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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 RTSI

‘The level of bilateral RussiaChina trade that officials were hoping to achieve — $200 billion in 2020 — is out of the question.’

‘ The Iranian precedent de-

SERGEY ALEXASHENKO, EX-DEPUTY CHAIRMAN OF CENTRAL BANK

IGOR IVANOV, FORMER FOREIGN MINISTER

66

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serves special attention in the context of the continuing crisis in and around Ukraine.’

58 54 Jun 23

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Saturday, August 29, 2015

Recession The decline of Russia’s currency is helping some manufacturers increase exports.

IN THIS ISSUE

Made in Russia: A Silver Lining to the Recession?

BUSINESS & POLITICS

Russia takes on S&P Officials move to create a new debt agency PAGE 3

A deep downturn is scrambling the strategies of investors in Russia.

While some cut losses, others are trying something new — using the country as a launchpad for exports.

SPECIAL REPORT

The New Eastern Frontier

ALEXEY LOSSAN

Moscow focuses on the Pacific

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MONEY & MARKETS

Sanctions Impact The IMF says Russia may lose 9% of its GDP

TASS

Two short years ago, international firms were hungrily eyeing Russian shoppers as a potential sales bonanza. The country’s economy was recovering from the financial crisis of 2008-2009, and disposable incomes were rising. Russia was angling for the status of Europe’s largest market in a host of categories from automobiles to baby food.

Firms like U.S. carmakers Ford and General Motors were busily setting up manufacturing operations inside the country to cater to the local market.

Today, the script is different.

A sharp recession in Russia, caused by a slump in oil prices and international sanctions, coupled with a dramatic decline in the value of the country’s national currency, has forced investors to shake up their plans.

Some, like GM, are pulling up stakes.

But others, like Ford, are adapting their operations in Russia toward a new end: using Russia as a manufacturing base to export products to other countries, as a cheaper ruble helps Russian-made products become more competitive on global markets.

To be sure, Russia’s economy remains dominated by energy exports, and is likely to remain so for years to come.

But this change, Russian officials hope, is the faint outline of a silver lining to the country’s current economic woes. Should it continue, the shift could help achieve a goal that the government in Moscow has been talking about for decades with little progress to show: a realignment of the Russian economy away from a reliance on the export of oil, natural gas and raw materials.

“The devaluation of the ruble in 2015 gave us an opportunity to sell more, and we are doing our best to make full use of it,” said Khakan

Production once meant to meet surging local demand in Russia is now being redirected towards foreign markets.

components produced in Russia from 40% to 85%.

In December 2015, the company will open a production plant in Russia to manufacture engines for the Focus, Fiesta and EcoSport models, eventually targeting production of 200,000 engines per year.

In total, Ford will invest about $1.5 billion in the development of production facilities in Russia.

Russian exports are still overwhelmingly made up of raw materials and minerals, especially ene r g y. O i l a n d n a t u r a l g a s accounted for 68% of Russian exports in 2013, according to the U.S. Energy Information Administration.

Yet firms producing consumer goods and manufactured products in Russia are now being forced to consider prioritizing external markets as domestic demand dwindles.

According to Russia’s Ministry of Economic Development, Russian retail turnover dropped by 8% in the first half of 2015, with demand

Mandaly, head of the Russia-based subsidiary of German washing machine manufacturer BSH Hausgeräte GmbH. Mr. Mandaly’s venture is planning to double international sales in 2015, he said, after exporting 50,000 Russian-made units in 2014.

While the bulk of the company’s export sales go to countries that are former members of the Soviet Union (in particular Armenia, Belarus, Kazakhstan and Kyrgyzstan), the company is also targeting markets in Europe, including Germany, France, Italy and the Scandinavian countries.

Ford’s local joint venture, Ford Sollers, which produces Fordbranded cars in Russia, is now planning to start exporting its vehicles to Europe. Late last year, Ford Sollers began supplying Ford Focus and Ford EcoSport models to neighboring Kazakhstan.

In order to reduce production costs, the company management decided to increase the share of

reduced by 7.7% for foodstuffs and by 8.3% for other goods.

According to the Association of European Businesses in Russia, sales of cars in Russia declined by 35% from January to July 2015.

Russia’s largest carmaker, AvtoVAZ, is in turn aiming to boost international sales of its most popular Lada model in 2015, seeking to export 100,000 vehicles a year.

According to the estimates by VTB Capital investment company, domestic sales of AvtoVAZ will plunge by 17% in 2015, going down to 320,000 vehicles a year, while exports are expected to rise by 35% to 70,000 vehicles yearly. Producing in Russia offers foreign companies access to cheaper labor, lower production costs and affordable components in a variety of sectors, said Ilya Balakirev, chief analyst at Moscow-based brokerage UFS IC. “As a result, companies are able to offer more competitive products both internationally and on the local market”,the analyst says.

REUTERS

Sharia Banking as a Sanctions Buster?

Russia seeks access to the world of Islamic finance PAGE 6

FEATURE

Tetris: The Game That Started It All

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Investment Kremlin officials hope to develop Russia’s underpopulated Pacific coastal region

Moscow Turns Sights on Far East Russia’s “pivot to Asia” will require the country to shore up its huge and sparsely-populated Far East region, which borders regional powerhouse China.

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Amid multi-billion dollar energy deals with China and worsening relations with Western countries, Russia is in the midst of attempting a massive reorientation of its foreign policy known as the“pivot to Asia.”

Yet the domestic leg of this platform poses Russian policymakers with a tremendous challenge: the

Vladivostok: Russia’s Pacific port

development of Russia’s vast Far East region, a landmass that is almost as big as the continental United States but has a population roughly equal to that of Denmark.

Russian officials fret that if left undeveloped and unattended, this enormous, sparsely-settled region could be swallowed up by an influx of immigrants and capital from Asia. The Russian Far East, with only 6 million inhabitants, shares a long border with China, which has a population of 1.4 billion.

As a result, Russian officials have whipped up a plan to spur the region’s development by funneling a targeted 3.5 trillion rubles ($53 bil-

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lion) to the Far East, with a goal to bring in 80% of that figure from private investors and companies through specially-targeted incentives. [See story on page 5.]

The policy, ultimately, must be a balancing act for Russia: to use the Far East’s proximity to rising Asian markets as a means of attracting investors, while not allowing the region to be overrun by the expanding power of Pacific-Rim nations.

“Financial flows are gradually moving away from the EU and the United States and closer to the AsiaPacific, since this region has all the required resources with next to no CONTINUED ON PAGE 4

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Debt Ratings Russia aims to establish a domestic debt ratings agency to challenge the Big Three

Moscow Moves Forward With Ratings Agency

• The Central Bank cut its key interest rate by 0.5% to 11%, as expected, citing a cooling economy that it said outweighed inflation risks. In its accompanying statement, the bank played down a recent pick-up in inflation, focusing instead on the economic downturn, which the bank said may lead it to revise down its output forecasts. “The balance of risks shifts toward the considerable economic cooling despite a slight increase in inflation risks,” the bank said.

• Russia has added Albania, Montenegro, Liechtenstein and Iceland to the list of countries from which it has banned most food imports in retaliation for Western sanctions over the Ukraine crisis, Prime Minister Dmitry Medvedev said. Russia will also ban certain food imports from Ukraine from 2016 if an economic association agreement between Kiev and the European Union comes into force.

• The Chamber of Commerce has expressed its support for an Orthodox financial system developed under the aegis of the Moscow Patri-

archate and strongly resembling the better-known Islamic financial system. “The Chamber of Commerce and Industry supports the creation of the Orthodox Financial System and is ready to provide its platform for detailed and professional discussion of these questions together,” the chamber’s press service reported.

• The minimum monthly income a household needs is $350 per person — nearly 2.5 times the official minimum cost of living in Russia, a recent survey by the Russian Public Opinion Research Center revealed. Residents of Moscow and St. Petersburg said they need a minimum monthly income of $395 per person to support themselves, while residents in small towns and villages con-

TASS

REUTERS(2)

Minister of Economic Development Alexey Ulyukaev is pushing for a Russian ratings agency after the country was hit with downgrades from U.S. firms.

The new agency is to be headed byYekaterina Trofimova, first vicepresident of Gazprombank, one of the country’s largest lenders. Ms. Trofimova worked for more than a decade at Standard & Poor’s, where she served as director of the group for financial institutions in developing countries.

Russian authorities say a new homegrown debt ratings agency will begin operating by the end of the year, although observers give the plan mixed reviews.

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sider a minimum monthly income of $270 per person sufficient for modest living.

• Austrian oil and gas group OMV is looking towards Russia for low-cost energy sources to boost the company’s upstream business, which has been squeezed by low crude prices.

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Russia will launch a new credit ratings agency by the end of the year in a move that follows accusations by officials in Moscow that downgrades issued by U.S.-based ratings agencies were politically motivated.

“The Russian market needs a strong credit ratings agency with a high level of corporate governance and professional competence, capable of satisfying the interests of the economy,” the Russian Central Bank said in a statement.

Russia needs a ratings agency that is “authoritative enough for Russian and foreign investors,”the Bank said.

The push for a homegrown debt ratings agency comes after stinging downgrades earlier this year

by U.S. firms Standard & Poors and Moody’s. The ratings agencies cut Russia’s sovereign debt to junk status, citing risks stemming from Russia’s absorption of the region of Crimea and the subsequent sanctions imposed by the U.S. and Europe on Russian firms.

The downgrades were seen by many in Russia as having political underpinnings.

Work principles A group of major Russian banks and corporations are to make up the agency’s shareholders, according to Russian officials.

The national rating agency’s capital is expected to be 3 billion rubles ($45.6 million) with an equal distribution of shares among investors.

The advance subscription for the shares will be held before the end of August 2015.

Trofimova, in an interview with the newspaper RBK-Daily, said that the founding shareholders of the new agency will be 25-40 firms participating in Russian financial markets including banks, financial corporations, insurance providers and pension companies.

Companies that have shown interest in joining the project include Russia’s second-largest stateowned bank,VTB; one of the country’s largest private banks, Promsvyazbank; investment giant, the BIN group; and the largest insurer Rosgosstrakh.

IN FIGURES

40 $46m 5% financial companies may be shareholders in the agency

the national rating agency’s expected charter capital, contributed by shareholders

Much to prove Financial analysts expressed views ranging from welcoming to doubtful when asked about the new agency.

“I am skeptical about the idea of creating such an institution, because I don’t really understand the meaning of its creation and what

“I am skeptical about the idea of creating such an institution,” said Ilya Balakirev, chief analyst at Moscow’s UFS IC. goals are set for this agency,” said Ilya Balakirev, chief analyst at Moscow’s UFS IC, pointing out that the main asset of rating agencies is their reputation earned over decades.

“The leading role of the Big Three U.S. rating agencies in the global rating market is due to the histor-

largest share in the agency to be owned by any one participant

ically high level of quality of their forecasts,” said Anton Soroko, analyst of the Finam investment holding.

However, the development of alternative appraisers will, in the long term, be a benefit not only to Russia but also to the world at large, Mr. Soroko said.

In particular, Mr. Soroko added, the rise of the Chinese ratings agency Dagong. has assisted the expansion of China’s domestic bond market, the so-called “panda bonds.”

The Chinese agency has already assigned the highest rating to the Russian gas monopoly Gazprom and its subsidiaries – the oil company Gazprom Neft and Gazprombank, whose vice-president is the future head of the Russian ratings agency. According to Balakirev, the idea of the creation of the agency in Russia can be viable if it is positioned as an institution to facilitate access to credit markets for small, local issuers.

Cigarettes Russian anti-smoking measures may be backfiring — and costing the state millions

Smoking Ban Spurs Counterfeit Sales New restrictions on smoking in Russia have done little to deter smokers, while experts say the measures have caused a sharp increase in counterfeit tobacco sales, including from China.

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“Giving up smoking is the easiest thing in the world,”the great American novelist Mark Twain once quipped.“I know because I’ve done it thousands of times.”

In Russia, millions of smokers would presumably agree.

Russia, the country with the highest smoking rates in Europe, is in the midst of a national campaign to help its citizens kick the habit. Last summer the country banned smoking in public places nationwide, as well as the open display of cigarettes in stores. Excise rates for imported tobacco products were hiked.

But while smoking rates have remained stubbornly high, experts say the measures are having an unintended consequence: a sharp rise in the sale of pirated tobacco and counterfeit cigarettes, including an increase in illegal supplies originating in China.

The overall smoking rate in Russia fell by one percentage point to 34% of the adult population over the past year, according to a sur-

TASS

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Anti-smoking measures may be boosting sales of counterfeit cigarettes.

vey by local polling agency VTsIOM. Meanwhile, a review by global market research firm TNS shows that in the course of the six months after the ban went into effect in June 2014, the quantity of counterfeit tobacco on display in Russian shops grew by 60%, and the share of cheap contraband products from neighboring countries increased by 25%.

Counterproductive Laws?

Sergei Kiselyov, Vice President of Corporate Affairs and Communications at Japan Tobacco International (JTI) in Moscow, told RBTH that the ban on the open display of cigarettes in stores and higher

excise rates had unexpected consequences for both the state and the public.

“On the whole, the introduction of the ban on open display probably went against the interests of the government and the consumer,”said Mr. Kiselyov, who explained that now it is difficult for consumers to even know if they are buying legal products.

Additionally, the ban is pushing sales into the black market and cutting into the state’s tax revenues.

“As a result [of the anti-smoking measures] the federal budget is suffering. Last year the government coffers did not receive 21 billion rubles ($320.44 million),”Mr. Kise-

lyov said, adding that the federal budget for 2015 shows expected revenues from taxes on tobacco products to be only 35 billion rubles ($534.1 million) by the end of this year.

The 2014 ban on openly displaying cigarettes in stores was accompanied by a ban on smoking in many types of public places, including restaurants and bars.

The press office of the Russian Federation of Restaurateurs and Hoteliers told RBTH that in the first month of the ban alone, restaurants’ commodity turnover decreased by an average of 25% and in six months many eateries saw a 15 to 35% decline in revenues.

The growing Russian market for knockoff cigarettes appears to have caught the eye of Chinese counterfeit cigarette makers, who have ignored the country in the past.

Timur Nigmatullin, an analyst from Moscow-based investment company Finam Holdings, confirmed that the share of counterfeit tobacco in Russia has grown substantially in recent years. However, he also noted that this is partly related to a decrease in the population’s real income associated with the country’s economic crisis.

According to Philip Morris, in the January-June 2015 period the Russian tobacco market shrank by 6.5%, with the figure predicted to be 8 to 10% by the end of the year.

Despite the ban, the number of smokers in Russia has barely changed.“As in other countries that had introduced a ban on the open display of cigarettes, the Russian ban also did not result in a significant effect on smoking prevalence,” said Mr. Kiselyov.

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Central Bank A decision to stop defending Russia’s currency has spurred controversy

Ruble Struggles to Stay Afloat The Russian ruble has been on a white-knuckle roller coaster ride since authorities switched to a floating exchange rate policy late last year.

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A sharp change in direction For the decade before the 2014 decision, the state of the Russian economy required the Central Bank to regulate the level of the exchange rate more or less strictly.

“The need to control the rate emerged in the early 1990s for many reasons – the fight against inflation, increasing confidence in the ruble, the financing of the budget deficit, attracting foreign investment,” says Korishchenko.

According to him, the reverse side of the stabilization of the ruble was its excessive strengthening. In November 2014, the Central Bank gave up the practice of regular interventions in the market due to the falling ruble; previously, the regulator sold dollars on the market to support the national currency if its rate reached the limits of the currency corridor set in advance.

• Gas sales to Europe jumped to an all-time high in July, gas export monopoly Gazprom said, as European customers capitalized on a steep fall in prices. Gazprom’s gas prices are pegged to oil with a six-month lag, which means its customers are currently paying the equivalent of the $45-$50 per barrel seen in January 2015.

TASS

• The cost of many categories of food in Russia has finally begun to stabilize or fall, according to official data. Food price inflation has been one of the harshest consequences for ordinary Russians of the country’s confrontation with the West over Ukraine. A steep devaluation of the ruble and bans on imports of European produce — Moscow’s retaliation to sanctions imposed by Western countries — pushed the average cost of food up by 20% in the 12 months to July.

• The Russian economy was 4.6% smaller in the second quarter of 2015 than the same period the year before in the wake of plummeting oil prices and Western sanctions. The sharp quarterly decline reported by the country’s state statistics agency is more than double the 2.2% contraction recorded in the previous quarter.

RIA NOVOSTI

Russia’s national currency touched six-month lows against the dollar and the euro in August as oil prices fell and the country’s economy sputtered.

The drop brought the overall descent of the ruble against the U.S. greenback to roughly 30% since May, or to a rate of about 65 rubles per dollar, after a springtime rally lost momentum and the currency began to lose ground.

The ruble has moved in near lockstep with the price of crude oil, the country’s most important export, since the Russian Central Bank ended a policy of spending billions of dollars to defending its value in November 2014 and switched to a floating exchange rate, analysts said.

Between May and August, Brent crude fell by more than 28% to $51.01 per barrel.

“The transition to a floating exchange rate is undoubtedly one of the key decisions in the field of macroeconomic policy of modern Russia,” says Konstantin Korishchenko, a former deputy chairman of the Central Bank and now head of the Stock Markets and Financial Engineering Department of the Finance and Banking Faculty at the Russian Presidential Academy of National Economy and Public Administration, an institution close to the government.

The move has proved controversial. Allowing the ruble to fall precipitously has angered some average Russians who feel their savings are losing value, at least when compared against others who opted to hold savings in dollars or euros.

The decline also made all imported goods more expensive, and hampered the Central Bank’s ef-

forts to tamp down double-digit inflation.

In February 2015, Andrei Cherepanov, the former head of the Central Bank’s Foreign Operations Department, filed a complaint against the decision to introduce a floating exchange rate. The Meshchansky Court in Moscow rejected the lawsuit.

In June 2015, another Moscow resident filed a claim asking the court to recognize inaction of the Central Bank during the fall of the ruble in late 2014 as “illegal.” According to the plaintiff’s suit, the Central Bank’s policy led to the creation of a state of crisis. Russian consumer prices rose 15.6% in July compared to a year earlier, after rising 15.3% in June.

Russia’s Central Bank cut its key lending rate to 11% in July in a move meant to facilitate borrowing and lending as the country suffers through an economic contraction. But a weaker ruble may constrain the bank’s ability to cut rates further to stimulate the economy, analysts said.

The ruble has lost ground against the dollar and the euro since last year.

The decision was taken in November 2014 after the record attack on the ruble associated with international tension. To support the national currency, the Central Bank sold $27.2 billion in October 2014.

According to chief analyst at UFS IC Ilya Balakirev, the timeliness of this reform raises some questions.

“I can’t say that the time for reform was well-chosen. The dramatic collapse of the Russian currency at the end of 2014 was caused by the Central Bank’s refusal to protect the stable exchange rate,”says Anton Soroko, an analyst at the Finam investment holding.

In his view, the liberalization of the ruble should be postponed until the external negativity becomes less significant. Nevertheless, the decision of the Central Bank has provided support to domestic pro-

ducers, as well as reduced pressure on international reserves, he adds.

Moreover, in May 2015, the Central Bank even started to buy dollars on the market to replenish reserves.

According to the Center for Macroeconomic Analysis and ShortTerm Forecasting, the real wages of Russians will fall by 8% at yearend 2015.

At the same time, opinion polls show that the Russian people expect an inflation rate of almost double its current value, or 27-28% per year in 2015.

According to the Central Bank, legal entities’ share of foreign currency deposits totals 44%. “The economy, including enterprises, banks and population, is trying to adapt to new conditions, transferring savings into foreign currency and applying to the state for funding,” says Mr. Korishchenko.

Sanctions A new policy on disposing of illegal food imports is causing fresh controversy

July Monthly Brief

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The BRICS and changes in Globalization TASS

“In general, Russians have quite a reverent attitude to food, [and] to the work of those who produce it,” said Natalya Shagaida of the Center for Agricultural and Food Policy at the Russian Presidential Academy of National Economy and Public Administration.

“A large part of the population sees the burning [and] destruction of benign products as blasphemous,” she said, adding that she personally had an“extremely negative attitude”toward the practice.

Authorities should confiscate the banned products and then “trans-

• Second-largest bank, VTB, has completed the placement of around $5.15 billion of preferred shares with the state-owned Deposit Insurance Agency. The share issue is to be included in VTB Bank’s core Tier 1 capital following registration of the issue by the Central Bank, Moscow-based VTB said in a regulatory filing. VTB was expected to receive the capital boost through a bank recapitalization program announced late last year, which aims to help banks keep lending in order to promote economic growth.

RUSSIA DIRECT IS A FORUM FOR EXPERTS AND SENIOR RUSSIAN AND INTERNATIONAL DECISIONMAKERS TO DISCUSS, DEBATE AND UNDERSTAND ISSUES IN GEOPOLITICAL RELATIONS AT A SOPHISTICATED LEVEL.

Russia moved to enforce sanctions against EU and U.S. food imports with regulations covering the disposal of banned products, sparking a national debate.

A Reverent Attitude to Food

• The only oil drilling rig in the Russian Arctic, the Prirazlomnaya platform, has produced over 4 million barrels of crude oil, owner GazpromNeft said in a statement. Prirazlomnaya, which began producing in December 2013, has been the focus of protests by environmentalists who argue that an offshore oil spill could have catastrophic ecological consequences for the pristine Arctic territory. At today’s oil prices, 4.3 million barrels is worth about $215 million. Prirazlomnaya was targeted by activists from Greenpeace in 2013.

CO N V E RT I N G M O N O LO G U E S I N TO D I A LO G U E

Russia Destroys Banned Food A decision by Kremlin authorities to destroy banned Western food products has provoked outrage among some in the country, amid calls for the seized items to be distributed to schools, orphanages and the poor.

Russian television has broadcast images of contraband imported European cheese being run over by bulldozers and hunks of meat being thrown into incinerators after the ruling came into effect in early August.

Russia slapped restrictions on European and American food exports last year in response to Western sanctions targeting Russian energy, financial and military firms.

This July, Russian PresidentVladimir Putin followed up by signing a decree directing that illegallyimported food products be destroyed immediately after seizure.

Authorities have also now set about seeking banned foods throughout the country, including inside grocery stores and warehouses.

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Russian television has broadcast images of contraband European food imports being run over by bulldozers.

fer them to schools, orphanages, homes for the disabled,” said Ms. Shagaida.

Support for the Measure Others in Russia, however, have supported the measure as a necessary component of enforcing the

“The introduction of the food embargo had both geopolitical and macroeconomic grounds,” said Mr. Nigmatullin. sanctions against European countries.

Timur Nigmatullin, an analyst at investment holding Finam, noted that banned goods are continuing to leak across the Russian border, often through neighboring Belarus.

Belarus, which is often consid-

ered a Kremlin ally, has pointedly refused to follow Russia in implementing sanctions against EU food imports, while border controls between Belarus and Russia remain far less regulated than those between Russia and other countries.

Mr. Nigmatullin said that, overall, the food embargo policy has been a success for Russia.

“The introduction of the food embargo had both geopolitical and macroeconomic grounds,”Mr. Nigmatullin said. In addition to punishing European countries for applying sanctions to Russia, the move also creates “support for domestic producers,” he said.

“In both cases the desired effect has been reached,” said Mr. Nigmatullin.

However, Ilya Balakirev, chief analyst at the UFS investment company, disagreed that the food embargo could be described as a success. The new decree is an ad-

mission of a “physical inability to fully control the importation of the embargoed products,” he said.

In August, Andrei Krutov, a State Duma deputy from the center-left party, A Just Russia, sent a letter to Agriculture Minister Alexander Tkachyov calling for the government not to destroy the banned food products but send them to the Donbass region of eastern Ukraine, where the population continues to suffer from food shortages amid an unresolved conflict between Ukrainian government troops and Russian-backed militants.

According to the decree, the process of eliminating contraband food items must be documented in photo and video form, and take place in the presence of at least two observers.

The destruction rule does not apply to food products brought into the country by individuals for personal use.

This summer, Russia Direct takes a look at the BRICS countries. Since the creation of the term in 2001, much has changed both in the global economy and for the countries themselves. What role can these emerging economies play in the global economic scene today?

This brief examines the way the BRICS have performed at different stages of globalization and what BRICS 2.0 looks like. It also takes an in-depth look at BRICS-specific initiatives, such as the new development bank.

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WHAT THE DATA SAYS

FAR EAST NEW FRONTIER

Major Cities of Russia’s Far East

RUSSIA AIMS TO ATTRACT INTERNATIONAL

RUSSIAN CITIES IN THE PACIFIC COAST REGION BOAST GREAT VARIETY AND UNIQUE ATTRACTIONS.

RIA NOVOSTI

The Russian Far East’s answer to Yellowstone is Petropavlovsk-Kamchatsky (4,204 miles from Moscow). Population: 179,780. The city lies on the Kamchatka Peninsula, with the Pacific Ocean to the east and the Sea of Okhotsk to the west, near the Chukotka Peninsula. Kamchatka is famous for its hot springs, gushing geysers, mountains and volcanoes.

CAPITAL TO ITS PACIFIC REGION

RUSSIA’S EASTERN FRONTIER: IN THE SPOTLIGHT CONTINUED FROM PAGE 1

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The city of Khabarovsk (3,462 miles from Moscow) is the administrative center of Khabarovsk Krai, lying just 19 miles from the Chinese border. It sits at the confluence of the Amur and Ussuri Rivers, about 500 miles north of Vladivostok. Population: 577,441. The city’s location in the Khabarovsk Territory and a visa-free border regime with China leads to a large flow of migrant workers of around 350 thousand people a year, typically employed in construction.

administrative barriers and is developing stronger trade ties with with Russia, which is of immense importance for the domestic investors,”said Anton Soroko, an analyst with Moscow’s Finam investment company.

Dmitry Bedenkov, chief analyst at Russ-Invest investment company, characterized the Russian development plan as both aggressive and achievable.

“Such ambitious plans of attracting private investment seem justified, given the serious prospects the region shows,” Mr. Bedenkov said.

The government aims to raise 64 billion rubles ($977 million) of investment in 2015, and 243 billion rubles ($3.71 billion) in 2016.

Small and dwindling Vladivostok (3,986 miles from Moscow) is the administrative center of Primorsky Krai, located at the head of the Golden Horn Bay, not far from Russia’s borders with China and North Korea. Population: 592,034. The city is the largest Russian port on the Pacific. Vladivostok serves as the starting point for the Trans-Siberian portion of the rail transport route connecting China and Europe. The city is famous for its giant suspended bridges.

TRAVEL

Hideaways fit for pirates in Russia’s Far East

The population of the Russian Far East is not only infinitesimal for the vast expanse of space, but in recent years it has also been falling rapidly.

From 1991 to 2011, the region lost about 22% of its population due to growing mortality rates and emigration.

Yet here, the new development program may already be showing early results.

In 2015, for the first time in years, the Far East achieved natural population growth, with the birth rate surpassing the death rate by 9,334 people. Moreover, as Russian prime minister Dmitry Medvedev said du-

ring a May 2015 cabinet meeting, the region showed “growth rates that are much higher than anywhere else in Russia” in 2014, with a promising advance of 20% in agriculture and 5% in industrial production.

Russia’s Ministry for the Development of the Far East is also creating a special fund, which will be filled by tax money coming from the investors operating in the region — which means, effectively, the creation of a Russian regional sovereign fund.

Key issues Experts say one of the major problems hampering the growth of the Far East is its infrastructure. To resolve it, the government is aiming to direct some of the investment to the development of ports.

In December 2014 PresidentVladimir Putin pledged, in Russia’s version of the State of the Union Address, to provide the region’s largest city, Vladivostok, with a free port status “also facilitating customs procedures.”

This special status — which has previously helped Hong Kong and Singapore become major trade centers, and which transformed the Chinese city of Shenzhen from a fishing village of 3,000 people into a vast metropolis with 15 million inhabitants — usually implies duty-free import of goods.

But the measures will not focus exclusively on Vladivostok: according to Russia’s Association of Sea Commercial Ports, the ports of the

have also decided to hold an economic forum, the Eastern Economic Forum, in Vladivostok in September 2015.

Russia usually holds three major economic forums: one in Vladimir Putin’s native St. Petersburg, another in the southern city of Sochi which hosted the 2014 Winter Olympics and yet another in Krasnoyarsk, known as the “capital of Siberia”.

Putin is expected to take part in the opening ceremony, and 400 Russian companies have applied to participate in the event.

Far East handled 135.3 million tonnes of goods in the first ten months of 2014, with the traffic reaching 12.9 million tons in Vladivostok alone.

Accordingly, the special status will be granted not only to the city’s port, but also to its airport, as well as all neighboring major ports.

Apart from customs privileges, port operators will receive tax incentives and the possibility to store cargo without paying fees and get a reduction in the ship call cost.

In order to attract the attention of investors, Russian authorities

Building Las Vegas on the Pacific Russia has signed agreements with investors, including gambling tycoon Lawrence Ho, on constructing a new casino center on the Pacific coast.

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Spin the wheel One of Primorye’s key investors is Melco International Ltd, a firm belonging to Lawrence Ho, one of the heirs to Stanley Ho’s gambling empire in Macau.

Apart from the Ho family, other large investors in the project include Diamond Fortune, which is preparing to begin the construction of a casino dubbed Golden Gate as early as the first half of 2016.

TASS

Investors are pushing forward with a multi-billion dollar gambling center on Russia’s Pacific coast, hoping to lure up to 10 million visitors per year to a Russian version of China’s Macau.

The resort area’s first casino is set to open its doors this September. Investors are planning to plow a total of $2.2 billion into the gambling complex, which has been dubbed “Primorye” after the Russian name for the region.

“Considering the zone’s geographical location, we can assume that about 50% of all visitors will come from Asia, especially from China,” said Timur Nigmatullin, analyst at Finam investment company.

Analysts said that Primoriye may benefit from being significantly closer to northern China than Macau, which is the largest gambling center in the world and is situated on China’s southern coast near Hong Kong.

The Primorye complex aims to attract up to 10 million visitors per year.

Royal Time Group, the project’s third investor, which is already heavily involved in the Azov-City gambling zone, is expecting to start the construction of its 250 thousand square kilometer Zhar-Ptitza (‘firebird’) casino and resort this summer.

The designers behind the project say the name was picked for a reason, since the future resort will mostly target Asian tourists.

The Zhar-Ptitza, or Phoenix as it is also known, is a mythical bird which arises from the ashes, and is considered highly symbolic in some Asian cultures.

“The project’s entire infrastructure has a uniform Asia-influenced style,” says Alexey Belinsky, head of the European division of Steelman Partners, an architectural company working on the project.

Initially the casino was planned to house 500 slot machines and 30 gambling tables. But the numbers

are currently being reviewed and may reach 3000 machines and 150 tables.

Primorye is located in the bay of Muravynaya near the city of Vladivostok.

Once completed, the 619 hectare

“A weakening ruble is likely to play a complementary role in attracting tourists,” Mr. Nigmatullin said. space will include 15 hotels, 12 rental villas, a yacht club, a multifunctional trade fair complex and other recreational infrastructure.

The zone will eventually be able to compete with Macau for the title of Asia’s largest gambling center – and, according to Russian experts, it has several crucial advantages.

Primorye is closer to northern

China than Macau, with Vladivostok located a two-and-a-half hour flight from Beijing and just a oneand-a-half hour flight away from Harbin, the capital and largest city of Heilongjiang province which borders Russia.

According to Russia’s Ministry for the Development of the Far East, the approximate revenues of Primorye may amount to $1.2 billion, reaching up to $5.2 billion in ten years. The tax rates for the zone will be between 3% and 7% - significantly lower than Macau’s 39%.

Russia, which by national law prohibits gambling outside specially-established zones, has established gambling centers in other areas, including in the Europeaninfluenced exclave of Kaliningrad, the Altai Territory in Eastern Siberia and in the Russian Far East.

Only one other gambling zone, known as “Azov City,” is currently operating in Russia at the moment, however.

Analysts said Primorye has the best prospects of any gambling zone established by Russia so far.

“According to my estimates, given the project will likely receive some tax relief, the investments in the project should pay off in about 18 months to 2-and-a-half years after the construction is completed,”says Timur Nigmatullin, analyst at Finam investment company.

“The “Primorye” gambling zone is the most promising project compared with other similar zones in Russia.

The expert says the entertainment business — and gambling in particular — is traditionally cost effective and is considered to return on investment quickly. A weaker ruble will also make visiting the resort cheaper, he said.

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VIEWPOINT

Trade With China: Falling Short of Official Goals Sergei Alexashenko SPECIAL TO RBTH

T

Ministry for Development of the Russian Far East

Russia Offers Investors Special Terms in Far East

work plan in 2 to 3 years,” Mr. Tonkikh said.

But will it work?

Russia is promoting preferential deals to investors in targeted zones in the Far East, hoping to attract international capital to develop the underpopulated region.

KIRA EGOROVA RBTH

LORI/LEGION MEDIA

Spurred on by Western sanctions and attempting to execute a“pivot to Asia,” Russia is revving up efforts to develop its Asia-Pacific region by offering aggressive tax incentives and other benefits to international investors.

As a sign of its seriousness, Russia has established an entirely new cabinet-level government agency — the Ministry for Development of the Russian Far East — which came up with a proposal to carve out specific zones known as “Advanced Development Territories,” or ADTs, in several Far Eastern regions that will offer preferential conditions for investors.

Firms established in ADTs will receive tax breaks for 5 to 10 years, pay reduced customs duties and will be entitled to a preferential income tax and value added tax (VAT) regime, officials say.

“The ministry’s goal is to build an ecosystem for new investors,” said Ivan Tonkikh, the head of the Direct Investments Department of the Ministry for Development of the Russian Far East.

The measures are part of an overarching attempt by Russia to build trade ties with Asian economies while developing its sparsely-populated Far East region.

Both the U.S. and Russia are attempting to form economic alliances with Asian countries as the center of gravity of the global economy shifts toward the Pacific.

However, even as Russia seeks to attract foreign capital, the terms of the offer underscore how officials in Moscow remain wary of granting foreign investors majority control of Russia-based operations.

Under the current scheme, investors will be able to participate in an ADT only by opening a subsidiary that is partnered with the Russian Far East Development Corporation, the company managing the ADTs. Investors will then be

Officials aim to turn Russia’s Pacific coast into a transportation hub.

Investing in Russia’s Far East Russia aims to attract hundreds of millions of dollars in investments towards specially-designated regions of the sparsely-populated Far East by offering investors special conditions in Advanced Development Territories, or ADTs. Planners are targeting $620 million for the Khabarovsk region, $210 million for the Komsomolskaya region and $120 million for the Nadezhdinskaya region.

The Khabarovsk ADT aims to create 3,000 jobs in metallurgy, transport and logistics. Planners hope to generate 3,000 jobs in aircraft manufacturing in the Komsomolskaya area, while a further 1,600 jobs are to be created in the Nadezhdinskaya ADT in logistics and food processing.

permitted to hold up to a 49% share of the partnership.

Foreign Players Despite these conditions, firms from Australia, Japan, Singapore and South Korea are already showing interest.

According to Mr. Tonkikh, a handful of anchor investors, all Russian companies, are already

working in each ADT. But the ministry is also currently in talks with 10 foreign investors.

Australia’s Tigers Realm Coal Ltd. (TIG) is planning to invest in the development of the Bering coal basin at the proposed Beringovsky ADT. Japanese company JGC Evergreen has already invested $35 million in a greenhouse complex in the Khabarovsk ADT. Another Japanese investor, Sojitz, intends to build an international terminal at the Khabarovsk airport.

Singapore’s Baoli Bitumina confirmed its intention to invest in the Khabarovsk ADT and build a hightech plant for the production of bitumen.

The company also plans to invest in the Kangalassy ADT inYakutia and in the Predmostovaya ADT in the Amur Region.

According to Mr. Tonkikh, the ministry is ready to sign an investment agreement worth $100 million with Baoli by September 2015.

Mr. Tonkikh added that a Samsung unit engaged in the assembly of automotive technologies will also eventually become a resident of one of the ADTs with a $5 million investment.

“We expect that by the end of the year, there will be at least 5 foreign companies among the residents. We expect to see the full list of approved investors and a final

Critics of the scheme point out that Russia has been down this road before, with mixed results.

Russia experimented with setting aside special economic areas in the mid-2000s. Out of the thencreated 15 special economic zones (SEZ), only two remain – one in the Russian exclave on the Baltic Sea, Kaliningrad, and one on its northern Pacific coast, in Magadan.

The rest were closed in 2005 due to ineffectiveness. The Ministry for Development of the Russian Far East says that the idea of ADTs is significantly different from the SEZ concept because the state will also take part in each project, working individually with every investor and building the infrastructure for residents.

In June, 2015 Russian Prime Minister Dmitry Medvedev launched t h e fi r s t t h re e A D Ts . T h e Khabarovsk and Komsomolsk ADTs are in the Khabarovsk Territory, while the Nadezhdinskaya ADT is in Primorye.

Earlier this year, the government approved another six ADTs, which will be launched in the Far East soon. These zones will be formed in the Primorye Territory, Chukotka, Kamchatka, the Republic of Sakha (Yakutia) and the Amur Region.

he sharp devaluation of the Russian ruble in late 2014 and early 2015 resulted in a significant reduction of imports into Russia. The total value for the first half of the year fell by 38.5%. It is therefore unsurprising to see a similar reduction in the exports of Chinese goods to Russia by 36%.

Moreover, it has become evident today that the level of bilateral Russia-China trade that officials in Moscow were hoping to achieve — $200 billion in 2020 — is out of the question at the current level of oil prices.

The rapid growth of bilateral trade over 20042015 was based on three factors: the sharp improvement in Russian-Chinese political relations, rising oil and commodity prices, and the signing of a number of agreements that opened the way for Russian hydrocarbons to enter the Chinese market. As a result, China’s share in Russia’s imports tripled from 2003 to 2013 — from 5.8% to 16.9%. On the contrary, Russia’s share in Chinese imports even slightly decreased over these 10 years — from 2.3% to 2%, which was mainly due to the raw materials orientation of Russian exports.

In order to achieve the $100 billion volume of Russian exports to China, trade would have to triple compared with its value in the current year. In other words, annual growth of 25% would be needed.

This is not impossible — a similar growth rate of Russian exports to China was recorded in 20042005 and in 2010-2011 — but in both of those cases, the rapid export growth was short-lived and also based on the growth of export volumes of Russian oil to China as well as an increase in oil prices.

Certainly, even slower economic growth in China will require additional volumes of natural resources (the niche for a production growth in Russia). But today, the Russian economy has no spare capacity for the production of raw materials which would be necessary to form the basis for a sharp rise in exports to China over the next five years. Oil prices are a major constraint in the growth of Chinese and any other exports in Russia; to boost Russian imports, the total export earnings should be increased.

This could be made possible either by a rapid growth in the production of competitive products in other segments, which so far seems unrealistic, or by an increase in global commodity prices. If the current pace of growth in China’s economy will inevitably provide an increase in China’s share in global GDP, then stagnation of the Russian economy may do the opposite for Russia.

Sergei Alexashenko is head of the analytical group at the Higher School of Economics and served as deputy chairman of the Russian Central Bank from 19951998.

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Transport and logistics Russia would like to use the ADTs to make its Far Eastern region a transport and logistics hub.

“We can offer logistics solutions to China, Japan and Korea, all of which have space constraints,”said Aleksey Chekunov, the head of the Far East Fund.

The success of the ADT program fully depends on the development of logistics and distribution facilities, according to experts in the region. Vladimir Markov, chief executive of Technonikol, a company that manufactures waterproofing and insulating materials, says transportation is the biggest problem in the Russian Far East.

“You can only sell products in Kamchatka if you manage to deliver them cheaply in the summer,” Mr. Markov said.

He added that the thinly populated area represents a small market, as the vast region has a population of less than 7 million.

“The only way to profitability is to export to China,” Mr. Markov said, adding that more trade routes needed to be developed to that country.

An analytical publication that focuses exclusively on the complex challenges and opportunities shaping the U.S.-Russia relationship.

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Economy The IMF forecasts Western sanctions may end up costing Russia 9% of its GDP

Economic sanctions imposed by the West may shave off almost a tenth of the Russian economy and restrain economic growth for years to come, the IMF said recently.

sian products on international markets.

“The recovery in 2016 will be supported by the ruble’s more competitive exchange rate, increasing external demand and normalization of domestic financial conditions,” the IMF said.

Russia’s national currency has fallen in tandem with oil prices from a rate of about 33 rubles per dollar to about 64 rubles per dollar as of mid-August. The price of crude oil, Russia’s key export, fell precipitously in late 2014 from over $100 a barrel to roughly half that value in just a few months.

DAVID MILLER

The ‘lowest point’?

IMF: Sanctions Hit Russian Economy

Alexey Lossan RBTH

J

ust as the development of the American Western frontier was once underpinned by the concept of Manifest Destiny – according to which, in some interpretations, the U.S. was destined

by God to expand its borders from coast to coast — so the development of the Russian Far East has an additional philosophical meaning. The least populated region of Russia has traditionally developed separately from the country’s main part. But now, as Russia sets out in search of new avenues for growth, this region has become symbolic of Russia’s “pivot to Asia.”

For a long time, Russia’s economy has been rooted in Europe, both as an energy supplier to other European countries and as the largest European consumer market by population with enormous potential for growth. But the onset of the economic crisis last year, stemming in part from the collapse of oil prices, has forced Russia to search for new modes of development. Lately, one of the most popular solutions is a plan to provide foreign investors with land for the production of goods and their export abroad. From a Russian perspective, the ideal place for such a policy is the Far East.

All of the projects so far announced for the area are targeted primarily at Asian investors. The establishment of a free port in the port city of Vladivostok should provide incentives for transportation and duty-free transit of goods. The gambling zone Primorye is designed for Chinese players, and the territories of priority development attract companies from China, South Korea and Japan. The Singapore company Baoli Bitumina plans to build a plant for the high-tech production of modern bituminous materials. The new industrial park will be able to host Chinese companies that export their products abroad. Essentially, Russian authorities aim to lend territories to Asian investors in exchange for investment.

The most outstanding example was demonstrated in the Trans-Baikal region located close to the Far East on the border with China, where a Chinese company signed a memorandum with the local authorities to lease 116,000 hectares of land. These lands will be used to cultivate crops needed primarily by the Chinese consumer, such as rapeseed.

Prior to these developments, Russia’s relations with investors have been based on an entirely different principle. Foreign companies came into the country primarily to meet growing local demand — for cars, clothes, household appliances and other consumer goods.

The new strategy, focused on the provision of land in exchange for investment, is essentially a change of political course, turning the Far East into not only a geographical, but also an economic frontier.

Alexey Lossan is executive editor for business at Russia Beyond The Headlines.

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Sanctions linked to the conflict in Ukraine could end up costing Russia as much as 9% of its gross domestic product, the International Monetary Fund said in a new report, adding that the country will struggle through recession this year before returning to“weak growth.”

The IMF predicted Russia would undergo a 3.4% economic contraction in 2015 and expand by only 0.2% in 2016. Thereafter, the Russian economy will likely grow at a slow average rate of about 1.5% per year over the medium term, the IMF forecast.

“The dual external shock of lower oil prices and geopolitical tensions are key factors exerting downward pressure on Russia’s GDP in the near term,” the IMF said in a press release accompanying the report in this month.

The forecast presents a stark contrast to the rapid growth rates Russia experienced during the early years of President Vladimir Putin’s tenure in the mid-2000s, when oil prices surged far above $100 per barrel and propelled the Russian economy to growth rates exceeding 8% per year.

In those heady days, Mr. Putin announced a plan to double the size of Russia’s economy within a decade, a goal that would have required sustained growth in excess of 7% per year.

But after being hammered by the 2008-2009 financial crisis, Russia’s nascent recovery was undone last year when the price of oil, Russia’s main export, collapsed, and the U.S. and Europe slapped the country with economic sanctions over its role in neighboring Ukraine’s civil unrest.

The IMF report suggests the damage from U.S. and EU sanctions, if left in place, will have a significant and long-term impact on the overall Russian economy.

“It is very difficult to disentan-

REUTERS

The Russian Far East as a New Frontier

A weak national currency may encourage Russians to buy local products.

...But a weaker ruble may promote growth

ALYONA REPKINA

06

gle the impact of sanctions from the fall in oil prices,” the multilateral financial organization said.

“However, IMF estimates suggest that sanctions and counter sanctions might have initially reduced real GDP by 1% to 1.5%. Prolonged sanctions may compound already declining productivity growth.”

The authors of the report went on to say that“the cumulative output loss could amount to 9 percent

of GDP over the medium term.”

The IMF noted, however, that the estimate is “subject to significant uncertainty.”

Ruble weakness The drop in the value of the ruble, Russia’s national currency, is likely to be one of the main drivers helping the country return to growth, the IMF said. A cheaper currency reduces the price of Rus-

Russia’s economic decline accelerated in the second quarter of 2015, falling 4.6% year-on-year after a 2.2% decline in the first quarter of 2015, according to figures from the Federal Statistics Service in Moscow.

The slump in the second quarter was worse than economists expected.

Shortly before second-quarter figures were announced, Economic Minister Alexey Ulyukaev told reporters that the second quarter of this year would be the “lowest point”for Russia’s current economic downturn.

Economists at Moscow brokerage Uralsib noted that within the second quarter, monthly statistics toward the end of the quarter appeared to be improving.

“Most of the key indicators for Russia’s economy improved moderately [year-on-year] in June,” Uralsib analysts Alexey Devyatov and Olga Sterina wrote in a note to investors on Aug. 10, noting that key economic indicators like industrial production, manufacturing and capital investment fell less sharply in June than in May, while overall employment rose.

Economists at Deutsche Bank predicted the Russian economy would decline by 3.2% in 2015, saying that, “in our view, economic growth is likely to remain negative” going into the third quarter, with a decline of about 4%-5%.

“Overall, the economic contraction was driven by the producer segment, especially in such areas as industrial production and construction,” Deutsche Bank economists Yaroslav Lissovolik and Artem Zaigrin wrote in a note to investors following the release of the economic data.

Western sanctions are aimed at Russia’s crucial energy, finance, and military-industrial sectors, cutting off companies’ access to international finance.

Banking Russian officials say Islamic finance may eventually help mitigate the impact of sanctions

Kremlin Moves to Attract Islamic Funds Hammered by sanctions, Russia is eyeing new methods of gaining access to international capital, including the multi-trillion dollar world of Islamic banking.

IVAN BRIZOV

REUTERS

SPECIAL TO RBTH

Russia may amend its financial regulations to allow Islamic banking in a bid to attract funds from Muslim countries, as its economy struggles with a recession and Western sanctions.

The move comes as economists, including those at the International Monetary Fund, say U.S. and European sanctions are having a significant negative impact on the Russian economy by blocking important Russian companies from accessing global financial markets.

Officials have created a task force charged with implementing Islamic banking in the country, including amending the country’s banking laws, said Dmitry Savelyev, deputy chairman of the State Duma Committee on Financial Markets and the leader of the task group, the TASS news agency reported.

Islamic law, known as Sharia, places restrictions on certain types of financial transactions, such as interest payments. Over the years, a sophisticated field of banking practices compliant with Sharia has arisen to facilitate financial activity among pious Muslims, including the issuance of Islamic bonds, known as “sukuk.”

The market for Islamic finance is expanding rapidly and should reach a total size of $2.6 trillion by 2017, according to a report by global consulting firm PricewaterhouseCoopers.

Another estimate by the IMF said total global Islamic assets would reach $3.4 trillion by the end of 2015.

Russia has a significant Muslim minority, estimated at about 15% of the population, which could make the practice attractive here.

Konstantin Baymukhashev, an attorney at UFS IC, said the changes in Russian legislation should help at-

Officials have created a task force charged with implementing Islamic banking in the country.

tract investment into the Russian economy from Arab countries.

Attracting Islamic assets Rustam Minnikhanov, the president of Tatarstan, one of Russia’s predominantly Muslim regions, has been one of the most vocal proponents for bringing Islamic finance to Russia.

“The Muslim countries have not taken part in the attempts to isolate our country on the international stage, and the latest developments in the world economy have shown that Islamic banks can withstand various global crises and complement the global financial system,” Mr. Minnikhanov said in a speech in June at the KazanSummit Economic Forum.

Islamic finance will help Russian companies compensate for the lack of funding caused by the recent deterioration of relations between Russia and the West, he argued.

In July, Mr. Minnikhanov concluded a cooperation agreement with the president of Russia’s largest lender,

state-owned retail banking giant Sberbank, involving the development of Islamic banking in Tatarstan.

Ahmed Mohammed Ali Al-Madani of the Islamic Development Bank, a multilateral Islamic lending organization based in Saudi Arabia, told RBTH that Sharia-compliant bonds have also been issued by entities based in non-Muslim countries, including the United Kingdom, and that the worldwide amount of such assets has reached $120 billion.

“The republic of Tatarstan could be promoted as an Islamic finance hub within Russia,” Mr. Al-Madani said. Tatarstan’s largest bank, AK Bark, has already attracted some funds based on Islamic investment.

Furthermore, in January 2015, local insurance operator Alliance began selling a specialized insurance product called“Halal Invest”that is compliant with Islamic norms.

“This kind of business is gaining momentum around the world, and by developing it in this country, we

IN FIGURES

$3.4 trln will be the total value of assets held by Sharia-compliant financial institutions by the end of 2015, according to the latest report from the IMF. Shariafriendly banks are active in both Muslim and non-Muslim countries.

$10 bln is the amount that Saudi Arabia’s Public Investment Fund (PIF) decided to invest in Russia in June, forging a partnership with the Russian Direct Investment Fund — a government-controlled fund tasked with supporting Russia’s endeavors.

will diversify sources of funding and increase confidence in the banking system,” said Semyon Nemtsov, an analyst at Russ-Invest investment company.

However, analysts said Russia is unlikely to see a sudden surge of investment from Islamic countries.

“Islamic banking is first and foremost a religious and ideological concept. Its actual financial significance is secondary. This is why there are in fact a great deal of obstacles that hamper its implementation within Russia’s legal and financial system,” said Konstantin Korishchenko, deputy director of the Department of Capital Markets and Financial Engineering at the Russian Presidential Academy of National Economy and Public Administration.

According to Mr. Korishchenko, there are numerous factors that will significantly complicate the alignment of Islamic finance and standardized Western banking, including the facts that Islamic regulations require that assets be sorted according to their source and deny explicit interest payments or futures transactions.

Moreover, Russia is likely to have more difficulties introducing Islamic finance than do common law countries like the UK. The introduction of Islamic banking will require deep, fundamental changes to Russian law.

According to Mr. Baymukhashev, Islamic and Russian banking systems are radically different from each other.

“Islamic banks do not provide their clients with loans in the classical sense, but rather sell actual products or act as partners (co-investors) in some kind of a project, thus bearing all the associated risks with the client,” Mr. Baymukhashev explains, adding that Islamic banking also precludes the financing of companies that produce or sell alcoholic drinks.

“The difference between those two financial systems is significant.

Amending the law is only a part of the ground we will have to cover while implementing Islamic banking in Russia,” says Mr. Baymukhashev.

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RUBLE, THEN YUAN: IS THE DOLLAR NEXT?

IGOR IVANOV EXPERT

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Konstantin Korischenko EXPERT

A

significant weakening of the yuan has created an avalanche of explanations for why China needs such a policy and why it is happening now. What is clear is that a significant behavioral shift is underway for the currency of the country with the second-largest economy in the world. What’s more, the change follows a similar event in Russia in mid-2014, which occurred when the Bank of Russia moved to a floating exchange rate.

What are we to make of this change? First of all, this step by China is the logical completion of the evolution of the Chinese economy after the crisis of 2007-2008. Speculation in 2010-2011 that the crisis had ended and that the world had returned to a period of sustained, regular growth proved to be too optimistic.

The global economic growth rate of 4-5% reached in those years, has now fallen below 3%.

Prospects for higher growth rates are none too great.

In this sense, the “slowing down” of China is a reflection of a global trend, which is now

clearly manifested in falling commodity prices and a sharp decline in world trade and transportation.

Given that the “business model” of China is export-oriented, and that the resource of cheap labor is almost exhausted, China’s leadership is at a crossroads.

It must make an extremely tough decision: either change the country’s development model, or search for a new way to stimulate the old one.

Here, the exchange rate proved to be virtually the only lever within reach for officials seeking a quick, if perhaps only temporary, solution.

Yet, to be sure, pressure to devalue the yuan has been building for a long time. Compared to other competing export-oriented countries, China’s currency has strengthened by 30-50% viewed against the last pre-crisis year of 2007.

Indeed, in the years immediately following the 2007 crisis, the currencies of Russia and China moved in parallel. Then, in 2013, the Russian ruble started gradually weakening, resulting in the transition to a “floating rate” in 2014 under the conditions of falling oil prices and the rising dollar.

Being pegged to the dollar, the yuan’s strength persisted, but it brought nothing good to the Chinese economy. Exports continued

to decline.

The difference between Russia and China is that Russia exports mainly raw materials, while China produces a wide range of manufactured products from consumer goods to complex industrial machinery.

As a result, the prospects for a recovery of China’s export-led growth are directly dependent on the speed and size of the devaluation of the yuan, while Russia remains largely hostage to the dynamics of oil prices.

Until mid-2011, China, like its main rivals – Europe, Japan and Korea - maintained the status quo.

But then “quantitative easing” – or, to put it plainly, the massive printing of money – began to be broadly applied in Japan and Europe.

This caused a sharp deterioration in conditions for Chinese exporters compared to their competitors from Europe, Japan and other Asian countries. Sooner or later, it had to lead to a “deceleration of China.”

The sharp appreciation of the dollar during the second half of 2014 and the first half of 2015 actually led the situation to a logical ending – China began to devalue the yuan.

The process will be not limited to 3-5%. For a more or less acceptable “alignment” of the situation, this figure should reach 20-30%. Perhaps, it will be accompanied by a transition to a more liberal exchange rate regime in China, to the“floating-yuan”policy in one form or another.

In turn for Russia, political agreements remain a much more important factor than exchange rates, including those on the active use of national currencies in this process.

So, the increased volatility of the ruble and the yuan may be more than offset by the support mechanisms, such as public funds and banks, through the mechanism of guarantees, trade financing, insurance, etc.

All of these tools when used properly can protect the businessmen of Russia and China from the storm which has already taken hold in the sea of currencies.

And, paradoxically as it may seem, the most stable “reef” in this sea – the U.S. dollar – may become the main victim of the disaster.

Konstantin Korischenko is head of the stock market and financial engineering department at the Finance and Banking Faculty of the Russian Presidential Academy of National Economy and Public Administration, and a former deputy chairman of the Russian Central Bank.

T

he agreements reached between the six international mediators and Tehran on Iran’s nuclear program is one of the most significant positive developments in geopolitics. In the deal, the nuclear nonproliferation regime has been strengthened, additional opportunities are emerging to bring together the efforts of the world’s leading powers in the Middle East, and a positive response from the international markets can be expected.

It should be noted that the agreement was reached against the very negative general background of relations between Russia and the West. This was because the goal of the negotiations was very clear and specific, not allowing for arbitrary understandings and one-way interpretations. In the years since the start of negotiations, most countries participating in the negotiations changed presidents and prime ministers, which meant that the composition of the negotiating team changed, too. However, the political will and determination to solve the problem on both sides won through in the end.

The negotiations were tough, but were carried out with respect for each other, with an effort to understand the partner’s position without resorting to hostile rhetoric and unleashing propaganda wars.

The Iranian precedent deserves special attention in the context of the continuing crisis in and around Ukraine. Not all the participants of the Minsk process demonstrate the political will required to reach a real agreement. The objectives of the negotiations are not always clearly defined, except when immediate, tactical aims are set.

In addition, the willingness of all parties to compromise and to take mutual interests into account is by no means always manifested. The propaganda war between the West and Russia does not provide even a temporary truce for a period of preparation and implementation of agreements.

The only way out of the Ukrainian impasse is the qualitative improvement of cooperation between the major international players interested in resolving the crisis as soon as possible. This applies equally to the intensity of the work of the negotiating mechanism. It concerns the formation of a broad international consensus concerning the stages of Ukraine’s exit from the crisis and the future of the country in a new system of European security. It also concerns a set of incentives — both positive and negative — that the international community must have at its disposal.

Igor Ivanov is President of the Russian Council on International Affairs and a former Russian Foreign Minister.

This op-ed was first published in Rossiyskaya Gazeta.

CULTURE BRINGS RUSSIANS AND AMERICANS TOGETHER Mary Ellen Koenig SPECIAL TO RBTH

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t the height of the Cold War, a 23-yearold Texan,Van Cliburn — who had studied piano in the Russian romantic tradition — won the Soviet Union’s first International Tchaikovsky Piano Competition, earning him worldwide recognition and a special place in the hearts of both those Americans and Russians who appreciate great performers.

Culture has a way of transcending political differences, bringing together people who may differ on political issues but who appreciate outstanding music, dance, drama, literature, film and visual arts. As the U.S. Embassy’s cultural attaché for the last two years, my goal has been to help show the depth and diversity of American culture. At the same time, I have developed a deep respect and admiration for the traditions of Russian culture and its impressive array of arts institutions.

Among the highlights of my two years here have been performances that involved collaboration between American and Russian artists.

This year, for example, one of the great U.S. ballerinas of the 20th century, Suzanne Farrell, brought her troupe to Moscow to partner with Ballet Moskva to perform ballets choreographed by the great Russian-American, George Balanchine. Another high point was last summer’s New Orleans/Moscow 2014 festival, which brought music, food, and photography from the American South to Moscow.

When our musical and dance groups travel throughout Russia, they always draw enthusiastic, knowledgeable and appreciative audiences. There is a real interest in American culture here in Russia and we are often pleased to partner with outstanding Russian institutions such as the Bolshoi, the Moscow Art Theater,

the Moscow Conservatory, the Multimedia Museum and the Documentary Film Center.

Over the years, culture has played a remarkable role in our nation’s overall diplomacy with Russia — in particular, when the political dialogue is difficult. In the Cold War era, some of the most memorable moments of U.S.-Soviet communications occurred at cultural events.

Van Cliburn’s stunning performance at the Tchaikovsky Competition made headlines worldwide in 1958.

The following year, Vice President Richard Nixon and Soviet premier Nikita Khrushchev held impromptu“kitchen debates”at the American National Exhibition. And Russian music

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lovers packed the Moscow Conservatory in 1986 to witness the return of the great Russian-born pianist, Vladimir Horowitz. This month, young American pianists performed well in the latest Tchaikovsky Piano Competition – 57 years after Van Cliburn’s triumph.

The U.S. and Russia share a long history. Their relationship has at times been turbulent — as it has been in the past year — but Americans and Russians set aside such debates when they have the opportunity to enjoy the best in one another’s culture.

Mary Ellen Koenig served as Cultural Attaché to the U.S. Embassy in Moscow from 2013-2015.

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Gaming Modern Russian video game designers have yet to match the success of the Soviet programmers who created Tetris

Tetris: How a Soviet Video Game Conquered the World The Soviet-made video game from the 1980s became a global cultural phenomenon, earning billions of dollars on the way. Modern Russian programmers have produced many games since, but none have come close to Tetris.

KONSTANTIN GOVORUN

Copyright issues In those days, the export of Soviet computers and software was officially controlled by a state corporation called Electronorgtekhnika (also referred to by a shortened version, Elorg). However, even before any actual agreement was signed with Soviet officials, several foreign companies released unlicensed versions of the game and started selling the rights to something they did not really own to each other.

The complex tangle of issues, involving some players who flaunted their personal connections with Soviet leader Mikhail Gorbachev, finally ended years later, with Atari acquiring the rights to an arcade version of the game and Nintendo obtaining the home console version.

In 1996, Mr. Pajitnov, having by then moved to the U.S., created The Tetris Company and restored the rights to the game to himself, later

AP

SPECIAL TO RBTH

After years of legal wrangling, Atari has acquired the rights to the arcade version of Tetris, which remains popular among players worldwide.

QUOTES

Alexander Kuzmenko HEAD OF GAMES.MAIL.RU, RUSSIA’S LARGEST ONLINE GAMING PORTAL

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Tetris is not just one of the most popular and recognizable games of all time, it is also one of those rare and precious things that make up what we call ‘the Russian cultural code....’ The average citizen of any country will instantly recognize Tetris as ‘that game invented by the Russians.’”

Christopher Hamilton PRODUCER AT FINNISH GAME DESIGNER ROVIO ENTERTAINMENT

AP

In the summer of 1985, a surreal hush fell over the computing department of the Soviet Union’s top state-run scientific research center. Wastepaper baskets overflowed. Ashtrays went unemptied. Researchers hunched over their computers, obsessed with the latest Soviet invention.

Outside, the country’s socialist economy was grinding to a halt. A political crisis was brewing in the Kremlin that would, just a few years later, tear the country apart.

But for the moment, economics and politics seemed far away from Moscow’s Soviet Academy of Sciences. The computer department was laser-focused on a technological breakthrough, one that would change the world. Researchers spent hour after hour “testing” the new program. Its inventor, Alexey Pajitnov, called it Tetris.

The devilishly addictive video game would eventually go on to conquer the globe, selling millions of copies and finding its way onto seemingly every computer operating system ever devised by humanity. The game also became a prize that would be eagerly fought over by the rising stars of the early video game industry.

By today’s standards, the design is almost childishly simple. A series of differently-shaped blocks falls from the top of the screen at everincreasing speed, giving a player less and less room for maneuver unless they can lock the puzzle-like pieces into place by rotating them.

But at the time, it was something radically new.

“The importance of Tetris for the gaming industry is hard to overestimate,”said Alexander Kuzmenko, head of Games.Mail.Ru, Russia’s largest online games portal.“In fact, the release of this game for Game Boy handheld consoles kick-started the advent of ‘pocket games,’ which in the age of Angry Birds and the like are known as mobile games.”

Christopher Hamilton, a producer at Finnish video game developer Rovio Entertainment, the company that gave the world Angry Birds, described Tetris as “probably the first breakout, casual video game.”

“Everyone was playing it while I was at university, including my Russian professor, who would comment on how Russians excelled in math and science,”said Mr. Hamilton, an American who first entered the industry in 2008 by localizing casual games developed in Russian

by St. Petersburg-based Nevosoft into English.

“Tetris was the first game developed in the Soviet Union that was exported to the U.S. and other Western markets. It really opened the door for a number of Russian developers who continue to make great content for global markets,” Mr. Hamilton told RBTH. Mr. Pajitnov assembled the first Tetris prototype on June 6, 1984. He then continued to refine his invention for several months. Russian video game historians generally consider the real birthday of the puzzle-game to be July 18, 1985. Indeed, it was in the summer of 1985 that the updated, color version of the game for IBMcompatible computers started circulating among Mr. Pajitnov’s friends and colleagues at the Dorodnitsyn Computing Center of the Soviet Academy of Sciences in Moscow. Thus began the rise of Tetris.

Putting Tetris on the Nintendo game console helped the Japanese firm beat the competition.

HIS STORY

Alexey Pajitnov TETRIS CREATOR

Alexey Pajitnov started developing the game Tetris with the help of Dmitry Pavlovsky and Vadim Gerasimov in 1984, while working at the Dorodnytsin Computing Center in the Soviet Academy of Sciences in Moscow.

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As I was designing the game, I was wary of making it too complex. I thought that it would be great to add some kind of reward, some bonus points for certain actions, but with each new rule I invented, I was becoming more and more convinced that gamers would get confused. But if I were making the game now, I would not change anything”.

signing an agreement waiving any further claims with the now-private Elorg. Ever since, the designer, who made very little money from the game’s popularity during the 1980s, has received royalties from all new releases of Tetris (including the latest version for new hardware platforms by Ubisoft).

This represents a major issue for Russian programmer Vadim Gerasimov, who — at the age of 16, no less — had helped Mr. Pajitnov to port the game, originally developed for the Elektronika-60 Soviet computer, to the IBM PC.

Game Boy killer app There are numerous versions of Tetris on the market today, spanning all kinds of personal computers, home gaming platforms and handheld consoles. It would simply be impossible to count the actual number of copies sold, all the more so since many of them were distributed free as pre-installed apps on various devices.

Mr. Pajitnov’s invention became the first game ported to mobile phones, appearing on the Hagenuk MT-2000 model in 1994. In the late 1990s, Russia was invaded by Chinese handheld electronic game devices named Brick Game, which also included Tetris as the main game.

But perhaps the biggest contribution to the gaming industry made by Tetris was its release on the Nintendo Game Boy portable console.

Tetris helped the Japanese company to beat the competition and solidify its leadership of the

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Everyone was playing it while I was at university, including my Russian professor, who would comment on how Russians excelled in math and science. Tetris was the first game developed by the Soviet Union that was exported to the U.S. and other Western markets.”

Alexey Pajitnov IN AN INTERVIEW WITH THE COLTA.RU ONLINE NEWSPAPER, 2011

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I created the game in 1984. There were no graphics in the first version of Tetris, because monitors were not well developed in those days. At that time, monitors looked absolutely ridiculous, with 24 lines with 80 characters per line.

Tetris was created on an Elektronika-60 computer, a clone of the American PDP-11.”

multibillion handheld consoles market.

“Tetris is not just one of the most popular and recognizable games of all time, it is also one of those rare and precious things that make up what we call ‘the Russian cultural code,’” said Alexander Kuzmenko. “It is just like an ushanka or a matryoshka,”he said, referring to the famous Russian furry hats and painted nesting dolls.“The average citizen of any developed country will instantly recognize Tetris as ‘that game invented by Russians.’”