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This supplement is produced and published by Rossiyskaya Gazeta (Russia) and did not involve the news or editorial departments of The Wall Street Journal 1500 1400 1300 1200 Sep 14

Oct

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‘Even with the oil price and other objective economic indicators, the ruble is undervalued and has the potential for strengthening.’

‘If you spent the entire budget of the Pentagon [on improving Moscow’s roads] you couldn’t solve the problem.’

ELVIRA NABUILLINA, RUSSIAN CENTRAL BANK CHAIRPERSON

MIKHAIL BLINKIN, DIRECTOR, INSTITUTE FOR TRANSPORT ECONOMICS AND TRANSPORT POLICY STUDIES

Dollar/Ruble 46 44 42

RTSI

Sep 22

Distributed with The Wall Street Journal

Oct 6

Oct 20

Nov 3

Nov 14

Saturday, November 29, 2014

IN THIS ISSUE

Geopolitics Cooperation set to grow between Moscow and Beijing

Sanctions Push Russia Toward China

POLITICS & BUSINESS

Lower Oil Prices The world’s biggest energy producer feels the burn PAGE 2

BUSINESS & POLITICS

Fishy Imports Traders find creative ways around food sanctions PAGES 3

SPECIAL REPORT

Trendy Restaurants and Epic Traffic Meet the new Moscow

REUTERS

Brunei’s Sultan Hassanal Bolkiah, Russian President Vladimir Putin, Chinese President Xi Jinping, his wife and U.S. President Barack Obama in Beijing.

Western sanctions over the conflict in Ukraine have created a new impetus for Moscow to expand ties with China. Energy and currency issues have taken center stage. DAVID MILLER RBTH

Russia is seeking a new economic and trade alliance with China, as sanctions limit Russian firms’ access to Western export and capital markets and the country’s political ties with the U.S. and EU continue to suffer over the dispute in Ukraine. Moscow’s outreach to Beijing comes amid rising headwinds for the Russian economy. This year the ruble has fallen to record post-Soviet lows, global prices for crude oil have dipped precipitously and Western sanctions on Russia’s oil industry have posed a challenge to the future expansion of crude output for the world’s biggest producer of oil and gas. Economic uncertainty and po-

litical fallout with the West over Ukraine has prompted Russian officials to act, following years of rhetoric about reaching out to China. So far, much of the negotiation between Moscow and Beijing hasfocused on energy and currency.

Barrels, rubles and yuan Russian President Vladimir Putin said this month that in seeking to expand trade with China, the two countries would attempt to shift away from using the dollar to cover energy transactions. “We’re moving away from the diktat of the market that denominates all the commercial oil flows in U.S. dollars,” Mr. Putin said in an interview with Russian state news agency TASS. “We’re boosting as much as possible the use of national currencies – both the ruble and the yuan.” During a trip to Beijing in November, Mr. Putin expanded an agreement reached earlier this year

to sell Russian natural gas to China. The two sides made a breakthrough in May, signing a deal worth $400 billion at the time for Russia to supply China with natural gas for 30 years, following a decade of deadlocked negotiations. The new memorandum foresees Russia shipping an additional 30 billion cubic meters (bcm) of gas to China each year – on top of the 38 bcm per year agreed in May – along a second pipeline route. Yet skeptics pointed out the new deal is non-binding and that price negotiations may yet complicate reaching a finalized agreement. Meanwhile, Russian crude oil major Rosneft has invited the China National Petroleum Corporation to take a stake in the mammoth Siberian oil deposit, Vankor, just as Western majors like ExxonMobil and Shell are being forced to abandon oil projects they’d been developing alongside Russian partners due to U.S. and European sanctions.

During a meeting in October between Russian Prime Minister Dmitri Medvedev and Chinese Premier Li Kequiang, the two sides signed a raft of 38 separate agreements covering energy, finance and technology, which Mr. Medvedev said would help double bilateral trade over the next five years to $200 billion. Among the accords was an agreement on yuan-ruble currency swaps between the two countries’ central banks, worth 150 billion yuan ($25.5 billion). “The bilateral national currency swap agreement entered into by the Bank of Russia and the People’s Bank of China will foster bilateral economic relations by means of expanding opportunities for trade financing and direct investment, as well as facilitate the use of the Russian ruble and the Chinese yuan in international trade and investment activities,” the Russian Central Bank said in a statement following the deal.

SHUTTERSTOCK/LEGION-MEDIA

Class A Office Space and Starbucks which boasts all the amenities of any other European city PAGES 4-5

FEATURE

Craft Beer Takes Off... Small producers find fans SLAVA PETRAKINA

...But Vodka Remains the Russian Spirit

Cities 25 years after the Berlin Wall fell, Moscow has been transformed

although the mass market is still driven by price

Amid Tensions With West, A New Moscow Emerges

PAGE 8

ONLY AT RBTH.COM Moscow and the West may be far apart politically. But at street level, the Russian capital looks closer to Europe than ever. SAM SKOVE SPECIAL TO RBTH

900-year history. As the world noted the 25th anniversary of the fall of Berlin Wall this November, it might be said that no other major city has transformed more dramatically since that event than Moscow. During the original Cold War, Russia was cut off from international trends like fast food, Hollywood movies and credit cards, and many Russians lived radically different lives from those of their Western counterparts. CONTINUED ON PAGE 4

LORI/LEGION MEDIA

Among long-time visitors to Russia, there are those who recall when a Customs declaration at Moscow’s Sheremetyevo International Airport meant a bottle of whiskey for you, and one for the border cop. But not any more. Today, those bottles of stiff drink

are safely stored behind glass in the international duty free shops. Saunter past those and there’s the shiny new Aeroexpress train waiting to whisk you to the city center. As political pundits debate the start of a new Cold War, Moscow seems farther from Washington or Brussels politically than it’s been in decades. But the renewed political drama underscores a distinct irony: At street level, Moscow is looking more like a Western European metropolis than at perhaps any time in its

Old meets new in central Moscow’s White Square district.

What? The local Uzbek place doesn’t deliver to your office? RBTH.RU/41201

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Oil Russia’s most important industry faces myriad challenges

• Russia aims to boost the percentage of its trade turnover with Asia-Pacific countries to 40% of the total, according to President Vladimir Putin. Mr. Putin made the comment while attending the Asia-Pacific Economic Community (APEC) summit in Beijing. He also invited Asian firms to set up production facilities in Russia’s Far East. Asian countries currently invest about $9 billion in Russia.

ALAMY/LEGION MEDIA

• CNN will stop broadcasting in Russia by the end of this year due to changes in Russian media legislation. A law passed last month bans foreign companies from having more than a 20% ownership stake in a Russian media outlet. The company notified its service providers of its decision at the end of October. The company will continue to have reporters working in Russia. CNN opened its Moscow bureau in 1983.

REUTERS

World’s Top Oil Producer Hit by Prices, Sanctions

• Russia jumped 30 places in the World Bank “Doing Business” rankings thanks to a new methodology. The 2015 report, called “Going Beyond Efficiency,” aims to reflect more qualitative factors. “Doing Business is by and large about the efficiency of regulations: how fast, how cheap, how simple it is to get a transaction completed. But now we’re branching out to also measure the quality of regulations,” the World Bank’s Rita Ramalho said. Russia is now 62nd out of 189 countries ranked.

Russia’s oil firms are losing access to Western expertise for help in developing more difficult crude reserves, just as falling prices threaten to pinch profits.

• The Ministry of Economic Development said in a statement that several Russian blue-chip stocks, including state-owned oil and gas giants Rosneft and Gazprom and non-state oil producer Lukoil, are considering delisting from the London Stock Exchange and instead listing in Hong Kong. London has long been the favored exchange for Russian listings; aluminum major RusAl is the only Russian stock listed in Hong Kong currently.

ALEXEI LOSSAN AND DAVID MILLER RBTH

TASS

Russia’s oil industry is facing double jeopardy in the form of sagging crude prices and Western sanctions, posing a thorny dilemma for the world’s top crude-oil producer even as output continues to flow at nearrecord levels. Oil prices have slipped dramatically this year, falling roughly 25% over four months to less than $85 per barrel as of mid-November.This is due in part to a dramatic rampup in shale-oil production in the United States. Meanwhile, the U.S. and Europe have hit Russia with sanctions over the dispute in Ukraine that restrict access to international financing for some Russian energy firms, and also bar Western companies from helping Russia tap difficult new deposits like shale oil and offshore Arctic crude. The sanctions restrict the export of advanced oil recovery technology to Russia. “The abundance of oil on the market, due to the increase in production in the U.S. and weak consumption in the world, are driving prices down in the current year, which is obviously raising concerns

• Beginning this month, Russian eBay users will be able to pay for purchases using terminal payment system QIWI. Russians tend to be skeptical about making payments online, hindering eBay’s growth in the country, according to the company’s press service. “For eBay in Russia this is an important move, demonstrating our company’s aspiration to make online purchases for Russians more convenient and secure,” said eBay Russia General Director Vladimir Dolgov. • Russia will challenge a European Court of Human Rights ruling forcing it to pay $50 billion to shareholders of the defunct oil company Yukos. The court ruled that Russia had violated the Energy Charter Treaty by breaking up the company in 2004. Russia is likely to argue that the court had no jurisdiction to hear the case.

through hydrodynamic impact on formations, primarily hydrofracking,” says Ms. Malikova. But, she added, “hydrofracking equipment is produced predominantly in the U.S.” Several Russian firms had invited foreign majors to join them and provide expertise in more challenging fields. But sanctions have forced some Western firms to back out. American oil giant ExxonMobil has terminated nine of its 10 oil production projects with its Russian partner Rosneft in the Russian Arctic,Western Siberia and on the Black Sea shelf. Oil major Shell has ceased its operations exploring Russia’s vast Bazhenov shale formation, leaving its partner, Gazprom Neft, to continue the project independently. “We will continue to work… by ourselves,” Gazprom Neft CEO Alexander Dyukov told Russian news agency Interfax in October.

in Russia,” says Ivan Kapitonov, deputy director of the Faculty of Governmental Regulation of the Economy at the Russian Academy of Sciences. For now, Russia is still producing crude at levels close to post-Soviet record levels, or about 10.6 million barrels a day last month, according to government statistics. By contrast, Saudi Arabia was producing crude at a rate of 9.6 million barrels a day in August, according to a report by the Organization for Petroleum Exporting Countries.

Future output Analysts have warned that Russia’s future output may be hampered, because the lack of access to finance and foreign expertise hinders the development of new resources. The bulk of Russia’s current production comes from aging fields in its traditional production zone in Western Siberia, and ensuring future output will require the development of new regions. The sanctions will make it harder for Russian firms to pursue an advanced form of oil recovery known as hydrofracking, according to Olga Malikova, a professor at the Institute for Government Service and Management at the Russian Academy of National Economy and Public Administration. “Up to 25% of Russia’s currently recoverable oil is extracted

Oil prices and the state The decline in the oil price also has a direct impact on the Russian government’s budget, roughly half of which is drawn from taxes on the energy sector. According to a study by Citigroup, in order for the Russian budget to be balanced in 2014, Russia needs an average price of $105 per barrel of oil. Yet the impact on Russia’s budget is also being mitigated by the declining value of Russia’s currency, the ruble. A weak ruble means that when oil is sold in dollars, it can be converted back into the domestic currency at a higher rate. “A one-dollar decline in oil prices results in a 70-billion-ruble reduction of revenue for the Russian budget,” Russian Finance Minister Anton Siluanov says. But, he adds,“a one-ruble fall in the exchange rate leads to a growth of 180 billion to 200 billion rubles” in the budget.

IN FIGURES

$105 25%

out of 10 projects have been canceled by ExxonMobil

is the average price per barrel of oil required for Russia to have a balanced budget

of Russian recoverable oil is being extracted through fracking

INTERVIEW ALEXEI ULYUKAYEV

• Aeroflot, Russia’s national airline, has begun to sell tickets for travel on its new low-cost airline Pobeda (Victory.) The airline is Aeroflot’s second attempt to launch a budget carrier this year. The first company, called Dobrolet, failed in the spring after being subjected to Western sanctions. The cheapest one-way ticket on the carrier will cost 999 rubles ($21).

THE GAME GOES ON IN AFGHANISTAN

MINISTER OF ECONOMIC DEVELOPMENT ON SANCTIONS AND INVESTMENT VIKTOR KUZMIN SPECIAL TO RBTH

In an exclusive interview, Russian Minister of Economic Development Alexei Ulyukayev spoke with RBTH about how Russia can attract foreign investment in today’s difficult political climate.

rbth.com/40835

AFP/EASTNEWS

What changes has the Russian economy recently undergone, particularly as a result of the international sanctions? We are observing a dual impact of the sanctions on the Russian economy. On the one hand, there is the inevitable decline in growth rates, higher inflation, ruble volatility and reduced liquidity. On the other hand, these same new realities are capable of helping overcome the structural imbalances. I am first and foremost talking about the excessive pegging to fuel and commodity exports, as well as the orientation towards imports of a wide set of goods – both producer and consumer demand. The Russian economy possesses a sufficient reserve of dura-

bility, which allows it to ensure future growth. In the World Economic Forum’s Global Competitiveness 2014-2015 report, Russia rose by 11 ranks to 53rd (64th last year) out of 144. In that case, how fast will the Russian economy be able to overcome the crisis period? Our economic development forecasts are based on the premise of relative stabilization and a lack of more serious sanctions. Capital outflow may decrease substantially by 2017. The GDP dynamic is expected to rise to 1.2% in 2015, versus 0.5% in 2014. Faster GDP growth will primarily be connected with the investment dynamic, which will grow by 2% in 2015, versus a 2.4% decrease in 2014. We are continuing to work on improving the investment climate so that businesses feel comfortable and safe in all respects. Russia is not fencing itself off from the outside world and is not breaking business ties.

OLESYA KURPYAEVA / RG

Russia is not breaking business ties HIS STORY

Alexei Ulyukayev MINISTER OF ECONOMIC DEVELOPMENT

A native of Moscow, Alexei Ulyukaev holds degrees in economics from both Moscow State University and the Pierre Mendes University in France. He was an architect of Russia’s economic reforms in the 1990s and has served as Minister of Economic Development since June 14, 2013.

How can Russia solve the structural economic problems you mentioned? Russia has entered a period of new economic conditions, and the government needs to tighten its belt. The situation with the budget is compounded by the fact that the country’s revenues will continue to decline relative to previous periods in the long-term, which will prevent Russia from counting on any sig-

nificant shifts in the government’s economic and budget policy. At the same time, the present moment seems the best to make the most effective investments in the country’s development. With Russia’s introduction of tit-for-tat sanctions on imports from the U.S., Canada, Norway, and the European Union, we have a unique opportunity to develop the most crucial industries. In your opinion, which Russian regions might be attractive to foreign investors? The dynamic development of Siberia and the Far East is a national priority, and a decision has been made to introduce profit tax breaks for new investment projects being implemented in this region. Fiveyear holidays are being provided on the profit tax, mineral extraction tax (with the exception of oil and gas), and the land and property taxes, and discounted insurance premiums are being given to new companies located in the priority development territories.

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Sanctions Russian companies use middlemen to get around Moscow’s ban on EU fish imports

Firms Find Food-Ban Loophole IRINA ZHAVORONKOVA RBC DAILY

Despite Russia’s ban on the import of Norwegian salmon, lightlysmoked salmon fillets have not disappeared from Russian shelves. Instead, resourceful suppliers are exploiting a legal loophole to circumvent the ban. Most Russian companies selling fish now cooperate with firms in Belarus in order to get around the ban on European food imports imposed by Moscow in retaliation for EU sanctions on Russia over its support of pro-autonomy militants in eastern Ukraine. According to Alexander Starobinsky, deputy managing director of the St. Petersburg-based holding company ROK-1, fish from Norway is first delivered to Belarus, where it undergoes primary processing (gutting and pickling) before being shipped to Russia. “After the sanctions were introduced, we traveled all over Belarus in search of a local fish processing factory to buy. But in the end we decided simply to place orders there since we expect the sanctions to be lifted soon,” says Konstantin Petrov, commercial director at another fish company, Baltiysky Bereg. Petrov refuses to disclose where in Belarus the company places its orders and in what amounts, citing commercial secrets. According to its website, Baltiysky Bereg is one of the top five “federal companies in this segment.”The company’s output features over 150 products, made at Baltiysky Bereg factories in St. Petersburg and the Leningrad and Murmansk regions. Bans on fish imports from Norway have been in place in Russia since Aug. 7, part of a list of items banned for a year. However, fish

• Ukraine plans to buy up to 1.5 billion cubic meters of Russian gas by the end of the year, according to Ukrainian Energy Minister Yuri Prodan, who made the statement in an interview with Ukrainian newspaper Novoye Vremya. However, Ukraine’s gas company Naftogaz declined to confirm the comments, and its CEO Andriy Kobolev said there was no plan to order fresh supplies of gas. • German utility RWE’s sale of its oil and gas business DEA to Russian billionaire Mikhail Fridman may take longer than expected. The transaction, announced in March, coincided with sanctions imposed on Russia. This could complicate the sale process, which requires approval from the 14 countries where DEA operates. DEA owns stakes in about 190 oil and gas licenses or concessions in Europe, the Middle East and North Africa.

Landlocked Belarus has found a way to export salmon.

of fish and seafood from Norway. In 2013, Norwegian exports of fish to Russia grew by 10%, reaching approximately $1.06 billion.

Legality comes at a cost A representative of a fish processing company has told Russian news service RBK that, compared with the period when fish imports could come directly to Russia, his costs have increased by the amount of the commission fee he pays to his Belarusian partners. According to other RBK sources, their costs have risen by 15-20%. These deliveries could be halted by Rosselkhoznadzor (the Russian Federal Service for Veterinary and Phytosanitary Supervision) but only if there is something wrong

with the papers accompanying them.“We are interested only in the veterinary certificate and the results of spot checks. Customs codes are not our remit,” says Rosselkhoznadzor representative Alexei Alexeyenko. “The fishing business, unlike the others, has been very particular about complying with the sanctions restrictions. If, in order to be brought into the country, fish needs to be salted, this is what they do. It is absolutely legal,” says executive director of the Russian Fisheries Union, Sergei Gudkov, who estimates that since the embargo was introduced, some 80% of the preliminary processing of chilled salmon has been moved out of Russia.

Russia Finds Alternatives For U.S. Meat Russia, once the top market for U.S. poultry exports, has turned to other providers amid a food import ban imposed as a result of the conflict over Ukraine. INTERFAX

Russia has turned to Turkey, Brazil and Argentina to provide poultry to domestic consumers following the ban on poultry imports from the United States. According to Sergei Dankvert, head of Russia’s consumer food products watchdog Rosselkhoznadzor, overall poultry imports declined from 42,000 tons last September to 18,800 in September of this year. However, im-

ports of poultry from Brazil increased from 5,000 tons to 7,650 tons; supplies from Argentina were up from 1,200 tons to 1,700 tons from Argentina; and Turkey has supplied 2,050 tons. Last year, the United States was Russia’s main poultry supplier, exporting 27,000 tons to the Russian market in September 2013 alone. Poultry was also imported from France, Belgium, the Netherlands, Poland, Lithuania, Denmark and a number of other “sanctioned” countries. Similar substitutions are being made for supplies of fish, pork and dairy products. Other countries expanding their exports to Russia in-

clude Chile, Thailand and the Faroe Islands. In Mr. Dankvert’s opinion, the numbers show that Russia is making progress in finding new suppliers for popular foodstuffs.“You can see by these numbers that many countries are eager to come to our market and fill the vacant niches,” he said. Russia banned imports of meat and meat products, fish and fish products, milk and dairy products, and fruit and vegetables from the European Union, the U.S,, Australia, Canada and Norway on Aug. 7 in retaliation for the sanctions imposed on Russia over the events in Ukraine.

Energy The U.S. and Russia continue to work together to process spent nuclear fuel safely

Nuclear Program Not Felled by Sanctions American and Russian officials reaffirm their commitment to keeping nuclear materials out of the hands of terrorists and rogue states. ANDREI REZNICHENKO

PHOTOSHOT/VOSTOCK-PHOTO

SPECIAL TO RBTH

Despite strained relations, the United States and Russia are continuing to collaborate on a radioactivewaste management program that has been in place for the past 15 years. At the opening of the VI ATOMEX 2014 International Forum of Nuclear Industry Suppliers in Moscow on Oct. 29, Sergei Kiriyenko, the general director of Russia’s state nuclear agency Rosatom, said that the sanctions against Russia have had no effect on the Russian nuclear industry and that all contracts with foreign partners are being carried out in full. “The Russian nuclear industry is not a target of the sanctions. That goes for both individuals and corporations,” Mr. Kiriyenko said. He had previously noted that Rosatom has long-term, mutually beneficial relations with American nuclear players that are much stronger than any political disagreements. According to Mr. Kiriyenko, integration has reached such a high level that Rosatom currently owns 20% of U.S. uranium reserves. “We have been implementing the Megatons to Megawatts Program for the past 20 years, in which Russian fuel has met half the needs of U.S. nuclear power plants. “We’ve had better and worse times during that time, but we have not seen a single disruption in fuel supplies – not a single day’s delay – in 20 years,” Mr. Kiriyenko said. The Megatons to Megawatts program, which lasted from 1993 to

U.S. Secretary of Energy Ernest Moniz speaking at an IAEA conference.

2013, turned 500 tons of Russia’s highly enriched, weapons-grade uranium into nuclear fuel that was subsequently used in U.S. nuclear power plants. The U.S. has no intention of abandoning its collaboration with Russia to ensure nuclear security

The nuclear fuel removal program is a testament to the importance both countries place on securing nuclear waste. or cooperation in nuclear energy and research, U.S. Secretary of Energy Ernest Moniz said at the 58th International Atomic Energy Agency (IAEA) General Conference in Vienna at the end of September. According to Mr. Moniz, everyone understands that serious tensions have arisen between Russia and the U.S.

NEWS IN BRIEF

DPA/VOSTOCK-PHOTO

imports from Norway to the other two countries of the Russia-led Customs Union – Belarus and Kazakhstan – have not been banned. Although raw fish cannot be transported from these countries to Russia since its country of origin remains Norway, if the fish undergoes some processing (for example, if the raw fish is salted or smoked) and is packaged, it becomes a Belarusian or a Kazakh product, and is no longer subject to any restrictions. For example, in Belarus, Norwegian salmon is given a new foreign economic activity code, which is used by Russian customs: It is transferred from the designation 0302 (“chilled salmon”) to 0305 (“salmon fillet with minimum 3.5% salt content”). Fish consumption in Russia in 2013 stood at 2.8 million tons, with over a third of that amount imported. The biggest exporter was Norway, accounting for nearly 40% of Russia’s fish imports. According to the Norwegian Directorate of Fisheries, in 2012-2013, Russia was the biggest importer

Russian fish processing companies now import chilled fish to Belarus, where it is gutted and salted before being returned to Russia as processed fish.

However, the two countries are continuing to work together on individual projects, particularly involving nuclear security. He drew attention to a program to return highly enriched fuel intended for research reactors to its country of origin. As part of this program, highly qualified specialists from both the U.S. and Russia work with third countries to return the spent nuclear fuel of research reactors, to counteract the illegal spread of nuclear materials. Russia and the U.S. are doing everything in their power to ensure that spent nuclear fuel or highly enriched uranium do not end up in the hands of terrorists. The program was initiated in 1999, after joint consultations between Russia, the U.S., and the IAEA. When an agreement was reached, the general director of the IAEA sent a letter to 15 countries that house Russian-made research reactors, requesting their partici-

pation in the program and asking that they return the highly enriched fuel to Russia. Similar letters were sent out to countries with research reactors built using American technology, from which the Americans were to remove the highly enriched uranium. The first batch of highly enriched fresh fuel was removed in 2002 from the Vinca Research Institute outside Belgrade, Serbia. Fuel was removed from Romania soon after. The first batch of spent fuel was delivered out of Uzbekistan in 2006. So far, more than 3,500 pounds of spent and fresh highly enriched fuel have successfully been returned to their country of origin in several dozen operations, all thanks to joint Russian-American efforts. In recent years, infrastructure has been built to load and transport fuel, and special Russian and Czech-made containers have been purchased for that purpose. Measures have been adopted to enhance work efficiency. Whereas previously one to two removals were performed per year, now there are plans to remove 10-15 batches per year. The containers can be used on all types of transport, making it possible to unify the shipment process. Two deliveries were made from Romania and Libya by air in 2009. Russia and the U.S. will continue to use air transport in the future because it is the most efficient in terms of time – and in terms of averting threats of terrorism. Russia and the U.S. plan to continue the program at least until 2016. The program is entirely financed by the U.S., with the exception of cases when fuel is removed from countries with higher incomes, for example Germany. In all other cases, the American side has paid for the operations in their entirety, from preparing the fuel to licensing shipments to delivering the fuel to Russia. Russia’s contribution is its unique experience and high technology. The continued cooperation in the current nuclear fuel removal program is a testament to the importance both countries place on securing nuclear waste.

AFP/EASTNEWS

• Russia revealed its logo for the 2018 FIFA World Cup. The emblem, which was inspired by the World Cup trophy, was first shown by cosmonauts at the International Space Station and then projected onto the side of the Bolshoi Theater. Russian officials maintain that World Cup plans are moving ahead on schedule and FIFA has repeatedly said it has no intention of reopening bidding for the event, despite calls to do so. • A Russian court extended the house arrest of Vladimir Yevtushenkov, chairman of Sistema, which is the majority shareholder in oil company Bashneft. Yevtushenkov has been under house arrest since Sept. 24, when the government seized control of Bashneft. On Nov. 8, a court ruled that the government’s takeover of the company was legal, since it had been illegally privatized in the 1990s. • Mikhail Prokhorov’s Onexim investment company has taken control of mobile phone retailer Svyaznoy. About 90% of Svyaznoy will now be owned equally by Prokhorov’s Onexim and pension fund Blagosostoyanie, the statement said. Maxim Nogotkov, Svyaznoy’s founder, will lose operational control as part of the deal. The company is reportedly worth $300-$400 million. • Foreign companies hoping to buy more than a 25% stake in Russian media will soon face another hurdle. Regulations that come into effect on Dec. 6 require potential owners to request government approval for any deal. The new rules will be redundant in January 2017, however, when a law goes into effect prohibiting foreign owndership of more than 20% of Russian media outlets. • Russia will contribute $20 million to the global fight against Ebola, according to Prime Minister Dmitry Medvedev. Russian scientists are already in the process of testing possible vaccines for the virus and Russian doctors have spent several months in Guinea helping treat patients. • Freight volumes on Russian Railways continue to grow, according to numbers released by the company at the beginning of November. The growth in freight volumes has been driven largely by growing volumes of thermal coal, oil and oil products, grains and ferrous metals. • Federal Drug Agency head Viktor Ivanov has said that soft drugs will not be legalized in Russia, although there had been a push for Russia to consider the legalization of marijuana. “Whichever drugs are used, they always lead to a sorry end,” Ivanov said. • Investors could earn returns of more than 50% on Russian equities in 2015, says investment bank Renaissance Capital. In an interview with news source Business New Europe, Charles Robertson, Chief Global Economist at the Moscow-based bank said, “Russia may well offer some of the best returns you will get in 2015... The ruble is oversold, the market is down, heavily, and we assume that sanctions will ease in 2015.”

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INFOGRAPHICS

MOSCOW REBORN

Changes in Office Space Over Time

MOSCOW IS CHANGING FAST, DEFYING STEREOTYPES OF BOTH

AS MULTINATIONAL FIRMS MOVED INTO MOSCOW, DEMAND FOR CLASS-A OFFICE SPACE GREW. BUT THE MARKET SUFFERED SETBACKS WITH THE GLOBAL FINANCIAL CRISIS AND FOLLOWING THIS YEAR’S POLITICAL TENSIONS.

THE COLD WAR ERA AND THE POST-COLD WAR ‘WILD EAST’

AMID TENSIONS WITH WEST, A NEW MOSCOW CONTINUED FROM PAGE 1

One example: In 1987, there were only 87 licensed restaurants in all of Moscow. Today, the city is in the throes of a massive facelift as the new mayor, Sergei Sobyanin, toils to undo the worst remnants of Soviet urban planning. “Moscow is reborn in terms of architecture, green spaces and lighting,”says Jacob Lifflander, an American who has spent 27 years in Moscow as an embassy driver, businessman and business editor for English-language daily newspaper The Moscow Times. “When I moved here, the roads were ragged and devoid of vehicles,”Mr. Lifflander says.“The city was grey and so were the people.” When it was the capital of the socialist world, Russia’s most important city presented Western visitors with something of an alien landscape. For many, the first impression they got after the airport was wide streets with few cars and no advertising. Today, the city is struggling to clear mammoth traffic jams, while officials weigh measures to reduce the clutter of advertising. The changes have rendered the city center cleaner, more convenient, and – thanks to bans on the sale of alcohol in public after 11pm

as well as drinking in the subway – more sober, than seemingly anyone can remember. In one marker of the change, a survey by British multinational bank HSBC recently named Russia the 17th best country in which to live for expats. Five years earlier, Russia ranked 24th out of 26 countries.

New times, new buildings Throughout the city, landmarks to the Soviet past have been torn down and replaced with modern

Today the city is in the throes of a massive facelift as Mayor Sergei Sobyanin toils to undo Soviet urban planning. versions. In the heart of Moscow, directly opposite the Kremlin, once stood the colossal Rossiya Hotel. Built in 1967 at a scale meant to showcase rising Soviet power, the hotel boasted 3,200 rooms and was for decades the largest in the world. Today, the Rossiya has been torn down and the location is being redesigned as an open public space by a group of companies led by the NewYork architecture firm that designed Manhattan’s celebrated High Line, Diller Cofidio + Renfro.

Meanwhile, a small island in the center of Moscow that was once the home of the Red October chocolate factory has been gutted and revamped. Today, the island that older Russians associate with Soviet chocolates now teems with Russian hipsters scuttling between bars, cafes, photo galleries and media offices. A few miles away lies the 300acre Gorky Park.The socialist“people’s park,”mentioned in the Scorpions’ 1990 power ballad Wind of Change, fell into disrepair after the Soviet collapse and became infamous for drug use. Now, the space has been transfigured by the design firm Wowhaus, filling the park with public art and free WiFi. Every weekend, from summer to winter, the sprawling grounds teem with Muscovites playing table tennis, taking yoga classes or playing bocce. In the aftermath of the Soviet Union’s collapse in the early 1990s, the city transformed from a grey socialist netherworld into a wheeling-dealing metropolis full of entrepreneurs reinventing capitalism by their own rules. “After the fake life of the Soviet system – big stores empty of goods, people lining up for lemons — this seemed like real life, real commerce,” says Michele Berdy, an American translator who

moved to Moscow in the late 1980s. After President Vladimir Putin took over in the year 2000, rising global prices for oil and gas turned Moscow into a city of “massive amounts of money, massive market growth, all accompanied by international interest in opening up stores, businesses and hotels,”notes Nikolai Petrov, professor of political science at the Higher School of Economics. Moscow became a“24hour city.” Still, as Ms. Berdy says, no matter what, Moscow is neither the grim Soviet capital nor the gangland paradise many Westerners imagine it to be. “No matter how many times I tell people,‘really, it’s a modern European city,’ nobody believes me,” she says. “Until they come here.”

NATALIA MIKHAYLENKO

A Growing Taste for Dining Out

IN FIGURES

11.5 million is the population of Moscow, according to the most recent census taken in 2010. Unofficial estimates put the number closer to 14 million.

Moscow’s dining scene has been transformed, with the number of restaurants growing between 15% and 20% per year. Yet economic uncertainties cloud the future. KIRA EGOROVA

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4 years is how long the current Mayor Sergei Sobyanin has been in office. His predecessor, Yury Luzhkov, held the job for 18 years.

QUOTE

Sergei Sobyanin MOSCOW’S MAYOR SPOKE TO THE LOCAL TV CHANNEL TSENTR IN OCTOBER ABOUT THE CITY’S PLANS FOR DEVELOPMENT

SERGEY MIKHEEV / RG

ur city’s economy is, on the whole, stable, and I hope that we’ll finish the year on the plus side – both in terms of industrial development and investments and in terms of the budget. But, of course, for that to happen we need to exert ourselves: improve the investment climate, develop the infrastructure, work with investors and attract them to the city. Strictly speaking, that’s the task of any government – to mitigate problems and to put effort into making the city more attractive for investors.

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is the number of stations in the Moscow metro. Another 40 are scheduled to open by 2017. The system averages 6.7 million passengers a day.

While the average American adult goes to a restaurant about five times per week, in Russia dining out has never been much of a tradition. In fact, just a few years before the Soviet Union collapsed in the early 1990s, there were only 87 registered restaurants in all of Moscow, a city where millions live. An Associated Press article from 1981 noted that the Socialist capital had no Italian or French restaurants at all, and observed drily that the city’s lone pizzeria, located down a narrow side street a few blocks from the Kremlin,“falls well short of world pizza standards.” In order to cater to local tastes, Chinese restaurants served dishes accompanied by big helpings of traditional Russian black bread. But today, the city has been been transformed by a revolution in dining culture that has been gaining momentum over several years. Official city statistics now list 11,000 restaurants, a number that has been

Younger Russians are embracing restaurant and coffee culture.

expanding 15% to 20% per year since 2000, according to Andrei Petrakov, executive director of the RestCon consulting company. Meanwhile another American tradition, coffee, is also taking hold, as a trip to the local coffee shop starts to replace Russia’s traditional mid-afternoon custom of enjoying a cup of tea in the office. Seattle-based coffee chain Starbucks opened its first location in Moscow in 2007 and has since expanded rapidly, with 70 branches in Moscow today. “We believe people will develop

an even stronger ‘coffee culture.’ The increasingly dynamic lifestyle in the city makes us optimistic about the potential of the market,” says Hannah West, a U.S.-based representative of Starbucks’ PR firm Edelman. “We believe that there’s plenty of room in the market where independent stores and small chains can continue to grow along with Starbucks.” Moscow residents still have some way to go before they catch up with American dining habits. According to the Moscow Department of

Trade and Services, Muscovites spent 7.4% of their food expenses on eating out in 2013. For Americans living in big cities, according to the U.S. Department of Agriculture, the equivalent figure is 76%. And despite the rapid expansion in recent years, Moscow restaurateurs face challenges ahead. Economic sanctions and the falling ruble have restricted Russians’ purchasing power. Additionally, restaurants have been forced to change menus and suppliers, due to Russia’s ban on food imports from the U.S and the EU. In October, the Department of Trade released a forecast showing that, by the end of the year, the city’s restaurant market may suffer a drop of as much as 15%. Customer numbers have recently taken a hit because of the weakening ruble, the effect sanctions have had on the variety in menus and also a ban on smoking in restaurants, which came into effect this summer. A spokesperson for the Federation of Restaurant and Hotel Owners told Russian daily Izvestiya that chains have stopped opening new outlets and have begun a review of the existing ones.

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Has Moscow Lost its Identity in Expansion? Ivan Sukhov SPECIAL TO RBTH SHUTTERSTOCK/LEGION-MEDIA

1. The modern office towers of the White Square business center greet visitors to the city coming in from Sheremyetevo airport. The towers are home to major multimationals like KMPG and PwC; trendy restaurants fill the lower floors. 2. Gorky Park has undergone a mejor renovation and rebirth in recent years, with the space attracting more visitors annually than the entire population of Moscow.

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A $62 Billion Plan For Traffic Home of the world’s worst traffic jams, Moscow has launched a massive effort to clear the roads, introducing paid parking and raising costs for car ownership. SAM SKOVE SPECIAL TO RBTH

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Moscow has launched an ambitious, multi-billion dollar campaign to unsnarl its notorious traffic jams, a gargantuan task in a city ranked as the world’s most-gridlocked. Moscow aims to transform itself by 2020 through spending a total of 2.9 trillion rubles ($62 billion) and doubling down on public transportation, in a series of projects initiated by Moscow Mayor Sergei Sobyanin. Meanwhile, a paid-parking regime and expanded toll roads will increase the cost of car ownership. Amid signs of early progress, skeptics say success can only come in degrees. “Even if you spent the entire budget of the Pentagon [on improving Moscow’s roads], you couldn’t solve the problem,” says Mikhail Blinkin, director of the Institute for Transport Economics and Transport Policy Studies.The city’s twisted streets and centuries-old layout mean that“Moscow can’t be a city for cars,” Mr. Blinkin says. The plan, which includes suburban rail development, road construction and even creating 300 kilometers of bike lanes, aims to save drivers 88 hours a year, according to Deputy Mayor Maxim Liksutov.

Moscow’s inappropriately named Garden Ring, which circles the city center, is usually 16 lanes of pure gridlock.

by the towing fleet, began in the center of the city, then spread outward. As of late October this year, Mayor Sobyanin announced that the average speed of traffic in the paid parking zones has “risen by an average of 12%.” The plan also foresees an expansion of the Moscow metro, boosting the the number of stations by 78 to 250, and placing 93% of Moscow’s residents within walking distance of a metro line.

Gridlock capital Stuck in traffic At the top of the mayor’s action plan: Getting muscovites to park in approved spaces, instead of simply pulling their cars up on to the sidewalk or double-parking in the road. The latter creates an acute problem by tightening the city’s circulation into random bottlenecks. To fix the parking issue, city officials dispatched a fleet of little green tow trucks, which quickly became notorious for making off with inappropriately parked cars. In 2013, paid parking, regulated

Moscow is ranked as the world’s most gridlocked metropolis, ahead of Istanbul, Rio de Janeiro and Mexico City, according to road navigation company’s TomTom’s 2014 yearly traffic report. It wasn’t always so. The roots of the problem stretch back into the Cold War years. Under the Soviet Union, deficiencies in the socialist economy made cars a luxury item. That left Moscow’s centuries-old byways largely uncongested and meant that city planners had no need to worry about traffic.

When the Soviet system collapsed in the early 1990s, the pentup demand for automobiles was unleashed. As Russian incomes grew, car ownership exploded and Russia emerged as one of Europe’s top five auto markets. Young Russians, whose parents and grandparents had never even dreamed of owning a car, enthusiastically embraced this new sym-

Progress will depend in part on the city’s commitment to spending in the face of Russia’s economic uncertainties. bol of wealth. In 2014, Moscow’s official population of 11.5 million was driving at least four million cars, according to the Interior Ministry’s count. Some experts argue that Moscow was simply never designed for this many cars. Unlike the orderly grids of New York or Chicago, Moscow converges all transport options into

the business-heavy city center. “Just look at [the roads] on Google maps – it’s like an asterisk,” says Mr. Blinkin.

Roadblocks ahead? Yet even as Moscow grapples with its existing traffic problem, its population growth may only make the challenge even more difficult going forward. The city estimates that Moscow may grow to 15 million by 2025, and illegal immigration from Central Asia means that the real population may be much higher. Mr. Blinkin notes that progress will depend in part on the city’s commitment to spending in the face of economic uncertainties. In the meantime, notes Alisher Budtobaev, a Moscow taxi driver, the construction connected with the upgrade has actually made traffic worse in many places. “As soon as the construction ends, I expect it’ll become gradually better,” he says. Millions of Russian commuters — along with city officials — all hope that he’s right.

was born in Moscow, and the city was the setting for every important event in my life. But something has changed, elusively, in the past 15 years or so. The thing is that Moscow is becoming a city that is difficult to love. In the past two decades, Moscow has done more than ever to transform itself from a city into an entire country. Satellite imagery taken at night says more about modern Russia than voluminous statistical reference texts. Europe and North America shine almost entirely, while Russia has only Moscow and a few other cities; the rest is just darkness. This situation reflects the condition of the economy in the Russian regions. For many people, the only hope for success is to move to Moscow. For residents of nearby regions, whose workforce has been almost completely absorbed by Moscow’s labor market, the priority of residents is just to survive. I do not know if Moscow will ever become a financial capital for anyone besides Russian regional administrators, but for now most of Russia’s money is here – and this has the same effect on people that a light has on moths. It would be wrong to think that bears roam the streets of Russia’s regional towns. In fact, some people prefer life there with its slower pace and more human level of communication. But Moscow and its suburbs contain onefifth of Russia’s population, according to official statistics, and a large percentage of the population of two or three former Soviet republics, according to unofficial ones. Muscovites have long become accustomed to wearing what people wear in other capitals, of eating what others eat (well, until the government’s recent introduction of food sanctions), of watching the same films, of reading many interesting books, of going to public lectures, of getting to know one another during demonstrations against rigged elections or the conflict in Ukraine. But we cannot free ourselves of the feeling that our world is but a thin cortex, under which bubbles the lava of a future social disaster. Signs of this disaster penetrate our daily lives ever more frequently. The nervous character of city life can no longer be attributed to the speed of the capital. The speed, as a matter of fact, is being reduced. It has become practically impossible to move around. The municipal administration, with its paid parking and new interchanges, cannot keep up with the increasing quantity of cars, whose drivers often behave as if there are no traffic rules at all. The Moscow metro system is also at its limit, as indicated by constant technical breakdowns and the occasional serious accident. The office of Mayor Sergei Sobyanin has perhaps done more than any other municipal administration to give the city a certain civilized aspect. Moscow now has plenty of nice parks, bicycle paths, free WiFi in public spaces. But all this is just paint that the administration is using to give a modern look to an old facility. Today, as Russia encounters its most serious economic difficulties since the fall of the Soviet Union, there is the risk that there will not be enough money for the city admininstration to continue its painting. But the situation will be still worse in Russia’s regions. In the past 20 years, the residents there have used up the last remnants of social infrastructure that existed in the final phase of the Soviet Union – and should Russia’s relative economic stability indeed break down, Moscow will have to be prepared to cope with yet another influx of people trying to seek their fortunes. For now this has more probability than Ilyinka Street, near the Kremlin, has of becoming Russia’s answer to Wall Street. Ivan Sukhov is a Moscow-based journalist.

INFOGRAPHICS

A City’s Growth in Coffee Beans SINCE STARBUCKS OPENED ITS FIRST COFFEE SHOP IN MOSCOW IN 2007, THE COMPANY HAS POSTED ROBUST GROWTH, EVEN IN A CITY WHERE PEOPLE HAVE TRADITIONALLY PREFERRED TEA TO COFFEE, AND WHERE THERE ARE PLENTY OF LOCAL CHAINS TO CHOOS E FROM. NATALIA MIKHAYLENKO

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Currency Russia fulfills a long-held plan to let the ruble float freely, following a steep drop in value

History Says: Don’t Count Russia Out Just Yet

Russian Officials Battle Ruble Decline, Inflation

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irst, the bad news: Moscow-Washington relations are at the lowest point since the 1970s Brezhnev era. Capital flight from Russia is at record levels and is forecast to reach $128 billion this year. Economic growth has stalled at close to zero. That’s sobering for a country that once had double-digit growth and more recently was stable at around 4% while rivals stood still or declined. And the ruble is in free-fall against foreign currencies. Russia’s problem is that the price for its Urals Crude oil brand has dived from $115 to $83 a barrel since June. Deutsche Bank claims that, due to sharply increased spending in recent years, Moscow needs $100/barrel to balance its budget. The Russian government itself puts the number at $80. The Kremlin’s failure to diversify the Russian economy could be coming home to roost now. However, there are reasons to believe that to a certain extent Russia can dodge the oil bullet. A falling ruble may be a disaster for ordinary households, but it has a positive impact on the Russian government’s budget, because income from oil is in dollars and domestic expenditure in rubles. This eases the pressure on the Kremlin’s coffers. And the Saudis aside, other Middle Eastern oil producers can’t sustain lower yields over a period of years. Russia has healthy cash reserves and can bear the economic pain for a while yet. The U.S. shale boom, which is keeping unemployment there in check, can’t cope with prolonged exposure to sub $90 prices. The last time Russia faced financial ruin was in August 1998 when the ruble collapsed against the dollar after President Boris Yeltsin’s administration defaulted on domestic debt payments and froze repayment due foreign creditors. Within the space of a few weeks the ruble exchange rate against the dollar collapsed from around six to 21. Ordinary people, who kept their savings in rubles or who had dollar-denominated mortgages and loans, faced ruin. And yet, in a country that is no stranger to crises, within a few years the Russian economy was booming as never before with annual growth in double digits. Bryan MacDonald is an Irish journalist who focuses on Russia and international geopolitics.

Russia’s Central Bank has allowed the ruble to float freely following a steep decline in the currency’s value, while pledging to intervene against speculators. DAVID MILLER RBTH

Russian officials are striving to shore up the country’s financial stability amid a historic decline in the value of the ruble and persistently stubborn inflation. The ruble has fallen from about 32 rubles to the dollar at the beginning of the year to over 45 versus the greenback as of mid-November, buffeted by slowing economic growth and a drop in the price of oil, Russia’s main export. This month Russia’s Central Bank announced it would abandon its policy of targeting an exchange rate within a band set against a dollar-euro basket, effectively letting the currency float freely on the market. But officials added they will defend the ruble as necessary to deter speculators from betting against the currency by performing ad hoc interventions. “We will intervene in the currency market at whichever moment and at the amount needed to decrease the speculative demand,” Central Bank chief Elvira Nabiullina said in an interview on Nov. 10 with the Rossiya-24 channel. Russia’s central bank has spent billions of dollars supporting the ruble in recent months, including $30 billion in October alone. Russian PresidentVladimir Putin likewise blamed speculators for the recent bout of turbulence after the currency had its worst week in over a decade, falling 8% during the week ending Nov. 7. “We’re witnessing some speculative jumps in the ruble rate but I think it will end soon, in connection with the steps the Central Bank is taking in response to the speculators,” Putin told a confer-

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Bryan MacDonald

The ruble has lost more than 30% of its value against the dollar.

ence during a visit to Asian Pacific Economic Council summit in Beijing this month.

Oil and sanctions “The ruble’s depreciation was prompted by a number of fundamental factors,” the bank said in

Although a cheaper ruble makes imports more expensive, it also helps offset the impact of lower oil prices on the budget. a statement earlier this month,“first of all, by the falling price of oil and limited access to external capital markets.” Russia, the world’s biggest producer of crude oil, relies on hydrocarbon taxes for about half of government budget funds. Western sanctions, meanwhile, have

limited several key Russian firms’ access to foreign financial markets. Although a cheaper ruble makes imports more expensive for Russian consumers, it also helps offset the impact of lower oil prices on the government’s budget because Russian oil firms selling crude for dollars end up earning extra rubles in the exchange. The Central Bank’s move to drop the exchange rate target is in fact part of a long-held plan to let the ruble float freely and shift policy towards tamping down inflation. The decision to let the ruble float freely “may improve the scope for the [Central Bank] to deal with mounting exchange rate pressures,” Deutsche Bank analysts Yaroslav Lissovolik and Artem Zaigrin wrote in a research note to investors.“The decision also supports the commitment of the Central Bank to transition toward inflation targeting,

with one of the important steps having been taken.” The Central Bank also raised its key benchmark lending rate by 1.5 percentage points to 9.5% at the end of October as inflation “grew more rapidly than expected earlier,” the bank said in a statement on its web site. The annual consumer price growth rate was 8.4% as of Oct. 27. Consumer price growth is “very likely to persist at the current level”through the first quarter of 2015, the bank said. The bank predicted Russia’s economic growth rates in the last quarter of 2014 and first quarter of 2015 will be “close to zero.” The central bank has long held the ruble within a floating band set against a dollar-euro basket, and intervened when the currency moved towards the borders of the band. The new policy means that the bank will no longer intervene at the boundaries of the corridor.

Cities Long known for its cultural offerings, Russia’s “Northern Capital” is starting to make an impact as a business center

St. Petersburg Overtakes Moscow in Finance Rating

of gross regional product by 2019. Fixed capital investment will grow to 70% of that figure. At the moment, more than 730 small- and medium-sized enterprises, among them some of the largest companies in Russia, make up the basis of St. Petersburg’s industry. There are 22,000 small enterprises involved in the manufacturing sector. St. Petersburg is also one of Russia’s leaders in the cluster policy for industrial development.

Investor interest

Trade between St. Petersburg and the U.S.

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In 2013, St. Petersburg’s foreign trade turnover totaled $54 billion, with 193 country trading partners. Its trade with the United States alone grew 8.2% to $1.6 billion, even though the U.S. is only the city’s 11th-largest trading partner. Nevertheless, imports from the U.S. ($311.6 million) were roughly onefourth the value of exports ($1.3 billion). St. Petersburg’s main offering to American consumers is mineral fuel, which accounts for 23% of the city’s exports. It also exports wood, fur, and optical instruments. In turn, the U.S. primarily delivers meat and meat products, nuclear reactors, ground transport, electronic equipment, and other items to St. Petersburg.

St. Petersburg has been better known for its history than its trade potential, but that is changing.

St. Petersburg has surpassed Moscow for the first time in a major international ranking of financial competitiveness. Regional authorities say it comes down to a concerted effort to attract foreign investment. IGOR ROZIN

infrastructure, and human capital, as well as their reputations. St. Petersburg took the lead in part due to its role as a center for foreign investment. In addition, St. Petersburg adopted a new strategy in 2014 that facilitates a substantial increase in foreign investment.

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St. Petersburg, Russia’s second-largest city, has overtaken Moscow in a global rating of financial competitiveness known as the Global Financial Centers Index (GFCI), compiled by the London-based consultancy Z/Yen Group. According to the report published in September, St. Petersburg jumped six places in the ranking to 72. Moscow fell to 80th place. The global leaders were New York, London, Hong Kong, Singapore, and San Francisco. The cities were judged according to their business environment, financial sector development,

New strategy Regional authorities attributed the improvement to the city’s ability to attract foreign investors, who have channeled money into manufacturing. The St. Petersburg authorities offer major concessions to investors who show interest in the region. In particular, regional officials have promised to introduce a tax break on land for companies and tax breaks for IT companies and players in the tourism market. “We are creating all the necessary conditions

for the leading domestic and foreign companies to come to our city, which possesses a whole host of geopolitical advantages. St. Petersburg is open to cooperation,”says St. Petersburg Governor Georgy Poltavchenko. “Today, our portfolio includes many projects that would be equally beneficial to both the city and our partners, the investors.” St. Petersburg’s labor productivity in manufacturing tops $80,000 per employee as measured by purchasing power parity for the ruble to the dollar, compared to the $36,000 average for Russia as a whole, according to the city administration’s press service. However, this figure is still two to three times lower than the average for developed countries. St. Petersburg can narrow that gap by attracting foreign investors, the administration said. As a result of its new strategy, St. Petersburg is slated to boost the share of production in the hi-tech and knowledge-based industries to 20%

St. Petersburg is among Russia’s three largest innovation centers and among the top 100 in the world, according to the Innovation Cities Global Ranking. The northern city boasts great human resources and intellectual potential, with more than 320 scientific organizations and over 90 Russian universities. St. Petersburg is creating special infrastructure – for example, the Ingriya and Kristall business incubators – with an eye to developing its innovation potential. According to the St. Petersburg Administration, American companies were the pioneers behind the development of the city’s auto industry. At the moment, Jonson Controls and Tenneco have a presence on the city’s market, and General Motors is one of the biggest investors in the St. Petersburg economy. Ford has a large auto factory not far from the city. The city’s administration also has experience working with American pharmaceutical companies. For example, the Healthcare Committee and U.S. companies are jointly implementing a program called“Clinical Research on Drugs for Medical Use.” In 2013, U.S. investment in the St. Petersburg economy totaled $116 million. As a whole, $471 million in American investment has accumulated in the city’s economy. Compare that to $13.4 billion in combined foreign investment in the city in 2013, as well as $25.4 billion of accumulated foreign capital. St. Petersburg annually hosts major international conferences, including the St. Petersburg International Economic Forum, the St. Petersburg International Innovation Forum, the St. Petersburg International Cultural Forum, and others. Economic and political observers predict a rise in the city’s international profile, partially due to the World Hockey Championship matches scheduled to be held there in 2016, and also because of the FIFA World Championship matches scheduled there for 2018.

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UKRAINE, THE U.S. AND SHALE Pat Davis Szymczak SPECIAL TO RBTH

KONSTANTIN MALER

n the 20-plus years since Ukraine declared independence, the country’s governance has lurched from one corrupt group of oligarchs to the next. Transparency International ranked Ukraine 144 on a scale that sets 177 as most corrupt. Russia fares better at 127 and the EU member states are all well below 100. I point this out not to defame Ukraine as much as to ask why Ukraine is always portrayed in the western media as a “little bit of Europe” suffering under Russian tyranny. It’s worth remembering that Ukraine has run its own show since 1992, and during those 20 years, the country has treated its relationship with Russia in terms of gas imports like a teenager who wants to live off a parent, but not follow the parent’s rules. My friends and acquaintances in Ukraine represent a rainbow of opinions: pro-Ukrainian Russians, pro-Russian Ukrainians, a couple of expats, even a guy from Lvov (a city in western Ukraine, which tends to be pro-Europe) who is married to a girl from Crimea (now part of Russia). They disagree on a lot. But they all agree on this: Ukraine’s economy never had a chance to develop, because one group of politically embedded oligarchs after another profited off the state, effectively bankrupting the country. Red revolution, Orange revolution and whatever color it was in 1992, the old bosses haven’t differed much from the new. In the mid-1990s, I interviewed Shell’s Ukrainian country manager in Kiev. At that time, Shell was negotiating with Ukraine’s first postSoviet government to reopen Ukrainian gas fields. Shell’s man in Kiev told me there was enough gas left to supply Ukraine’s domestic needs and to even export. But Shell abandoned the project when it couldn’t reach an agreement with the Ukrainian side. The executive I spoke with told me that the demands for payoffs had made it impossible to negotiate a deal, even though the project would have enriched the economy of newly independent Ukraine with new sources of tax revenue, new jobs, and even energy independence from Russia. Shell returned to Ukraine only in 2013 to sign a $10 billion deal to develop shale gas in eastern Ukraine. Shell drilled two exploration wells in theYuzivska field before fighting around

Ukraine’s inability to get its act together and take advantage of its energy assets has created an opening likely to be filled by North America. Slovyansk forced it to freeze operations this spring. Shell’s agreement in January 2013 was followed in November by a similar $10 billion deal negotiated by Chevron to develop the Olesska shale gas field in western Ukraine. The U.S. Energy Information Administration estimates Ukraine’s shale gas reserves as Europe’s third largest, at 42 trillion cubic feet.

Offshore it’s a similar story. Shell, Chevron and ExxonMobil have tried over the years to develop projects there, together with Ukrainian interests. A New York Times article recently quoted experts as saying the energy potential of the Black Sea might even exceed that of the North Sea. But nothing ever really took off. Ukraine’s inability to get its act together and take advantage of its assets has created an opening likely to be filled by North America. The U.S. has seemingly overnight moved from being an energy importer to a potentially massive exporter, at a time when Russia is struggling to maintain its position as the world’s top energy exporter in the midst of a production decline in its prolific West Siberian fields. As the EU and U.S. discussed their first round of sanctions against Russia earlier this year, Platt’s reported that Washington had let European leaders know it was prepared to shift U.S. diesel fuel

exports bound for South America to Europe “if the price were right.”The offer was to encourage Europe to consider sanctioning Russian diesel. In May, Spain’s Iberdrola power company signed a 20-year contract to buy $5.6 billion worth of U.S. liquefied natural gas from Cheniere Energy Inc. And as talks commenced this summer on the Transatlantic Trade and Investment Partnership – potentially the largest trade agreement in the history of the world, the Washington Post obtained a“leaked”document in which the EU pressed the U.S. to end its ban on crude oil exports. Events in Ukraine and distrust of Russia were cited as reasons. Pat Davis Szymczak is the founder and editorial director of Oil&Gas Eurasia, a monthly, bilingual trade publication devoted to the application of western technology to Russian and CIS oil and gas fields.

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WHAT’S BEHIND THE RUBLE DROP? IT’S THE SANCTIONS

November Monthly Brief: What’s Next for the G20 The members of the G20 recently met in Brisbane, Australia. In this monthly report, RD experts examine this meeting and consider what could be achieved by the participants. The memo takes a look at the role the G20 can play in the creation of a new, multipolar world and how the group is acting as a foil to the G8.

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foreign exchange reserves, but not added to the reserves of the Central Bank. And the payments are sizeable: Sberbank CIB, the corporate and investment-banking business of Russia’s retail banking giant Sberbank, estimates that Russian debtors have to transfer $29 billion abroad in Q4 this year and $106 bil-

Unlike previous years, when Russian companies took out loans to invest in new projects, all incoming funds will simply go abroad in order to settle debts. lion in 2015, of which $58 billion is presently lacking. Furthermore,“most short-term debt is owed by companies under U.S. and EU sanctions... “These companies’ external debt as of end 2015 is expected to stand at $84 billion, which corresponds to almost 60% of the gross exter-

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nal debt that must be repaid by end 2015,” according to a report from Sberbank CIB. This group includes companies operating in two sectors of the economy — banking, and oil and gas. The liabilities of oil and gas companies make up $62 billion, or 74% of the total liabilities of companies in the group. The money can be found and the debts paid off, but it must be kept in mind that unlike previous years, when our companies and banks took out loans to refinance past loans and invest in new projects (which is why the external debt was forever rising), this time around, all incoming funds will simply go abroad in order to settle debts with no investment whatsoever in the Russian economy. One can only imagine the impact this will have on the economic situation in the country. I personally expect that as early as 2015 the Russian economy will see a marked decline — there is no source to replace Western loans at present. Vladimir Milov is the president of the Institute of Energy Policy, an independent think tank based in Moscow, and a former Russian Deputy Energy Minister.

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December Monthly Brief: Year in Review

PHTOXPRESS

he explanation behind the collapse of the ruble is simple. It is essentially a direct result of Western sanctions. The fact is that loans from Western banks are a key source of financing in Russia, one that in recent years has helped the Russian economy get up off its knees. The scale of lending has been stupefying: Whereas a decade ago, the total external debt of Russian banks and companies amounted to around $100 billion, this year it peaked in July at $660 billion — one-and-a-half times more than the currency reserves of the Central Bank. A significant portion of these loans are relatively short-term and in need of constant refinancing. New loans are needed to pay off old ones. But due to events in Ukraine and Crimea, Western creditors started closing the credit positions of Russian borrowers. That was followed by direct sanctions on major borrowers, such as Rosneft and stateowned banks. As things stand today, funding is limited even for those borrowers not under sanctions.Western banks often impose their own internal rules, just to be on the safe side, since they might suddenly end up with a Russian client on the sanctions list. Russia tried to cozy up to its new geopolitical ally, China, but during Chinese Prime Minister Li Keqiang’s October visit to Moscow, all hopes of a mass influx of Chinese money to replace Western loans evaporated. The fact that the Chinese are not giving us any cash is neither surprising nor unexpected. China’s financial system is not structured for mass lending to foreign borrowers; it is set up primarily to provide loans for the Chinese economy and Chinese exports. The Chinese are not prepared to extend large credit lines to foreign customers, since unlike Western banks they are not in a position to properly assess the risks — and with Russia right now the risks are many. So we have a situation where lots of currency is required to pay off Western creditors, but there is no source of lending. What’s more, Russia’s foreign currency reserves are not that large. All foreign exchange reserves (excluding gold and reserve positions in the IMF) total less than $400 billion, down $70 billion for the year. Half is government money in the form of reserve funds, which are taken into account in

Never before have postCold War relations between Russia and the United States been surrounded by such pessimism and uncertainty. Bilateral contacts in almost all areas and at all levels are either frozen, suspended or stagnant at best. Where do we go from here? What lessons should we come away with for the a new year?

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Trends The popularity of locally produced craft beers is gaining the attention of big multinational brewers

JAMES ELLINGWORTH SPECIAL TO RBTH

Craft beer—is it a creative, flavorsome resistance to the bland beer produced by faceless corporations, or the overpriced preserve of bearded hipsters? Whatever associations you might have with those two words, here’s one you almost certainly don’t: Russia.Yet exotic hops and citrusy pale ales have now spread from the experimental brewers of Colorado and the fashionable crowd in Brooklyn, all the way to Russia’s sprawling cities and snowy steppes. Nikita Filippov is one of the trio of friends behind AF Brew, a two-year-old start-up producing fiercely hoppy India pale ales in St. Petersburg. “Originally it was just an extension of our beer-drinking and beer-traveling hobbies,” Mr. Filippov says, a reaction to the locally made “tasteless, industrial pale lagers” packing the shelves of Russian supermarkets. Think Miller Lite with Cyrillic writing on the label. “Our first ever slogan was, ‘We’re brewing beer that nobody brews, and if nobody likes it we are the ones who will enjoy it,’” he adds. But that didn’t happen. AF Brew—the initials stand for Anti-Factory, in opposition to the industrial beer giants—is now firmly established among the vanguard of Russian craft brewers. Yekaterinburg in the Ural Region is also one of Russia’s craft-beer centers. Local brewer Jaws, based near a Soviet-era nuclear power plant, has spent the past five years producing flavorsome American-influenced beers with label designs drawn from Hawaiian surf culture. Even the brewery’s name is borrowed from a famously powerful wave off Maui. Other up-and-coming Russian brewers include LaBEERint, from the central city of Kaluga, and Martin, based in a village in southern Russia, whose innovative lagers were a big hit when the company set up a bar near the hotels for foreign journalists at the Sochi Olympics. It’s not yet quite clear why the trend has yet to conquer Moscow, Russia’s capital. The city’s smattering of craft-beer shops and its fashionable bars, like the brightly colored downtown hipster den Entuziast, tend to stock bottles of

PLACES IN RUSSIA TO TRYLOCALLY MADE CRAFT BEER

Some Moscow restaurants offer their own beers on tap, plus a selection of locally brewed bottles.

the old guard in any revolution, is trying to exploit the trend. St. Petersburg’s Baltika company makes almost half of the beer sold in Russia, producing many of the industrial lagers that craft brewers oppose. Multinational brewing giant Carlsberg completed a buyout of Baltika shares in 2012, around the same time that AF Brew’s insurgents were getting started on the other side of town. Now, however, even Baltika is discovering a bit of craft spirit. In March, it launched two beers branded “Brewer’s Collection,” one a tasty, citrus-flavored “California light,” the other a rather insipid “Viennese”-branded lager. Retailing at

around $1.50 in supermarkets, they may not be “craft”, but they at least show a major brewer providing its customers with beer varieties they may not be able to otherwise afford—and they are pretty popular. Unlike Baltika’s typical mass-market lagers, the beers in the new “collection” sport labels that discuss hops, malt and fermentation. But if enthusiasm for craft beer is joining the Russian mainstream, where does that leave the revolutionaries? Nikita Filippov has the answer. “We must keep rolling 24/7, keep coming out with new beers, crazy flavors, unusual ingredients, collaborations and events,” he says. “And that’s what we do.”

PRESS PHOTO (4)

St. Petersburg and Yekaterinburg brew, if they offer any independent Russian beer at all. Even there, things are changing. The bar at popular concert venue 16 Tonn, modeled on an English pub with wood panelling and stained glass, has a window offering drinkers a view of the fermentation tanks of its in-house brewery. One thing brings all of Russia’s craft brewers together, though: a revolutionary spirit. “We wanted our craft beer to become a part of a lifestyle for creative and non-conformist young people in Russia—like it was with foods, music, movies, clothes and gadgets,”AF Brew’s Mr. Filippov says. “We took a lot from the American craft brewing tradition, and we still lean towards American brewing style and innovations—beer styles, ingredients, label designs. “At the same time, we realize that we operate in Russia and the majority of our customers are Russians; many things that took decades to develop everywhere else may only take [a few] years here.” The fruits of the revolution don’t come cheap, though. Once it has completed the almost 900mile journey by road from Yekaterinburg to Moscow, a bottle of Jaws’ signature American Pale Ale costs 160 rubles ($4) in a shop, rising to $6.30 or so in a bar. That price difference has opened up a gap for Russia’s brewing establishment, which, like

Russian beer enthusiasts are jumping on the craft bandwagon, creating flavorful brews in small batches. In a country that’s long been a top-five global beer market, big brewers are taking notice.

PHOTOSHOT/VOSTOCK-PHOTO

Craft Beer Gains a Toehold in Russia

Entuziast Moscow Stoleshnikov Per. 7, Bldg. 5 Tucked away through two courtyards off Moscow’s fashionable Stoleshnikov Pereulok is this small bar popular with

hipsters and motorbike riders. Entuziast offers some fine club sandwiches, washed down with an excellent range of craft beers from St. Petersburg and Ekaterinburg.

HopHead Moscow Friedrich Engles St. 20. bldg 1 With 405 types of bottled beer and 36 varieties on draft, HopHead’s owners have created a shrine to beer in all its

forms. From Russian craft to imported Danish, British and American brews, there’s plenty to choose from, but it’s not cheap: expect to pay upwards of 300 rubles ($7).

Beermarket Moscow Strastnoy Bulvar 4, Bldg. 3 With 350 kinds of beer on offer, including very limited-edition local brews, Beermarket would be an excellent craft pub

even if it weren’t for its best feature. There’s a shop attached, which means that patrons who find a beer they like in the bar can stock up on bottles to take home with them.

I Believe Bar across RusSt. Petersburg Zverinskaya Ul. 2, Bldg. 5 Right at the center of St. Petersburg’s fast-growing craft scene, I Believe has a superb range of local beers from

sia. Due to the city’s location in the far northwest of Russia, a bottle of Jaws APA from Yekaterinburg will have traveled as far as a bottle of wheat beer from Munich.

Spirits Higher taxes on beer have prompted Russians to return to the country’s traditional drink

Russians Return to Vodka as Beer Prices Rise Excise duties for beer were tripled in 2010, followed by an increase of another 25% last year. The move effectively equated the duty rate on beer with that on hard liquor, erasing beer’s financial advantage vis-a-vis vodka.

Pabst - no longer an American beer?

ALEXANDER PANIN

SHUTTERSTOCK/LEGION-MEDIA

Brewers in Russia are streamlining their operations, in response to government overregulation and decreased consumer spending caused by the overall economic slump. Baltika, one of Russia’s four largest beer producers, said it has halted operations at two of the 10 breweries it operates in the country. According to Russian statistics agency Rosstat, beer consumption last year decreased by 8% overall and was down another 7% in the first half of 2014. “[The] first half of this year included, the market has dropped close to 30% in the past four years,”said Baltika’s president Isaak Sheps during the Eurasian Brewers Forum, held in Moscow at the end of September. A spokesman for Heineken Russia also said that the shrinking market was keeping many producers from investing in new production lines. The company closed two breweries between 2009 and 2010 in Russia. “As any beer producer would do under the circumstances, we are now focused on decreasing costs,”says Kirill Bolmatov, the head of corporate communications at Heineken Russia. A total of seven breweries have closed down in Russia over the past four years. Ten years ago, when the regulation for beer

In September, Moscowbased Oasis Beverages bought the Pabst Brewing Company for between $700 million and $750 million. The deal was backed by American private equity firm TSG Capital Partners, which will receive a minority share in the brewer. After the deal was announced, Oasis chairman Eugene Kashper called the company “the quintessential American brand.” “It represents individualism, egalitarianism and freedom of expression,” Mr. Kashper said. “The opportunity to work with the company’s treasure trove of iconic brands is a dream come true.” Mr. Kashper will become CEO of the Pabst brewery, although the company will remain headquartered in Los Angeles. Founded in 2008, Oasis is the biggest independent brewer in Russia. It also distributes beer and soda in Russia, Kazakhstan and Belarus. Pabst was founded in 1844 in Milwaukee. The company’s Pabst Blue Ribbon brand has recently gained in popularity among young people, thanks in part to its low price. ALAMY/LEGION MEDIA

THE MOSCOW TIMES

The lower cost of vodka relative to beer is bringing consumers back to the spirit.

in Russia was milder than that for spirits, increasingly vodka was pushed to the sidelines of the Russian drinks market. “[At] the beginning of the 2000s, vodka consumption was falling every year, replaced by the consumption of beer,” Mr. Bolmatov says. But then the situation reversed. While overall volumes of beer drunk in Russia have decreased, net alcohol consumption has stayed at about the same levels for the past two years, meaning that people were switching to other beverages.” What is now happening is that growth in beer consumption has

stopped, followed by a halt in the declining trend for vodka drinking,” Mr. Bolmatov says. While the big producers can cope with the downturn, small brewers have been hit more directly. For some, the choice boils down to either selling their business or increasing prices. “Another choice is to offer quality beer, which has a unique taste and its share of loyal customers. Such beer is not needed in massive volumes, which is how we manage to stay afloat,” says Vladimir Perlovsky, general director at Braumeister, a small brewery based in the northern city of Arkhangelsk.

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