 trillion rubles, as of October 1. “The problem is not why retail lending is growing rapidly, but why corporate lending is so weak,” says Artem Konstandian, the president of Promsvyazbank, a leading commercial bank, adding that the volume of corporate loans was twice as high a year ago. Normally lots of consumer lending wouldn’t be a problem, but with the debt markets in the West effectively closed to all but the biggest Russian companies, banks have been forced to dip into their capital to fund this lending bonanza. Banks need to keep at least $8 in cash at all times out of every $100 they receive as deposits, as this is typically the amount customers will ask for on any given day. Because emerging markets are a lot more volatile, Russian banks have been keeping up to 20% of their deposits as cash in case there is a rush on withdrawals. CONTINUED ON PAGE 5

ITAR-TASS

...And Bolshoi at Home With Restored Acoustics, Tickets Are Much in Demand at Revered Moscow Theater PAGE 8

ONLY AT RBTH.RU PRESS PHOTO

What Makes Space Russia’s Final Private Frontier? RBTH.RU/20317

ADVERTISEMENT 02

Politics & Business

NEWS IN BRIEF

RUSSIAN BUSINESS INSIGHT SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA WWW.RBTH.RU

Regulation Minor legal changes should bump up Russia in the Ease of Doing Business survey

• Russia’s energy-based economy will take a serious blow from membership of the WTO owing to the global slowdown, President Vladimir Putin has warned, singling out the animal farming, agricultural machinery, medical equipment, automotive, pharmaceutical, textile and food industries as those most at risk from lower import duties from foreign goods. • President Vladimir Putin has resumed his schedule of foreign visits after a hiatus of two months, arranging trips to Turkey and Turkmenistan, signaling that he is fit for travel again after some speculation about his health. A Kremlin spokesman denied the reports of an illness, saying that the president had merely pulled a muscle while exercising. • Prime Minister Dmitry Medvedev has expressed confidence that the euro zone’s economic fortunes will improve, saying that Russia’s Central Bank has no intention of switching its euro-dominated foreign-exchange reserves into other currencies.

REUTERS/VOSTOCK-PHOTO

ITAR-TASS

• Members of the Russian punk band Pussy Riot were nominated by Time magazine for the “Person of the Year” award for 2012. The punk band is among 40 candidates that dominated the news this year, for better or worse. This list also includes President Barack Obama, Secretary of State Hillary Clinton, Syrian leader Bashar al-Assad, Olympic champion Michael Phelps, and others.

Roadmaps for Business several successful reforms in place. The banking sector was transformed by reforms launched in 2004, while the power sector was successfully privatized in the middle of the last decade, attracting billions of dollars of investment as a result. And comprehensive domestic capital market reforms launched in April 2008 will culminate at the start of next year, when Russia’s securities markets are hooked into the global financial system. But a new pragmatism has crept into the efforts to re-engineer the Russian economy that are aimed at making life easier for the small businessman, as well as for the international investor. In February this year, President Vladimir Putin called on the administration to raise Russia’s place on the World Bank’s Doing Business ranking from 120th place to 50th by 2015 and then to 20th by 2018. Indeed, the very first thing he did after his inauguration as president in May was sign a decree

A push to simplify bureaucratic procedures will improve the investment climate.

• Russian scientist Valentin Danilov was freed on parole from a prison near Krasnoyarsk, after serving eight years of a 14-year jail sentence for selling state secrets to China. Upon his release, Danilov protested that he had committed no crime.

BEN ARIS SPECIAL TO RUSSIAN BUSINESS INSIGHT

• A detachment of Cossacks, descendants of the Tsarist warrior caste, have begun patrolling a patch of central Moscow in patrols organized to support the city’s police force. The Cossacks, whose powers are not officially recognized, were looking to report illegal street trade and clear the streets of drunks. • Russia’s economic growth slowed to 2.9% in the third quarter of 2012, compared with the same period in 2011, the State Statistics Agency has reported. The slowdown comes after two successful quarters this year, of 4.9% and 4% growth, respectively.

“People say there are no reforms in Russia, but it simply isn’t true,” says Marcus Svedberg, chief economist at East Capital, Russia’s largest regulated investment fund. In fact, the government has launched 22 roadmaps that are designed to transform various sectors of the economy. Nikolai Petrov, an analyst with Carnegie Endowment, has dubbed this“Putin’s NEP”– the New Economic Policy Lenin introduced that saw private enterprise flourish. “For Putin, this is evidently his last chance to get on top of a situation which is objectively not going his way. And if he does not take advantage of the moment now, he will not have such an opportunity again,” says Petrov. Despite its poor investment image, the Kremlin has already put

to make it easier to obtain construction permits – a key variable in the World Bank’s rating. In the World Bank’s latest ranking, released in October, Russia has already improved its placing to 112, as the first reforms begin to bite. “While many changes are relatively minor, we believe that [the roadmaps] add up to a more positive environment for investors,”says Kingsmill Bond, chief Russian strategist for Citi in Moscow. Russia does surprisingly well in some aspects. It ranks 11th out of the 185 countries polled for contract enforcement, in stark contrast to its reputation for lawlessness. And this year it did particularly well in tax administration, rising from 105th to 64th, overtaking America in the process. Documentation requirements were slashed and the whole process was moved online: the number of Russians who filed tax returns via the internet has soared to 75%, from 10% in 2000, according to the Federal Tax Service.

Energy International team to launch world’s first commercially viable fast atomic reactor

Ridding the World of Nuclear Waste, One Plant at a Time

• Moscow’s iconic Luzhniki Stadium could be demolished and rebuilt from scratch for the 2018 World Cup, Russia’s sports minister, Vitaly Mutko, says. • Cash and valuables worth about $23 million were confiscated during an ongoing arms industry fraud inquiry, which followed the dismissal of Defense Minister Anatoly Serdyukov. The Interior Ministry first said on Nov. 15 that it uncovered a possible $1.7 billion-worth of embezzlement scams by state officials.

from the reactor to extract uranium and plutonium and remanufacture nuclear fuel. “Fast reactors will help us solve one of the most pressing problems connected with atomic energy, and that is what to do with the atomic waste of nuclear power stations that are currently operational. Russia, the United States and France have considerable experience working with fast-neutron reactors — that is, not only in building, but also in the experimental operation of reactors that have the potential to be reliable sources of energy for centuries to come,” Bolshov said.

Fast-reactor technology may grab 10-15% of the world’s nuclear energy market in the near future. ANDREI REZNICHENKO

At the Central European Nuclear Industry Forum (ATOMEX) in Prague last month, Russia’s Rosatom nuclear agency signed an unprecedented deal to build a fast nuclear reactor on Russian territory in cooperation with 13 Czech companies. It has been dubbed the SVBR-100 project. The advantage of such technology — previously considered financially unfeasible — over conventional nuclear power is that it utilizes highly enriched nuclear fuel in the generation process. Left unused, the fuel remains a dangerous byproduct of conventional nuclear reaction to be stored and monitored, since it is also a key ingredient of nuclear weapons.

• Russia’s much-disputed new NGOs law came into force in November. The legislation requires nonprofit organizations with foreign funding to register as “foreign agents.” Some NGOs have said they intend to defy the new legislation. • The U.S. House of Representatives has voted overwhelmingly to “name and shame” Russian officials allegedly involved in the 2009 death in pre-trial detention of lawyer Sergei Magnitsky, while also voting for “permanent normal trade relations” with Russia. The Magnitsky Act, if passed by the U.S. Senate, would deny visas to Russian officials on the blacklist. • Rostelecom, whose CEO Alexander Provotorov is embroiled in a fraud investigation, posted a rise in third-quarter sales as new pay TV and broadband subscribers helped to offset a declining fixed-line business. Provotorov and billionaire Konstantin Malofeyev are being questioned over their links with Marshal Capital, a Moscowbased fund, amid speculation that Provotorov is about to be replaced at the Russian telecoms company.

ITAR-TASS

Local and international experience All of the fast reactors tested in the world to date have been experimental. Russia’s BN-600 reactor, which was operational from 1980 until 2005 in the Ural mountains, has been the most advanced testing ground for the technology. BN-600 was also the world’s most powerful fast nuclear reactor with a sodium coolant; sodium in a fast reactor does not dissolve amid high levels of radiation. Therefore the reactor produces a small amount of nuclear waste, which has a relatively minor effect on the surrounding environment when compared to traditional atomic reactors. The BN-600 reactor holds the world record for safely operating fast nuclear reactors that operate with sodium. Meanwhile the nearby BN-800 reactor, based on more advanced development of the same technology, is nearing completion. In 2004, the reactor’s developer,

SPECIAL TO RUSSIAN BUSINESS INSIGHT

• Russia has agreed to give Serbia a low-cost loan of $800 million to finance improvements to its railway infrastructure, Russia’s finance minister, Anton Siluanov, has announced. The loan will be at an annual rate of 4.1% over five years.

However, Russia does less well in many other crucial areas. Although Putin acted swiftly to launch reforms for the construction industry, Russia remains 178th in terms of the ease of gaining construction permits and is the second-hardest place in the world in which to get a factory connected to the mains grid (184th). Especially damaging is the inefficiency of the customs service (162nd). Economic Development Minister Andrei Belousov said, following the release of the ranking: “Customs remains a bottleneck for our entire economic development.” But Belousov was not downhearted, because the reforms are only just starting to kick in; those for construction, customs procedures and connections to electricity grids will not be implemented until 2013. “The roadmaps really only began to be implemented in the second half of this year,” says Belousov. “Thus we expect the main impact to be next year and [the year after].”

The BN-800 reactor is under construction at the Beloyarsk Nuclear Plant.

Fedor Mitenkov, was awarded the international Global Energy award for his contribution to the project. The technology has been so successful that Rosatom’s Afrikantov Insitute developed the China Experimental Fast Reactor outside of Beijing. It was launched two years ago. During a recent visit to China by President Vladimir Putin, Rosatom head Sergei Kiriyenko said that the firm was in discussions with Chinese partners on the construction of a fully functional, nonexperimental fast reactor in China, similar to the one being constructed in Russia by Rosatom. Commercially viable? Leonid Bolshov, a professor at the Institute for the Safe Development of Nuclear Energy of the Russian Academy of Sciences, said: “We have learned a great deal from

our experience with the BN-600. Russian nuclear scientists spent years perfecting the design of the reactor, and have learned how to use sodium as a coolant. If, after all the discussions and licensing are taken care of, the next project is given the green light, then it has the potential to become the first commercially viable high-powered fast-neutron reactor in the world.” Huge amounts of spent and irradiated fuel from conventional nuclear power plants have been accumulated over the years.The problem of what to do with all this spent fuel is a problem for any country that uses atomic energy, as well as the global community as a whole. According to Bolshov, the development of fast nuclear reactors is essential for closing the nuclear fuel cycle, which involves processing the irradiated nuclear fuel discharged

The coming years Research and design work on the new reactor will continue until the end of 2014, while operations proper are set to begin in 2017. The SVBR-100 could become the world’s first fourth-generation commercial medium-powered reactor that uses a coolant for heavy metals. It has the potential to take 10– 15% of the global market for small and medium-size power stations. “Fast reactors are the basis of our [global] competitiveness,”said Kiriyenko.“These include the fastneutron reactors that already exist at Beloyarsk, lead-bismuthic reactors, lead reactors and other liquid metal coolants. All of these technologies will allow us to utilize the U-238 [highly enriched] isotope in the fuel cycle, which is abundantly available in nature but is currently almost unused.” The United States is a key partner for developing new types of reactors for the company, says Kiriyenko.“We can conduct joint R&D to develop a new generation of nuclear reactors; such cooperation should go on between our two countries on a national level and not be restricted to just one company,” he said.

Business & Politics

RUSSIAN BUSINESS INSIGHT SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA WWW.RBTH.RU

Infrastructure A new priority area is emerging for capital upgrades in the air transport industry

NEWS IN BRIEF

Regional Airports Become Attractive for Investment

• BP’s board approved the sale of its 50% stake in joint venture TNK-BP to Russia’s largest oil company, Rosneft. The deal clears the way for the formation of one of the world’s largest oil companies. • New Jersey Nets owner Mikhail Prokhorov has taken control of one of Moscow’s biggest privately owned investment banks, Renaissance Capital, after buying just over 50% of the shares that belonged to the bank’s founder and longserving CEO, New Zealander Stephen Jennings.

REUTERS/VOSTOCK-PHOTO

• Britain’s former treasury minister, Paul Myners, has been recruited to join the board of Megafon, which announced a price range for its IPO of $20- $25. The price range values the telecoms operator between $11 billion and $14 billion.

• State corporation Russian Technologies is selling its 45% stake in the world’s largest titanium producer, VSMPO-Avisma, to a joint venture of VSMPO managers and Gazprombank, for $970 million. The deal will give them a majority shareholding of 50% plus one share, while nearly 25% of the company will be freely traded and not in the hands of major shareholders. • Russia’s state-owned Sberbank has signed a $1 billion loan deal with Belarusian potash producer Belaruskali. Some $800 million will be used to refinance the company’s long-term hardcurrency debts. Sberbank says it may invest in the company.

The domestic terminal of Novosibirsk Airport (the busiest in Siberia) recently underwent a major renovation.

The Russian government is attempting to make regional airports a lucrative destination for international investors. SERGEY STARIKOV SPECIAL TO RUSSIAN BUSINESS INSIGHT

Less than a decade ago, the only way that residents ofYekaterinburg could fly to the Czech Republic or the Greek islands was routing via Moscow. But today the new, modern, international terminal Koltsovo has direct flights to a wide range of world destinations. The whole situation began changing in the mid-2000s, when Russian private capital investors began taking an interest in the country’s transport infrastructure. That activity is now gaining impetus. The Russian government alone has pledged to invest approximately $5.7 billion over the next three years in airport development. Private investors have promised to invest an equivalent sum. The huge majority of transport movements in Russia are now made using foreign-manufactured aircraft, and passenger traffic accounts for 89% of this business. What will it cost? According to figures from the Ministry of Transport, the Russian government is preparing to spend approximately $5.7 billion dollars on airport infrastructure between 2013 and 2015. By comparison, expenditure on comparable projects for the entire preceding decade was just $4.6 billion dollars, with the bulk of the cash going towards fixing up Moscow’s airports. In Mos-

IN FIGURES

$5.7 billion

315

$200 million

has been committed by the Russian government as investment into developing regional airports over the next three years.

airports currently function across Russia’s territory, down from 1,300 in Soviet times. The plan calls for modernizing 64 of those still open.

has already been invested by Changi Airports International into developing airport infrastructure in Russia’s southern regions.

cow, six runways were entirely rebuilt. Nowadays policy at the Ministry of Transport has altered. From 2013 onwards, regional airports will be the priority area for capital investment. “We used to have around 1,300 airports in Russia, whereas today only around a quarter of these are operational. It’s our job to turn this around,”says Maxim Sokolov, minister of transport for the Russian Federation. Of Russia’s 315 airports, 64 require urgent rebuilding. Nearly half of these are located in areas where no other feasible transport alternatives to air travel exist. Private investors aren’t looking for that kind of project. Evgeny Chudnovsky of investment company Renova notes that private companies aren’t interested in looking at airports serving fewer than one million passengers a year. However, the government hopes that its cash injection into regional airports will help to promote private investment. There are currently four major holding companies forming in the airport sphere: Renova, owned by Viktor Vekselberg, and known as

Airports In The Regions; Bazel Aero, a part of Oleg Deripaska’s Bazel corporation; Novaport, which has come out of Roman Trotsenko’s AEON Corporation; and Sidinka Holdings, which is controlled by Arsen Kanokov, the President of the Kabardino-Balkaria Russian Republic. Together, these holding companies control 17 of Russia’s most important regional airports. Main tasks Just like the government, the airport holding corporations are interested in one primary aim – the decentralisation of passenger air traffic.Where regional airports previously served flights from Moscow, as well as charter flights to Turkey and Egypt, inter-regional and international flights are emerging. In the near future, many of these independent airports will become fully fledged nodal hubs. Yekaterinburg’s Koltsovo airport, part of the Airports In The Regions group, is already there, serving more than three million passengers a year. Also in this category are Novosibirsk’s Tolmachevo airport, part of the Novaport group, and Kras-

nodar airport (owned by the Bazel Group); each has passenger throughputs above two million a year. The nascent activity of this private business sphere has begun to attract foreign investors. Last year, the business oligarch Oleg Derispaska was able to secure the interest of one of the leading international players, Changi Airports International – as a result of which one third of the Bazelairport business, specifically Krasnodar airport, is controlled by a global company. It has invested $200 million in the Russian airport holding. And this is not the only example: the Korean Incheon International Airport Corporation purchased 10% of Khabarovsk airport, and is now preparing to increase its holding. What holds back the growth of the Russian air business is a low number of air passengers. The coefficient of air mobility of Russia’s citizens is just 0.5 – in other words, out of every 100 people, only 45 have taken flights. In the U.S., the same coefficient is 2.3. High prices bear some of the responsibility. A ticket from Moscow to Yekaterinburg (about 1,000 miles) costs $306. But a ticket from Moscow to Berlin (about the same distance) is just $100 dollars if bought in Europe. “The decentralisation of transport will enable greater and greater savings to be made on costs,” says Alexei Sinitsky, chief editor of Air Travel Review. “But the main thing which will cut ticket prices is ensuring optimal passenger loads on planes.”

• The Russian government plans to sell its entire stake in the country’s two biggest statecontrolled banks, VTB and Sberbank, within five to 10 years, “as soon as the situation is right,” said First Deputy Prime Minister Igor Shuvalov. • Prime Minister Dmitry Medvedev lambasted his government for failing to fulfil 58 decisions issued by the country’s Constitutional Court and adopt over 200 government ordinances, saying the failure was “unacceptable” and “outrageous.” • British billionaire Richard Branson has set up a $200 million green energy fund, VGF Emerging Market Growth, in Russia. He signed the deal with Rusnano chief Anatoly Chubais in Moscow. • Sberbank CEO and former Economics Minister German Gref called on the government to switch to a pro-growth policy, echoing calls in Europe for the same. Russia’s new federal budget has cut spending in real terms for the first time in a decade. • U.S. fast-food chain Burger King says it will open stores in Siberia by the end of the year. Supplier deals are already in place. • Yandex.Money has begun a trial of its mobile card-reader this week, which will enable retailers to accept mobile credit-card payments via smartphones, tablets and PCs. The system is being trialed with a taxi company in Moscow and can accept Visa and Mastercard. • Russia will earmark $3.2 billion to develop the pharmaceutical sector through to 2020, said Prime Minister Dmitry Medvedev. Domestically produced medicines should account for 50% of the market and domestic medical devices for 40%. • Ukraine plans to slash its gas imports from Russia to 18 billion cubic meters in 2013, from 27.5 billion cubic meters this year, Ukraine’s energy minister, Yury Boyko, has announced. The proposed cut comes as many of Gazprom’s regular customers in Europe are seeking alternative supplies of liquefied natural gas and shale gas.

Budget Aviation Will cheap flying finally take-off in Russia?

Getting Low-Cost Airlines Off the Ground KOMMERSANT DENGI

“Pure low-cost carriers modeled after Ryanair are not viable in Russia because of infrastructural and legal restraints,”Konstantin Teterin, former CEO of Avianova airlines, said exactly a year ago. At the time, following the collapse of Sky Express and Avianova, it seemed as though there would be no other discount airlines in Russia in the foreseeable future. Moreover, after Yaroslavl’s Lokomotiv hockey team perished in a plane crash, the government labeled all non-major airlines as flyby-night outfits and vowed to fight them. However, in mid-October, First Deputy Prime Minister Igor Shuvalov’s government commission on competition and small-to-medium enterprise development suddenly instructed the Ministry of Transport, the Ministry of Economic De-

• A pension fund owned by Russian Railways could buy Absolut Bank, a commercial lender, from Belgian financial group KBC, at a discount on its 2007 price, Vedomosti reported. The fund, Blagosostoyanie, received an approach from KBC, which is seeking state aid in Belgium. • Gazprom has secured a 30-year deal to supply gas to private companies in Turkey. The supplies, through Russia’s Western pipeline, could rise to 14 billion cubic meters a year.

Budget carrier Sky Express famously went bust last year.

al carrier Aeroflot announced plans to set up its own subsidiary discount airline within a year. The company tied the decision to the passage of certain legislation by the government. A special airport is now planned to accommodate the low-cost carrier. Aeroflot CEO Vitaly Savelyev also promised Vladimir Putin that his company would “start with itself” in air travel de-monopolization, by waiving its monopoly on 34 international flights. The Ministry of Transport was quick to express its hope that the bill on nonre f u n d a b l e a i r t i cke t s – a cornerstone of the low-cost airline business – would be brought before the State Duma before the end of the year.

Aeroflot and other “big birds” were never directly accused of helping strike down Russia’s pioneer discount airlines, but Konstantin Teterin, who participated in launching all of Russia’s lowcost projects, complains of“an economic environment where any large airline has leverage.” Vnesheconombank Deputy Chairman SergeiVasilyev says that Russia needs“more connectedness.” He adds: “In the Soviet times, the country’s unity was ensured by low airfares. No Western investment is going to come to any provincial towns if it’s impossible to get there by plane.” Translated from an original article in Kommersant Dengi.

• Rosneft has won contracts worth a total of $2 billion with Finland’s Fortum and Germany’s E.On to supply natural gas to their power stations in Russia, Rosneft’s Eurobonds prospectus reveals.

REUTERS/VOSTOCK-PHOTO

OLEG KHOKHLOV

velopment, the Federal Anti-Monopoly Service and the Federal Tariffs Service to propose a model for stimulating competition in the air-travel market, by creating conditions for developing low-cost travel. A week later, the low-cost British airline EasyJet announced that it would launch two daily flights from London to Moscow in the spring of 2013. The minimum fare will be 6,500 rubles ($205), including duties and taxes. By comparison, Aeroflot, British Airways and other carriers are offering tickets in that same period for more than 11,000 rubles. Even Air Baltic and Lufthansa, which offer connection flights, charge more – around 9,000 rubles. EasyJet is also planning domestic Russian flights, though“not in the immediate future.” Immediately following EasyJet’s announcement, Europe’s largest discount airline, Ryanair, applied for permission to operate flights to Russia from Ireland. Airline experts had barely just explained why discount carriers would fail in Russia when nation-

KOMMERSANT

The government plans to open the skies for cheap carriers, but experts question whether it will actually lower ticket prices.

Special Report

RUSSIAN BUSINESS INSIGHT SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA WWW.RBTH.RU

CREDIT BOOM

VIEWPOINT

Debt Growth Currently Well Below Risk Levels

RUSSIANS ARE TAKING OUT LOANS FOR EVERYTHING FROM FLATSCREEN TVS TO HOMES, BUT EXPERTS WARN OF A BUBBLE

CONSUMER LENDING ON FIRE

Chris Weafer SPECIAL TO RUSSIAN BUSINESS INSIGHT

lthough Russia is most often viewed by investors as a petrostate, the reality is quite different. Almost all of the country’s economic growth since 2005 has come from the consumer sectors and the general expansion of the domestic economy. While the country’s budget depends on oil and gas revenues for just under 50% of the total (a figure that has been steadily falling as tax revenues from individuals and other industries have been growing), extractive industries have contributed almost nothing to GDP growth in six years. Retail sales in Russia expanded by almost 7%, year-on-year, through the first half of 2012, fueled by an 11.3% gain in real wages and an increase of 2.7% in real disposable incomes. There has also been a 40% rise in retail lending by the banks and other finance organizations over the past 18 months. The obvious questions are whether this is sustainable, and are we seeing a bubble effect developing in the retail debt market? The answer to the first question is that while the pace of growth in the retail sector is likely to ease back a little, i.e. as the base effect grows, conditions are in place to sustain meaningful growth for the foreseeable future. Russia’s federal budget spending has moved more toward social spending, and the government is also prioritizing the boosting of wages in the state-funded sector. In addition, the post-Soviet generation is now becoming a bigger part of the workforce and has Western-focused spending habits and lifestyle ambitions. Previous concerns about demographic deterioration have also now been resolved as the birth rate increases, people live healthier lives and immigration has reversed. This year, Russia will see a net increase in the population for the first time since the early 1990s, and projections have been revised to forecast population growth in the coming decades. In terms of debt expansion there is no issue here either, for while the pace of growth is very high in absolute terms, it comes off a very low starting point. Russian households are among the least leveraged in the world and, as a legacy of the Soviet era, the country has one of the highest levels of un-mortgaged property ownership in the world. So there is plenty of scope for further debt expansion without approaching risk levels. Of course, that pace of growth does have implications for the banks. To fund the consumer-driven growth, the banking sector will have to regularly tap markets for new capital to remain within the Central Bank’s stringent capital adequacy guidelines. But, so long as the capital asked for is to fund continued growth, there is never a problem with investors. The banking sector provides a sort of proxy for the expanding domestic economy and the fast-growing consumer sectors, which can otherwise be difficult for the biggest investment funds to access. Only about 17% of the value of Russia’s stock market represents companies in the domestic sectors, while an additional 12% is represented by banks. The bulk of the stock market is currently accounted for by the extractive industries and the big state corporations. Investors, who can ignore the short-term volatility that has afflicted all markets since the 2008 crisis started, still have an attractive entry level into Russia’s consumer sectors, i.e., one of the fastest expanding economic themes in the world. Current valuations are typically at a discount to global emerging market peers because of the risk-contagion from the perceived oil threat to the economy. Yet Russian earnings’ growth rates in the consumer sectors remain in the double digits. Over the coming few years, this sector in the stock market is set to expand and, in time, the opportunities for investors will become more diverse and more liquid. The valuation of existing listed stocks that offer exposure to Russia’s expanding consumer and other sectors will clearly benefit from that trend.

Despite fears of Europe’s economic woes spilling over toward the East, spending is at an all-time high and debt is low. BEN ARIS SPECIAL TO RUSSIAN BUSINESS INSIGHT

It’s Saturday afternoon in the Evropeiski shopping center, which stands on the banks of the Moskva just a short distance from Russia’s White House, the home of the government.What was, only a few years ago, a barren patch of wasteland that played host to an informal cigarette wholesale market, is today a sparkling new mall which houses hundreds of shops and boutiques and attracts growing crowds of eager shoppers. This scene at the Evropeiski wouldn’t look out of place in any major city in the world, except for one thing – measured in terms of customers per square meter, the Evropeiski is by far the world’s busiest shopping center in terms of customer traffic. With 811 customers per square meter, it boasts six times as many as the world’s second most popular shopping destination, The Dubai Mall. Despite the recent economic slowdown, shopping is booming in Russia, driven largely by soaring consumer credit. Even if we exclude the Evropeiski from the statistics, Russia’s major retail centers enjoy a level of customer attendance comparable to the best shopping centers anywhere in the world. It seems that, after 70 years of deprivation, Russians are now taking advantage of their growing prosperity to start stocking up on some of those little luxuries that most in the West take for granted. While the rest of the economy suffers, consumption is being driven by soaring consumer credit. In

October, Russia’s banking sector surprised the nation again, with retail lending growth accelerating to 43% growth year-on-year – well into what the Central Bank of Russia deems “overheating” territory. Companies and banks were in the front line following the collapse of Lehman Brothers in 2008, but the Kremlin worked hard to shelter the population from the fallout of the 2008 collapse, bailing out troubled banks and propping up state-owned companies. Wages have continued to rise throughout the crisis, while unemployment is currently at a 20year low of 3.8%. Add to this the fact that the average Russian has no debt to speak of – everyone was simply given their apartment by the state in 1991 and things such as mortgages and credit cards have only just taken off – and the average Russian is free to borrow heavily, most of their income being disposable. Retail loan growth sped up in October, surprising the economists, who were expecting it to slow in the second half of this year. “This comes as a positive surprise for retail trade in October and supports our expectation of acceleration in retail trade growth from 4.4% year-on-year in September to 5.0% year-on-year in October,”says Evgeny Gavrilenkov, chief economist at Sberbank CIB. The consumer-borrowing binge is spilling over into other sectors of the economy directly connected to shopping. Supermarket chains are the first beneficiaries: the last thing consumers cross off their shopping list, even in tough times, is food. Most of Russia’s leading supermarkets are reporting 2012 revenue growth of up to 33% year-on-year. Car sales have also been strong, increasing by 13% year-to-date, ac-

NATALIA MIKHAYLENKO

Spending is also driving investment into real estate, where Moscow is ranked the third most attractive city in Europe. cording to the Association of European Businesses. Russia is on track to become the largest car market in Europe within the next five years. Spending is also driving investment into commercial real estate: in November, Moscow was ranked the third most attractive investment destination in Europe for retailers, by Jones Lang LaSalle. “More than 90% of the most pop-

KOMMERSANT

Chris Weafer is chief strategist at Sberbank Investment Research.

It takes the average Russian consumer seven years to repay a mortage.

ular European brands operate in the Russian market already, with the rest considering entry,” says James Brown, head of EMEA retail consulting and research, Jones Lang LaSalle.“Within the coming years, the high level of disposable income and the rapidly growing middle class will make the Russian retail market one of the European leaders in terms of turnover.” And because Russian consumers are buying increasing amounts of big-ticket items, the more traditional financial services have also started to take off there. The potential of Russia’s mortgage market is unparalleled in Eastern Europe, say analysts at UralSib. The housing stock is among the lowest in the region, but then so are the ratios of mortgage debt to GDP, at only 3%. This compares with 9% in Ukraine, 12% in Poland, 34% in Latvia and 36% in Estonia, UralSib points out. Express loans made at the point of sale introduced most Russians to buying on the never-never, and they still account for about a third of white-goods and furniture purchases. The use of credit cards has also taken off during the past year: the Russian credit-card market increased 60.3% during the first nine months of 2012, to 590 billion rubles ($19 billion), with no sign of slowing down.

Online Banking Gaining Wider Acceptance Consumers, particularly in the country’s urban centers, are adopting Internet banking at a fast rate. From 2010-2011 the number of users more than tripled. SERGEY TITOV SPECIAL TO RUSSIAN BUSINESS INSIGHT

KOMMERSANT

Oleg Tinkoff popularized online banking in Russia.

A recent survey showed 13% of Russians take advantage of Internet banking.

Most clients of Russian bank Tinkoff Credit Systems (TCS) do not even know where its sole office is located. That’s because the bank, founded by Oleg Tinkoff in 2006, was one of the first online banking systems in Russia that allowed users to access services via a mobile phone or computer. Today, TCS’s services are used by about two million people - and in TCS’s wake, others are beginning to develop their own offerings. In 2010-11, the number of Internet banking users in Russia increased 3.5 times, states a report by industry research group MForum. The proportion of online banking users at the end of 2011 was estimated by the rating agency Expert RA at 6% to 7% of the country’s population. In August 2012, a survey by the Public Opinion Foundation showed that 13% of Russian citizens use Internet banking.

Uptake is particulary strong in urban centers: a study by the agency Romir showed that 46% of residents in Russia’s major cities regularly use Internet banking services. Moreover, 17% stated that they use online banking at least once a week, and 29% check their online account one or more times per month. The most active users of these services are men aged 25-34 with higher-than-average incomes. According to the study, online banking is most commonly used to pay utility and other bills (60% of respondents), followed by account management and accumulation of funds (55%), money orders, and credit repayment. According to Expert Rating Agency, in 2010-11 the proportion of remote transactions increased threefold (to 26% from 8%), while in the past three years the share of accounts with online access grew to 25% from 12%. Banks have thus reduced service costs, closed down offices, and increased proceeds from online commission fees. As is clear from the research, the market is far from reaching saturation point. According to the Public Opinion Foundation, 11% of re-

spondents said they would consider using online banking services, potentially doubling the target audience. Tatiana Belozerova, head of alternative sales channels at Raiffeisenbank, estimates the annual rate of growth in the number of online banking customers at 50% to 80%.“Most of the growth is coming from the regions,” she says.

The most active users of services are men aged 25-34 with higher than average incomes. Expert Rating Agency analyst Anton Kartuesov is less optimistic, but still expects to see 25% to 30% growth in the coming year. Oleg Anisimov, vice president at TCS, believes that a retail bank without online services will be “complete nonsense in just a couple of years.” In the near future, he foresees growth in the number of people banking using their cellphones.“Without doubt, growth in mobile banking is set to outstrip regular online services,” he says.

Yevgeny Loktev, head of remote service channels at Citi Bank, agrees. The number of users of Citi’s mobile service is 2.6 times greater than in 2011, he says. Raiffeisenbank’s Belozerova believes that banks will eventually offer all their services in online and mobile forms. The move is already underway. By early 2012, a third of credit institutions surveyed by Expert Rating Agency were accepting loan applications online (compared with 18% a year earlier). Many were offering mobile air travel booking and e-money transfers. Some have added modules for managing personal finance. The main obstacles to the development of Internet banking could turn out to be people’s distrust of online services, reluctance to carry out major transactions remotely, and the complexity of Internet banking for ordinary customers, notes Expert Rating Agency. Regulation may also hinder development. In October, the Central Bank of Russia proposed a scheme to oblige banks to use clients’ IP and MAC addresses for authentication to help combat money laundering.

Special Report

RUSSIAN BUSINESS INSIGHT SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA WWW.RBTH.RU

Real Estate in For a Spell of Costly Financing EVGENY BASMANOV SPECIAL TO RUSSIAN BUSINESS INSIGHT

Central Bank Bolsters Banks CONTINUED FROM PAGE 1

Some banks have put up interest rates to attract more deposits, which they need to fund loans, forcing them to take bigger risks in order to meet higher obligations. In the year to October, Russian banks have seen their capital adequacy fall from over 18% to 13.1% - only a few percentage points over the Central Bank’s minimum requirement of 10%. This has triggered significant measures. In September, state-controlled VTB Bank, Russia’s second biggest bank, issued the country’s first $1 billion perpetual bond to shore up its capital. A month later, Russia’s fourth-biggest bank, Gazprombank, also state-run, issued its own $1 billion perpetual bond. Russia’s biggest bank, Sberbank, state-owned as well, is likely to be next with another share offering in the new year to shore up its capital. The Central Bank is well aware of the problems. It restarted its lending program to banks this summer,

also extending the list of securities it will accept as collateral. And several regulatory changes have been made to boost banks’ robustness, including hiking reserve requirements on loans to force banks to slow their lending. The Central Bank is also accelerating its move to Basel III international banking standards. But the most effective measure it has taken to bolster confidence in the banking sector is to increase the retail deposit insurance limit to 1 million rubles ($32,000) from 700,000 rubles, to encourage the public to keep more of their money in banks. Russians are already confident about the scheme, which worked well in the aftermath of the 2008 crisis, paying back depositors in the handful of small banks that closed. “By slowing consumer-loan growth, the CBR’s measures should help contain the risks; but in the longer term Russia’s banks will have to raise more capital,” says Roland Nash, chief investment officer at Moscow-based Verno Capital.

Moscow accountant Marina Morozova, 27, has finally bought herself a home by taking a mortgage at 12% per annum.“I had wanted to buy a place of my own for a long time and I finally decided to take out a mortgage when I saw the rates were down,” she confessed. Unwittingly, she became one of some 300,000 very lucky people who were able to take out loans, in the first half of 2012, on the best terms in the history of the Russian mortgage market. The record low rate worked better than any advertising: in the first half of 2012, the volume of loans grew 60% yearon-year. In 2012 as a whole, the overall lending volume may top the psychologically important level of 1 trillion rubles ($32.3 billion) for the first time, marking a 40% annual rise. Apparently, however, the rapid growth of the Russian mortgage market will end there. Experts are already pointing to a certain slowdown. According to the Bank of Russia, mortgages issued in September amounted to a modest 89 billion rubles ($2.9 billion), a mere 26% above the previous year. The Central Bank’s move to raise the discount rate, which brought about an increase in interest rates virtually across the board, involving most major lenders, put a dampener on the mortgage market. The October statistics are predicted to be even worse. According to market participants, the market cooled down fast primarily because of the increasing financing costs and its dependence on external factors. “All banks are quoting higher rates on the interbank lending market,”Kommersant newspaper quoted Andrei Vladykin, head of the mortgage and lending department at the real estate agency NDV, as saying.“With the Bank of Russia’s financing costs rising and high country risks preventing foreign investors from giving out cheap loans, personal deposits emerge as the only way to raise the money, and here we’ve recently seen an increase in rates. So loans are gradually getting more expensive and this is likely to become a marketwide trend.” As it happens, the dependence of the Russian mortgage market on the situation surrounding troubled European banks impacted primarily on foreign banks operating in Russia. As such, Absolut Bank and Raiffeisen Bank were the first to drop out of the top 10 banks in terms of loans extended in the first half of 2012, with their mortgage lending tumbling 21% and 17% respectively. This, incidentally, was in sharp contrast to their results in the same period a year earlier, when their mortgage portfolio growth had exceeded 400%. Most lending agencies have so

Credit Cards See Record Growth, but For How Long? An explosion in the number of credit cards issued has banks scrambling to offer clients attractive conditions, but a major financial event could lead to insolvency. VITALY PETLEVOY SPECIAL TO RUSSIAN BUSINESS INSIGHT

According to the Russian Microfinance Center (RMC), the past year has seen the number of credit cards in the country rise 60%; Russian banks also report increased lending since January 2012. The growth is attributable not only to the fact that the country has recovered from the 2008 crisis, but also to the first tentative steps being taken toward changing Russia’s consumption pattern. Experts say that the growth in the credit-card market stems from the fact that, in early 2012, many of Russia’s banking majors joined the race for market share in credit cards and focused their attention on promoting products in this area.

Of no small significance was the role played by public sector banks, which began to encourage customers to take credit cards with special terms and conditions for salaried clients, thereby improving their ratings and increasing the number of cards in circulation. Grigory Babajanyan, director of retail products at Alfa-Bank, notes “We’ve noticed a major rise in the number of credit cards issued at our bank. Sales for the year are up severalfold. Many banks in the market consider the segment to be fastgrowing, with high potential for development, and are therefore focused on creating new credit-card products to boost sales performance with more aggressive marketing.” He adds,“It’s had an effect — the market is growing; competition is increasing.” Alfa-Bank is one of the few that managed to maintain market share and consolidate growth by joining the race in the second quarter of this year. In the period between

May and October, the company reported record growth in the issue of credit cards: up 2.5 times against the previous year, while the total number of credit-card holders passed the one-million mark. From the client’s perspective, a credit card is the modern way to make regular purchases with a grace period, and it also offers discounts and rewards under various co-branding programs.

State-owned banks led the trend in encouraging customers to take out credit cards under favorable terms. Mikhail Mamut, president of the National Partnership of Microfinance Market (NAMMS), believes that Russia has begun to actively recover from the financial crisis. “Whereas, before, the sensible policy was to accumulate funds in one’s

WHAT THE DATA SAYS

Homes, Cars and Consumer Goods A CREDIT BOOM IS BEING FELT ACROSS ALL SECTORS OF RUSSIA’S CONSUMER-DRIVEN ECONOMY, WITH RECORD VOLUMES OF DEBT-DRIVEN PURCHASES OF PRODUCTS.

far managed to maintain growth figures, but this will become an increasingly difficult task next year. General Director of the Agency for Housing Mortgage Lending, Andrei Semenyuk, expects market growth to stay under 20% in 2013. Some other market participants are even less optimistic. “Next year, the market is likely to remain at the same level or even contract, because of the increased rates. Expert opinions differ, ranging from 900 billion to 1.2 trillion rubles a year”, says Roman Slobodyan, head of mortgage product sales at Nordea Bank. With no prospect in sight of inflation and hence of a decrease in the refinancing rate, the development of securitization appears to be the only practical solution to the current liquidity problems facing Russian banks. Meanwhile, the market leaves much to be desired. At this point, mortgage bonds account for no more than 10% of the total lending volume, although Russia’s Housing Mortgage Lending Strategy, adopted in the summer of 2010, expected the figure to reach 45% in 2012. Furthermore, in line with this strategy, most loans (up to 70%) are to be refinanced through securitization as early as 20 years from now. As it is, however, Russian lending agencies are extremely reluctant to mess with derivatives. According to the latest Expert

One in five of all real estate deals in Russia now involves a mortage: a record number. According to the Bank of Russia’s figures, total mortgage housing debt has reached $56.6 billion, while the average amount of a mortgage stands at approximately $45,000.

As Russia’s top financial institutions have scrambled to woo customers toward credit cards with various attractive options, the leaders of this boom have been state-owned Sberbank (21.8% of the total market share), Russian Standard (14.9%), VTB24 (7.9%), TCS Bank (6.8%) and Orient Express (6.8%). The top 10 list also includes Svyaznoy, a mobile phone retailer that added credit to its portfolio of services.

The market cooled down fast primarily because of increasing financing costs and external factors, such as the European crisis. RA poll, a mere 25% of market participants have any securitization plans for the next couple of years. Nevertheless, certain progress has been made in the development of this funding tool. In recent years, the Agency for Housing Mortgage Lending (AHML) has been able to replace all foreign deals with domestic ones, which encourages domestic demand for mortgage bonds. The agency pins hopes on syndicates being formed to issue mortgage securities to help small banks lower their risks and securitization costs. Yet for this idea to be viable, the legal framework and mortgage lending standards need to be updated and adjusted. Alexander Semenyaka, general manager of AHML, says: “The mortgage-backed securities programme of the U.S. national mortgage association Ginnie Mae helps banks make several syndicated issues a day. This is a model we’d like to adopt, but it requires serious changes in the law on mortgage-backed securities. “Banks must have confidence in the quality of each other’s loans and must agree to abide by a common standard.” At this point, the agency is forging ahead with its debut syndicated deal, which will deliver model documents and streamline the issue mechanism.

account, now the pattern of human behavior is different: lending is on the rise, against a backdrop of increased consumer optimism.” This increased optimism is reflected by Euroset, one of the most popular retailers of mobile technology in Russia, which has also felt an increase in the credit market. The company now provides various financial services in its stores. Not only can its users pay utility bills, but they can also take advantage of microcrediting. The retailer notes that, since launching its credit program, it has issued seven billion rubles ($225 million) at an average of 55,000 rubles per microloan. The company approves up to 10,000 loan applications per month. “Right now, the Russian consumer finance market has great growth potential. But the risk remains that an unforeseen financial event on a global scale could make some borrowers temporarily insolvent,”says Mamut. The problem could be partially offset by a new federal law on personal bankruptcy, which the lower house of parliament has been considering for some time now. It would force down interest rates on loans, but at the same time tighten issuance procedures.

After briefly becoming Europe’s largest market for cars in 2008, Russia’s auto purchases hit a slump during the financial crisis, before achieving a rapid recovery, helped by a generous state cash-for-clunkers program. Presently, credit sales at authorized dealers account for 30-35% of total sales. Last year, a total of 806,000 car loans were made (this could soon hit 1.2 million annually).

IN FIGURES

33%

revenue growth is expected by Russia’s leading supermarkets this year, as domestic and foreign-owned chains expand into the country’s regions. Cities with a population of over one million remain the major target for most retailers.

13%

growth in car sales has also been reported this year, as Russia gears up to regain its position as Europe’s largest car market (after Germany) within the next five years. More “foreign” cars are now being assembled within Russia than ever before.

90%

or more of the most popular European brands already operate in the Russian market, with the rest considering entry, according to James Brown of EMEA Retail Consulting and Research.

PHOTOXPRESS

As the rapid growth of mortgages is cut in half, market participants come up against a serious problem: raising money amid constantly rising interest rates.

Russians enjoy a wide variety of credit options.

Euroset, Russia’s largest mobile technology retailer, has moved into providing various financial services for clients.

ADVERTISEMENT 06

Money & Markets

RUSSIAN BUSINESS INSIGHT SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA WWW.RBTH.RU

AHEAD OF THE CURVE

Finance Sound macro-economic fundamentals have generated a high demand for bonds

Tackling the pensions shortfall

Russian Bonds Flying Off the Shelf

Boris Titov IZVESTIA

ome serious, strategic decisions must be taken to improve conditions for doing business in Russia. President Vladimir Putin’s “Road Maps,” which have set out paths to improve the country’s business climate, are a good start. Yet expedited building permits and efficient customs can only help so much. The total business tax burden in Russia is 30% higher than in neighboring Kazakhstan; energy prices here have caught up with those in the U.S.; and interest rates are the highest in the civilized world.A key problem is the delay in tackling pension reform, which has been postponed until 2014. The government’s strategy has been criticized by many in the business community. How the pension system works is vital for businesses, because their insurance premiums are the main source of Pension Fund contributions and the size of premiums (and procedures for their accrual and payment) affect businesses’ profitability and outlook. When premiums were raised to 34% in 2011 (they were later cut to 30% after an outcry), the share of under-the-table salaries rose to 41% from 9% – a level not seen for over a decade. Pension Fund income fell and the whole economy suffered. The government’s current path will not tackle the pensions shortfall. They will make businesses pay and raise social contributions again. Business association Delovaya Rossiya has proposed detailed reforms that would solve the problem, however – by financing pensions from different sources, depending on citizens’ ages. Under these proposals, Russians born 1967 or later would accrue accumulated pensions through the Pension Fund. For current pensioners and those who will retire soon, a Fund for Senior Generations would be set up, funded with revenues from privatization, oil and gas companies’ dividends, tobacco and alcohol taxes and a luxury property tax. This would enable reasonable pensions to be paid to non-working pensioners, and could re-energize the lethargic privatization program. Yet the problem is bigger than specific reforms on pensions, tax, credit, tariffs and infrastructure. We need a program to develop the non-commodity sectors, to industrialize and develop competition and the entire private sector. If we can meet these challenges, Russia has excellent, virtually unique opportunities for growth. We have huge potential in import substitution, commodities processing, high-tech, agriculture and transportation. Russia has strong demand, buoyed by commodities, and is financially solvent and stable. We have the money and resources, technology and personnel: everything required for an economic breakthrough.

Boris Titov is the Russian President’s Ombudsman for Entrepreneurs’ Rights.

STATE MATTERS

Cracking down on corruption

GETTY IMAGES/FOTOBANK

Sberbank has the country’s largest base of private banking clients.

Russian bonds are hot, but with yields falling some analysts are asking if a bubble hasn’t emerged. BEN ARIS SPECIAL TO RUSSIAN BUSINESS INSIGHT

The Russian government has also been cashing in on the enthusiasm for emerging-market fixed income instruments, while several statebacked companies have issued bonds to raise money in order to restructure. Russia’s international bond issuance has been on fire this year, as issuers seek cheaper borrowing on dollar-based rates in global bond markets rather than relying on expensive loans back home. Russia is on course to issue a record number of bonds: by September, Russian borrowers had issued $28.6 billion of bonds, second in the world only to Brazil’s $34.4 billion of new debt. The total volume of new Russian Eurobond issuance in 2012 might come in at $40 billion, against a total of $250 billion of emergingmarket issuance, according to JP Morgan’s estimates. Among those taking advantage of the cheap borrowing costs was the state-owned, pan-regional development bank Eurasian Development Bank (EDB), which placed $500 million worth of 10-year Eurobonds in September at a yield

of 4.767% - almost half of its previous issue three years earlier and less than Russia’s bluest blue-chip retail giant Sberbank’s 5% for a $750m Eurobond issued in July. “The markets are hot this year, with Eurobond issuance out of Russia for the first 10 months at approximately twice that of all of last year, and already at the 2010 level,” says Dmitry Krasilnikov, a member of EDB’s board of directors, who organized the bond

coupon of 0.1% per annum,” says VTB spokesman Vladim Bely. The gold bond follows on from VTB’s $1 billion perpetual bond issue in September, which the bank used to bolster its capital. Stateowned Gazprombank issued an identical $1 billion bond only a few weeks later. Indeed, with capital being squeezed by a boom in consumer lending, which rose 43% in the first 10 months of this year, Russian banks make up the lion’s share of the issues. Overall, Russia printed some $8.2 billion in new deals in October alone, of which almost $6.5 billion came out of the financial sector. Moreover, almost $5.8 billion of these banking sector issues was used to shore up bank’s capital. “Many Russian banks and corporates are an attractive bet for international institutional investors, who are seeking yield pickup for their portfolios on the back of the monetary easing by key central banks,” says Krasilnikov. However, some analysts warn that the bond rally is now nearing its peak, because yields in some classes of emerging-market bonds are now at historical lows, driven down by returns-hungry investors. “The bond market has been a stellar performer this year, but

VTB Capital issued Russia’s first gold-linked bond with a maturity of one year and variable yield capped at 20%. placement. And the banks keep coming up with new types of paper to appeal to investors. At the end of November, Russian investment bank VTB Capital issued Russia’s first ever gold-linked bond with a maturity of one year and a variable yield capped at 20%, priced in rubles. “Investors’ profits will come from rising gold prices and will be paid as a variable coupon at the end. In the event that the price of gold falls, clients’ initial investments will be returned fully, plus a fixed

IN FIGURES

$36.8 billion is the total value of all Russian bonds bonds issued this year until now.

80% is the share of Russian bank issues from total Russian issues in October this year.

16% is Russia’s share of bond issues from total emerging-market issues forecast for this year.

yields can’t keep falling for ever,” says Roland Nash, CIO of Verno Capital. “Either the volume of issuances will slow next year, or else investors will start switching out of bonds into other assets, such as equities, that offer better returns.”

Mark Galeotti

hat corruption is a serious challenge for Russia has long been acknowledged, not least by President Vladimir Putin and Prime Minister Dmitry Medvedev. There has been a regular trickle of arrests and dismissals connected with abuse of office, but generally they’ve been of smaller fry or else connected with wider political struggles. On the whole, it has been hard to see any will seriously to address the problem. If anything, there has seemed to be a culture of impunity. Suddenly, that seems to have changed. Defense Minister Anatoly Serdyukov was sacked after allegations that a company linked to his ministry sold off $95 million of property at below-market prices. A former deputy regional development minister was arrested after claims that $470 million was embezzled as facilities were built for September’s APEC Summit in Vladivostok. New investigations are being opened within the Health and Social Development Ministry and the Glonass satellite navigation system. Why the apparent change of heart? First, the government has truly come to appreciate the costs and risks in allowing corruption to fester. For example, military spending is under pressure given the need to fund everything from education to pensions. According to military prosecutors, one-fifth of the State Armament Order is misappropriated. And fraud connected to events like the 2014 Sochi Winter Olympics and the APEC Summit deters foreign investors. There is also a domestic political dimension. The public is dismayed by the persistence of corruption, which has become one of the relatively few rallying cries able to unite the disparate opposition forces. Aware of this, the Kremlin is looking to capture the corruption card for itself, presenting itself as the body able and willing to clean up the country. To lighten the burden of corruption on people’s dayto-day lives, it is largely bribe-takers at the bottom or middle ranks of the apparatus who must be targeted. However, to have a political impact, more exalted heads must roll. It is hard to know how credible the campaign will be, though. If it is envisaged as little more than a political marketing campaign – a couple of months’ rhetoric, a few high-profile arrests, then business as usual – it may well prove counter-productive. Truly fighting corruption means a dramatic reshuffle of the elite, a comprehensive change in the administrative culture of Russia. This would be a phenomenal legacy to leave Russia, but it is not yet clear whether Putin has the enthusiasm, determination and authority for the task.

Mark Galeotti is Professor of Global Affairs at New York University.

Q&A

Jim Rogers: Russia Changing for the Better VTB Capital, the largest Russian investment bank, recently hired the Russia-skeptic investor Jim Rogers as an advisor to its agriculture division. Why did he take the job? MARK ZAVADSKY EXPERT MAGAZINE

“Drop by my place at 8:30 a.m. – we’ll talk while I do my spinning workout.”This is probably the way that one of the world’s most successful investors should be interviewed. Time is money – and who knows how much 90 minutes of Jim Rogers’ time is worth? During his workout, the discussion focused on his sudden interest in Russia. How did you come to join VTB? I’ve been to Russia several times. My first visit was in 1966, and people know that I have been always very skeptical about the country. But people at VTB asked me if I wanted to work for them – they said they knew my views could change. We first met this summer in Moscow, and then at the APEC summit in Vladivostok. I do think the situation is changing for the better in Russia – otherwise I wouldn’t be working for VTB. People wonder whether your enthusiasm for Russia is part of the contract. If you think you can buy me for a couple thousand rubles or dollars, you’re wrong. I might have a price, but it is too high. I don’t really know

how much I would have to be paid to say what I don’t really think is true. I heard an interview withVladimir Putin and realized that I agree with almost everything he had to say – it made me think. This had never happened to me before – at least, not when I listened to a politician speaking. Has Russia changed, or were you too critical of the country in the past? My attitude was fair. It’s the country and the people in government that are changing. When things change, people have to alter their opinions. Many remain skeptical, including people in Russia, which is good, because skepticism makes assets cheaper. When most people are wrong and you turn out to be right, you can make a lot of money. What exactly did you like about that interview with Putin? Putin said that foreigners should expect good returns in Russia and have their investments secured. Capital needs only two things: security and yield. The higher, the better. The president admitted that investors weren’t entirely safe in Russia before, that Russia needs to ensure the rule of law is upheld. But even if what he said was correct, they are still only words. You’ve got a point. Russia has been saying the right things for 95 years: “We love you, just get your money

REUTERS/VOSTOCK-PHOTO

SPECIAL TO RUSSIAN BUSINESS INSIGHT

HIS STORY

Jim Rogers ADVISOR TO AGRICULTURAL DIVISION OF VTB GROUP

Jim Rogers co-founded the Quantum Fund with George Soros in 1973, leading it to a record 4,200% profitability in 10 years. Following an extended stint of avoiding investments into Russia, he joined the board of VTB Group after announcing that Russia was changing for the better.

here, we want to help you.” And then they take your money and send you to prison. But I believe that, now, both actions and words will be positive, although this doesn’t necessarily mean things will go smoothly. What do you think about the situation in the United States? America is the largest debtor in the history of mankind. This might be the beginning of the end. There are many ways for a country to go bankrupt: you can simply print too much

flat money. In the Soviet Union, if I owed you a million in the 1980s, I’d easily repay you in the 1990s, and the million would cost me nothing. A country’s economic situation can change very fast. Should the U.S. try to reduce the debt, or is it too large? It’s a meaningless question. They won’t even consider it. Back in 2008, Obama promised that he would address the budget deficit. If people wake up tomorrow and decide something needs to be done, we can salvage the situation. We lived in debt for 50 years, but it’s better to lose your arm than wait for cancer to finish you off. The Japanese had similar problems in the 1990s. They didn’t allow their companies and people to go bust, and they lost two decades. Scandinavian countries did the opposite: they let their companies and people go bankrupt. It was terrible for three years, but then they started growing as Japan went down. This is the realistic way. Russia made this choice in the 1990s, when the ruble collapsed and everyone who deserved to go bust did so, but afterward you had a favorable economic situation. We should opt for the short-term pain.

Comment & Analysis

RUSSIAN BUSINESS INSIGHT SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA WWW.RBTH.RU

SHALE DIVIDES RUSSIA, U.S. GAZPROM NEEDS TO ADAPT, AND FAST Mikhail Korchemkin ANALYST

few years ago, Gazprom regarded the United States as one of the main consumers of Russian natural gas. By 2015, the Russian gas monopoly had planned to increase its share in the U.S. natural gas market to 10%. However, the shale gas revolution thwarted its plans. The U.S. doubled its annual shale gas output in 2007 and 2008, even though import prices were quite reasonable, at $243 and $307 per 1,000 cubic meters, respectively. During most of 2009, the import price remained below $130, but shale gas production continued to grow. U.S. imports of liquefied natural gas (LNG) not only failed to double over the past five years as had been predicted, but fell dramatically, with imports in the first eight months of 2012 less than one-fifth of the volumes half a decade earlier. Thanks to shale gas, the tables have been turned: the U.S. has changed from a major gas importer into a potential exporter. Russia’s president,Vladimir Putin, in October warned that the development of shale gas production solutions“could seriously restructure the global market for hydrocarbons.” Yet Gazprom CEO Alexei Miller still speaks about the shale gas revolution as if it were a futuristic Hollywood movie, commenting recently that Gazprom didn’t consider shale to be a promising business. The truth is that the global gas market is now unfavourable for Gazprom. Because of reduced U.S. demand for natural gas, the LNG traditionally supplied from Trinidad, Nigeria and other countries is being rerouted to the spot markets of Europe and Asia, resulting in lower prices. Gazprom’s competitors have renegotiated and cut their prices faster, grabbing market share, and it currently faces huge political pressure and lawsuits. The answer is to meet its customers halfway in price negotiations. The shale revolution also hits Gazprom’s prospects of supplying gas to China by pipeline. China plans to increase its shale gas output to 80 billion cubic metres per year by 2020. Given annual supplies of 55 billion cubic metres of natural gas from Central Asia, Russia will have no gas future in China, at least until Gazprom offers Beijing a competitive fee.

Gazprom still believes that, despite the global shale gas bonanza, its position in the world market will remain unshaken.“The current shale gas output volumes won’t be enough to change the situation in the European gas market because of the cuts in the production of traditional natural gas,” Gazprom said in its report for the third quarter of 2012. “In the medium term, Gazprom’s natural gas supplies to its traditional markets will remain competitive.” Yet the global figures tell a different story. If shale gas production costs remain at the average U.S. level of $4 to $5 per MMBtu, then shale gas will be as competitive in some regions as pipeline gas delivered by Gazprom. Does Gazprom have real shale gas produc-

Gazprom needs to cut costs on pipeline construction and save its share of the major gas markets. tion prospects of its own? I don’t think so. Instead it should focus on keeping its (falling) share in the major gas markets – in Russia, the former Soviet Union and Europe. Inefficent Gazprom needs to cut costs, especially on pipeline construction, and put off exploring some deposits, specifically the Bovanenkovo gas field. Shale gas may be attractive for independent Russian producers, including Novatek, Itera and smaller companies working in the regions that have no access to network gas. They will be able to work in local markets, offering fees below those charged by Gazprom. The Kremlin has promised that domestic gas supplies will eventually be as profitable as exports, so shale gas could ultimately displace Gazprom’s pipelines. I believe shale gas production costs will average $4-5 per MMBtu. In the U.S., production costs remain within $3 per MMBtu at some deposits, which is lower than Gazprom’s average wholesale price in Russia. So the challenge for Gazprom is clear: become more competitive, or face being eclipsed by its competitors. Mikhail Korchemkin is president of East European Gas Analysis, a consulting firm.

GAS, BLACK GOLD AND THE COUNTRY’S FUTURE Ian Pryde ANALYST

ost observers agree that after making generous promises during the presidential election campaign, Vladimir Putin has finally realized that Gazprom is no longer the state’s cash cow. In October, he warned that the development of shale gas“could seriously restructure the global market for hydrocarbons,”although experts argued it was a game changer long before. The same observers see all the moves to create a huge energy conglomerate at Rosneft in recent months as Putin’s attempt to shore up the budget to keep his election promises. The problem is not only that Russia still seems totally wedded to the failed Soviet methods of state-run gigantism, but has simply shifted all its eggs from one basket to another and will remain just as exposed as before to the vagaries of global energy prices. In this sense, the economy’s structure has hardly changed since the Soviet era, when oil propped up the budget, but the country had to import grain periodically from the likes of the United States, Argentina and Australia to make up for failed harvests due to bad weather and its chronically inefficient agricultural sector. Before and after the Asia-Pacific Economic Cooperation (APEC) summit in Vladivostok in early September, Prime Minister Dmitry Medvedev and Oleg Deripaska, one of Russia’s richest oligarchs, wrote virtually identical articles in the Financial Times about Russia’s need to “pivot to Asia,”which involves developing Russia’s sparsely populated, poorly developed and often inhospitable Far East Region in order to supply Asia with the resources it needs, especially oil, gas, metals and electricity. Russia, however, has been here before – the Kremlin was convinced that the commodity boom would last until 2014, despite warnings to the contrary from numerous experts, including even Jim O’Neill, the inventor of the much vaunted BRIC acronym. Once again, the approach is typically Soviet-cum-Russian – grandiose medium and long-term plans and projects that do little to ease pressing problems now. And once again, there are significant risks. The BRIC countries, three of which are in Asia,

are all experiencing significant slowdowns following their unbridled optimism in 2000-2008. Then there’s energy – the threat to Russia is not just from shale gas and oil. As energy expert Daniel Yergin asks, if global GDP jumps from some $70 trillion now to $130 trillion in just two decades and the number of cars doubles from 1 billion in 2011 to 2 billion, mostly in Asia, will fuel resources be sufficient? If not, Russia will of course benefit enormously. But the future is unknowable, and another disruptive technology – or technologies – could change the equation fundamentally. Given its educational level and intellectual history – the Soviet Union produced 27 Nobel Prize winners in economics and science – Rus-

Just like in Soviet times, Russia is finding it extremely difficult to move up the added value chain. sia should be doing much better in diversifying its economy, but as in the Soviet period, modern Russia is finding it astonishingly difficult to move up the value chain. As Ruchir Sharma, head of Emerging Market Equities and Global Macro at the investment bank Morgan Stanley, has pointed out, the Moscow stock exchange lists not even one large global manufacturing company, while none of the top 5 global vodka brands is Russian! Ultimately, Russia’s problems come down to politics. There are no rich countries of any size that are not democratic. As Sharma noted, “Russia needs not only a new non-oil economic model. It needs a new non-tsarist mindset.”That means fundamental economic and political reforms – and development of the rule of law and trust in society both between state and people and between the people themselves. A modest start might have been made. Recently, Russia finally passed a law to allow people to register businesses at home – just 21 years after the collapse of the Soviet Union! Ian Pryde is Founder and C.E.O. of Eurasia Strategy & Communications in Moscow.

NATALIA MIKHAYLENKO

THE ENERGY BEHIND INNOVATION Oleg Fomichev DEPUTY MINISTER OF ECONOMIC DEVELOPMENT

t this month’s Open Innovations Forum in Moscow, we brought together some of the world’s top leaders in the fields of innovation and business - including Sir Richard Branson - to examine what conditions are necessary for the knowledgebased economy to thrive. This is something Russia’s leadership has invested considerable time and resources in creating. While our country is still at a very early stage in this process, we can already look at positive dynamics and competitive products coming out of the many organizations tasked with its development, like Skolkovo and Rosnano. Unfortunately, Russia’s economy is not yet at a stage where private enterprise has a huge demand for innovation. One reason is that our companies haven’t yet exhausted the potential of“sluggish innovation,”whereby they sim-

ply import foreign technologies or methods and rapidly improve their productivity. Another factor is that our business environment still leaves much to be desired. Until we optimize basic things like customs legislation, taxes and social transfers, business will not have enough incentive to invest in innovation. Therefore, innovation won’t happen in Russia without state involvement at this stage. Even in the U.S., which prides itself on having a liberal economic policy, the government supports innovative development via various incubators, tax breaks and other incentives. Our idea is to emulate these best practices while gradually handing over the initiative to private businesses. The obvious question is over the role Russia’s energy sector, currently the major source of revenue for the federal budget, can play in this process. At the energy cluster in Skolkovo, for example, one of our home-grown companies is currently negotiating with global oil majors to develop its own method of refining oil into gasoline much more efficiently and cheaply than

THIS SUPPLEMENT IS PRODUCED AND PUBLISHED BY ROSSIYSKAYA GAZETA (RUSSIA) AND DID NOT INVOLVE THE NEWS OR EDITORIAL DEPARTMENTS OF THE WALL STREET JOURNAL WEB ADDRESS HTTP://RBTH.RU E-MAIL US@RBTH.RU TEL. +7 (495) 775 3114 FAX +7 (495) 988 9213 ADDRESS 24 PRAVDY STR., BLDG. 4, FLOOR 7, MOSCOW, RUSSIA, 125 993. EVGENY ABOV PUBLISHER ARTEM ZAGORODNOV EXECUTIVE EDITOR ELENA SHIPILOVA EDITOR TIM WALL, PETER PURTON GUEST EDITORS OLGA GUITCHOUNTS REPRESENTATIVE (U.S.) ANDREY SHIMARSKIY ART DIRECTOR ANDREI ZAITSEV HEAD OF PHOTO DEPT MILLA DOMOGATSKAYA HEAD OF PRE-PRINT DEPT ILYA OVCHARENKO LAYOUT AN E-PAPER VERSION OF THIS SUPPLEMENT IS AVAILABLE AT WWW.RBTH.RU. TO ADVERTISE IN THIS SUPPLEMENT CONTACT JULIA GOLIKOVA, ADVERTISING & PR DIRECTOR,

current practices allow. I’m convinced there’s a great potential coming out of a synergy between our new economy, innovation, and our traditional sectors in energy. Moreover, in this field the demand actually exists as Gazprom and other majors adjust to

There’s great potential coming out of a synergy between Russia’s traditional energy-based economy and innovation. Shale gas and other factors have created the necessary demand. new realities in the global energy market. New technologies allow them to tap into previously inaccessible oil fields, while shale gas has brought about nothing short of a revolution in this field. A smaller challenge also comes from

AT GOLIKOVA@RG.RU © COPYRIGHT 2012, FSFI ROSSIYSKAYA GAZETA. ALL RIGHTS RESERVED. ALEXANDER GORBENKO CHAIRMAN OF THE BOARD. PAVEL NEGOITSA GENERAL DIRECTOR VLADISLAV FRONIN CHIEF EDITOR ANY COPYING, REDISTRIBUTION OR RETRANSMISSION OF THE CONTENTS OF THIS PUBLICATION, OTHER THAN FOR PERSONAL USE, WITHOUT THE WRITTEN CONSENT OF ROSSIYSKAYA GAZETA IS PROHIBITED. TO OBTAIN PERMISSION TO REPRINT OR COPY AN ARTICLE OR PHOTO, PLEASE PHONE +7 (495) 775 3114 OR E-MAIL US@RBTH.RU WITH YOUR REQUEST. RUSSIAN BUSINESS INSIGHT IS NOT RESPONSIBLE FOR UNSOLICITED MANUSCRIPTS AND PHOTOS.

renewable energies, such as solar and biofuels, which have developed into drivers of economic growth in other countries. Russia’s leadership is taking every measure to guarantee that our companies do not lose market share to more innovative players via state support for research and development. This will allow energy to remain a major driver of Russia’s economic modernization in the coming years, especially as it currently provides a lot of upstream and downstream demand for other sectors. It’s important to remember that the energy sector is not going anywhere; its role in Russia’s economy will just be diminished as consumer demand-driven production and services are localized here and businesses begin to invest in innovation. Next year’s Forum will focus on more global problems - namely, how a lack of investment into fundamental research in traditional “innovation” hotbeds like South Korea and Singapore will affect the global knowledge economy in the future. In this field, Russia has a lot to offer the world.

LETTERS FROM READERS, GUEST COLUMNS AND CARTOONS LABELED “COMMENTS,” “VIEWPOINT” OR APPEARING ON THE “OPINION” AND “REFLECTIONS” PAGES OF THIS SUPPLEMENT ARE SELECTED TO REPRESENT A BROAD RANGE OF VIEWS AND DO NOT NECESSARILY REPRESENT THOSE OF THE EDITORS OF RUSSIAN BUSINESS INSIGHT OR ROSSIYSKAYA GAZETA. PLEASE SEND LETTERS TO THE EDITOR TO US@RBTH.RU

ADVERTISEMENT 08

Feature

RUSSIAN BUSINESS INSIGHT SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA WWW.RBTH.RU

Theater The former artistic director of Moscow’s Bolshoi brings American ballet to life

Dancing for the Stars, in NYC Choreographer Alexei Ratmansky is revitalizing the world of ballet in New York with a balance of satire and reverence, which he may have inherited from his stint at the Bolshoi. NORA FITZGERALD, AYANO HODOUCHI

Ratmansky’s Revitalized Nutcracker In 2010, Ratmansky bravely took on American ballet’s predictable holiday spectacle,“The Nutcracker,”and transformed it into something deeper. Critics were thrilled: “Made with complete theatrical authority from first to last, it shows many aspects of Mr. Ratmansky: satirist,

Alexei Ratmansky practicing with his dance troupe in New York City.

HIS STORY

Alexei Ratmansky CHOREOGRAPHER, FORMER ARTISTIC DIRECTOR OF BOLSHOI BALLET

Alexei Ratmansky was born in St. Petersburg in 1968. His father was a famous developer of components for the Soviet space program. In 1978-86 he studied in the Moscow choreographic academy, where he had his first experience with ballet. He was the main soloist for a number of ballets, including Royal Winnipeg Ballet and the Royal Danish Ballet. His first full production was in 1998 at the Mariisnky Theater in St. Petersburg. In 2004-08 he served as the Bolshoi’s artistic director before becoming the choreographer of the American Ballet Theater in NYC. KOMMERSANT

Alexei Ratmansky has a calm and elegant presence, somehow appearing both vaguely aristocratic and deeply casual at the same time. The former artistic director of the Bolshoi Ballet and veteran dancer has fully matured as an artist, becoming, unarguably, one of the world’s great choreographers. And while his work consistently reflects his Russian roots, he thrives in the United States. Since 2009, he has been artist in residence at American Ballet Theater; he has also made NewYork his home, or at least one of them. On November 9, Ratmansky was rewarded with a cross-cultural affirmation of his stature. He was awarded the Liberty Prize at the Russian Consulate on 91st Street, a nod to his gifts and his ability to move ably as an artist and cultural ambassador between Moscow and New York, and all the major ballet cities in between. The award, and an undisclosed cash prize, has been bestowed every year since 1999 by three prominent Russian Americans—artist Grisha Bruskin and writers Alexander Genis and Solomon Volkov. Past winners have included writersVassily Aksyonov andVladimir Sorokin, and publisher Irina Prokhorova. Straining above the din of celebration at the New York consulate, Ratmansky thanked the Russian-American organizers of the award. “Above all I am grateful to my profession,” he said. “And I am lucky that in ballet it is possible to be a patriot in all innocence,” he said, meaning that he is lucky to serve his country through his art. Ratmansky also spoke of his tenure on American soil, which in many ways has been more nurturing and less controversial than his stint as the artistic director of the Bolshoi, where he learned the constraints of managing artists and being an artist at the same time. “If you put on a good production, they will embrace you here and welcome you eagerly,” Ratmansky said of the U.S. “And if you talk about the repertoire of classical ballet, more than half of it is Russian. It’s prestigious to be a Russian choreographer in the U.S., where there is such respect for Petipa, Fokine, and other great [choreographers]. “And the respect people have for these names are reflected on you as well,” he said, addressing the mostly Russian audience. “Such support is priceless.”

GETTY IMAGES/FOTOBANK

SPECIAL TO RUSSIAN BUSINESS INSIGHT

storyteller, dramatist, poet,”wrote The NewYork Times. American Ballet Theater performs Ratmansky’s“Nutcracker”from December 7 through December 16, at the Brooklyn Academy of Music Opera House. While Ratmansky knew better than to try to revolutionize a cash cow like“The Nutcracker,” he also knew he could improve the ballet. Ironically, this ballet is the single reason many ballet companies survive financially. The ballet, based on the children’s tale by E.T.A. Hoffman, was not well received in Europe and Russia when it premiered in 1892 - critics uniformly panned the early productions. Tchaikovsky did not live long enough to relish its eventual and indomitable popular appeal. The 44-year-old choreographer, who was born in St. Petersburg (then Leningrad), has said in many interviews that he was never a huge fan of the original ballet. He felt the music was overexposed and hard to feel anew. But Ratmansky breathes life into the work, revealing a dreamlike maturation of protagonist Clara, a role originally danced by Veronika Part, an extravagantly generous and virtuosic dancer. Ratmansky chose to change the climactic pas de deux, and choreograph it between Clara and the prince, who are the main characters of the ballet—rather than the prince and the sugar plum fairy. The duet is more powerful and ma-

ture in its rendering. At a rehearsal for the premiere, Ratmansky appeared relaxed and confident in ABT’s Broadway studio. “At American Ballet Theater, I don’t have to waste time explaining why I want to do this or that,”he said at the time.“They understand that this is their job.” At the Bolshoi, Ratmansky recalled, “There is a cult called ‘We are the Bolshoi.’ It’s limiting on one hand. On the other hand, there is a sparkle. Sometimes the self-importance leads to great performances.” “Don’t tell him, but the Bolshoi is going to change, partly because of his ballets, and so be it,” New Yorker dance critic Joan Acocella predicted in 2005. And she was right. In 2011, Acocella called him the “most sought after man in ballet.” Critics have noticed that he has a penchant for old stories, and a reverence toward tradition, yet still he is creating what Acocella calls a “renewed modernism.” When Ratmansky was at the helm of the Bolshoi, the company experimented for the first time with the modern choreography of Twyla Tharp. He also restored a long forgotten Soviet-era ballet,“The Bright Stream,”to the music of Shostakovich in honor of his 100th birthday. Ratmansky’s passion for the Russian avant garde is something devotees are sure to see more of in the future.

City attractions It’s hard to get a seat at Moscow’s most famous cultural destination

One year after reopening, the historic building struggles to pair imperial glamour with contemporary appeal. JOY NEUMEYER SPECIAL TO RUSSIAN BUSINESS INSIGHT

One year after a star-studded gala toasted the reopening of the Bolshoi Theater, the Russian icon is prompting both awe and eye-rolling in its attempts to bolster its reputation as one of the world’s leading companies. Last November’s gala put a coda on a sixyear renovation process that totaled upwards of $688 million dollars.While workmen replaced the building’s 19th-century wooden foundations, thousands of artisans were brought in to uncover painted-over mosaics, reapply gold leaf and re-glue chairs with a concoction of tea leaves and sturgeons’ innards. Concrete that was poured under the floor during the Soviet era was removed, restoring the theater’s original acoustics. The Bolshoi’s new sound continues to impress its audiences. “Before the reconstruction, the sound went right over your head,” says Raymond Stults, longtime Bolshoi critic for the Moscow Times, referring to the first row of orchestra seats. “It’s made a lot of difference.” Last season opened to high expectations, with

Dmitry Chernyakov’s provocative production of “Ruslan and Lyudmila,” which found favor among critics (and provoked booing from some audience members). But this promise went unfulfilled: “Ruslan and Lyudmila” was the only Bolshoi production from the past year to be nominated for a Golden Mask award, Russia’s top performing arts honors. While Richard Strauss’s“Der Rosenkavalier” was well received, a spring production of Tchai-

After a buying frenzy made tickets all but impossible to attain, the theater cracked down on scalping and introduced an online reservation system. kovsky’s seldom-performed opera“The Enchantress” confounded many. Writing for Kommersant, Sergei Khodnev called it “dismal and old-fashioned.” Meanwhile, integrating the theater into the international community remains a challenge. “Historically, these Russian companies have been islands unto themselves,” said opera critic George Loomis. “They think of themselves as pure repertory companies.”

Russia Beyond the Headlines ONLINE

Do you think Madonna broke the law which forbids the promotion of homosexuality in Russia?

But for its first full season since the renovation, the Bolshoi has planned five opera and five ballet premieres, plus two international festivals that will bring in top companies such as Ballet Bejart Lausanne. The program also includes plenty of appearances by outside talent, such as American director Francesca Zambello, whose “La Traviata” won raves this fall. “The Bolshoi hasn’t had a season so full of rich and promising events, not only in the prerevolutionary and Soviet periods, but even in the creative era of [former ballet director Alexei] Ratmansky,”gushed Kommersant ballet critic Tatyana Kuznetsova. Now, the Bolshoi has begun grouping premiere performances together rather than sprinkling them throughout the season, bringing it in line with other major companies. And a new young artists’ program is grooming fresh talent for opera, which so far has been less successful at producing post-Soviet stars than ballet. After a post-renovation buying frenzy made tickets all but impossible to attain, the theater cracked down on scalping and introduced an online reservation system. Premieres still sell out months in advance, but prices remain relatively affordable, with tickets ranging from under 1,000 rubles ($30) for the upper balconies to 6,000 rubles for the front row.

GETTY IMAGES/FOTOBANK

Boos and Bravos at a Modernizing Bolshoi Theater

The Bolshoi’s main hall features much improved acoustics since the renovation.

“Of course we want to watch the classics we haven’t seen in years, but we’re interested in new productions as well,”says Svetlana Kapustina, waiting in line with a friend to buy tickets for “Swan Lake.” “They may be controversial, but it’s best to see them with your own eyes,” she adds. Despite the war on ticket scalping, a familiar group of men in black jackets was standing just outside the box office. Their asking price for balcony tickets to a sold-out production of “La Traviata” began at 3,500 rubles. A policeman looked on indifferently. Tickets can be purchased at www.bolshoi.ru/en/visit

Don`t miss S i l ve r A rc h e r USA AWARDS

Share your opinion! www.luchnik.ru/silver_archer-usa/awards

www.rbth.ru

facebook.com/russianow

twitter.com/ russiabeyond

C O N TAC T U S : F o r e d i t o r i a l i n q u i r i e s , p l e a s e , c o n t a c t u s @ r b t h . r u

Official media sponsor: RBTH

F o r p a r t n e r s h i p o r a d ve r t i s i n g c o n t a c t s a l e s @ r b t h . r u p h . + 7 ( 4 9 5 ) 7 7 5 3 1 1 4