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THE ECONOMIC TIMES IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA

WEDNESDAY, DECEMBER 12, 2012

NEWS IN BRIEF

SECURITY: Focus on special artillery shooting, saving crews and anti-piracy operations

Indra: Naval bonding in Mumbai

‘Gazprom eyes stake in Chennai LNG terminal’ Gazprom, which recently made its first major liquefied natural gas (LNG) deal with GAIL, is now in talks with Indian Oil Corp Ltd for a stake in a planned $793 million LNG terminal near Chennai, a newspaper reported. The refinery will have a capacity of 5 million tonnes per annum (mtpa) LNG terminal planned at Ennore near Chennai, the paper said. “Talks are on between Gazprom and IOC for a stake in the Ennore LNG terminal. Gazprom is setting up a huge liquefaction facility at Sakhalin. It wants a gasification facility in India to cater to the growing demand here,” it reported. RIBR

Ahead of Putin’s December 24 visit, the joint exercise and arrival of the Pacific Fleet underlines special strategic ties AJAY KAMALAKARAN RIBR

Sukhoi Superjet 100 gets Indonesia boost

Marshal Shaposhnikov, the anti-submarine destroyer, off the Mumbai coast. The Pacific Fleet is famous for its role in the 1971 war. Army hero Boris Shaposhnikov, has a chequered recent history. The ship went on an anti-piracy operation in the Gulf of Aden in 2010, when it freed a Russian merchant vessel that was hijacked by Somali pirates. The anti-submarine destroyer has 2 Ka-27 helicopters and a naval infantry unit on board. The Russian ambassador, who rubbished media reports about a cooling in Russia-India relations, said he was happy to see increased naval exchanges between the countries. “There was a lull in the exchange of our military ships but we are now again working with

India and continuing an old tradition from even before 1971,” Kadakin said. He added that the second phase of Indra will be held next year off the coast of Mumbai and will comprise of a much larger set of exercises. The word Indra is a portmanteau of India and Russia. Since 2003, the two countries have held five Indra-series joint ground and naval exercises with the last one being held by army units in 2010. When asked about the future trajectory of cooperation between Russia and India, the ambassador said that the sky wasn’t

DIPLOMACY: Urgent need to scale up trade sets $20 bn target by ‘15

‘Russia remains India’s most vital partner’ Moscow adds decisive value to our national capacities, says Foreign Secretary Ranjan Mathai SHWETA CHAND RIBR

AFP/EASTNEWS

Amid speculation about a drift in IndiaRussia ties, a misperception that acquired a life of its own after the postponement of Russian President Vladimir Putin’s visit to New Delhi, India has asserted the pivotal role of Moscow in its foreign policy calculus. In a little-noticed but a powerful articulation, India’s Foreign Secretary Ranjan Mathai stressed that the relations with Russia, from the Indian perspective remains “perhaps the most vital, most decisive of our strategic partnerships.” In a tacit repudiation of sceptics who have accused India of drifting into the Western camp in recent years, Mathai underscored that “even today, in this dramatically redefined post-Cold War world, our relations with Russia remain a key priority for India’s foreign policy, and one which adds decisive value to our national capacities.” He was speaking at the sixth India-Russia dialogue, organised by the Observer Research Foundation and Russkyi Mir Foundation, on November 22 in New Delhi. “We also like to believe that India continues to be as relevant to Russia. Our ‘special and privileged’ strategic partnership today rests on a strong

Ranjan Mathai, India’s Foreign Secretary, stressed the importance of strategic partnership with Russia. edifice built upon traditional pillars of cooperation.” What’s more, Mathai underlined that the relationship “enjoys tremendous support in the public and across the political spectrum, in India as well as in Russia.” The phrase “time-tested ties” has been much bandied about in the context of India-Russia relations, but Mathai’s speech has a special reminder to the new generation that seems to have forgotten the special role Russia has played in critical national building capacities

of India that includes setting up some of the first iron and steel plants and has now extended to the realm of civil nuclear cooperation. The ties have morphed into a multifaceted architecture of partnership, which Mathai pointed out, rests on a tripod or 4-legged stool – political dialogue (starting from the highest level) which encompasses sharing of views – to counter terrorism cooperation; defence, civil, nuclear energy and space. He also dispelled some myths spread by vested interests, which speculate about India-Russia defence ties slipping into turbulence. “We often hear rumblings in the media, both here and in Russia, whenever a big-ticket defence deal does not go the Russia way or when Russia collaborates with others. I am confident that our ties are much too mature to be shaped by individual deals in India’s competitive defence space, or by Russia expanding horizons,” he said. On the global stage, Russia remains India’s trusted friend and confidante, he said. “Russia’s overt support for India’s permanent membership of the UNSC, the NSG, SCO and the APEC are extremely vital for us.” However, India’s top diplomat also voiced what he called “a major disappointment” about trade and economic ties not matching the strategic ties.” Reiterating the target of scaling up around $10 billion to $20 billion by 2015, Mathai said that the two countries have identified “a few sunrise industries which we can focus on: these include pharmaceuticals, information technology and space-based navigation systems for civilian purposes.” Setting the right tone, Mathai hoped Russian President Vladimir Putin’s visit to India on Dec 24 will “be both symbolic and substantive.”

the limit since the two countries have been cooperating even in outer space. “There isn’t a field of human activity where India and Russia would not cooperate,” Kadakin said, citing examples as diverse as India’s Moon mission and fifth generation fighter aircraft. The envoy underlined that Russian President Vladimir Putin’s upcoming visit to India on December 24 is not a routine affair. Stressing that Russia was the first country to hold annual summits with India, he said the yearly meetings bought “tangible results” in cooperation.

PRESS PHOTO

Indonesia has validated the international certificate for Russia’s Sukhoi Superjet 100 airliner, spokesman for the Indonesian Transport Ministry Bambang Ervan said. “The plane meets all aircraft building standards,” stressed Ervan. The Russian plane has got the first certification in Southeast Asia, say analysts. The Sukhoi Superjet 100 (SSJ 100) is a modern, fly-by-wire regional jet in the 75- to 95-seat category. With development starting in 2000, the airliner was designed by the civil aircraft division of the Russian aerospace company Sukhoi in cooperation with its main partner Boeing. The Moscow News

Vikramaditya: Russia, India ﬁnalise schedule

Fast-tracking roadmaps to spur reforms BEN ARIS RIBR

arcus Svedberg, chief economist at East Capital, Russia’s largest regulated investment fund, says: “People say there are no reforms in Russia; but it simply isn’t true.” The Russian government led by President Putin has launched 22 roadmaps to transform key sectors of the economy. Nikolai Petrov, a Carnegie Endowment analyst, has dubbed this “Putin’s NEP” -- the New Economic Policy Lenin introduced that saw private enterprise flourish. The Kremlin has already put several successful reforms in place. The banking sector was transformed by reforms launched in 2004. The power sector was successfully privatised in the middle of the last decade, attracting billions of dollars of investment. And comprehensive domestic capital market reforms launched in April 2008 will culminate next year when Russia’s securities markets are hooked into the global financial system. Indeed, the very first thing Putin did after his inauguration as president in May was sign a decree to make obtaining construction permits easier. 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.

Full version at www.indrus.in

ITAR-TASS

Rosoboronexport spokesperson Viacheslav Davidenko has announced that Russia and India have ﬁnalised and approved the list and work schedules to complete the refurbishment of the Vikramaditya aircraft carrier by the end of 2013. “Sevmash shipyard is currently repairing the boiler system. All the repair work on the aircraft carrier will be completed by the summer of 2013, when it will head for another round of sea trials,” a source in the defence industry said. The contract to refurbish the heavy nuclear-powered aircraft-carrying cruiser Soviet Fleet Admiral Gorshkov was signed with India in 2004. RIA Novosti

Bill to monitor officials’ spending approved The Federation Council approved on December 5 presidential bills introducing controls over personal spending by government officials. The controls will apply to spending “related to every purchase transaction involving land or other real estate property, vehicles, securities and stocks, if their amount exceeds the income of the purchaser and his or her spouse for the three years immediately preceding the transaction.” The law also introduces criminal liability for failure to pay a fine. The provisions of the new law become operational on January 1, 2013 and will apply to transactions entered into in 2012. RIBR

s the sunset gave way to twilight on a picture-perfect November evening in Mumbai’s naval dockyard, a group of sailors and officers from the Russian Pacific Fleet rehearsed the drill to welcome Russia’s ambassador to India Alexander Kadakin. A few young cadets, who were not a part of the protocol, spoke quietly about not being able to go out into the city and soak in its sights and sounds. The sailors were not on a pleasure cruise and the stringent standards of discipline, which the Vladivostok-based Pacific Fleet is famous for, demanded that the crew be both mentally and physically prepared for a long-term mission. These are crew members of the Udaloy class destroyer Marshal Shaposhnikov, which is on an official visit to the Mumbai port for Phase-1 of the “Indra” naval exercises with the Indian Navy. The Indian Navy’s INS Mysore destroyer and the Tabar class guided missile frigate will join the Marshal Shaposhnikov, the Irkut tanker and the Alatau rescue tug boat for the Indra exercises on the waters of India’s financial hub. The bonhomie and warmth between the Russian and Indian navies is legendary, with several Indian naval personnel posted in Severodvinsk, which houses the Sevmash shipyard. The words “Pacific Fleet” has a special resonance in India due to the role the Vladivostok-based fleet played in the 1971 Bangladesh liberation war by keeping the American Seventh Fleet out of Indian waters. “Friendship between the fleets of India and Russia is very deep-rooted and at certain points in India’s history; it has been playing a very important role,” Kadakin said after getting on board the ship. “The arrival of the vessels from the Pacific Fleet illustrates very graphically the strategic and privileged partnership that our countries have.” “Indra will focus on special artillery shooting exercises, saving crews, as well as anti-piracy exercises,” Captain First Rank Vladimir Vdovenko said. The Pacific Fleet squadron will then set sail for the Gulf of Aden. The Marshal Shaposhnikov, which is named after Red

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IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA

Business Report WEDNESDAY DECEMBER 12, 2012

THE BIG PICTURE

TRADE: Minsk demands higher valuation; Russia, China give tough competition

Playing the potash game India and Belarus are locked in hard bargaining over Indian plan to buy 10-15% stake in Belaruskali ALEXANDRA KATZ

China joins fray, banks on Uralkali

RIBR

India needs to get its act together fast on Belaruskali as Beijing has joined the fray by approaching Uralkali. Uralkali and Belaruskali own 50% each in their joint export arm, Belarusian Potash Company (BPC). In early November, the key shareholders in Uralkali issued convertible bonds in favour of China’s Chengdong Investment Corporation (CIC) in exchange for $4 billion in investment. If the bonds are fully converted into ordinary shares in the potash miner, CIC will own a 12.5% shareholding.

PRESS PHOTO

ndia has revived talks with Belarus on acquiring a 10-15% equity stake in Belaruskali, the world’s potash fertilizer giant, to secure its long-term supply of the plant nutrient. However, the planned acquisition in the potash major, which is valued at around $30 billion, has become complicated due to a host of factors. A few foreign investors have expressed an interest in buying a stake, including Russian businessman Suleiman Kerimov, the principal shareholder in Uralkali. The Russian fertilizer giant has questioned the $30 billion price tag Minsk had put on Belaruskali, thus triggering a new potash game. Muriate of potash or potassium chloride (MOP) is traded at $450-470 per tonne in the world market, half the price of crude oil. India was reported to be eyeing a 20-25% in Belaruskali at around $6-7 billion last summer. The country would like to secure long-term MOP supplies ahead of the anticipated surge in demand, but it can expect competition from Russia and China. A representative in the Indian Ministry of Chemicals and Fertilisers told Reuters that the Indian government was con-

India is keen on buying a 10-15% equity stake in Belaruskali and thus securing long-term potash fertiliser supplies but Belarus proves to be a tough bargainer. sidering gaining a strategic stake in Belaruskali. Belarus is, however, proving to be a tough bargainer and now wants not only money, but also a larger share of the Indian potash fertiliser market. Both Deputy Prime Minister Vladimir Semashko and Prime Minister Mikhail Myasnikovich confirmed in November

that Belarus might sell between 10% and 15% in Belaruskali to India. “I won’t specify the profit margin, because it is confidential, but it is way higher than that in the oil and gas businesses,” said Semashko. According to him, $30 billion is too little to ask for such a company. “We are talking about $34-36 billion now.” “India is ready to

buy 2.7 million tonnes of potash fertilisers from Belarus every year, almost enough to meet its domestic requirements,” Myasnikovich said when he returned from India. He said Belarus expected a delegation from the Indian Ministry of Chemicals and Fertilisers to come to Minsk to negotiate the price formula for 2013 and for years to come.

Getting ready for the G20 challenge RIA Novosti

he G20 group is not the G8 group. It possesses greater legitimacy because it is an annual gathering of heads of state representing the world’s largest economies. Russia will need the talent of all its relevant ministries if it wants to prove that its chairmanship is not simply the technical allotment of an arena for meetings. Every country always has a list of priorities ready when it assumes the rotating chair of the G20; it names the issues on which it will focus during the entire year. Russia is no exception, and officials have already outlined key priorities: strengthening financial stability, reducing government debt, stimulating growth, fighting unemployment. These are all burning issues, so stormy discussions are guaranteed. True, the experience of previous summits has shown that the best prepared agenda goes right out the window in the event of some terrible crisis. Thus, both the

French and Mexican chairs were forced to discuss one and the same issue: the Greek debt crisis and financial measures for putting out the fire in the euro zone. It may be that the perennial Greek issue will upset the applecart in St. Petersburg as well, although it seems that everyone has come to see Athens as routine. Clearly, in the case of the G20 group, the old saying is true: “All animals are equal, but some are more equal than others.” In other words, the main discussants number only three or four. They are the United States, China, the European Union (or, rather, Germany speaking for the EU), and, possibly, Japan, thanks to the size of its economy. True, the presence of many countries with different types of economies and political systems gives the discussion additional legitimacy. The G8 group has no such legitimacy since it was created as an exclusive club for the West and, in essence, has remained just that. Incidentally, the trademark of Russia’s G20 chairmanship will be the BRICS summit slated

REUTERS/VOSTOCK-PHOTO

Russia must mobilise talent of all its ministries to ensure that its G20 presidency is a success. FYODOR LUKYANOV

Light at the end of the Afghan tunnel

to take place in St. Petersburg on the sidelines of the main event. Although BRICS has yet to become a consolidated center for making decisions about global issues, the specter of such a center continues to trouble countries in the West. Much depends on the organisational abilities and ambitions of the chairing nation. France, under Nicolas Sarkozy, made titanic efforts to show that it was not simply offering an arena for meetings, but genuinely leading the world process. Even so, it did not entirely succeed in this.

During this year’s chairmanship of the Asia-Pacific Economic Cooperation forum by Russia, many people noticed that the relevant Russian ministries showed themselves to be capable organisers of conferences and that these conferences managed to reach the necessary consensus. This is an extremely difficult thing to achieve since China, for example, has constantly resorted to blocking all manner of decisions. At the G20 meetings over which Russia will preside, these organisational talent will be every bit as useful.

M.K. BHADRAKUMAR Foreign policy analyst

he regional capitals could heave a sigh of relief that some exceptionally good news is coming out of Afghanistan. The Taliban and their Afghan adversaries are agreeable to hearing each other out. This may seem a small step, but in a fratricidal strife, when the kinsmen finally show willingness to listen, speak to each other, the defining moment has been reached. The United States and its western allies, notably France, are acting behind the scenes to facilitate this nascent process whereby the leaders of the groups comprising the erstwhile Northern Alliance [NA] shall be sitting around later this month in Paris with the representatives of the Taliban. In sum, a process of intra-Afghan dialogue, which is crucial to a durable settlement, is commencing. Paris – the locale evokes poignant memories. It was in Paris that the then United States National Security Advisor Dr. Henry Kissinger held the tortuous negotiations with the Vietnamese Politburo member Le Duc Tho (who were later awarded the Nobel Peace Prize – although Le Duc Tho refused to accept it). The negotiations that began in 1968 led to the Paris Peace Accords of 1973. This time round, the NA leaders or Mullah Omar are unlikely to be awarded the Nobel. Nor are their parleys likely to be as prolonged, since the timeline for bringing peace to Afghanistan is very short – a year or two at the most. The forthcoming intra-Afghan meet cannot be expected to produce any dramatic breakthrough. Nonetheless, it is a stunning development that the Afghan groups are prepared to constructively engage at all. So much blood has been spilt, so much of mutual hostility and suspicions accumulated. Obviously, the United States has got Pakistan on board, and Islamabad has been instrumental in bringing the Taliban to sit cross the table with the NA representatives. The NA groups are amenable to persuasion by the western powers. The Paris meet is taking place even as the US began negotiations with Kabul regarding the establishment of long-term American military presence in Afghanistan – something used to Taliban oppose tooth and nail. On the other hand, the US insists that it is not going to walk away from Afghanistan. The grit that the US has shown would appear to

have had a salutary effect on Pakistan (and the Taliban). The point is, the long-term US military presence in Afghanistan implies that any attempt by Pakistan to push for an outright Taliban takeover in Kabul will be fraught with the grave risk of confronting the American military at some point. That is not an eventuality that suits Pakistan. On the contrary, without an outright Pakistani military intervention as in the mid1990s, Taliban’s chances of capturing power in Kabul are very remote. All the same, it is unfair to overlook that there has also been a rethink in Islamabad. For the past year Pakistan has been engaging the NA groups and admitting the need of an inclusive, broad-based Afghan settlement. Significantly, top NA leaders do not resort to harsh criticism of Pakistan anymore. For the Taliban, too, Paris meet signifies a shift. They ridiculed Hamid Karzai as a US puppet and simply refused to talk with him. But now Karzai’s representatives are attending the Paris meet. Alongside the Paris meet, we should expect that the US is almost certain to engage the Taliban on a parallel track in direct talks. Thus, the reins of the peace process remain in American and Pakistani hands, while Karzai is reduced to just another Afghan group. He won’t like this “downsizing”. Thus, there has been a spate of statements lately by Karzai harshly critical of the US on various counts. His rancor that he may be marginalized is self-evident. But then, arguably, NA stalwarts such as Ahmad Zia Massoud, Yunus Qanooni or Mohammed Mohaqiq who are key participants in the Paris meet, will not accept Karzai as their team leader, either. There is an inherent danger that advantage goes to the Taliban, which is the most cohesive group. But, equally, the NA leaders are also approaching the peace process without illusions. The UN is expected to navigate the intra-Afghan dialogue. A follow up intra-Afghan meet is already on the cards at Ashgabat. Clearly, the clincher will be the progress achieved in the US-Taliban talks.

Read M.K.Bhadrakumar’s blog at indrus.in

TECHNOLOGY: Over 250 IT ﬁrms generate $1-1.5 billion outsourcing sales, language still a barrier for professionals

Russia emerges as a new oﬀshore programming hub VITALY GUSANOV Specially for RIBR

ussia first started exporting IT services after the collapse of the Communist regime, when talented and well-qualified programmers approached foreign markets with their products. IT outsourcing has now become one of the most popular business terms in Russia. Last year, at least 250 companies were offering offshore programming services in Russia. The real number is, however, closer to 350–400. Their IT outsourcing sales are estimated at $1–1.5 billion a year. When it comes to the Russian IT outsourcing business, we mostly refer to offshore programming and software product development, which is a major

difference from India, the acknowledged IT powerhouse of outsourcing exports. China, one of the world’s fastest-growing economies, is expected to gain on India in IT outsourcing by 2020, a crucial breakthrough for the country that only a couple of years ago stood where India was in 1995! Admittedly, Russia won’t get close to the two giants in terms of the volume of outsourced IT services in the foreseeable future. Some of the IT outsourcing segments, including customer support services and remote sales, are extremely well developed in India, but remain virtually unknown in Russia for a natural reason – there is a language barrier between the potential customers and suppliers. Another reason behind the niche

WEBSITE of the embassy of the Russian Federation in India www.rusembassy.in

specialisation is Russia’s generally low appeal as a country for doing business, despite its highly qualified personnel. Compare Russia’s rank 45 in A.T. Kearney’s 50 top countries for outsourcing and its people score of 15, especially given that the latter takes into account the language proficiency of workers. India and China traditionally have the top two slots in all categories. It turns out that Russia, a successful exporter in one of the segments of the IT outsourcing market, namely, offshore programming and the development of knowledge-intensive applications, is a potential importer in other segments. When we analyse the market for outsourcing services, we can’t disregard outsourcing for the domestic market.

PHOTOXPRESS

Faced with IT giants India and China, Russia has carved a niche as an exporter in software development, knowledge-intensive applications

The domestic demand for IT outsourcing services is also growing rapidly in Russia. In India, export accounts for up to 70% of IT outsourcing, whereas in China, more than 80% of the $25-billion business targets domestic consumers. In Russia, export accounts for some 60% of this market in value terms. However, the number of companies offering IT outsourcing services domestically is much higher and is growing much

faster. Sergei Makedonsky, president of the Russia Association of Strategic Outsourcing, projects a growth in sales of outsourcing services to $7–8 billion in the next few years, and most of this increase will come from domestic sales. The domestic demand for programming services is traditionally high. Other rapidly developing outsourcing

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segments are the development and maintenance of websites for commercial companies and state organisations, as well as backoffice services. The demand from the public sector is increasing. The new legislation requiring state organisations to provide their services online and have comprehensive information about their services in electronic form has contributed greatly to the explosive growth in demand for outsourced IT services. Moscow’s 2000 schools and kindergartens are required by law to run websites, which are designed and maintained by outsourcing companies. Internet retail is one of the fastestgrowing segments, as most online stores operate using outsourced services. The most sought-after IT outsourcing services in Russia are in IT systems management, the creation and management of IT infrastructure, applications management, maintenance and support services, data centre services and server rentals. In Russia, outsourcing appears to be a very exciting sector for consumers, investors eyeing high-tech businesses and suppliers of hardware, software and network infrastructure.

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Business Report WEDNESDAY DECEMBER 12, 2012

From oil & gas to n-energy, it’s time to scale up

GAS: With gas demand dipping in Europe, Moscow ﬁnds India an attractive partner

India and Russia need to leverage energy ties’ potential, implement a cooperation blueprint VINAY SHUKLA RIBR

PRESS PHOTO

The energy partnership between India and Russia is evolving, albeit with mixed results. Sakhalin-1 is often cited as a glittering example of energy cooperation. In 2001, it was India’s maiden venture in the Russian energy sector when it invested $2.7 billion dollars through Oil and Natural Gas Corporation’s overseas arm OVL to pick 20% stake from Russia’s then ailing Rosneft oil major in offshore Sakhalin-1 in July 2001, a production sharing arrangement(PSA). The Sakhalin-1 project is operated by the US Exxon’s subsidiary Exxon Neftegaz, which has 30% stake in this large oil and gas field in Far East offshore in Russia, spread over an area of around 1,146 sq km. In the first phase of Sakhalin-1, two of the three offshore oil fields, Chayvo and Odoptu, started production in 2005 and 2010 respectively. The development of Arkutun Dagi, the third oilfield, is in progress and first oil is expected to be produced in the third quarter of 2014. In order to expand its footprint in Russia after a series of setbacks due to stiff competition from the alliance of Rosneft and China’s CNPC, a desperate OVL in January 2009 spent $2.1 billion to acquire Londonlisted Imperial Energy Corporation Plc which has main activities in the Tomsk region of western Siberia. The local media had then reported that the OVL overpaid at least $1 billion for acquiring Imperial Energy as its oil reserves are much smaller than were claimed by the previous owners. According to the OVL website during 2011-12, the production of Imperial Energy was 0.771 MMT of oil as compared to 0.770 MMT during 2010-11. The total output from both Indian investments in Russia is far below India’s aspirations. Back in July 2006, Prime Minister Dr Manmohan Singh, during his meeting with President Vladimir Putin on the sidelines of the

VICTOR KUZMIN

VLADIMIR PUTIN

President of Russia

RIBR

hanks to the shale revolution in the US, the global gas market is entering a new golden age and Russia is straining every sinew to connect its gas pipelines to Europe. Worn out by the endless gas disputes with Ukraine, Moscow has spared no expense on new pipelines to link Russia directly to 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 strings of the Nord Stream pipeline that promises to spur economic integration between Russia and Europe. One of the two new pipelines will run to the UK. A series of swap deals has provided Gazprom with enough funds to begin investments in the offshore route, says Konstantin Simonov, head of the National Energy Security Fund. The plans to expand the pipeline were confirmed in October by Gazprom CEO Alexei Miller. Capacity is set to go upto 100 billion cubic metres a year — approximately the same amount of gas that Russia currently pumps through Ukraine. The construction on the South Stream project, due to run under the Black Sea to Bulgaria and onwards overland through Hungary, Serbia, and Slovenia as far as Italy, is scheduled to start on December 7. Four strings are to be built, each with a capacity of 15.75 billion cubic metres. The first deliveries are slated for December 2015, and commercial supplies will come on line in the first quarter of 2016. The two pipelines should be enough to break Russia’s dependence on the problematic supply route through Ukraine.

“In the US, they are developing technologies to produce shale gas. National energy companies must respond to these challenges.” ALEXEI MILLER

CEO of Gazprom

“The demand for natural gas in India will exceed current ﬁgures by 1.7 times by 2020. “ Another important factor is that the demand for gas in Europe is not growing, and Germany has yet to indicate its interest in additional gas supplies from Russia. Experts at the Energy Center of the Skolkovo Business School are sure that the risk factor regarding Russian gas in the European market is rising. Demand will not recover until 2018, while spot trading is growing by leaps and bounds: 30-40 per cent a year. As a result, the commercial and political appeal of Russian gas is waning noticeably. At the same time, LNG supplies are surging and gas at power plants is being replaced with coal and other resources. In its drive to string new pipelines together, Moscow has to constantly look over its shoulder at the ongoing shale revolution in the US. Shale is not only forcing importers of traditional fossil fuels out of the US market: at the current rate of production growth, in just 10 years the US could itself be-

320

dollars per 1,000 cubic metres is the estimated price of the US shale gas in Europe.

of the world’s shale gas reserves are estimated to be in Russia.

come a major exporter of LNG to the global market. However, according to Skolkovo experts, 1,000 cubic metres of US-produced gas would cost $320 in the European market. Preliminary estimates indicate that this would be the production cost of shale gas in Poland. Hence, if suppliers of natural gas curb their appetites, they will have no trouble in keeping shale gas out of Europe simply by offering a lower price. Nevertheless, the increase in the fuel supply has already reduced demand for Russian gas in Europe, and the Russian authorities have been forced to acknowledge the problem. In October, Russian President Vladimir Putin instructed Gazprom to analyse the market and report back on the company’s export policy, focusing on shale gas. Subsequently, Gazprom announced that it was studying the prospects of shale oil, not shale gas. Russia has about seven percent 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 large-scale 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. Against this backdrop, Moscow is actively searching for alternatives, specially Asia, which is projected to be the market of the future. According to Skolkovo experts, by 2030, demand in China alone will grow from 150 billion cubic metres to 430-450 billion. Simonov, however, feels that the promising Chinese market is a problematic alternative. Another prospective consumer of Eastern Siberian fuel is India. In early October, Gazprom signed a 20-year contract to supply LNG to India’s GAIL, plus memoranda of intent with several other energy majors. Beginning 2019, GAIL will receive 2.5 million metric tonnes of liquefied natural gas per year. India could actually be a more attractive partner for Russia since it has already agreed to buy LNG, says Simonov. The gas agreement with India will strengthen Russia’s positions in its dealings with China. “It will be a good way to put pressure on the country,” says Mikhail Delyagin, director of the Moscow-based Institute of Globalisation Studies. “It is another step towards concluding a proper large-scale agreement with China. As the Chinese taught me, the best way to haggle is to walk away.”

PRESS PHOTO

Shale propels Russia to build new gas pipelines, explore Asia

G-8 summit in St. Petersburg, had sought sustained supplies of 1 million barrels per day (MBPD) of crude oil from Russia to ensure India’s national energy security. A decade after first investment in Sakhalin-1, this dream remains elusive. However, there are chances things could change for better. During President Putin’s visit to India later this month, the energy majors of the two countries could sign commercial deals to firm up upstream and downstream cooperation. Besides hydrocarbons, Russia is also a major source of civil nuclear technology, which will contribute to India’s energy security. However, concerns over nuclear safety post-Fukushima has slowed down cooperation in this vital sector. In India, legitimate concerns of local residents have further delayed the operationalisation of the Kudankulam nuclear power plant Unit I by more than one year and the Supreme Court has reserved its ruling on the Public Interest Litigation (PIL) seeking a ban amid reports of Unit-1 of Russia built VVER 1000 reactor attaining criticality during President Putin’s visit later this month. The fate of unit 3 and unit 4 hangs in the balance as New Delhi is insisting on the retrospective application of nuclear liability law. The two sides are currently engaged in negotiations to resolve these differences before Putin comes to India on December 24 for the annual summit. If the nuclear liability law is applied, the cost of the unit 3 and 4 would certainly go up. But despite these hitches, India must make sure that it benefits from Putin’s energy policy. In 2006, while addressing the national Security Council, Putin had expressed Moscow’s willingness to open new gas and oil pipelines and civil nuclear technology to reach the Asian markets to create new energy networks in the world to avoid conflicts among future generations over energy resources.

Sakhalin-1 was India’s maiden venture in the Russian energy sector launched in 2001.

FUTURE IS NOW

Post-Fukushima, here’s how one can get the energy mix right EMMANUEL GOUT ENERGY ANALYST The International Energy Agency (IEA) says the demand of energy will increase more than 33% by 2035. According to the IEA, following the German decision to quit the nuclear industry within 2020, by 2030, electricity cost in Europe will be 1,5 times higher than in the US. Saudi Arabia, the world’s chief petrol producer, will build two nuclear power plants in the near future. These hard facts spawn new questions regarding the future of energy and choosing the energy of the future. Renewable? Fossil? Schist gas? Nuclear? Others? When facing a marked increase in the demand, it appears clearly that the future of energy goes not only through an energy mix, but also a solution able to give the right

answers to the environment (basic pollution, CO2 emissions and the consequences of global warming) and safety. In fact, if solar and wind energy become more and more part of the energy mix, the IEA underlines that this might significantly influence the energy mix within 20 years. As a result, traditional energy and schist gas will remain or become the base – despite some accidents with high pollution rate, such as in Mexico recently - of the energy mix: we can only wonder whether the nuclear industry has a future after Fukushima. Let’s try to consider the future of nuclear industry. In fact, the March 2011 Fukushima radiation disaster revived legitimate security sensitivity on the

nuclear industry and the potential risks, but it could be useful to stress that all analyses of the Fukushima incident point to an error in the chain of command, to a human mistake and to an underestimation of the tsunami risk by the operator and not to a technical nuclear power plant problem. But let’s be frank: these conclusions do not justify any underestimation of the risks linked to the nuclear industry. In fact, an accident at a nuclear power plant – no matter who is the operator – affects the nuclear industry worldwide and that is the reason why the argument according to which nuclear energy is eco-friendly – no CO2 emissions – is not enough today to justify nuclear energy development. It is important to face the concerns of the population and that’s why, all nuclear countries and mainly Europe and Russia, promoted stress tests to all their plants after Fukushima – Russia also extended its stress tests to terrorism conditions. The conclusions were published and all operators had to invest millions to

complete security rules. At this stage, it could also be useful to think about a specific global authority able to deal with security and safety issues, with strong parameters and real attention to the population. Parameters of safety are in constant evolution. In fact, the real challenge for nuclear industry lies in winning the game of public perception. Clashes between

The future of energy lies not only in energy mix, but also in a solution that blends safety, viability and ecological concerns governments can lead to total misunderstanding by the people. For example, take the situation in Lithuania where on one side the government wanted to promote its nuclear power plants and on the other hand was accusing neighbours of building unsafe power plants. As a result, the referen-

dum organised recently said a sharp ‘NO’ to nuclear energy. No one knows what will happen with Bulgaria where the confusion on this topic is high and its government appears a prisoner of pressure from the US. Rosatom, which signed a deal, a few years ago for building Belene plant, was stopped and is now asking for the compensation. In fact, Bulgaria appears to be a “complex country” for foreign investments and Rosatom is not the first international company facing this policy flip-flop in Bulgaria. A paradox already exists. We were mentioning the debate following Fukushima, the increasing scepticism about atomic energy, but in fact, we can also list countries, which have chosen to promote nuclear energy anyway: not only Great Britain, Poland, Czech republic, Slovakia, but also India, Turkey, China, South Africa, Argentina, Saudi Arabia, Jordan and some African countries. Rosatom is, for example, following 38 new projects. Besides, the role of nuclear energy in Russia will increase from 16 to 25% in the next 20

years. In the Czech project Temelin, for example, there is a key strategic challenge – supported by its population - for the country and like in most of the scenarios, the competition is strong between the French Areva, the American Westinghouse and the Russian-Czech alliance SkodaRosatom. Regardless of which way the debate pans out, one thing is for sure: Fukushima declared the end of lowcost nuclear energy, and reinforced the policy of safety and security levels for different players, but it is probably not enough and worldwide nuclear safety and security authorities seem to be necessary and should not be limited to an area as France is trying to promote on a European scale: it is not enough! Energy security is a challenge not limited to the “old world”, but one which is changing the dynamics of the new world and all the countries, which are looking for internal growth. All sources of energy will have to be used to ensure comprehensive national growth. The involvement of traditional fossil energy producers in new energy resources such as nuclear and renewable demonstrate how different sources of energy are complementary and not an alternative between themselves. It’s time for the world to get the energy mix right.

IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA

F |E |A |T |U |R |E

Business Report WEDNESDAY DECEMBER 12, 2012

MARKET: Borrowing binge spills over into other sectors of the economy; from TV sets to house, Russians are happily taking loans...

Russians live it up! Shop till you drop, let a hundred malls bloom RIBR

t’s Saturday afternoon in the Evropeiski shopping centre that stands on the banks of the Moskva, a short distance from Russia’s White House, the home of the government. Once a barren patch of wasteland that was home to an informal cigarette wholesale market only a few years ago, today, the crowds swirl through the spanking new mall that houses hundreds of shops and boutiques. The 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 leader in terms of customer traffic. The 811 customers per square meter is six times more than the second most popular mall in the world, the Dubai Mall. Despite the recent dramatic economic slowdown, shopping is booming in Russia, driven largely by soaring consumer credit. Even counting out 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, according to a real estate company. It seems after 70 years of deprivations, Russians are revelling in the growing prosperity and stocking up on those little luxuries that most take for granted in the west. While the rest of the economy suffers, consumption has scaled a new peak. In October, Russia’s banking sector surprised again with retail lending

growth accelerating to 43% growth year-on-year -- well ahead into what the Central Bank of Russia deems to be an “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 fall-out of the 2008 collapse, bailing out troubled banks and propping up state-owned companies. The result: wages have continued to rise through the crisis while unemployment is currently at a 20-year low of 3.8%. Add to this the fact that the aver-

The spending binge is also driving investment into real estate, where Moscow was ranked the third most attractive city in Europe. age Russian has no debt to speak of – everyone was simply given their apartment by the state in 1991 and things like mortgages and credit cards have only just taken off – and the average Russian is free to borrow heavily as most of their income is disposable. Retail loan growth surged in October, thus surprising economist that were expecting it to slow down 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’s borrowing binge is spilling over into other sectors of the economy directly connected to shopping. Supermarket chains are the first beneficiaries as the last thing consumers cross off their shopping list when times are tough is food and most of Russia’s leading supermarkets are reporting revenue growth this year of upto 33% year-on-year. Car sales have also been strong, increasing by 13% year to date, according to the Association of European Businesses. Russia remains well on track to become the largest car market in Europe sometime in the next five years. The spending is also driving investment into commercial real estate where Moscow was ranked the third most attractive investment destination in Europe for retailers by Jones Lang LeSalle in November. “More than 90% of the most popular European brands operate in the Russian market already, with the rest considering to enter,” James Brown, Head of EMEA Retail Consulting and Research, Jones Lang LaSalle explains. “Within the coming years, the high level of disposable income and rapidly growing middle class will make the Russian retail market one of the European leaders in terms of turnover.” And as Russians are buying increasingly big-ticket items, the more traditional financial services have also started to take off. The potential of Russia’s mortgage market is unparalleled in eastern Europe, say analysts with UralSib. The housing stock is amongst

Mortgage: up and up... Car loans hit 1.2 million Credit cards: 60% rise PHOTOXPRESS (3)

BEN ARIS

Defying global economic slowdown, soaring consumer credit and rising wages have sparked an unprecedented shopping boom in Russia

In 2011, Russian banks issued a record $23.67 billion in mortgage loans. The record low interest rate of 12% per annum in the first semester of 2012 led to 60% growth of loans volume year-on-year. In 2012, the overall lending volume may top $32.3 billion for the first time, marking a 40% annual rise.

the lowest in the region, but 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, says UralSib. Express loans made at the point of sale intro-

Car loans are also exploding: the total number has increased from 806000 upto 2011 to 1.2 million this year alone. The maximum car credit amount in Russia is $150, 000, the minimum sum is $1, 400. The interest rate in dollars and euros is 12.5— 14.0%. The term of car credit loan is three months to five years.

According to the Russian Microfinance Centre (RFC), the past year has seen a 60% increase in the number of credit cards in Russia. Russian banks also report increased lending since January 2012. Public sector banks encourage customers to take credit cards with special terms and conditions for salaried clients.

duced most Russians to buying on the never-never, and still account for about a third of white good and furniture purchases. The use of true credit cards has also taken off in the last year: the Russian credit card market increased

60.3% during the nine months of 2012 to RUB590bn ($19bn) with no sign of slowing down. The spending is also driving investment into real estate, where Moscow was ranked the third most attractive city in Europe.

INNOVATION: Judges commended SIS II forensic audio analysis software, which is used by experts in 36 countries

Russian company wins top award for speech solution The St. Petersburg Speech Technology Centre has created history by winning a Speech Industry Award, which is presented annually in the US. The firm has developed the largest voice biometrics. TATYANA TOROPOVA RIBR

PRESS PHOTO

n a singular distinction, a Russian developer of speech technologies has won a prestigious Speech Industry Award for the first time. The awards are presented annually for achievements in the global market for speech solutions. The St Petersburg Speech Technology Center (STC), the first Russian company to win such an award, has carved a unique place in this area. The judges were particularly impressed by the STC’s country-wide voice database management and voice identification system. The system, which was developed for Latin America, remains the largest voice biometrics solutions to date. The judges also commended the release of the SIS II forensic audio analysis software, which is successfully used by audio analysis experts in 36 countries around the world. The panel called the SIS II software STC’s top achievement so far in audio analysis, combining all of the solutions required for forensic analysis involving speech technologies.

Innokenty Dementiev (left), executive director of STC, which has created a unique SmartTracker system. Speech technologies have long been used by law enforcement services across the globe to ensure security. These include the unique voice and face recognition solutions developed by the Russian company. The STC has been the chief Russian developer of speech technologies for

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more than 20 years. The company was established in St Petersburg in 1990 by a team of enthusiasts from the Dalnyaya Svyaz scientific development and production centre, a leading producer of multi-channel communication systems in the then USSR since the 1930s. Like many companies those

days, they had to start from scratch. These days, the STC-developed systems are used by the FSB, the Ministry of Internal Affairs, the Presidential Executive Office, the lower and upper chambers of parliament and the Ministry of Defence. They are also used by the Madrid

police department and throughout Mexico. The St Petersburg-based company is ready to develop a tailor-made system for the Skolkovo Innovation City, the Russian equivalent of the Silicon Valley. The STC has a Skolkovo registration and has already received a grant of €1.5 million to develop a multi-modal biometric voice and face recognition system. LAW ENFORCERS AND BANKS VoiceKey is a voice authentication solution developed by the STC that is used in call centres of banks and telecom companies. The system works by identifying a caller’s voice and then providing the operator with comprehensive information about the client, all in the space of a minute. If the caller is on the bank’s “black list”, the system will warn the operator that the caller is compromised. Face recognition systems are used to enhance security in crowded areas – at stadiums, concert halls and assemblies. Multi-modal systems offer both voice identification and face recognition options. The main customers for these services are law-enforcement agencies. The SmartTracker system makes use of solutions that do not depend on the language of the speaker – they can be used around the world,

irrespective of language, accent or dialect. The company decided to become a Skolkovo resident to facilitate further development and get access to new foreign markets, said STC innovation executive director Innokenty Dementev. “We are engaged in research that is both very popular and crucial in practical work, because public safety is at

Multi-modal systems offer both voice identification and face recognition options. The main customers are lawenforcement agencies. stake. As a Skolkovo resident, we enjoy the entire package of tax and administrative benefits. In the autumn of 2011, we received a Skolkovo grant of almost 60 million roubles. This helped us put together a research team that includes specialists from the United States,” he said. The success and uniqueness of the solutions developed by the St Petersburg-based Speech Technology Center has been justly acknowledged and receiving plaudits from peers and professional bodies.

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