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EUROPE’S RUSSIA POLICY CREATES INTERNAL DIVIDE

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t is unclear why the European Union imposed its latest sweeping sanctions against Russia on Sept. 12. This fourth round of sanctions, aimed primarily at Russia’s energy and financial sectors, comes as a cease-fire is holding in Ukraine and there are renewed hopes for a peaceful solution to the conflict. Washington also joined Brussels in this latest move, sanctioning Moscow by targeting Sberbank and Gazprom. The timing is especially strange since Germany, the E.U.’s largest and most powerful member, seemed to be pursuing a more pragmatic approach toward resolving the conflict. Washington likely played a key role in influencing this final decision, pushing the Europeans to adopt a policy of containment toward Moscow. Regardless, Russia expressed bewilderment, calling the new sanctions “counter-productive.” The most probable reason for the E.U.’s decision was a deal between the E.U.’s hawks (primarily Poland, the Baltic States of Latvia, Lithuania and Estonia and, to a lesser degree, the U.K.) and its pragmatists (Germany, France, Italy and Spain) over how to respond to Russia. This certainly included promises from the hawks to accept a negotiated ceasefire. According to Stephen F. Cohen, professor emeritus at NewYork University and Princeton, it likely included a less vocal position with regard to military aid to Kiev and a postponement of the E.U.-Ukraine Association Agreement until 2016. In exchange, German Chancellor Angela Merkel and the pragmatists agreed to the fourth round of sanctions against Moscow. CONTINUED ON PAGE 3

RUSSIA COMES TO TERMS WITH SANCTIONS In response to the sanctions imposed by the United States and the European Union on Russia over its actions in Ukraine, for the first time in Russia’s post-Soviet history, the Russian government initiated its own restrictive measures. While the sanctions that Western countries implemented were aimed at limiting exports, Russia’s aim was to restrict imports. On Aug. 6 the Kremlin introduced a complete ban on beef, pork, poultry, fish and shellfish, milk and dairy products, nuts and fruits and vegetables from Australia, Canada, the E.U., the U.S. and Norway for one year. The list was later amended to allow lactosefree milk, young salmon, trout, seed potatoes, onions, hybrid sweet corn and nutritional supplements. According to Ruslan Grinberg, the director of the Institute for International Economic and Political Studies at the Russian Academy of Sciences, Russia did not select these items at random. “In the European Union, agriculture is a subsidized segment of the economy, which usually develops thanks to active support from the government,” said Grinberg.“Thus, the Russian government is trying to influence European politics from within.” According to this theory, Europe’s supply of food products will increase and cause deflation, therefore damaging the European economy. The consequences of these retaliatory sanctions, however, have the potential to be much more serious for Russia’s economy.

WE TAI LO R O U R CONTE N T TO E ACH OF OU R P L AT FO R MS !

Although Russian leaders hope that sanctions will jump-start domestic industries, economists warn of a lack of accessible credit and fear that the likely result will be recession. According to official records, Russia imports about $40 billion worth of agricultural products annually. Approximately 20 percent of all imports and 10 percent of all goods on the market have been affected by the sanctions. During a session of Russia’s State Council on Sept. 18, President Vladimir Putin suggested that the sanctions could be turned to Russia’s advantage by increasing the competitiveness of the Russian economy, focusing on gross domestic and gross national product, consumption, savings, and capital formation, or the real sector. “In the next one-and-a-half to two years, it is necessary to take a real leap in the improvement of the real sector’s competitiveness,” said Putin, adding that in the past, such actions would have taken years to do. According to Putin, the efforts of all federal and regional government departments must be oriented toward developing the real sector. In particular, progess must be made on improving access to credit and creating new competitive conditions for financing business expansion. Explained Putin: “We need to use one of the country’s most important competitive edges: the capacious do-

mestic market.” It needs to be filled with quality goods made by the real sector, he said, while maintaining the economy’s stability and equilibrium.

Mission impossible? Experts reacted to the president’s words with caution, warning that there were many problems that must be overcome before Russian companies could produce, as Putin said, “a sufficient quantity of production that will not be inferior to foreign production in price and quality.” One problem is having the money to fuel development.“Talk of accessible credit has been around in Russia since the fall of the Soviet Union, but enterprises have still not received it,” says Anton Soroko, an analyst at Finam Investment Holding. Restrictions on foreign sources of credit as a result of economic sanctions will also not help improve the situation. Vladimir Osakovsky, chief economist on Russia and the Commonwealth of Independent States at the Bank of America Merrill Lynch is also doubtful about the ability of the Russian economy to show substantial growth in the near future.

“We expect that the macroeconomic situation in Russia will worsen as a result of the accelerating inflation caused by the restrictions on food imports, the fall of consumption and the volume of investment, as well as the reduction of exports,”Osakovsky said in the business publication RBC Daily. The sanctions that Russia has implemented have already led to an increase in inflation within the country. According to a new forecast by Osakovsky, in the second half of 2014 and the first half of 2015 Russia will sink into a recession, which will be followed by a recovery generated mainly by the base effect. Alexei Kozlov, chief analyst at the UFS investment company, has a different opinion, however.“The proposal to accelerate the development of the Russian economy that we heard during the State Council session is completely realistic,” he said. According to Koslov, such high goals are necessary to enact radical changes in the way the Russian economy functions. “On the whole, Russia has been voicing its aim to reduce its raw material dependence for a long time,” said Kozlov.“In light of the recent events, this

goal has been expanded and is now attainable.”

The market’s reaction Indeed, despite the sanctions, Russian industrial enterprises are showing positive economic signs. According to data collected in September by the Gaidar Institute of Economic Policy, shortterm investment expectations in the industrial sector are still high, on par with those of 2012. In addition, the institute’s “industrial optimism index” came close to the three-year maximum in September 2014. Between January and July 2014, the production of consumer goods grew by 3.3 percent, passenger cars by 5.7 percent and cargo vehicles by 12.7 percent. Textile and clothing manufacturing increased by 6 percent, and the production of electronic telecommunication components by 17.6 percent. In the first half of the year, the growth of industrial production was 1.5 percent compared with the same period in 2013, while G.D.P. grew by 0.8 percent. According to a study carried out by the Higher School of Economics, the last time this happened was in 2010-2011. However, it is important to

note that today, this growth is entirely the result of orders from the state. At the moment, according to experts, only a few industrial sectors are experiencing growth. One is the production of vessels, aircraft, spacecraft and other forms of transport. This segment also includes the production of railroad cars, airplanes, helicopters and submarines — a substantial amount of which are purchased by the government and by state companies. Production in this sector has been growing since the middle of 2013, and in 2014 it increased dramatically.While at the end of 2013, this subsector’s contribution was only 0.1 percent of the growth of industrial production (out of 0.4 percent growth), in the period between January and August 2014, it was already 0.7 percent out of 1.3 percent. Russia’s metallurgical industry has also experienced growth. The sector has received an additional share of the domestic market because of the ban on supplies from Ukraine. But the demand for increased metallurgical production is also related to construction on the South Stream and Power of Siberia energy pipelines. ■ALEXEI LOSSAN JOURNALIST

Alexei Lossan is the editor responsible for business and economic content at Russia Beyond the Headlines. He is also a lecturer in business journalism at Moscow State University.

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KALININGRAD FINDS ITS WAY PAST EMBARGO Russia’s exclave on the Baltic is learning to manage without imported goods.

Residents fear price rises

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Lying between Poland and Lithuania, Russia’s Kaliningrad Region — an exclave on the shores of the Baltic Sea — is far more dependent on European imports than the rest of Russia. According to official data, goods that fall under the Russian sanctions amount to about 16 percent of the total imports into the Kaliningrad region. Officials in the regional government have said that all these products can be replaced by Kaliningrad manufacturers and suppliers from countries that are not targeted by the embargo, but residents remain doubtful and some have found creative ways to get around Russia’s ban on foodstuffs from the European Union. The list of banned items includes cheeses, of which few are produced in the region, and several types of fruits and vegetables that had been supplied largely by Poland and Lithuania. Russia has banned imports of fruits, vegetables, nuts, meat, fish and milk and other dairy products from the United States, the European Union, Australia, Canada and Norway. Some exceptions have been made for special dietary products such as nutritional supplements and lactose-free milk as well as immature salmon and trout, seed potatoes and onions and hybrid sweet corn. Svetlana Kumaneva, the first deputy head of the Kaliningrad Region customs house, said that within 10 days of the introduction of the food sanctions on Aug. 6, Kaliningrad had found new sources of popular produce items. She said that apples and tomatoes were arriving from Serbia and grapes were coming from Malaysia, adding that

Vester’s Bolychev, a number of suppliers have already raised retail prices. Since Aug. 25, prices for the Russian company Morozko’s prepacked frozen meat products have jumped by 5 percent, while prices on Russky Khleb’s baked goods with cheese and dried fruit have increased by 9 percent.

agreements had been signed with additional suppliers from Belarus, Turkey, Israel and several South American countries. According to Kaliningrad Governor Nikolai Tsukanov, the ability of the region to quickly source new suppliers was a result of its position as a Russian exclave completely surrounded by European Union member states. “We have always been vulnerable to food security as an exclave region,”Tsukanov said at a meeting with the heads of major local retail chains and supermarkets on Aug. 21.“Retail chains have long needed to not be beholden to Polish and Lithuanian supplies, but to build our own storage locations to hold reserves of vegetables and fruit.” Semya, a Kaliningrad-based group of retail chains, is already building a large stockpile of goods, while the Fito-Depo group of companies, which

SANCTIONS COULD BRING RUSSIANS BACK TO THE LAND More people are interested in growing their own produce. ber is up from 49 percent in a similar survey in 2011. However, FOM analyst Irina Osipova said that it is difficult to say if this increase is because of the sanctions. “The season is already over, so the only thing we can do is continue research next year,” Osipova admitted. “After all, nobody is going to be making Parmesan at their dacha. However, products grown in dacha gardens really did help a lot in times of crisis.” Researchers have noticed a newfound interest in dacha gardens in recent years as environmentalism and a healthy lifestyle have become trendy among Russians.“Whereas in the mid2000s many people started growing flowers instead of fruits and vegeta-

Logistical challenges The new food suppliers, however, face an additional challenge in getting into the region. Customs officials and foodsafety bodies have tightened requirements for documents related to imported vegetables and fruits. As a result, the importation of some produce has been held up. Between Aug. 19 and 22, six vans with perishable products for theVester store chain were stopped at the INMAR customs temporary storage depository coming into the Kaliningrad region. “New suppliers from Turkey, Macedonia, Serbia, Belarus and Israel, unlike the former contractors from the E.U., are refusing to work without 100 percent prepayment,” said Oleg Boly-

Situated between the E.U. member states of Poland and Lithuania, the Russian exclave of Kaliningrad faces special challenges.

Residents noted that over the course of a few days in August, stone fruits disappeared completely from chain stores.

bles, now we are seeing a return to produce,”Osipova said.“And, of course, when we ask about food products, Russians tend to prefer domestic [goods], considering them to be more environmentally friendly and healthy.” Researcher Akindinova added that while the trend toward healthy living is good, there is a downside. “From a social point of view, the fact that people can provide for themselves is certainly a good thing,”Akindinova said. “But, of course, productivity drops as a result of this trend, and it might have a negative effect on the overall economy. In and of itself, the desire to have a private garden and travel outside the city for rest is quite normal, but to rely on the garden for produce is a strange practice for residents of a normal country.” The geographer Vladimir Kagansky said that there is another reason to be concerned about any growth in dachas. According to him, the belt of dacha communities around large cities is destroying the existing structure of the land and eating away at natural resources.“The ecological balance has been skewed,”said Kagansky.“According to my estimates, one acre of dacha plot completely transforms, in a negative sense, about 5 to 6 acres of surrounding land.” ■KIRILL ZHURENKOV KOMMERSANT

ITAR-TASS

One consequence of Russia’s ban on food imports from the United States and the E.U. could be a renewed interest among Russians in growing their own produce. While most Russians live in cities — 74 percent, according to the 2010 census — many urban dwellers have a small country house called a dacha. During the Soviet era, when the availability of a range of food items was sporadic, people used their dacha plots to supplement what they could buy in stores. Experts suggest that changes in food supplies caused by the sanctions could again encourage Russians to look to their own land as a source of fresh food. Natalia Akindinova, head of the Center of Development Institute at the Higher School of Economics, said that the restrictions on imports have caused inflation to increase more rapidly than previously anticipated. “Under these conditions, low-income citizens, whose main household expense is groceries, would be better off relying on their own hard work, especially in their dacha gardens,” said Akindinova.“Besides that, a lot of people already have these gardens. They will just have to start using them more.” Overall, the figures are impressive. According to a recent survey by the Public Opinion Foundation (FOM), 59 percent of Russians own dachas. For 54 percent of these dacha owners, the produce they grow in their gardens constitutes a “substantial addition to purchased food products.” This num-

supplies the region with potatoes, vegetables and fruit, has also announced similar plans.

More Russians are supplementing their meals with home-grown vegetables.

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chev, chair of the board of directors of the Vester group. He said it is possible, therefore, that stores will see a temporary shortage of apples, pears, grapes, peaches, apricots, nectarines, pineapples, berries and exotic fruits. Such a reaction was not unexpected following Russia’s ban on food imports. Oleg Bucklemishev, director of the Economic Policy Research Center at Moscow State University, said that companies who deal with Russia would likely be more cautious in their contracts.“Western partners from all sectors, not just sanctioned ones, will be more demanding toward Russian clients, and may ask for 100 percent prepayment or use a residual approach,” Bucklemishev said. Kaliningrad-based food producers who previously used raw ingredients from European sources are already anticipating such changes. According to

Local residents have noted that over the course of a few days in mid-August, stone fruits disappeared completely from chain stores. Apricots, peaches and nectarines were subsequently replaced by Macedonian fruit, and instead of Polish fruit, Serbian fruit arrived, but a kilogram of apples now costs twice what it did before the sanctions were imposed. “I’m afraid that business will decide to take advantage of the situation and prices on everything will go up,” said Kristina Litvak, aged 25. Some residents say they will just eat more of what they produce themselves or can buy from their neighbors rather than relying on imported goods. Said Alexander Melkov, 55, “My wife always used to make lemonade herself, but now I’ll think twice before buying lemons. Apples grow at our summer house; we’ve always gotten and continue to get meat from farmers at the market.” Local authorities are encouraged by statements such as Melkov’s. They hope that the ban on imports will stimulate the development of vegetable and fruit cultivation and livestock breeding in the region. However, retailers in Poland and Lithuania are expecting to benefit from the situation. Thanks to a 2011 agreement, Kaliningrad residents can cross into parts of northern Poland without a visa. Ryszard Chudy, a spokesman for Polish customs, told Poland’s PAP news agency in mid-August that since the embargo was enacted, the number of Kaliningrad residents crossing into Poland has risen and “the situation will only get worse.” ■ULYANA VYLEGZHANINA SPECIAL TO RBTH

PURPOSE OF SANCTIONS IS UNCLEAR FOR MANY RUSSIANS As restrictions remain in place, a survey shows uncertainty about the goals of the bans. At a meeting on Sept. 30, the Committee of Permanent Representatives of the European Union declined to make any changes in the sanctions currently in place against Russia. The next chance European leaders will have to consider the question of whether sanctions against Russia can be lifted will be Oct. 23-24, during the European Council meeting in Brussels. A source close to E.U. officials told the Russian news agency Tass that any decision on the sanctions will be based on “how the situation in Ukraine will unfold.” According to Fyodor Lukyanov, editor-in-chief of the journal“Russia in Global Affairs,” this reasoning is not surprising.“Political leaders will continue to follow the development of events in Ukraine, and only in the case of stable progress can sanctions be attenuated,” said Lukyanov. The senior editor is hopeful that the E.U. will act sooner rather than later to remove some sanctions, since the ties between Russia and the E.U. mean that European economies are also suffering from the policies. Alexei Skopin, head of the department of regional economy and economic geography at the Higher School of Economics in Moscow, said that Russia’s retaliatory sanctions were having their intended effect on the E.U., although Russians may be suffering more. “The first series of Russian retaliatory sanctions demonstrated its counter-productiveness both for Russia and the E.U.,” said Skopin. “In particular, it had been estimated that prices on agricultural products [in Russia] would increase by 15 percent, but prices on

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certain products increased by 40 percent, which is completely unacceptable.” He emphasized that the result of the sanctions is that in Russia consumers are suffering, whereas in Europe, the producers are feeling the pressure.

The U.S. role Regardless of what the E.U. decides later in the month, Lukyanov noted that the U.S. political establishment was not even open to discussing the lifting of sanctions at this point. Ac-

Most Russians do not connect the economic sanctions imposed by the U.S. and the E.U. with Russian policy in Ukraine. cording to Lukyanov, the United States is much less tied to Russia economically than Europe is and can therefore continue to put economic pressure on Russia for a long time. “I think that Washington’s objective is not even the defense of Ukraine from Russia’s aggression, but rather the long-term intention to have Moscow assume a more circumspect foreign policy course,” Lukyanov said. Skopin thinks that the U.S. has additional motives for keeping the sanctions in place. “The American economy gains a new weapons market in Europe and Ukraine,” Skopin said. “New jobs will consequently be created and the economy will receive a

boost. The sanctions against Russia kill two birds with one stone — reduce the market for Russian weapons and reduce the credit line for Moscow.”

Russian reaction According to a recent survey by the analytical Levada Center, most Russians do not make the connection between economic sanctions imposed by the U.S and the E.U. and Russian policy in Ukraine. In a poll conducted Sept. 19-22 among 1,600 respondents in 46 Russian regions, 71 percent of Russians believe that the main purpose of Western sanctions is“to weaken and humiliate Russia.” Another 18 percent felt that the sanctions were in response to Russia’s annexation of Crimea, while 4 percent said the purpose of the sanctions was “to stop the war, destruction and human casualties in eastern Ukraine.” Sixty-eight percent of the respondents believe Russia should“continue its policy” in retaliation against the sanctions, almost a fifth (22 percent) call for “seeking a compromise and making concessions in order to stop the sanctions” and 10 percent are undecided. While respondents generally were open to additional retaliatory sanctions against some Western products, 51 percent were against banning Western pharmaceutical products and 45 percent were against banning Western computers and mobile phones. ■NIKOLAI LITOVKIN JOURNALIST

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GAZPROM-CHINA DEAL CAN RESET GAS MARKETS ALEXANDER KURDIN ANALYST

TATIANA PERELYGINA

REFORMS FOR MODERN TIMES VLADIMIR MAU ECONOMIST

utual sanctions are always extremely unpleasant, and the application of the“hot”trade war between Russia and the United States and the European Union can have no benefits. Today the world is undergoing a systemic economic crisis comparable to the crises of the 1930s and 1970s. This is a very difficult situation that could aggravate the overall economic picture in both Russia and Europe. However, the tit-for-tat sanctions enacted by Russia, the United States and the European Union should not be considered a cause of Russia’s and Europe’s economic problems. These problems arose much earlier. Rather, the sanctions just exacerbate the crisis. The European economy has been characterized by low or zero growth in recent years, and in turn Russia is balanced on the verge of recession. There is no recession in the country yet, but there is a significant slowdown, which can be attributed to several factors. First, many of the countries in the European Union — Russia’s main trading partner, accounting for more than 50 percent of turnover — have experienced recession, and given this relationship, it would be strange to see rapid growth in Russia. Secondly, there are cyclical reasons, including reduced investment activity by major corpora-

CO N V E RT I N G M O N O LO G U E I N TO D I A LO G U E Russia Direct is a forum for experts and senior decision-makers from Russia and abroad to discuss, debate and understand the issues in geopolitical relations from a sophisticated vantage point.

Quarterly Report: The Future of Innovation

The Russian government identified innovation development as a priority in the mid-2000s. Now, economic growth based on innovation is gaining new momentum thanks to an unexpected push — economic sanctions imposed by the United States and the European Union as a result of the conflict in Ukraine. Sanctions could force Russian companies to look for domestic solutions to technological problems and to accelerate economic modernization.

tions in 2012-2013, especially by stateowned corporations, as well as the investment cycle, which in recent years has seen Russia pour money into domestic projects such as preparations for the 2014 Winter Olympics in Sochi. Finally, by 2008 the reserve of restorative growth had been exhausted and in 2009, as a result of the global economic crisis, there was a significant decline in the Russian economy. This was followed by a recovery which, for a short time, supported moderate

The economy has slowed down mainly because the growth model of the 2000s, with its expansion in demand, is exhausted. economic growth. However, growth has not been sustainable. The economy has slowed down in Russia mainly because the economic growth model of the 2000s, with its steady expansion in demand, has been exhausted. This is due to both external circumstances — primarily the drop in oil prices — and internal ones. Some economists call this the middle-income trap. Russia has become a country with high labor costs and relatively poor economic institutions, which is one of the indicators used in the World Bank’s Doing Business survey and one of the factors that keeps Russia ranked relatively low in that assessment. According to per capita gross domestic product dynamics, in recent years Russia

has risen to the lower tier of the developed countries, while the quality of its institutions has remained at the developing-country level. This is the main structural problem in Russia’s economy, with no easy solution. Businesses are willing to put up with relatively weak institutions in a lowcost environment or pay more when strong institutions provide guarantees. A combination of bad institutions with expensive labor, however, is undesirable for entrepreneurs and does not encourage investment. Economists have been aware of this problem for some time. From an economic point of view, the change needed is simple: Russia needs to transition from a demand economy to a supply economy, with economic stability and predictable rules of conduct.The country also needs to be able to offer available credit (which requires low inflation) and reasonable taxes to stimulate production development. Economic development is not straightforward. In the face of rising political tensions caused by the situation in Ukraine, part of Russia’s political elite seems to rely on the country’s ability to develop internally to meet economic demand, but in today’s world it is important not to impose further sanctions on ourselves. A much more effective response might be economic liberalization, which would provide the necessary modernization for institutional growth. This was the path that China took when faced with international sanctions following the government’s crackdown on protestors in Tiananmen Square in 1989. Against this backdrop, China decisively

strengthened its economic reforms and soon after, in 1992, the country experienced an investment boom. To all this Russia must add another structural problem: the need to modernize the welfare state. In particular, this means a reform of the educational and health care systems as well as pensions. The Russian welfare state was created in the industrial era and still reflects the values of that time. Then, a person simply had to choose one job and perform it. Additionally,

The Russian welfare system was created in the industrial era and still reflects the values of that time; today the situation is different. life expectancy was then below retirement age. Today, the situation is much different. To succeed in the labor market, a person must keep learning throughout his or her life and may hold a variety of jobs. Today, people visit doctors when they are sick, but also for preventative care. And many people live for decades after they retire. To solve these problems, Russia must also preserve its greatest achievement of the past 10-15 years — macroeconomic stability, because this kind of stability is hard to establish, yet easy to destroy. Vladimir Mau is the rector of the Russian Presidential Academy of the National Economy and Public Administration.

espite how well gas markets function in Europe and the United States, the world is far from forming a unified gas market. Sustained price imbalances among key consumers — countries in Europe, North America and the AsiaPacific region — are evidence of the great potential that a united gas market would offer for more efficient supplies of gas worldwide. However, gas prices have yet to show any signs of converging. At the end of the summer, the price of natural gas at the U.S.’s Henry Hub in Louisiana cost approximately $150 per 1,000 cubic meters (some 35,000 cubic feet), while on European wholesale markets it ranged between $250 and $400, depending on the type of contract. Meanwhile, liquefied natural gas (LNG) has been selling for $600-$700 per 1,000 cubic meter in Japan since the Fukushima disaster. Persistently diverging gas prices over the past four years indicate a paradoxical deglobalization of gas markets. Initially, this happened because of limited progress on the LNG market. This market has stagnated in recent years, in part because of insufficiently developed infrastructure. For traditional gas supplies, the markets are hamstrung by a lack of a pipeline connection between Europe and Asia. Russia is now working on the construction of a pipeline to China, the Power of Siberia, but there are no plans for a pipeline that would stretch all the way from Europe to Asia. Outside of Russia, Turkmenistan theoretically has the capability of exporting gas to both China and Europe. The country has the world’s sixth-largest natural gas reserves, but currently its exports are dominated by China. Turkmenistan’s gas supplies to Europe are limited because of insufficient production and infrastructural problems in the country itself.

Regional divide Divided regional markets may benefit individual producers or consumers in the short term, given that they allow these producers or consumers to secure a dominant position in a particular local market. Yet divided regional markets create additional risks and losses for the gas industry as a whole, especially to the players who do not have the ability to switch to other markets in case they are shut out of one. Large-scale gas supplies to China, such as those covered by Gazprom’s recent $400 billion, 30-year contract with the Chinese National Petroleum Company, will make it possible to par-

EUROPE’S RUSSIA POLICY IS CREATING INTERNAL DIVIDE

tially overcome this situation and to usher in strong new links between European and Asian markets. This contract, which was signed during a visit by Russian President Vladimir Putin in May, opens up possibilities and gives impetus to expand gas transport infrastructure and gas production in Russia’s eastern regions. Such a move would not only entail building pipelines, but also developing new fields and, in the future, new LNG terminals. An increase in LNG exports from North America to Europe and Asia will have a similar impact on the global gas industry.

The future is global These moves toward gas market globalization will help create a position for natural gas in the global energy market as a whole, amid the gradual development of new energy sources – particularly renewable ones. Obviously, the main beneficiaries of the Gazprom-China contract are the contracting parties themselves. Gazprom will secure access to the rapidly growing Chinese gas market, which currently needs some 50 billion cubic meters of gas a year, but will need 150 billion cubic meters by 2020 and probably more than 200 billion cubic meters after 2030. In return, China will be able to take advantage of Russia’s vast reserves — the largest and geographically closest of their kind to China. As a result of the arrangement, both Gazprom and China can now intensify competition among their partners on the gas markets. The contract allows both the supplier and the consumer to substitute supplies and, as a result, both have greater room to maneuver at the negotiating table. The arrangement means that Gazprom can strengthen its negotiating position with European consumers, although it is important to note that the deal with China comes at the same time that other countries are boosting their LNG imports to Europe. Russian export volumes to the East will not match volumes to Europe until at least 2020, so Gazprom is not at a serious advantage at the moment. Yet, in the long term, Europe, Russia and China will all benefit from the development of gas production and the gas transport system in Russia as a result of tighter market connectivity. Thanks to Gazprom’s new contract, Russia will ramp up its gas production capacity and, in the future, will have the option of shifting among exports to the East, the West and internally. This arrangement will help Russia avoid gas shortages or oversupplies on individual markets and will ease price fluctuations for many players in the market. Alexander Kurdin is director of the Strategic Energy Research Office at the Analytical Center for the Government of the Russian Federation.

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October Monthly Memo: Sanctions CONTINUED FROM PAGE 1

Yet while Europe may present an image of unity in this decision, behind closed doors, there is still much disagreement — not only over how to proceed regarding the Ukraine crisis, but also about the very nature of the crisis itself. Europe’s major continental powers, primarily Germany but also France, Italy and Spain, form a “pragmatist” group.Viewing the conflict more as the result of dueling geopolitical interests rather than one of “Russian aggression,” they recently signaled their reluctance to pursue any further sanctions against Russia. Likewise, they ruled out any military action in Ukraine, including sending arms to Kiev. Of these countries, Germany is the most powerful and its chancellor, Angela Merkel, has been tasked with the tough“balancing act” of guiding Germany’s relations between Washington and Moscow, while ensuring that the crisis does not escalate further. France, the next most powerful player in this group, initially had a more hawkish voice. Its president, François Hollande, fully supported Washington’s position in the conflict. Now, however, as the situation wears on with

an emerging humanitarian catastrophe in the Donbass region, Paris has been slowly distancing itself from its earlier position. Opposing the pragmatists are the hawks, (as mentioned, mainly Poland and the three ex-Soviet Baltic republics). In their view, the conflict in Ukraine is a definite act of aggression by Moscow. Furthermore, the hawks felt that this is only the first step of a grand Russian plan to march into Eastern Europe. Poland’s push is because it suffered a long history of oppression and division by the Russian Empire and the Soviet Union. Meanwhile, the Baltic States, which remember all too well their forced illegal annexation by Stalin in the 1939 Ribbentrop-Molotov pact beween the Soviet Union and Nazi Germany, fear a potential Russian effort to overrun their small republics again. Between these two camps are a number of other positions, articulated by varying state interests. In Scandinavia, there have also been some hawkish rumblings, stemming from concerns with security in the Baltic. These have been primarily in Sweden and Finland. Early on, Poland brought in Sweden as a co-sponsor in its Eastern Partnership program to

take in six states of the post-Soviet Union (Belarus, Ukraine, Moldova and the three Caucasus republics of Georgia, Armenia and Azerbaijan). The Ukrainian crisis has also split the Visegrad group, an alliance of four Central European states — the Czech Republic, Hungary, Poland and Slovakia. While Poland has put itself forward as the main supporter of a hardline position toward Russia, the Czech Republic, Slovakia and Hungary are refusing to go along with this position. They have bristled at the thought of more sanctions and are also opposed to sending arms to Ukraine. Reliant on Russian energy, the Czechs and the Slovaks have taken a more pragmatic approach to the situation and stood against escalating the situation any further. This is significant considering the history of communism in the Czech Republic and Slovakia, and the memory of the Soviet Union’s crushing of the Prague Spring in 1968. Economic concerns and nationalism are also guiding factors in Romania’s response to the Ukraine crisis. Bucharest’s position on Ukraine oscillates from hawkish to pragmatic. Economically, the country is concerned about the impact of more sanctions.Yet in the context of the ex-So-

viet territory, it is also concerned about Moldova. The Moldovan people speak the Romanian language and follow Romanian cultural norms and traditions, even though the Soviets attempted to forge a unique “Moldovan” identity. Bucharest regards them as compatriots and Romanian President Traian Basescu has openly spoken about“reunification.” Additionally Bucharest also has concerns regarding diaspora communities in Ukraine. The reaction toward Ukraine has also been tempered by pragmatism in the former Yugoslavia — from Catholic Croatia to Russia’s traditional ally, Orthodox Serbia. And nearby Orthodox Greece and Bulgaria have likewise opposed escalating the situation in Ukraine. Observing the diversity of views of the Ukrainian conflict, it is apparent that Europe is certainly not united on this issue. Time will tell how such diverging viewpoints will ultimately have an impact on Europe’s evolving response to the crisis. Pietro Shakarian is the author of the online publication “Reconsidering Russia and the Former Soviet Union” and a member of the editorial board of the Gomidas Institute in London.

With the West preparing to announce a new round of sanctions against Russia aimed squarely at the financial sector, Russian lawmakers are not sitting idly by. In this latest issue of the RD Monthly memo, find out what steps Russia is ready to undertake to protect its economy and financial sector, how realistic these initiatives really are and what this means for both ordinary Russian citizens and foreign players.

Feature

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THE GUARDIANS OF THE HERMITAGE Throughout the 260-year-history of the Hermitage Museum, some of its most devoted servants have had a purr-fect view of the art collection. The art-adorned halls of one of the world’s greatest museums are also home to a pampered legion of cats.

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St. Petersburg’s Hermitage Museum is the treasure chest of Russia. Founded by Empress Catherine the Great, the pale green palace on the bank of the Neva River contains one of the world’s most renowned art collections. But beneath its baroque grandeur lies a netherworld of heating ducts and storage rooms. Here, the walls are not covered with Rembrandt and Caravaggio, but cat photos. The cats’ story parallels that of the institution they have guarded for centuries, from splendor to poverty and back again. “It’s a true symbiosis of animal and human,” said Maria Haltunen, assistant to the museum’s director and the cats’ press secretary.

dogs were shot alongside their owners, the cats were left behind at the palace. The Bolsheviks nationalized the Hermitage, beginning a traumatic period for the museum that lasted more than three decades. In the 1930s, Stalin began selling the Hermitage’s art to finance the Soviet Union’s rapid industrialization. The Old Masters that the American industrialist Andrew Mellon purchased during that time became the foundation of the National Gallery in Washington, D.C. Yet the worst was yet to come. During World War II, the 872-day siege of Leningrad resulted in the deaths of up to 1.5 million people. The Hermitage collection was evacuated to the Ural Mountains, leaving only empty frames. Meanwhile, the city starved. “All the animals in the city

Of mice and masterpieces

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Cats have resided in the Winter Palace since the time of Empress Elizaveta Petrovna. In 1747 she issued a decree arranging for a chauffeur to bring “house cats suitable for catching”to the Winter Palace — the building that today houses the Hermitage Museum. A carriage full of Russian Blue cats was quickly dispatched from the central Russian city of Kazan, about 600 miles east of Moscow, to the imperial residence in St. Petersburg. It was Elizaveta’s successor, Catherine II (the Great), who transformed

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the palace into one of the world’s greatest art institutions.“Very early on, she realized that [art] was a status symbol among the rulers of Europe,” said Geraldine Norman, author of“The Hermitage: Biography of a Great Museum” and advisor to the Hermitage’s director. In 1771, Catherine brought the first Raphael painting to Russia. Eight years later, she purchased the nearly 200-piece collection of British Prime Minister Robert Walpole, which included works by Rubens andVelazquez. In all, Catherine acquired some 4,000 Old Master paintings and 10,000 engraved gems, which author Norman called her “great love.” “It was a love affair, but also state policy, and a very clever state policy,” Norman said.“She was competing with the French, the Germans, the English,

Although the cats no longer roam the halls, they have their own “passports” and an annual holiday in their honor.

and she was steadily outclassing them in her purchases of art.” The rising prestige of Catherine’s collection, which was opened to the public as Russia’s first public museum in 1852, was mirrored by the status accorded to its guardians. Under Catherine, the palace began making a distinction between house and court cats, which had free rein of the halls. Their work was more important than ever: in a letter, Catherine wrote:“There are few visitors to the galleries — only me and the mice.”

vanished, even the birds,” Haltunen said.“There was simply nothing to eat.” This was also the unfortunate fate of the Hermitage cats. The war years mark the only time in the Hermitage’s history when the cats have been absent from the museum. After the war, the Hermitage recruited new cats. As the country stabilized, the museum’s growing cat population paralleled the expansion of its displays. After Stalin’s death, the museum once again showed post-Impressionist and modernist canvases.

Absent art and animals

Feline at home

In 1917, the October Revolution drove Emperor Nicholas II from the Winter Palace. According to feline press secretary Haltunen, the last Romanov rulers had a soft spot for animals, owning several dogs and cats. While the

In the early 1990s, the collapse of the Soviet Union left the Hermitage destitute. In the documentary“Hermitage Revealed,” museum director Mikhail Piotrovsky recalls that there wasn’t even enough money to repair the roof.

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In 1995, shortly after she began working at the museum, Haltunen walked down to the basement and was shocked to see dozens of cats staring back at her. The cats, like their home, were in dire straights, hungry and neglected. Haltunen and a friend began bringing porridge down from the cafeteria to feed them. They started a “Ruble for a Cat” campaign to raise money for food and medical treatment, and won Piotrovsky’s support to devote an area of the basement to the cats’ care and keeping. Today, it is full of scratching posts, food bowls and blankets placed on top of heating pipes, where the cats cluster in winter. Under Piotrovsky, the museum has gained new life. Two years ago, it opened an innovative contemporary art department, and this summer welcomed the contemporary art biennial Manifesta. For his video installation “Basement,”the Dutch artist Erik van Lieshout spent nine months living with the cats in the basement while it was being renovated.“The cats are the soul of the building,” Lieshout said. “They are a subculture for me.” Though the cats no longer roam the halls as they did in Catherine’s day, the more sociable among them venture into the courtyards or down to the riverbank, pausing to scratch their claws on the entrance gate. Today, they have their own “passports” and boast a dedicated legion of volunteers and veterinarians, as well as an annual holiday in their honor, when visitors line up for the chance to meet (and adopt) them. Now, they are less hunters than cultural ambassadors — or “spoiled house cats,” as Haltunen jokes — but their presence still deters mice. They remain a part of the Hermitage’s history, no less essential than its Monet paintings or its ancient gold, or the splendid halls of the Winter Palace. ■JOY NEUMEYER JOURNALIST

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