New issue of RBTH supplement for The Wall Street Journal issued on November 7 by Russia Beyond

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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

Oct

‘As long as there is civil war in Syria, the construction of a gas pipeline on its territory is out of the question.’ SERGEI ALEXASHENKO, ECONOMIST

Nov

PAGE 7

Dollar/Ruble

‘ Our current goal is

to make the economy less dependent on the price of oil.’ ANTON SILUANOV, MINISTER OF FINANCE

PAGE 4 Sep 1

Distributed with The Wall Street Journal

Sep 15

Sep 29

Oct 13

60 Oct 27

Saturday, November 7, 2015

IN THIS ISSUE

Finance After years of capital flight, capital inflows to Russia indicate finances are stabilizing

BUSINESS & POLITICS

Kremlin Sees First Capital Inflow in 5 Years

Russian wine, anyone? Moscow lures foreign capital to the vineyards PAGE 3

SPECIAL REPORT

Surviving Sanctions Russia’s top banks, backed by the state, take on the world PAGES 4-5

MONEY & MARKETS

Stocks Notch Gains as Oil Ticks Up A year of intense volatility continues EGOR ALEEV / TASS

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Net capital inflows in the third quarter are being called a sign the country’s finances may be stabilizing despite a recession and international sanctions.

At the end of the third quarter, the Russian Central Bank reported a net inflow of funds into the country for the first time in half a decade.

ALEXEY LOSSAN RBTH

Russia saw a net inflow of capital for the first time in five years during the third quarter in a sign that financial conditions are stabilizing despite an ongoing recession and international sanctions. Capital inflow into Russia reached $5.3 billion from July through September, the Russian Central Bank said. The last time Russia saw a net inflow of funds into its economy was five years ago, during the second quarter of April-June 2010.

During the first two quarters of 2015, the Central Bank registered a net capital outflow from Russia of $45 billion. “The inflow was driven mainly by the non-financial sector: the Russian population actively sold foreign currency during the quarter,” economist Irina Lebedeva at Moscow’s UralSib brokerage wrote in a note to investors following the publication of the statistics.“It appears the Russian private sector managed to both refinance its maturing debt and obtain new loans during the quarter,”she continued. Russia has experienced massive capital flight over the past few years as the price of oil, its key export, has fluctuated, and as political events like the outbreak of fighting in neighboring Ukraine spooked

investors and sent the country’s national currency, the ruble, on a wild roller coast ride. Russian PresidentVladimir Putin has said that despite the outflows, Russia does not intend to institute capital controls or fix the country’s exchange rate. “We are not planning steps of this kind,” Mr. Putin said in a speech at the Russia Calling! economic forum in Moscow this October. Such measures were tried in the late 1990s, he noted, but did not lead to a significant change in the pace of currency devaluation at the time. Mr. Putin said that the broader trend of capital outflow from emerging markets has a number of fundamental reasons, including the monetary policy of the U.S. Feder-

al Reserve. Mr. Putin hailed the inflow as a sign that the Russian economy will continue to stabilize, overcoming the current recession and begin positive trends. “Capital inflows are connected with the strengthening of the ruble and seasonal factors. Companies more actively obtain funds in rubles, giving up external borrowing,” said Freedom Finance Investment Company’s head of operations in the Russian stock market, Georgy Vashchenko. According to Mr.Vashchenko, real investment inflow into Russia will start in Russia once oil prices exceed $70 per barrel. “Until that time, investments will be discrete; the interest in the market is so far speculative,” he says.

Moscow Seeks CarbonFiber Leadership Officials boost composite materials PAGE 6

FEATURE

Siberian Mozzarella... Reinventing classic cheeses amid sanctions SHUTTERSTOCK/LEGION-MEDIA

Finance Russia’s biggest banks have faced a host of challenges, yet avoided a financial meltdown

Russia’s Banking Sector: How To Survive A Crisis Amid recession, loan-loss provisions and sanctions, Russia’s banking sector has had more than its share of adversity this year. Yet it has avoided full-blown collapse. ALEXEY SERGEEV RBTH

The year 2015 should have been the great annus horribilis for Russian banks. On the high seas of finance, the country’s two biggest banks, statecontrolled Sberbank andVTB, were like ships beset by typhoons, sea monsters and enemy craft all at the same time. The price of Russia’s key export, oil, collapsed to half its original value, causing the country’s curren-

Russian banks have proved surprisingly resilient despite adversity.

cy to plummet. Loan-loss provisions skyrocketed as a painful recession set in, and Russian firms’ debts became unsustainable. The U.S. and Europe slapped both banks with sanctions in the summer of 2014, blocking their access to the relatively calm waters of Western finance. Risk management costs and the cost of funding rose perilously. As the world saw during the financial crisis of 2008, a shock to a country’s financial network can be like a massive heart attack, disrupting the entire economic system as credit stops flowing. Surely U.S. and European policymakers knew this when they took direct aim at Sberbank and VTB,

the main vital organs of Russian finance, in an act of economic statecraft intended to punish Russia for its role in the conflict in neighboring Ukraine. Lesser Russian banks Gazprombank,Vnesheconombank and Rosselkhozbank were also targeted by Western sanctions. Against this backdrop, the Russian Central Bank sprang into action, demonstrating it would steadfastly ensure the two country’s two most-important banks’ financial stability. In March, Sberbank sealed a subordinated loan from the Central Bank for 500 billion rubles ($8 billion), whileVTB and Gazprombank received a combined 350 billion rubles ($5.6 billion) from the state to finance infrastructure projects. Now, while both Sberbank and VTB have seen significant declines in profitability this year, Russia has so far managed to avoid a fullblown financial crisis. CONTINUED ON PAGE 4

...And Russian Roquefort But will anyone buy it? PAGE 8

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Russian eSports could bring billions of dollars to investors RBTH.COM/534365

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Politics & Business

NEWS IN BRIEF

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Tech Following a lawsuit, Google must allow competitors access to its Android operating system

• Foreign investment in Russian commercial property has hit a seven-year high as the weak ruble has made the market more attractive for international companies, the RBC newspaper reported. Foreign capital accounted for 42% of investment in the commercial real estate market in the first nine months of the year, the highest rate since 2008, when foreign capital was used in 77% of the deals over the same period. • Gas giant Gazprom exported 41.4 billion cubic meters (bcm) of gas to Europe and Turkey in the third quarter, up 23% from the year-earlier period, the company’s head Alexei Miller said. In September, gas exports stood at 13.3 bcm, an increase of 24%. European buyers of Russian gas have increased purchases before the cold season and as the price of the commodity, pegged to prices of oil with a lag of six to nine months, fell. • Czech Airlines plans to fly more routes to Russia, the Interfax news agency reported, even as other international airlines cut services to the country due to a slump in demand. The Czech na-

Google Forced to Open OS The European Commission, the executive branch of the EU, earlier this year opened a formal investigation into Google’s behavior on the European market in regard to its Android system. “The Commission will assess if … Google has illegally hindered the development and market access of rival mobile operating systems, mobile communication applications and services in the European Economic Area,” the commission said in a statement. The United States’ Federal Trade Commission is now also investigating whether Google has limited competitors’ access to the Android system, Bloomberg reported in September, citing two unidentified people familiar with the case. Russia’s case moved strikingly quickly, however, racing from complaint to ruling in just seven months. By comparison, India’s investigation into whether Google’s search engine favors its own services over other companies’ has stretched on for more than three years. Russia’s demands also follow on the heels of a series of other rulings against Google since the beginning of last year, when tensions between Russia and the West escalated following Russia’s annexation of the Crimean peninsula from Ukraine. Records on the Federal Anti-Monopoly Service’s website show that Google has been hit by a series of small fines for various alleged violations, including fines for advertising abortion and gambling. The company has also been affected by a state effort to seize tighter control of the Internet in Russia and of foreign companies’ activities in particular. A law came

Google is being required to open its Android operating system in Russia following a complaint by its key local competitor Yandex.

DELPHINE D’AMORA SPECIAL TO RBTH

• Iran will start shipping cheese to Russia a little over a year after Moscow imposed an embargo on dairy products from most European countries, a Russian agricultural official said. Iranian dairy products to be supplied to Russia have successfully passed an inspection by Russia’s agricultural watchdog, Rosselkhoznadzor, Alexei Alexeyenko,

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an assistant to the watchdog’s chief, said in an interview with the Russian News Service radio station. Russia is seeking to find new food suppliers after banning a range of imports from Western countries in August last year in response to sanctions imposed by the U.S. and EU.

Google has faced steep competition in Russia from the Moscow search engine Yandex, which lodged a complaint against the U.S. tech giant.

into effect on Sept. 1 requiring all companies that process Russian users’ data to do so on servers within the countries, although international companies have been told that their compliance will not be checked until next year.

“Yandex has very limited ability to compete with Google,” wrote Gazprombank analyst Sergei Vasin. This sudden regulatory attention may be raising red flags in Google headquarters, but for local competitor Yandex, September’s decision comes as a welcome relief. Yandex, often described as the Russian answer to Google, has fallen behind on the local market as its better-heeled competitor ad-

vanced. A report issued by Russian lender Gazprombank in February found thatYandex had been losing market share to Google since March of last year. “The key reason behind this trend is Google’s dominance on mobile platforms — in Russia, about 86% of smartphones are powered by Android. Yandex has very limited ability to compete with Google,”Gazprombank analyst Sergei Vasin wrote in the report. Yandex doesn’t expect the federal order to expand its share of the search market, but the move does open doors for the company, a Yandex spokesperson said. “The decision will without a doubt give us new opportunities,” the spokesperson wrote in an email. Read more at www.rbth.ru/50033

QUESTIONS & ANSWERS

Russia Extends Credit to New Businesses ALEXEY LOSSAN RBTH

To stimulate new enterprises, Russia has created a separate organization, the Industry Development Fund, which provides soft loans to promising projects, including those with foreign participation. In an interview with RBTH, the head of the fund, Alexei Komissarov, explained which projects are eligible for funding. The most recent investment forum in SochimostlyfeaturedRussianplayers. Can we talk about the isolation of Russia and how dangerous that is in terms of technology? The Sochi forum has always been focused more on internal regional policy, but there have been foreign participants as well. I am convinced that cooperation with other countries is important and necessary for Russia. The Russian economy cannot develop in a vacuum, particularly in the area of innovation. For instance, our fund has a variety of projects, including some examples of successful cooperation between Russian and Western businesses. For example, the Kostroma automotive components plant produces pistons for car engines in cooperation with a German engineering company, and they will be used by both Russian and foreign automakers who have localized production in Russia and the CIS, including Volkswagen, Renault, Nissan, Ford and others. One of the best and fastest ways to develop the economy is to attract companies that have already achieved something in the world. As for technology start-ups, there can be no doubt at all about the need for international relations. Innovation can only be global.

manufacturing businesses. Small businesses do not often go to the manufacturing sector, while large businesses can find other sources of funding. As of mid-October, we have supported 47 projects for 16.5 billion rubles in industries such as pharmaceuticals, electronics, mechanical engineering, chemistry, biotechnology and production of new materials. Do you ask for any guarantees in exchange for a loan? We do not enter into the share capital of the company, we only give a loan for the development on favorable terms, and we are strongly against any grant funding programs for industry. As any lender, we want to be sure that our money is returned. We basically work only with financially stable companies, and the condition for obtaining a soft loan is to provide security for the entire amount.

Racked by recession and Western sanctions, Russia is seeking new methods for spurring the development of new businesses, including state-backed credit.

PRESS PHOTO

tional carrier will add one additional weekly flight from Prague to the Russian cities of St. Petersburg, Yekaterinburg, Rostov-on-Don and Samara starting this winter, the company said in a statement cited by Interfax. The decision to increase the frequency of the flights was driven by the improving demand for travel between Russia and the Czech Republic.

A worker operates the machines at a new assembly line in Kostroma.

HIS STORY

Alexei Komissarov HEAD OF RUSSIA’S INDUSTRY DEVELOPMENT FUND

KOMMERSANT

EPA/VOSTOCK-PHOTO

The Russian government has given U.S. tech giant Google until Nov. 18 to open up its Android operating system to local competitors, following its September ruling that Google’s contracts with mobile device providers violated Russian antitrust law. If Google fails to modify its contracts in Russia, it could face a fine of up to 15% of 2014 revenues on the market for applications that are preloaded onto mobile devices, the Federal Anti-Monopoly Service, Russia’s state antitrust watchdog, said in a statement. The agency opened a case against Google in February after Yandex, Russia’s largest Internet company and main local competitor, lodged a complaint concerning Google’s contracts with Russian mobile device providers. The fight is over whose applications can be pre-installed to phones and other devices that operate on Google’s Android system. Google typically contracts with providers to have a number of its own applications pre-installed, but — according to the anti-monopoly watchdog — it bars partners from signing similar contracts with other companies, such as Yandex. Google did not respond to requests for comment. The company is already embroiled in a series of other antitrust investigations across the world, from India to the U.S. to the European Union.

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A native of Moscow, Alexei Komissarov trained as an engineer specializing in car repair. He later earned an MBA at Kingston University in the UK. A well-known entrepreneur and business angel, Komissarov is also head of the Department of Entrepreneurial Leadership at the Moscow School of Management Skolkovo.

Do you fund projects only at an early stage? Not necessarily. The fund was created to solve the problem of obtaining financing when creating new or expanding existing production, but we are not talking about seed or even preseed funding. We are considering projects from existing companies with clear sales markets and customers, where the price is clear and the risk is minimal; that is, we are not talking about venture capital investment. The aim of the fund is to help fund financing in three stages when banks do not give loans: pilot-plant stage, design work, engineering, etc. Our fund provides them with debt financing at 5% per year in rubles for a period of 5-7 years and for 700 million rubles. The informal mission of the organization is to support projects that cannot be realized without such funds. Do you have any priority sectors that you support? No, our principled position is that we are not limited to a specific industry or region, but we try to focus on the support of medium-sized

How do you select projects for funding? In the first stage, we consider an application for compliance with the formal requirements and give an answer literally within five days. Then we carry out production and technological as well as financial and legal expert analyses. Then the advisory council, which consists of representatives of business and banks, takes the final decision. In doing so, it relies on very clear demands. There are three important conditions. First, the Fund’s loans should not violate the competitive environment — that is, the applicant company must produce a product which has no analogues in Russia, and therefore there is no competition. Secondly, what is important to us is the feasibility of the project, and, thirdly, the export potential of the project. Are there examples of international cooperation? We have a lot of projects that cannot be called “innovative” from a global point of view, but for the Russian market, they represent the most advanced developments and high-tech production. However, we have some worldclass innovative products. For example, one of the projects supported by us is the creation of a domestic processor, which is already being exported to Germany.

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Wine Russia is reaching out to foreign investors to quadruple its wine output and improve quality

Russian Wine? It’s More Serious Than It Sounds Russia hopes financial incentives and other perks can tempt foreign investors to bring expertise and capital to put its local vintages on the map.

NEWS IN BRIEF • A Russian IT company has launched a project to develop a locally built cloud computing platform, the Kommersant newspaper reported. The new cloud service, used to store data online, will challenge existing U.S. platforms such as Microsoft Azure and Amazon Cloud, the paper reported, citing a video presentation of the project by its creator, a company called Parallels. • The Hong Kong company REX Global Entertainment Holdings has bought a 65% stake in Russia’s Yota Devices, the maker of a twoscreened smartphone, for $100 million. Launched in 2013, the YotaPhone, which has an LCD screen on one side and an e-ink screen similar to the one used on Amazon’s Kindle on the other, was Russia’s first entry into the global smartphone market.

ALENA UZBEKOVA SPECIAL TO RBTH

• Online retail giant AliExpress will allow Russian vendors to sell their goods through its web-

SHUTTERSTOCK/LEGION-MEDIA

site from Nov. 11, as part of the Chinese company’s rapid expansion in the country, news agency RBC reported. The first companies to start selling via AliExpress include Wikimart, an online supermarket, electronics brand Technosila and DIY and gardening store 220 Volt, as well as official resellers of international brands in Russia.

Wine from California? Before the 1970s, no one took it seriously. Japanese whiskey, too, was a laughable idea until the Nikka distillery’s 10-year Yoichi single malt won“Best of the Best”at the Whisky Magazine awards in 2001. Now, Japanese single malts compete with the best Scotland has to offer. But Russian wine? If officials in the Kremlin have their way, the idea will, one day, cease to sound like an oxymoron. Yet Russia knows it needs outside help. The Ministry of Agriculture has launched a new program to attract foreign investors to fund Russian vineyards, with a goal of quadrupling the area used to grow wine grapes from 90,000 to 400,000 hectares. As a lure, the government plans to offer special protections against competitors and sharp discounts on imports of winemaking materials. Yet if the very idea of Russian wine strikes you as unusual, you’re not alone. Should the average American wine enthusiast stumble across a bottle of Russian vino, chances are they wouldn’t like it much. Or at least they’d find it perplexing. That’s because four-fifths of wines sold in Russia are poor quality semi-sweet varieties involving the use of concentrate. The reasons for this date back to Soviet times, when the Russian taste for semi-sweet and sparkling wines was formed. Many Russians today consider dry wines too sour. It was Joseph Stalin, an ethnic Georgian, who did most to foster this tradition. It may be hard to believe but, according to the International Wine Office, the Soviet Union ranked fifth in the world in terms of area under vines and seventh in terms of wine output by the end of the 1950s. The young Soviet winemaking industry found enthusiastic support from Stalin and from Anastas Mikoyan, his Armenian minister for food production. Both Georgia and Armenia, in the fertile, Mediterranean-like climate of the South Caucasus, have a rich tradition of winemaking that predates even the ancient wine culture of Greece. Wine was drunk in Russia only by the aristocracy before the 1917 Revolution. But all this changed

Officials in Moscow hope to boost Russian wine output with perks for investors and businesses.

To remedy this flaw, grape sugar and often ethyl alcohol were added to the wines — a practice that is still widely used in the Russian wine industry to this day.

IN FIGURES

90,000

Investor interest By attracting foreign investors, Russia hopes it can reboot its wine industry with foreign expertise, and produce vintages with more foreign appeal. “Many foreign wine companies have technology and knowledge. Russia has a good school of winemaking, too, but we were mainly focused on the production of dessert wines,”said Boris Titov, one of the most famous winemakers in Russia and owner of the AbrauDurso winery The cheapest Russian wines sell for about $3 a litre and are mostly sold in the box. And indeed, even by local standards, the quality can be uneven. Several Russian wine producers have recently lost their licences for making poor-quality products. The concentrate used by many Russian winemakers is basically “an ideal camouflage for swill,”said Yelena Denisova, who chairs the board of directors at Château le Grand Vostok, one of a handful of high-quality Russian wine producers. “This concentrate is added to poor, sour, semi-wine at the fermentation stage or mixed in with

is the total number of hectares currently growing grapes for wine in Russia.

400,000 is the total number of hectares growing wine grapes Russian officials hope to reach.

90% is the share of Russian wines in the country’s domestic market for economy class wines.

under Stalin, who believed wine had to be affordable for every Soviet citizen. Scientists managed to produce frost-resistant, high-yielding varieties of grape. But the quality suffered: wines made from such grapes were barely palatable because of their high acidity and lack of taste.

ready fermented wine material in an attempt to correct its awful taste. On top of that, artificial flavours and colours are added,” she said. In Soviet times, workers proudly raised their glasses at parties, toasting Comrade Stalin with wine that would horrify a native of Bordeaux, and Russians’ preference for sweet wines persists. Russia’s Union of Viticulturists and Wine Makers says semi-sweet and sweet wines account for 80% of the Russian market. In the economy segment, Russia’s largest, their share exceeds 90%. According to the new initiative being worked out by the Ministry of Agriculture, foreign investors will get a plot for a term of three to 15 years. “We do not object to a reasonable number of respectable, strong, foreign investors working in the Russian soil,”Agriculture Minister Alexander Tkachyov said in an interview in the state-run newspaper Rossiyskaya Gazeta. In exchange for compliance with the necessary conditions, the Russian government is ready to protect wine producers from competitive cheap imports. According to Mr. Titov of the Abrau-Durslo winery, foreign companies account for only 10% of wine production in Russia.

DAVID MILLER SPECIAL TO RBTH

Russia, the world’s top energy producer, met with Organization of Petroleum Exporting Countries (OPEC) and non-OPEC oil producers inVienna in late October to discuss forging a common response to falling prices in global oil markets. The meeting comes as Venezuela, a member of OPEC, pushes the group to return to its previous policy of actively supporting oil prices, advocating a potential target of $88 per barrel. But the idea of cutting oil production to support prices was not discussed at the meeting on Oct. 21, officials said after the event. Nevertheless, observers called the meeting unusual, in part because it brought together energy-powerhouse Russia and four other large oil producers who are not formally part of OPEC. OPEC, formed in 1960, is a

GETTY IMAGES

Russia, OPEC Meet to Discuss Oil Markets 12-member group whose official purpose is to“coordinate and unify the petroleum policies”of its member states and “ensure the stabilization of oil markets.” The gathering in Vienna comes as global crude oil prices flounder around $50 per barrel, less than half the price from a year ago. The world’s biggest oil countries are producing crude at full-tilt in a global battle to hold on to market share. Analysts have said that Saudi Arabia appears to be attempting to drive American shale oil producers out of business in the wake of a dramatic upswing in U.S. output. So far, however, U.S. production volumes have proved resilient. Meanwhile, OPEC’s own figures indicate the group produced 31.57 million barrels of oil per day (bpd) in September, even though the group’s official target currently stands at 30 million bpd. Before the meeting, Russian Energy Minister Alexander Novak said he expects Russia to produce an average of 10.5 million barrels of oil per day in 2016. Although the group took no steps towards supporting oil prices, en-

Russia, so far, has not said it will support oil prices by cutting output.

ergy traders closely watched the proceedings. Just the news that Russia was planning to meet with OPEC officials in early October was enough to push oil prices upwards. Analysts say Russia has historically preferred to to reap the benefits of OPEC’s role in supporting oil prices while not joining in production cuts itself. “Russia may discuss production reductions with both OPEC and non-OPEC states; however, such hopes in the past have led to little action,”wrote Cole Akeson, an analyst at Moscow’s Sberbank, in a note to investors circulated before the meeting. The decrease has put severe pressure on the state budgets of countries like Russia andVenezuela that earn much of their income from oil export receipts. Russian officials are facing difficult choices for han-

PRESS PHOTO

Spurring investment

Oil Russia holds talks with the world’s top oil exporters, seeking a common response to low prices

Low oil prices are hammering the budgets of big energy exporters like Russia and Venezuela, prompting calls for a coordinated response from oil producers.

• A hotel in Russia’s Far East gambling zone is booked out through the end of the year, the RIA Novosti news agency reported. There are no available rooms in the hotel until next year, Deputy Prime Minister and Presidential Envoy to the Far Eastern Federal District Yury Trutnev said, according to RIA Novosti, adding that most of the rooms had been booked by foreign guests. The five-star hotel, controlled by Chinese hotel operator Summit Ascent, is part of the Tigre de Cristal complex that includes Russia’s biggest casino.

dling a looming budget crunch amid lower energy prices as the country’s state tax receipts have been slashed. Russia relies on revenues from oil and gas exports for about half of its government budget. While state planners based budgetary plans on assumptions of an oil price of $100 per barrel a year ago, crude has since fallen to less than half that level. As a result, the government is facing a shortfall of some $50 billion. This year the state filled the gap by tapping its sovereign wealth funds, which are currently worth roughly $144 billion. But Russian Finance Minister Anton Siluanov warned in September that the funds could be fully depleted in 16 months to two years if the state doesn’t reduce spending levels.

• Russian drivers will be able to buy the world’s cheapest car — the Indian Bajaj Qute. Prices for the car will start at 250,000 rubles ($4,000). The cheapest car currently available in Russia is China’s Lifan Smily, which costs 320,000 rubles ($5,000). Sales will begin in March or April next year, once the vehicle is tested in Russia.

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QUOTES

IN FOCUS RUSSIAN BANKS

Anton Siluanov

RUSSIA’S BANKING SECTOR CAME UNDER FIRE FROM WESTERN SANCTIONS AT JUST THE MOMENT THE COUNTRY’S ECONOMY SPIRALED INTO RECESSION

RUSSIAN FINANCE MINISTER, INTERVIEW WITH CNBC ON THE PROBLEMS OF THE RUSSIAN ECONOMY, OCT. 13, 2015

KOMMERSANT

Our current goal is to make the economy less dependent on the price of oil. Our fiscal projections for next year are based on the assumption of $50 per barrel — the level we have today — and we have this year experienced a significant reduction in oil and gas revenues within the budget, and next year we estimate this revenue at 43% out of all budget revenue. It was around 52% a while ago. With the depreciating ruble, coupled with sanctions imposed on Russia, we will have to develop other industries.

Elvira Nabiullina

BANKS FACE A SERIES OF SIMULTANEOUS CRISES CONTINUED FROM PAGE 1

How much pressure the system can take remains to be seen. At the start of 2015, analysts at France’s BNP Paribas estimated that Russia may have to spend a whopping $42 billion this year alone to avert a banking crisis and keep the system well capitalized.

Sberbank versus the World

GOVERNOR OF THE RUSSIAN CENTRAL BANK, INTERVIEW WITH CNBC, OCT. 13, 2015.

KOMMERSANT

Indeed banks were in a difficult situation at the end of last year and the beginning of this year. The cost of funding increased sharply for them. They cut lending to the economy. But the situation started to change. Already from May the banks started to boost lending to the economy, and deposits from the population returned to the banking system. Over nine months the growth of deposits among the population was a bit more than 13%, and that’s why the banks have the resources and the opportunity to provide lending to the economy. Basically their condition is quite stable. And we continuously analyze all the indicators in the banking system and we monitor the situation with bad assets.

Speaking to the CNBC network recently, German Gref, the Chief Executive Officer of Sberbank, said his firm, which is the biggest lender in Russia, had faced three“black swan” events at the same time, referring to unpredictable, major events that have enormous impact on a firm’s long-term well-being. “We are being attacked by new businesses. We are being attacked by new regulations. We have to make newer and newer investments in technologies and this has to be done simultaneously. So we got not one Black Swan but three Black Swans,” he told the network.“The past year was an extremely tough year for both Russia and for the Russian banking sector…the next year, in our opinion, is going to be much better even if oil prices remain the same,” he said. Earlier in October, Mr. Gref said he expected the bank’s net profits to fall by either a third or half in 2015 compared to a year earlier, after posting earnings for the second quarter that had declined 44% compared to the same period a year earlier. Yet Mr. Gref said Oct. 22 that the bank will seek new efficiencies to cut costs and boost profits through 2018, predicting that net profit could rise by 10% as a compound annual growth rate from 2013 to 2018. One of Sberbank’s key advantages is its legacy position as

the retail bank of choice for most Russians, having been originally created as the Soviet Union’s key domestic retail savings bank. As a result, today, Sberbank holds some 30% of Russia’s total banking sector assets, and can rely on its massive cushion of average Russians’ retail savings. Alexander Morozov, Sberbank’s Chief Financial Officer, added that the bank will continue to pay dividends of 20% of net profits on its 2015 results and onward through 2018.

Despite a roughly 50% loss on the investment so far, Mr. Mann told the Bloomberg agency that he remains convinced the shares will rally. Bloomberg noted that Mr. Mann is not alone in this conviction: about two-thirds of the 22 research firms that rate Sberbank shares recommend that investors buy the stock.

“The past year was an extremely tough year for both Russia and for the Russian banking sector,” said German Gref.

“After the devaluation of the ruble, certain industries gained competitive advantage,” said Dmitry Monastyrshin.

“Given its solid reputation, extremely low cost of funds and relatively small share of bad loans compared to its peers, Sberbank is by all regards an excellent bank, and it has a huge potential in the long term,”Bill Mann, Chief Investment Officer for Motley Fool Management LLC, told the Bloomberg News agency in October. Mr. Mann has 2.4% of his $381 million Motley Fool Independence Fund invested in Sberbank shares, which he purchased in March 2014.

tial Academy of National Economy and Public Administration, said that the last time the Russian banking market experienced anything similar was during the global financial crisis of 2008-2009. “It was easier then than it is now [for Russian firms], because external sources of borrowing for Russian banks were not closed.This provided not only liquidity but also appreciable amounts of funding, the recession in the real sector was short, and there were no sanctions,”he said.

Not your father’s crisis Vasily Yakimkin, associate professor of the Faculty of Finance and Banking at the Russian Presiden-

IN FIGURES

61 30% 19% The number of Russian bank licenses revoked in 2015.

of credit institutions were loss-making in Russia during the first eight months.

of loans are nonperforming in Russia’s construction sector.

According to Mr. Yakimkin, the Russian banking sector at the beginning of the crisis in 2014 had worse capital adequacy indicators than in 2008. Government support for Russian banks over the past nine months has been crucial, Mr.Yakimkin said. “The growth of own funds in that period was mainly due to the largest state-owned banks,” says Mr. Yakimkin. According to him, the decline in GDP in the first eight months of 2015 was 3.8%, but in September, an increase in economic activity was recorded at 0.3%, granting a sliver of optimism that the situation is gradually improving. “After the devaluation of the ruble, certain industries gained competitive advantages that allow them to increase production and sales of products,” says Promsvyazbank’s principal analyst, Dmitry Monastyrshin. At the same time, he said, exporters and companies that can replace imports have supported the banking sector, taking out loans they can fully expect to repay while also facilitating financial activity throughout the economy more broadly. According to Mr. Monastyrshin, the most serious problems with non-repayment of loans are in the construction and air transportation sectors, where the share of nonperforming loans is already 19% and 24%, respectively. In the entire banking system, the share of overdue loans to legal entities increased since the beginning of the year from 4.2% to 5.8%. “The key difference between the current situation and the past crisis is that in 2009, oil prices showed a rapid recovery. After a drop in oil prices to $36 per barrel in late 2008, prices rose to the

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Russia’s postal service joined forces with VTB Bank to establish Post Bank, a new retail lender with three times as many retail branches as the current leader, Sberbank. KIRA EGOROVA RBTH

Russia’s government approved the establishment of a massive new bank based on the country’s postal service, a move that will eventually create an institution with more retail branches than all other Russian banks combined. The new entity, called Post Bank, is a joint venture between Russian Post and one of the country’s largest lenders, state-ownedVTB Bank. Post Bank is being established in part to provide banking services across Russia’s far-flung, nearempty regions, and to target pensioners. VTB will fuse one of its subsidiaries, Leto Bank, into the new institution. The partners say the new institution will begin giving out loans as early as January 2016, with a pilot project to be launched in Moscow this fall. Over the next three years, the bank will open outlets in no less than 15,000 Russian Post offices. After this initial rollout, the bank should start operating in all the 42,000 offices of the national operator. The current leader, Sberbank, has more than 17,000 outlets. Once it is completed, Post Bank will have more retail locations than all other Russian banks combined, according to the Russian banking portal Banki.ru.

Post Bank’s Board of Directors will be headed by Russian Communications Minister Nikolai Nikiforov. “The question of the creation of Post Bank has been discussed for 15 years; eventually we came to the conclusion that it would be created in partnership with the VTB Group,” Mr. Nikiforov told reporters at a conference in September. According to the minister, after the renaming of Leto Bank as Post Bank, VTB will keep 50% plus 1 share of the new entity while the rest will be acquired by Russian Post.VTB will invest 16 billion rubles ($246 million) in Post Bank. In turn, Russian Post will assume the costs for modernizing its post offices to accommodate the banking operations. The government won’t back Post Bank up with financial help, social benefits or donations, Leto Bank’s press office said, adding the new institution aims to bring more Russians into the banking system. “Today only 50% of Russia’s population [over 18 years old] uses banking services. In China the share is 70%, and in Scandinavian counties it’s over 97%. The creation of Post Bank should change this situation”,Leto Bank press service said. “The experience of France, Japan and China proves that a bank project like this is relevant and rather successful. Moreover, Post Bank should decrease the share of cash payments and increase the competition in some areas where only one or two banks operate,” the bank said. The success of the new bank will largely

REUTERS

Moscow Creates Vast New Bank From Post Office Russia is creating a massive new bank based on the postal system.

depend on how well it combines banking processes with the work of Russian Post, which is broadly considered to be notorious for inefficiency and poor organization, analysts said. “The low efficiency of Russian Post is largely due to the low cost of the services, which is important to ensure the availability of post services to the broad public,” said Dmitry Monastyrshin, the principal analyst at Russia’s Promsvyazbank. However, he said, the use of VTB Bank’s up-to-date banking technologies, coupled with Russian Post’s extensive infrastructure and access to its customer base, should create synergies and ensure the profitability of the new group. “But for all that, a lot will depend on the new bank’s approach to the formation of the loan portfolio,” Mr. Monastyrshin said. Increased efficiency is a question of time under proper management, said Sergei Deineka, an expert with the BKS Premier bank. “A striking recent example is Sberbank. Even 10-15 years ago, it was considered just as clumsy and ineffective an organization as Russian Post, and was associated exclusively with huge queues by the public,” he said. “After a total restructuring, the

situation has changed dramatically, and now instead of the usual Sberbank, we see quite a modern bank, keeping up with the times.” Mr. Deineka believes that Russian Post can repeat this success. According to VTB chief Andrei Kostin, Post Bank aims to serve as many as 20 million people, half of whom will be pensioners. Post Bank’s loan portfolio will grow to 418 billion rubles ($6.43 billion) over 10 years, and its deposit base will reach 577 billion rubles ($8.87 billion), he said. “Post Bank will offer pension delivery with special cards and accounts. Special deposit and credit services will be available for pensioners,” Leto Bank press service commented. The main competitive advantage of such a bank is a broad infrastructure and access to the large customer base of Russian Post, whose regional network covers even the smallest and most remote communities of the vast Russian territory, said Mr. Monastyrshin. According to him, the national operator serves approximately 150 million addressees and has been familiar to the public for many years.“Customer confidence in Russian Post will translate into loyalty to Post Bank,”Mr. Monastyrshin said.

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Setting Russia Back on Track For Growth Vladimir Korovkin EXPERT

providing them with much-needed liquidity at the right moment,” says Mr. Yakimkin. The Russian Central Bank expects a considerable slowdown in lending in 2015 — down to 11% from the forecast 15-17% for 2014, a conclusion that has been generally supported by private analysts. Now, according to the data from the Russian Central Bank, for the first eight months of 2015, 30% of operating credit institutions are loss-making — or 232 out of 774. Russian Finance Minister Anton Siluanov, during an interview with CNBC, said that the Russian economy may begin growing as soon as 2016. “We experienced a slowdown in growth this year. We estimate it to be minus 3.8% in 2015, but the third quarter and the end of the year are proof that we are turning the corner. In 2016, we expect positive growth of around 0.7%”, Mr Siluanov said. The minister said the economy has started to adapt to the new conditions, and noted that Russia still maintains a strong balance of payments, with a current account surplus of 6% of GDP. “I think that whenever the lifting of sanctions happens it’s going to be a major positive shock,” the chief executive of one of Russia’s largest investment banks,VTB Capital, Alexei Yakovitsky told CNBC in an interview in Moscow.

The Ruble-Dollar Rate vs Interest Rates

ALYONA REPKINA

range of $60-80 per barrel in the second half of 2009,” says Mr. Monastyrshin. But the current excess supply of oil on the world market creates expectations for a prolonged period of low prices, he said. Such a period of low energy prices would have a strong impact on the Russian economy and its banking sector. “Now the Russian economy and the banking sector will probably require a longer period of recovery,” he says. For his part, Premier’s analyst Sergei Ilyin recollects that the current situation is different from that in 2008-2009 — then it was a“fast” V-shaped crisis; the situation deteriorated sharply, but started to recover fairly quickly. At the same time, an important factor was that the markets were awash with money from foreign regulators, thanks in part to low interest rates set by the U.S. Federal Reserve. “The deterioration in asset quality, overdue loan growth, borrowers’ defaults — it was much more massive, but it all happened pretty quickly, and then the situation slowly began to improve,” says Mr. Ilyin. “The government supported banks at this short and difficult moment,” he said. “Then the system was restored to a large extent on its own due to

cheap money and an influx of liquidity because of high oil prices,” Mr. Ilyin said.

Possible prospects According to Mr. Ilyin, it is not yet clear if this crisis is deeper than the previous one, but it will definitely be longer, and short-term one-off support measures will hardly change the situation. “Now the situation is growing more slowly, there are no such shocks, no wave of corporate defaults, delinquency is not rising so much, and the banks have learned a lot and were able to promptly minimize the losses,”says Mr. Ilyin. The current situation may yet prove to be more severe, he said, because it has been caused by a

GETTY IMAGES

Financial managers have hung tight as Russian assets fluctuated during a wildly volatile year in 2015.

systemic crisis that will not be eased with outside money due to low oil prices and the sanctions. “The banks that received additional capitalization from the government did not run to build portfolios, as it was last time, but began to cut spending and curtail unprofitable operations, preparing for a long hibernation,” says Mr. Ilyin. As a result, in the first nine months of 2015, 61 commercial banks had their licenses revoked by central regulators. “Nevertheless, we can conclude that the Russian banking sector is so far going through crisis satisfactorily, and in many respects it is an achievement of the state, which offered additional financing to banks at the right time, thereby

ecently my colleagues and I undertook a study of the dynamics of economic growth for all independent countries of the world during the 40 years from 1970 to 2010, with a separate analysis of top and bottom performers. Our initial goal was to determine and describe the structural models that led to fast growth, as represented by countries like China during the 1990s2000s, Russia in the 2000s and — more recently — by African nations like Nigeria, which is currently on the path towards becoming one of the world’s 20 biggest economies. We did identify a few models of quick growth that spanned several consecutive years. Yet the key outcome of our research was this: the growth that we observed was very much dependent on the international context prevalent at the time. Because this context evolves constantly, no single model sustained growth over a long period. What was effective one year led to stagnation or even decline a few years later. A common view on growth is that economic activity is fundamentally cyclical in nature, and that this cyclicality can be used as the basis for country-level strategic planning. This view implies that when a structural model stops working effectively, patience must be exercised to live through the “lean years” and wait for the good times to return. At the moment, one can see such sentiments in Russia with regard to oil prices. But our research suggests that if national economic planners opt to simply wait for good cyclical phases to return, such a plan carries high strategic risks. What, then, constitutes a superior national economic strategy? In our research we have found no country that was among the top performers for every one of the four decades. In fact, the group of countries in the top for the whole period of 40 years has a few peculiar members like Brazil, Turkey, Ireland or Australia. Those did not have starring success in any single decade in the past 40 years, but achieved stronger long-term progress than some “stars” of the past. In our view, there are sprints and marathons in economic development. An anxious sprinter faces the risk of burning himself out. So what is behind the success of “marathoners”? It is rather difficult to find structural similarities; actually they are amazingly diverse in the key metrics of structure. The commonalities lie rather in the ways they managed their economic growth. Our key finding sounds a bit recursive: growth is the result of a national effort to manage growth. It does not “just happen.” Nor is it a result of a smart one-off decision to make the right structural bets and win. More precisely it is about a prolonged effort coming from high consort of the intentions and actions of society, government and the business community. Vladimir Korovkin is the head of innovation and digital research at Moscow School of ManagementSkolkovo.

New app Deutsche, UBS Take Divergent Paths by Natalia Vodianova: ‘Love’ is better than ‘Like’ bilities to upgrade the team,” Mrs. Titova said, Bloomberg reported. “This doesn’t mean we hire a lot, but if we see interesting options, like in the case with the former Deutsche Bank employees, then we’ll consider them seriously,” she said.

Deutsche Bank is shuttering its operations in Russia while UBS stands fast, hoping to wait out the country’s recession and maintain market share. DAVID MILLER

SPECIAL TO RBTH

Decisions amid recession

GETTY IMAGES

Russia’s economic downturn is forcing big foreign banks to make a decision: either cut and run, or hunker down and weather the storm. Two of Europe’s biggest lenders, Deutsche Bank and UBS, are on divergent paths. While Germany’s Deutsche Bank is unwinding the vast majority of its operations in the country, Switzerland’s UBS is doubling down, and may even pick up some of Deutsche’s former employees. Deutsche’s move to shutter most of its operations in Russia was announced in early October, and comes as the firm makes broadbased changes aimed at shrinking the bank’s global footprint under the leadership of its new Chief Executive Officer John Cryan. The long-term plan, known as Strategy 2020, will refocus Deutsche as more of a regional player with global connectivity, rather than as an outright worldwide financial powerhouse. Prior to the announcement, Deutsche Bank maintained one of the largest presences in Russia of any of the big foreign banks, although its operations there have been a small part of Deutsche’s overall business. The initiative is “part of an ongoing review of its global footprint,” Deutsche said in a statement. “This decision has been made in order to reduce complexity, costs, risks, and capital consumption,”the bank said. “Deutsche Bank’s Russian Corporate Finance and Markets businesses will now operate from international hubs,” Deutsche

Germany’s Deutsche Bank and Switzerland’s UBS are on opposite paths.

continued. Deutsche has said that it plans to maintain its transaction services business in Russia. The move to pull out of Russia follows years of rising pressure on Deutsche Bank over poor profitability, as well as mounting highprofile lawsuits and regulatory probes. It also comes amid an investigation in the U.S. and Europe into share trades carried out at Deutsche’s Moscow office that is causing a headache for Deutsche in Russia. As a result of the retreat from Russia, Deutsche Bank will cut about 200 jobs in the country by the end of the year.

UBS stays the course One of Deutsche’s main competitors, UBS, is taking a different tack in Russia, despite the country’s recession and sanctions imposed by the U.S. and European countries. UBS isn’t planning to cut jobs in its investment banking or wealth-management businesses in Russia and is in fact considering

hiring former Deutsche employees, Elena Titova, chief executive officer of UBS’s Russian unit, told the Bloomberg news agency in an interview in early October. “Clients appreciate when banks stay with them, even if they can’t work properly due to sanctions” against the country, Mrs. Titova

“Clients appreciate when banks stay with them,” Elena Titova, CEO of UBS’s Russian unit, told Bloomberg News. said, Bloomberg reported. “Such consistency with time turns into income.” The bank’s Russian operations are a“material and meaningful part of UBS’s business,”Mrs. Titova told Bloomberg, adding that the firm has more than 100 employees in Moscow. UBS is “growing” its wealthmanagement business in Russia, she said. “We keep looking at the possi-

The differing calculations by Deutsche and UBS come as Russia’s economy suffers through a painful recession this year, and amid questions over how quickly it can return to growth. Western countries have also slapped sanctions on two of Russia’s biggest homegrown banks, Sberbank and VTB, making life harder for foreign banks attempting to continue operating normally in the country. Russia’s Gross Domestic Product is set to contract 3.9% in 2015 according to government estimates, and the International Monetary Fund has predicted sanctions may shave 9% off Russia’s GDP in the medium term. Meanwhile a decrease in disposable income and corresponding decline in consumption will push Russia’s poverty rate from 10.8% in 2013 to 14.2% in 2015 and 2016, the World Bank has predicted. Ratings agency Standard & Poor’s has said that even after Russia returns to growth, it expects the country’s economy to expand at a sluggish rate of 0.4% annually through 2018. That weak growth rate reflects “a lack of external financing due to the introduction of economic sanctions and the sharp decline in oil prices,” the agency said. Oil prices have floundered at near $50 per barrel this year. In October, Russia’s Economy Minister warned the country must prepare for the likelihood that oil prices will remain low for a long time.

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Stocks & Bonds Amid sanctions and recession, Russian assets have been on a wild ride in 2015

Has Russia’s Economy Reached the Bottom?

Stocks Flip From Annual Losses to Gains

Alexey Lossan RBTH

Alexey Lossan is executive editor of Russia Beyond the Headlines for Business

Russian stocks swung from losses to gains from August to October as oil prices ticked upward. Yet what remains for the rest of the year is yet to be seen. DAVID MILLER SPECIAL TO RBTH

Russian stock and bond markets swung upward as summer faded to autumn, defying dreary news about the country’s economy and continuing what has been an extremely volatile year for Russian financial markets. Analysts attributed the rise to an uptick in the price of oil, Russia’s key export, which rebounded off six-year lows touched in August. Political headlines, such as Russia’s military actions in Syria, didn’t seem to dent Russian markets. According to a calculation by the financial news agency Bloomberg, the MarketVectors Russia ETF (exchange-traded fund) had returned 15% for the year as of Oct. 11, the best performance of 776 U.S.-domiciled ETFs with assets of at least $100 million. Yet this year, volatility has been the rule for Russian markets. The agency noted that just seven weeks earlier, the Market Vectors Russia ETF had trailed 260 of its competitors, having fallen 1.6% for the year. Meanwhile, Russian government bond prices rose for eight weeks straight amid speculation that a rise in the exchange rate of the ruble, which closely tracks the price of oil, will give the Russian Central Bank the freedom to continue cutting interest rates. The ruble gained 5.4% against the dollar from Oct. 1 to 19. The price of Brent crude recovered about 15% from mid-August to mid-October. Yet many questions hang over Russian markets, potentially re-

KOMMERSANT

ecently a debate has begun over whether the crisis in the Russian economy has ended. Russia’s Economic Development Deputy Minister, Alexei Vedev, announced at the end of October that economic growth is on the horizon, and by one metric, has even begun. According to Mr. Vedev, Russian GDP growth in September was 0.3% compared to August. The Economic Development Ministry expects growth in the fourth quarter compared to the third quarter. Mr. Vedev’s immediate superior, Economic Development Minister Alexei Ulyukayev, said: “there is no more crisis.” And he continued: “I am confident that we will not fall further.” Representatives of the ministry were followed by the head of Russia’s second largest stateowned bank VTB, Andrei Kostin, who also announced the end of the crisis. “There is no crisis in Russia,” he told the Russia Calling! forum in Moscow. Certainly the Russian economy is still showing mixed trends. According to the Federal State Statistics Service, agricultural production increased by 4% in September 2015. The decline in investment in the first ten months amounted to 5%, however, as the slowdown in production moderated, from 3.7% to 3.2%, over the same period. The slowing pace of economic decline, although gradual, has given economists reason for optimism. Moreover, positive prognoses have been supported by Russia’s experience in the 2008-2009 crisis, when the economy recovered fairly quickly after the initial deep shock. After the last crisis of 2008-2009, Gross Domestic Product returned to growth after two quarters of decline. This means that in the event of a repetition of the scenario, Russia’s GDP will start to grow in six months — in the second quarter of 2016. However, during the previous crisis, the economy was supported by growing consumption. This time there will be no such luck. The decline in real wages reached 10%, and the reduction of retail spending — a significant indicator of the actual income of the population — amounted to 10.4%. Therefore, warn analysts at Barclays Bank, the economic dynamic from here on may be more Lshaped than V-shaped, as it was in 2009. Many economists now say, furthermore, that a return to constant GDP growth in Russia will be possible only if the authorities are willing to take on structural reforms to reduce dependence on oil. As analysts from Citi showed in a recent report, every $10 decrease in the price of a barrel of oil will lead to a reduction of Russia’s GDP by 0.8%. After the crisis of 2008-2009, a quick recovery in oil prices led to post-crisis return to growth. If one assumes current oil prices are here to stay, then the Russian economy will have to find new horizons for development in the future.

Russian assets have swung between losses and gains in a turbulent year.

Russia’s sovereign 10-year bond yield

straining asset prices from future growth. Russia’s economy is grinding through a deep recession this year. The country has launched controversial military operations in Syria, and remains under economic sanctions imposed by the U.S. and Europe over the conflict in Ukraine. These issues, among others, may drag on Russian asset prices.

“The problems for the market are well known: low payout ratios, low earnings growth, high oil dependence,”analysts at U.S. brokerage J.P. Morgan Cazenove wrote in a note to investors. The analysts added that according to their calculations, the Russian stock market appeared to be about“20% overvalued near-term” as of mid-September.

But, looking further into the future, the analysts, including David Aserkoff and Alex Kantarovich, wrote that potential economic reforms and periodic fast-moving rallies in Russian equities could help the Russian market outperform U.S. stocks in the medium term. Looking back at the past 20 years of Russian stock market performance,“we note 13 rallies of 50% or more in 6 months or less,” the analysts wrote. Economic reforms by the government could help unlock market growth, they said. “We see more easy wins in Russia in terms of economic reform than any big market in CEEMEA bar Saudi,” they wrote, using the acronym that stands for Central and Eastern Europe, Middle East and Africa. Meanwhile, U.S. brokerage Goldman Sachs downgraded Russian energy giant Gazprom on Oct. 19, saying it expects the Russian natural gas exporter to report weak financial figures in the third quarter due to both lower gas prices and sales volumes. The energy giant is also likely to accelerate spending on new pipelines, and could face increasing competition in its key European markets in the form of tanker-born liquefied natural gas, Goldman said. But while advising investors to sell Gazprom shares, Goldman recommended investors buy Russian crude oil giants Rosneft and Lukoil, calling the firms “resilient to a lower oil price, owing to their ruble cost bases and the progressive tax rate.” “We forecast an improving production outlook for Lukoil and Rosneft versus declining production for Gazprom,” Goldman analysts Geydar Mamedov and Elena Malareva wrote. Russia’s volatile 2015 follows a disastrous 2014 in which the RTS index tumbled 45%.

Manufacturing Russia is seeking a strategic advantage in the production of carbon fiber materials.

Russia Seeks CarbonFiber Leadership Russia aims to regain its leadership in the carbon fiber sector and the production of strong, lightweight composite materials used in construction and industry. ANDREI RETINGER RBTH

There was a time when the Soviet Union’s quest to supply itself with building materials suitable for constructing its glorious communist future was a key part of the national zeitgest, to the extent that it was even romanticized, as in Flyodor Gladkov’s 1925 novel about love and hardship set in a factory, “Cement.” Today, the romance may be over, but Russia is plotting a return to its mid-20th century leadership in the development and use of technology for production of carbon fibers — the basis of strong, lightweight composite materials with a wide variety of uses in industrial and consumer goods. Materials based on carbon fibers have unique properties, being 10 times stronger and 4 times lighter than metal. And demand for composites in the automotive, shipbuilding and aircraft construction is rising at a rate of 10-15% annually. Overall, the world market of composite materials is now estimated at 12 million tons a year and amounts to about $483.5 billion, while the volume of production of composite materials in Russia is estimated at tens of thousands of tons, and is only 0.3-0.5% of the world market. According to SergeiVetokhin, Executive Director of the Union of Composites Manufacturers, Russia has unique developments in this field; for example, a mobile road surface that allows heavy vehicles to pass in difficult terrain, even through swamps. It is used mainly in the oil industry. “Excellent solutions exist for the construction of nuclear power plants; their technology, too, has no analogues in the world,” said. Mr. Vetokhin.

Russia is pouring resources into the development of composite materials.

“Excellent solutions exist for the construction of nuclear power plants, with no analogues in the world,” said Mr. Vetokhin. To bring Russia back to the world market of composites, the Russian government approved in 2013 a “roadmap”for the development of the composite materials industry. According to this document, Russia’s domestic production of composite materials and products by 2020 will amount to 120 billion rubles ($1.9 billion), with consumption of output per capita of 1.5kg a year, and a 10% share of exports. The composite industry in Russia is historically closely connected with the nuclear industry. Domestic carbon fiber production technology was developed at the enterprises involved in the nu-

clear industry as early as in the 1980s.

Government program Currently, the state corporation Rosatom is involved in the creation of the full-fledged carbon fiber market in Russia and organizes the export of these products to other countries. Rosatom and the Komposit Holding Company intend to create lowcost production of world-class quality polyacrylic fibers. “This requires a very expensive infrastructure,” says Alexander Uvarov, the head of independent nuclear online newspaper, Atominfo. In the spring of 2015, Russia launched the Alabuga-Volokno factory, which was commissioned by Rosatom and built by the Komposit Holding Company. The cost of the first phase amounted to 3.3 billion rubles ($52.3 million).

“The new facility will enable us to quadruple the production of composite materials, which means reducing the cost of raw materials and extending the range of applicability. That is why we believe that Alabuga-Volokno will help get rid of dependence on imports,”says Alexander Lokshin, First Deputy CEO of Rosatom. For the time being, the plan is to produce two brands of carbon fiber: Umarex UMT42-12K (this class of products is used in aviation, automobile and shipbuilding, as well as in wind energy production) and Umatex UMT42-24K for other industrial purposes. A technical feasibility study for the use of composite materials in nuclear power plants has already been developed on the order of Russian nuclear scientists. It deals with the use of composite reinforcement in the production and installation of concrete structures, as well as the use of composite pipes in cooling towers. It is expected that the use of such materials will improve the quality of the nuclear plants under construction. The urgency of replacing metal for composites is due to the effects of corrosion on metal — for instance, metal pipes rust in cooling towers and require constant maintenance. In contrast, composite reinforcement is not subject to corrosion and is superior to metal because of a number of other important characteristics. This means that the emergence of nuclear power plants, consisting at least partially of composite materials, can be expected in the near future. At present, the enterprise in Alabuga is operating in test mode; it produces pilot batches and sends product samples to potential customers. Later this year, dozens of contracts with customers in many countries are expected to be signed. Rosatom’s plans also include the construction of the second stage of the plant with four production lines, which the company hopes will allow annual production capacity to be increased to 10,000 tons by 2020 and occupy 7% of the global carbon fiber market. Composite materials account for a quarter of the dry weight of the Russian fifth-generation fighter T-50, created within the PAK FA (frontline aviation aircraft system) program.

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RUSSIACHINA: TAKE A CLOSER LOOK

THE WAR IN SYRIA AND RUSSIA’S ECONOMY

OLEG REMYGA EXPERT

KONSTANTIN MALER

SERGEI ALEXASHENKO ECONOMIST

ike any other war in the Middle East, the war in Syria has an important economic subtext. Traditionally, this is because the war in question takes place adjacent to the world’s largest oil and gas fields, in a region crisscrossed by important pipelines. For this reason alone, one might expect the war in Syria, and Russia’s involvement in it, to create short- and long-term consequences. Yet Syria itself is not a major player on the global hydrocarbon market. Even in the most prosperous years in the early 2000s, Syria was producing little more than 520,000 barrels of oil per day, slightly more than 0.6% of world production. Since the beginning of the civil war in Syria and the introduction of European sanctions, oil production in the country has begun to fall rapidly. By the beginning of this year, according to official statistics, it was a little over 30,000 barrels per day. Gas production in Syria is also not large by world standards — about 5.5 billion cubic meters (bcm) per year at present (compared to 9 bcm in 2010). In this context, we can safely say that no matter how

the war unfolds in Syria, no matter who wins, any development of the situation in the oil and gas industry in this country will not have a serious impact on the global oil market. Much more serious economic consequences for Russia may be caused by its direct interference in the Syrian crisis. Although Russian officials claim that the Russian air force is bombing the positions of ISIS militants, numerous sources in the region say that the main target of these attacks is the «moderate» Syrian opposition fighting against the forces of Syrian President Bashar al-Assad. Given that the key states in the region — Turkey and Saudi Arabia — support the Syrian Sunni opposition, then the longer and larger the Russian armed forces’ involvement in the Syrian civil war, the more political and economic problems will arise for Russia in the region. For example, the Russian Direct Investment Fund has announced the creation of investment partnerships with the sovereign wealth funds of Saudi Arabia and the United Arab Emirates. As part of these plans, these funds have expressed their willingness to invest, respectively, $10 billion and $7 billion in Russia. In a situation in which Western financial capital

markets have effectively been closed to Russian banks and companies, the capital from the Gulf countries is being considered by the Russian authorities as one of the possible and desirable alternatives. Obviously, in the case of a protracted military operation of the Russian army in Syria, the probability of the realization of these plans will fall sharply. Turkey, due to its geographical position, is beginning to play a key role in the construction of transport infrastructure between Europe and Asia. By all appearances, the country will start the construction of several pipelines in the coming years, which would be able to deliver gas from Iran, Azerbaijan and Turkmenistan to Europe. In addition, the pipelines may be laid to Turkey through Syria from Israel and Qatar. But if the Israeli project provides for the construction of the offshore gas pipeline outside the territorial waters of Turkey, the pipeline from Qatar must inevitably pass through Syria. It is clear that as long as there is civil war in Syria, the construction of a gas pipeline on its territory is out of the question. In theory, this situation could be to the benefit of Gazprom, which is heavily promoting its Turkish Stream project, but is faced with serious constraints in terms of access to the Turkish market and big problems in relations with its Turkish partners after lame statements by representatives of Gazprom on the active involvement of Greece. However, Gazprom cannot seriously expect that the inability to get gas from Qatar will make Turkey softer in negotiations with the Russian company, since the country’s gas needs will be satisfied without restriction in any case. In addition, it seems that the Qatari gas pipeline to Europe has already moved to the front of the line. To start a cost-effective supply of gas through Turkey, the ability to pump 15-20 bcm a year is needed, and that amount of gas is already there in Azerbaijan, Iran, Iraq and Turkmenistan. These countries could increase production while the pipeline is being built. As a result, the Russian military operation in Syria, in the short term, neither holds any significant losses (expenses) for Russia, nor promises any significant gains. At the same time, in the event of a more serious and long-term involvement in the civil war in Syria, Russia may face significant economic losses.

Chinese official statistics revealed that bilateral trade between Russia and China in 2014 was $95 billion, raising hopes that the countries could breach the $200 billion mark this year. However, due to the fall in energy prices and the 50% devaluation of the Russian ruble in the first half of 2015, trade volumes decreased by 30%. Although a growing number of experts have started talking about the futility of Russia’s turn towards the East, a careful analysis paints a different picture. For starters, we should take into consideration the currency factor. At the moment, calculation of bilateral trade figures in dollars presents a distorted picture. Since 2008, Russia and China have been working to establish payments in national currencies. Frontier trade in the Far East has almost completely changed to mutual payments in ruble-yuan, and oil and gas contracts between Gazprom, Rosneft and Sinopec are already stipulated in national currencies. The volume of VTB Bank’s yuan settlements in the Far East in the first half of 2015 reached 150.4 million yuan ($23.7 million), which is almost twice as much as the indicators from the same period in 2014. Secondly, with a 34% overall reduction in Russia’s foreign trade, the 30% fall with its southern neighbor means that China’s relative share in Russia’s foreign trade in the first half of 2015 basically grew. In comparison, Russia’s trade with the EU declined by 36%. When it comes to Sino-Russian trade, not all sectors have been affected by slow economic growth and turbulent financial markets. Many areas of cooperation received additional stimuli for development. Russia’s agricultural produce and bottled water constitute a good source for growth and expansion of exports to China. The Narzan mineral water producer plans to export 100 million bottles to China annually. Miratorg, a Russian food company that runs a chain of supermarkets, intends to export pork to China this year with estimated volumes of 2,000 tons per month. There is also a lot of potential for the export of natural gas to China, since the Chinese government is focused on reducing dependence on dirty energy. Although there has been a reduction in the overall trade volumes, the electronic commerce sector is growing. Yandex, Russia’s largest IT company opened an office in Shanghai and the Yandex.Kassa payment service’s Chinese turnover has increased sevenfold in the last year. Moreover, in September the Chinese TradeEase online platform began operating in Russia, helping people buy Chinese goods online. Overall indicators often distort the general picture. Cooperation between Russia and China is witnessing qualitative improvement. Even if bilateral trade figures don’t touch $200 billion by 2020, a new, improved and more diversified structure of economic interaction will likely be in place by then.

Sergey Alexashenko is a non-resident senior fellow at the Brookings Institution (Washington D.C.) and served as the first deputy chairman of the Russian Central Bank from 1995-1998.

Oleg Remyga is the director of the China Laboratory at the Moscow School of Management Skolkov’s Center for Asian Studies.

TPP FREE TRADE PACT DOES NOT MAKE SENSE FOR RUSSIA

russia-direct.org

C o n ve r t i n g m o n o l o g u e s into dialogue

RAYMOND TARAS POLITICAL SCIENTIST

THIS SUPPLEMENT IS PRODUCED AND PUBLISHED BY ROSSIYSKAYA GAZETA (RUSSIA) AND DID NOT INVOLVE THE NEWS OR EDITORIAL DEPARTMENTS OF THE WALL STREET JOURNAL WEB ADDRESS HTTP://RBTH.COM E-MAIL US@RBTH.COM TEL. +7 (495) 775 3114 FAX +7 (495) 988 9213 ADDRESS 24 PRAVDY STR., BLDG. 4, FLOOR 7, MOSCOW, RUSSIA, 125 993. EVGENY ABOV PUBLISHER VSEVOLOD PULYA EDITOR IN CHIEF ALEXEY LOSSAN EXECUTIVE EDITOR KIRA EGOROVA ASSISTANT EDITOR GREG WALTERS GUEST EDITOR (U.S.) OLGA GUITCHOUNTS, ANNA SERGEEVA REPRESENTATIVES (U.S.) ANDREY SHIMARSKIY ART DIRECTOR ANDREI ZAITSEV HEAD OF PHOTO DEPT MILLA DOMOGATSKAYA HEAD OF PRE-PRINT DEPT ILYA OVCHARENKO LAYOUT

IORSH

ree trade agreements like the Trans-Pacific Partnership (TPP) practically seem to have been designed to marginalize or isolate Russia in the global economy. But there is another key reason why Russia will distance itself from the TPP. The recent history of free trade negotiations has been characterized by secrecy, subterfuge and procedural chicanery. Mistrust has only increased as a result of the stumbling path being followed by the U.S. Congress to invest President Barack Obama with fast track authority to conclude the Trans-Pacific Partnership. How mega-trade agreements are hammered out — behind closed doors by vested interests — is controversial, to say the least. Nobel Prize laureate Joseph Stiglitz noted in the New York Times earlier this year that the Office of the United States Trade Representative negotiates these agreements, supposedly on behalf of the American people. In practice, he concluded, the trade representative’s office is inescapably linked to large corporations and their interests. Restricting intellectual property rights, which are frequently at the center of controversies over free trade, represents more than a war on pirated music and video downloads. In the case of the TPP, for instance, Stiglitz suggests that new “anti-piracy” rules could help big pharmaceutical companies increase their monopoly profits on brand-name drugs. He worries that the TPP will “trade away our health.” According to Mr. Stiglitz, these anti-piracy laws would also limit competition from generic drug manufacturers, not allow real price competition in any of the 12 TPP signatory countries, and have the knockon effect of putting pressure on producers of pharmaceuticals in other countries such as India. The health of billions of people may be affected by the TPP. This may appear to be an over-the-top conclusion, but there’s an important truth here. Pharmaceuticals are just one piece in a much bigger puzzle affecting citizens everywhere. Free trade deals are the basis

of greater socio-economic inequalities as they ruthlessly transform the world into haves and have-nots. This year the UK-based charity Oxfam reports that by 2016 the combined wealth of the richest 1% will be greater than that of the other 99% of the world’s population. A growing share of the 99% is now forced into conditions which can only be called slavery. It is as if the secret, inscrutable, and hurried free trade pacts among already wealthy countries are necessary to ensure that such already outrageous levels of economic inequality will only increase further. Free trade negotiations may be so secretive because they are polarizing and acrimonious. But under a winner-takes-all system, the principle of democratic centralism prevails: a defeated minority must completely submit to the will of the victorious majority. For Russia, free trade agreements like TPP seem designed to marginalize or isolate the country. These accords are sometimes given a political reading in which analogies with hostile military and politic blocs are

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made. It is a mistake to draw such comparisons. Russia has many reasons to avoid becoming stigmatized as seeking a return to state socialism or to be cast as an intransigent opponent of the global market economy. “Authoritarian,” “backward,” and “Oriental” are negative images of Russia propagated in much of the West. Ranting against the TPP in Moscow might reinforce this image. But Russia can capture much-needed moral high ground by distancing itself from the “globaloney” hype around the TPP.

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Raymond Taras is a visiting scholar at the School of Global Studies, Sussex University, and a professor of Political Science at Tulane University. The article was first published at Russia Direct. Read more at www.rbth.ru/opinion

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Cuisine Sanctions have blocked European cheeses

In Cheese Drought, Russia Aims For Local Classics

DARIA KEZINA RBTH

When civil war broke out in Ukraine, surely no one imagined that among the unforeseen consequences would be a revolution in the Russian cheese industry. Yet through a series of knock-on events, that’s what happened. It went like this: the U.S. and Europe hit Russia with sanctions over its policies in Ukraine, prompting Russia to retaliate by banning American and European imports from Russian supermarket shelves. Among the biggest casualties, from the Russian shopper’s perspective, were creamy, fragrant European cheeses. The standoff has turned Russia into a nation

On the Siberian Scientiﬁc Institute of Cheesemaking The Siberian Scientific Institute of Cheesemaking was established in 1958. It has developed dozens of cheese production technologies, as well as experimental equipment, starter cultures and enzymes. Currently, it is developing cheese with immunomodulating properties. It is planned to create a group of cheeses with a longer shelf life, based on enzyme preparation from new types of raw materials. The Institute is located in Barnaul in the Altai region in western Siberia. The region ranks first in Russia in terms of cheese production. In 1935, the famous Sovetsky cheese was created there.

T R AV E L 2 M O S C O W. C O M

of cheesemakers, as ordinary Russians began making cheese in their homes. Now, to alleviate the cheese drought, a team of Russian gastronomical specialists in Siberia has dedicated itself to pioneering local versions of European classics. At the forefront of the action is the wonderfully-named Siberian Scientific Institute of Cheesemaking, with a history dating back to Soviet times. Take, for example,“Altarelli,”the Russian answer to Mozzarella, with a name that nods to the Siberian Altai mountain range. Altarelli does indeed bear a passing resemblance to its classic forebear, being made of normalized cow milk plus Siberian starter cultures and organic acidifiers. The developers claim the process does not require the addition of any harmful stabilizers or preservatives. Another sanctions-buster is the smooth cream cheese that takes aim at Italy’s sweet, spreadable mascarpone, with fat content as high as 70%. Like its Italian counterpart, the Siberian version is intended to be used in desserts. To get the flavor right, the Siberian cheese scientists invented a new ingredient: a glucose derivative used as an alternative to starter cultures. Another new invention has been dubbed Sursele, and is a version of the moldy, pungent French Roquefort cheese.

A Brief History of Cheese in Russia Cheese production in Russia increased by 30% in 2014 with the imposition of sanctions against European foods, according to data from the company Market Analitika. The total volume of consumer goods imported into Russia fell by 42.4% in 2014 and by 87% for the first five months of 2015 compared to the previous year. Sanction restrictions and a general decline in living standards have led not only to an increase in domestic production, but also to a number of nega-

tive trends. In Russia, according to analysts, the popularity of “cheese product” is growing instead of natural cheeses, since it is in the low price segment. The increase in these products so far this year amounts to 53%. Manufacturers are increasingly moving to smaller package sizes while keeping the old prices for products. The total reduction in consumption of cheese in Russia so far amounts to 30% compared to 2014.

According toVladimir Tkachenko, deputy director at the Siberian Scientific Institute of Cheesemaking, entrepreneurs interested in cheese production are also hampered by tight credit conditions and logistical issues related to long-distance shipping. So far,“most of it is sold only in Siberia and Russia’s Far East,” Mr. Tkachenko said. So now, work at the institute is focused on the creation of a new group of cheeses with

a longer shelf life, based on an enzyme preparation made of new types of raw materials. If Russia does manage to craft a line of closeenough-for-comfort European-like cheeses, far from those products’ traditional home turf, other countries may be keen to learn how they did it. Indeed, manufacturers from Thailand have already reached out to show interest, sending representatives to meet with the Altai Territory Governor, Alexander Karlin.

ALAMY/LEGION MEDIA

Russia’s Siberian Scientific Institute of Cheesemaking has developed local versions of Mozzarella, Mascarpone and Roquefort, taking traditional cheese-production methods and adding new innovations, including new starter cultures and enzymes.

Sales problems The next part: how to bring the new Russian cheese to the masses. Russian middlemen have already purchased the technology for producing the new Siberian delicacies, but the finished products may not reach grocery shelves in Russia’s biggest cities, Moscow or St. Petersburg, anytime soon. Despite the high consumer interest, distributors and retailers have been cautious about the new items, fearing shoppers will be suspicious about new products with funny-sounding names of local origin.

The Russian ruble has lost around 40% of its value against the U.S. dollar over the course of the last 12 months. The decrease has made many products and services cheaper for foreign visitors in Russia.

Restaurants In 2015, you can sample masterpieces by the capital’s chefs without much damage to the budget. The average bill.

Taxis Tax cost of transfer Ave Average to tthe airport.

Rent a car Re In September, the car-sharing – short-term car rental system sy – started to operate services se in Moscow.

City tours C Average price of group tour. A

The Bolshoi Theater T O Only half of the cost of most musical theaters in the world. th

* Source: Federal State Statistics Service of Russia, Jones Lang LaSalle Incorporated, 2GIS. Prices are calculated at the exchange rate on 07.10.2015