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‘The U.S. market remains a priority for us. But it’s more developed, so competition is very steep.’

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SERGEI ANDREYV, CEO OF ABBYY

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been beaten after its leader was killed. But the group developed new cells.’ GEORGY BOVT, POLITICAL SCIENTIST

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Thursday, December 10, 2015

IN THIS ISSUE

Business Russia is rising in the World Bank ranking of competitive economies following reforms

BUSINESS & POLITICS

Russian investors buy European oil fields ...And may spend billions more PAGE 3

SPECIAL REPORT

Russia’s economy: Growth in 2016? In search of new horizons PAGES 4-5

MONEY & MARKETS

Russia Surges in World Bank Ranking

Stocks head towards year end with gains 2016 may be less volatile

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Russia jumped 10 places to 51st in the World Bank’s global Doing Business ranking, increasing its lead over China, India and Brazil.

ALEXEY LOSSAN RBTH

Russia leapt forward in the World Bank’s high-profile ranking of global business environments, winning a much-needed vote of confidence for its troubled economy as the country struggles to emerge from recession. The ranking, called Doing Business, measures the relative ease or difficulty of starting a small-to-medium size business in 189 countries. This year, Russia surged 10 places to 51st, ahead of European economies Greece, Serbia and Luxem-

bourg. Singapore took first place, and the United States landed in 7th. Russia also led members of the so-called BRICS group of large, emerging economies by a wide margin: Brazil clocked in at 116th, India placed 130th, China came in at 84th; and South Africa placed 73rd. The World Bank said Russia advanced in the ranking after making improvements in areas like companies’ access to credit, registration procedures for new businesses and in providing electricity in far-flung areas of the country. Sylvie Bossoutrot, Program Leader for the World Bank in Russia, said the result “confirms the positive tendency of the past four years, and that Russia maintained a strong reform momentum,” according to

a statement accompanying the report. “This year Russia scored amongst top 10 best performers globally in registering property and enforcing contracts.” Russia also streamlined licensing procedures and reduced the number of state inspections, World Bank researchers said. “Russia reduced the time required to obtain an electricity connection by eliminating redundant inspections,”‘the World Bank said. Russian PresidentVladimir Putin has made raising the country’s standing in the Doing Business ranking a national priority in an attempt to use the metric as an objective set of parameters for measuring the effectivness of pro-business reforms. In May 2012, Mr. Putin signed a

decree ordering bureaucrats to work towards improving Russia’s position in the ranking from 120th to 20th place by 2018, a transition that became known as the “hundred steps.” According to the president’s plan, by 2015 Russia was to achieve the intermediate goal of 50th place, or just one place higher than this year’s ranking. “In the last five years Russia has risen by more than 60 places,” said Konstantin Korischenko, deputy director of the department of capital markets and financial engineering at Moscow’s RANEPA institute and former deputy chairman of the Central Bank. “So this is essentially in line with the 2015 objective of entering the ranking’s top 50,” he said.

Recession leaves many with crushing debts Non-performing loans hit record levels as borrowers struggle PAGE 6

FEATURE

Driverless trucks

Economy Russia is searching for new horizons of development as its recession bottoms out

After a Rough Year, Fresh Hopes for Growth in 2016 Amid recession and sanctions, Russia’s economy had more than its share of adversity this year. Yet signs have emerged the downturn may finally be ending. ALEXEI SERGEYEV RBTH

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After a punishing year in which plummeting energy prices kicked off a grinding recession, signs finally began to emerge late in 2015 that the worst may be over for the long-suffering Russian economy. Economic activity declined by 4.1% during the third quarter compared to the same period a year earlier, according to Russian government statistics. While still brutal, the decrease was smaller than

Sectors like chemicals and healthcare have defied the recession.

analysts had expected, and less than the 4.6% contraction of the previous quarter. Indeed, the data showed a 0.3% month-on-month increase in economic activity since August. Meanwhile, industrial production declined in September at 3.7%, the slowest rate since March, and capital investment fell more slowly in September than in August. “It now appears that Russia’s recession may have bottomed” during the second quarter, analysts at Moscow’s UralSib investment house wrote in a note to investors.“Nonetheless,” the analysts wrote, “the recovery is fragile.” To be sure, Russia is set to see its first annual economic contraction this year since 2009, in a decrease

the World Bank estimates will be 3.8% for the year. For Russia, whether growth will resume in 2016 depends largely on the price of crude oil, the country’s key export. The world’s biggest producer of energy in combined oil and gas, Russia was hammered when oil collapsed by 60% from June 2014 to January 2015, causing its national currency, the ruble, to enter a tailspin as the Russian Central Bank abandoned its former policy of supporting the currency. According to an estimate by the American ratings agency S&P, Russian economic activity will be essentially flat in 2016 if oil prices stay roughly where they currently are, at around $55. Russia’s economy may expand by 0.3% next year and by 1.8% in 2017 if oil averages $65 per barrel. Meanwhile, falling incomes have pushed poverty levels up dramatically, and consumer spending fell 10.4% in September, year-on-year.

Unlike Google or BMW, Russian automakers are focused on sending driverless vehicles onto more treacherous roads

CONTINUED ON PAGE 4

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NEWS IN BRIEF

International Trade Sanctions between Russia and the West have hit earnings for EU farmers

• Food imports into Russia have dropped considerably in the first nine months of 2015 compared to the same period last year. Meat imports dropped by 27% in the first nine months of the year, while poultry and fish imports contracted 1.6 times and 1.7 times less respectively, the news agency reported, citing data from the Federal Customs Service. A big drop was also seen in imports of butter and vegetable oil, which were down 1.7 and 3.2 times respectively between January and September. The decline comes as consumer spending in Russia has been dramatically hit by the country’s economic recession and the weakened ruble — which has made imports more expensive.

EU Tastes Bitter Fruit of Sanctions

• Tour operators have lost 1.5 billion rubles ($23 million) since flights to Egypt were suspended on Nov. 6, the Interfax news agency reported, citing the Russian Tourism Industry Union. The major losses resulted from tour operators being required to fly empty planes to Egypt to evacuate Russian tourists, Russian Tourism Industry Union spokeswoman Irina Tyurina said. When returning tourists to Russia, every empty seat on the plane costs Russian tour operators approximately $125, the RBC news agency reported. Egypt is Russia’s most popular winter travel destination.

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• The price of foreign cigarettes in Russia have gone up by 20% over the past year, the RBC-Daily newspaper reported. An average pack of foreign-brand cigarettes cost 85.6 rubles in October, up 20% compared to the same month last year, according to data from the Rosstat state statistics service.

SPECIAL TO RBTH

Irish farmer John Ryan is angry. The Ukraine crisis has become a live issue for European farmers, he says. The Russia-EU sanctions war has led to an over-supply of food in Europe and depressed prices. “If the euro drops any more, and interest rates rise, the whole sector will crash,” he said. In recent months, producers’ frustrations have spilled over. On Sept. 3, thousands of farmers and 1,500 tractors blocked major arteries into Paris. They were protesting against rising taxes and increasingly strict environmental standards, which, allied to plummeting food prices, have destroyed farm incomes. Hell hath no fury like angry French farmers. Thus, after the disruption, French President François Hollande caved in, promising help. Inspired by the reaction in Paris, hundreds of farmers descended on Brussels — from as far away as Finland — days later, demanding EU intervention. Soon, 500 million euros was found for“support measures” for agronomists. Yet Albert Jan Maat of Copa-Cogeca, the umbrella organization for EU farmers and agri-co-operatives, remains unhappy. “EU producers have lost their main export market to Russia, worth 5.5 billion euros annually, and a 500-millioneuro aid package will not be enough to compensate for this,” he said. The reason for their anger is simple. Food prices, especially milk, but also meat and vegetables, have

Russia retaliates When Russia hit back with counter-sanctions on EU agricultural goods, many analysts reacted with bemusement. However, in August, EU agriculture commissioner Phil Hogan admitted that European farmers are paying the price for the EU’s policy on Ukraine. “The only sector taking the hit arising from the foreign policy decision by Russia has been agriculture,” he told the press. He added that it was a “very difficult situation” because Russia was “the recipient of 10% of the world’s dairy products”, and “Europe was their first port of call”. The trouble runs much deeper than that for Europe. In 2013, before the geopolitical tussle, a third of EU fresh fruit and vegetable exports went to Russia and a quarter of exported EU beef. Around 75% of EU cabbage, 63% of tomatoes and 52% of all EU apples sold abroad went to the alliance’s giant eastern neighbor. EU-Russian trade grew from 90 billion euros in 2003 to 325 billion euros in 2013. As a result, many Euro-

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BRYAN MACDONALD

Farmers and 1,500 tractors blocked roads into Paris on Sept. 3 in protest against rising taxes, strict environmental standards and falling food prices.

pean companies became heavily reliant on Russia. This increased during the crisis years earlier this decade, when Russia partially compensated for decreased intra-European demand.

“EU producers have lost their main export market to Russia, worth 5.5 billion euros,” said Albert Jan Maat of Copa-Cogeca. Last year, amid sanctions, the value of EU agricultural goods sold in Russia fell by 24%, from 11.8 billion euros to 9.1 billion euros. Preliminary figures for 2015 predict an even greater drop. Meanwhile, Russia is discovering new import markets, with 60% of all Brazilian meat exports now bound for Russia.

Furthermore, the Kremlin’s measures have led to an oversupply of food in Europe, causing a breakdown in prices.

A change of tack? Now the Ukraine crisis seems to be fizzling out, there are hints of a possible EU U-turn. The French agriculture minister, Stéphane Le Foll, visited Moscow in October and asked his counterpart, Alexander Tkachev, to repeal the countersanctions. The Kremlin demurred, indicating the EU should first cancel restrictions on Russia. The following day, European Commission chief Jean-Claude Juncker announced:“We [Europe] can’t allow our relationship with Russia to be dictated by Washington.” Read more at www.rbth.ru/49339

INTERVIEW SERGEI ANDREYEV, ABBYY

Russia’s ABBYY: At the Cutting Edge of IT The decline of the ruble is giving Russian IT companies an edge in foreign markets, says the CEO of ABBYY, one of the country’s brightest new lights in tech. VICTORIA ZAVYALOVA RBTH

Since its humble beginnings in a Moscow dorm room in the 1990s, ABBYY has grown to become one of the world’s leading developers of IT solutions. Today, ABBYY’s technologies are licensed by some of the world’s largest manufacturers, including Microsoft, Acer, Panasonic and Samsung. RBTH spoke with ABBYY’s CEO Sergei Andreyev about the challenges the company is facing in the new economic reality.

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VICKTOR DRACHEV / TASS

• The Central Bank has warned that increasing oil supply is likely to depress oil prices further, and may mean that the country’s 2016 budget will need to be amended, the Vedomosti business daily reported. According to the Central Bank, the widening price difference between Urals crude and the benchmark Brent blend could spell trouble for the ruble and the country’s economic growth. The current draft budget bases Russia’s projected spending on a Urals price of $50 per barrel.

collapsed this year. The cause of the crisis is also clear: the sanctions war between Russia and the West. After Moscow’s takeover of Crimea in early 2014, Europe and the U.S. first attempted to punish Russia with punitive travel bans and asset freezes. Amid heightened tensions in eastern Ukraine, those measures were extended to embargoes on Russian banks’ access to international markets. In conjunction with weak resource prices, the policy worked. Russia is hurting; its economy is in deep recession.

Europe’s farmers are raising an outcry against political decisions that have hurt their profits. As Russia battles recession, EU farmers warn of a crisis.

ABBYY is now one of the world’s leading developers of IT solutions.

Which markets are you focusing on? Are you expanding in the United States? For us, all regions are important. The U.S. market remains a priority, since it is more developed in terms of technology. In the U.S., competition in the technological sphere is very steep. It takes a lot of work to really transfer knowledge. We are exporters, and almost 80% of our profits come from abroad. We get about 20% of our revenue from Russia and about 40% from the United States. Europe accounts for 20%, and another 20% comes from a combination of Asia, Africa and South America. Interestingly, sales in developing countries are growing faster than in the developed nations. The decline of the ruble against the dollar is helping us develop new products and technologies. This is because we get higher profits from exports once we convert back into rubles. So for us, this is a positive situation. Also, the main component of the cost structure for IT companies is the [ruble-based] cost of salaries of qualified specialists.

HIS STORY

Sergei Andreyev CEO OF LEADING RUSSIAN DATA PROCESSOR ABBYY

A graduate of the Moscow Institute of Physics and Technology, Andreyev joined ABBYY (formerly BIT Software) as commercial director in 1991. Since becoming ABBYY’s CEO in 1999, he has supervised all aspects of production, sales and marketing, research and development, support, finance, and public relations.

How different are the products that you offer in different countries? Here, the question is really what kinds of projects arise around these products. In Russia, for example, solutions for document and data input are in demand. They are used, mostly, by financial organizations, stateowned corporations, and energy companies. For example, we have a project that is aimed at processing the results of the EGE [a standardized Russian test administered to students, similar to the American SAT – RBTH]. To complete this project on time, you must process thousands of pages in a single month. And there can’t be any mistakes, because a slip-up could lead to a young person failing to get into university. In Asia, we find that projects are much simpler. For example, we do a population census there, which has a more relaxed deadline. Which new technologies and projects do you consider most promising? We are actively moving into the market of projects related to computational linguistics, word pro-

cessing and information extraction from large streams of unstructured text. For example, we’re helping Russian banks make a quicker decisions about granting loans. We can automatically analyze the client’s credibility and determine how well data in a given real estate contract matches up with the market. We also work with computer vision, which is gradually transforming into completely new technologies. This can solve, for example, such tasks as software test automation for your computer. These days it’s done using a special program. At the same time, you should also assign a person to control the process, but this is expensive. It is easier to use a camera that will monitor how the testing goes. What projects are most in demand in the United States? We have, for example, a project in the oil and gas industry. In contrast to Russia, where the owner gets the rights to a piece of land and is free to do with it whatever he wants, in the United States, rights are sold for different layers. As a result, different people have different rights to the first, second, fourth, fifth layers. If, say, one of the owners wants to drill a hole in his layer, he must examine all claims and agreements. Previously, this was carried out by hand. But these agreements are, of course, text information, so you can automate the process.We also work with a company that is engaged in providing cloud services for accounting and tracking of sales. Customers using the system feed it with a body of data, including the provisions of their agreements – payment schedules, the terms of contracts, special conditions. We can structure this information and analyze it. We can notify you when you need to update the agreement, or of upcoming expiration dates. Now it is a pilot project. In the U.S., there are many companies in your field. What’s your advantage? It lies in our development of a universal system, called ABBYY Compreno, which helps the computer understand the content behind the text. Despite the fact that people speak different languages, they live in the same system of concepts. We are all very similar; we have the same conceptual framework.

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NEWS IN BRIEF

M&A Russia’s L1 Energy, owned by billionaire Mikhail Fridman, acquires oil licenses in the North Sea

Russia’s L1 Splashes Out $1.6 Bln for North Sea Oil

• About 24 million Russians already buy Chinese goods online, Interfax reported, citing the head of the Europe and Central Asia Department of the Chinese Ministry of Commerce Lin Zhi. The Commerce Ministry estimates the value of the purchased goods at $5 billion. On Nov. 11, Chinese online retail giant AliExpress, currently the most popular internet retailer in Russia, opened its platform to Russian vendors. About 20 Russian retailers, including online marketplace Wikimart, electronics brand Tekhnosila and DIY and gardening store 220 Volt, are now available on AliExpress.

A new, privately-held, fast-rising energy firm from Russia paid German energy giant E.ON $1.6 billion for North Sea oil licenses, in spite of UK opposition.

• The online lodging service Airbnb has seen rapid growth in Russia as the country’s economic recession forces more Russians to look for ways to supplement their incomes, the Bloomberg news agency reported. Airbnb’s Russian business has doubled during the past year, propelling Moscow into the world’s top 10 cities with the most book-

Mr Fridman and his partners are attempting to take advantage of depressed energy prices as a chance to scoop up assets, betting prices

ings. In the first half of 2015, real wages in Russia fell by 8.8 %, according to the Rosstat state statistics service. The online platform Airbnb allows owners to rent out apartments or rooms to travelers. • Turkey’s flagship carrier Turkish Airlines has become Russia’s top foreign airline as its competitors have slashed flights to the country amid falling demand, the Bloomberg news agency reported on Nov. 11. Turkish Airlines has increased Russian flights by 16% this year compared to 2014, while its rivals have cut flights to Russia by 43% over the same period. The previous market leader, Germany’s Lufthansa, has reduced its Russian services by 31% this year. Russia imposed economic sanctions against Turkey on Nov. 28 after the Turkish air force shot down a Russian Su-24 bomber.

MAXIM VARKUNKOV / TASS

Mr. Fridman’s Coup

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ALEXEI SERGEYEV RBTH

The L1 deal marks the first major M&A transaction by Russians in Europe since sanctions were introduced.

IN FIGURES

43 is the total number of production licenses L1 has acquired from German energy and utility giant E.ON.

45,000 barrels of oil equivalent per day is the amount of production L1 Energy acquired through the deal.

$1.6 bln is the total amount L1 will pay for the oil and gas fields in the Norwegian section of the North Sea.

will rise in years to come, said Nikita Kulikov, CEO of the Moscowbased consulting company Heads. “The oil and gas market has slowed down,”he said.“As a result, many assets have come down significantly in price and become very attractive.” Sergei Ilyin, an analyst at Moscow financial firm Premier, called

the deal an enormous coup for Mr. Fridman and his partners, given both how reluctant European regulators are about admitting Russian investors, and how cautious Russian investors have become about venturing back into Europe. Yet it was the fulfillment of L1 Energy’s mission, he said, noting that “L1 Energy was originally created for investments in the energy sector, and initially focused on foreign projects.” As it set out to acquire foreign assets, L1 Energy snatched up toplevel talent in the oil and gas industry, including former BP CEO Lord Browne, who now serves as L1 Energy’s executive chairman.

...After Being Thwarted by British Regulators LetterOne Group, the parent company to L1 Energy, was established by Mr. Fridman and his business partner German Khan in 2013 to invest some of the $14 billion the men earned from selling their stake in TNK-BP to state-controlled oil giant Rosneft. In March, Mr. Fridman’s group agreed to buy RWE’s entire British division RWE Dea for 5 billion euros, including significant reserves in the British section of the North Sea as well as assets in countries like Algeria, Egypt, Germany and Turkmenistan. However, before the transaction could be closed, UK authorities

blocked the deal, demanding that the Russian investors sell the North Sea fields. British authorities said the Russian investors might eventually be included in the list of those impacted by European sanctions in the future, a move they said could threaten production at the offshore fields and jeopardize Britain’s energy security. On Sept. 11 this year, L1 Energy announced it had sold the British fields to the Swiss chemical company Ineos. According to a report by the Reuters news agency, the Russian company had expected to earn $1.2 billion from the sale, but was forced to accept a maximum offer of $750 million. In October, however, L1 Energy received a letter from the new British administration, reassuring Mr. Fridman that he was still welcome to invest in Britain despite the denial of the RWE Dea deal by the previous governing coalition. Besides the oil market, LetterOne Group is also active in telecommunications, and has sought to invest $4 billion in Brazil’s Telecom Oi, according to the Bloomberg news agency. The offer to Oi SA is conditional on the carrier agreeing to a merger with rival Tim Participacoes SA, according to Bloomberg. Mr. Fridman and his partners also own Russia’s second-largest retailer, X5 Retail Group, and wireless operator VimpelCom.

• The International Launch Services have signed a contract with Intelsat to launch five tele-

EPA / VOSTOCK-PHOTO

Russia’s L1 Energy has scooped up $1.6 billion worth of oil and gas fields in the North Sea, defying previous attempts by the British government to keep the firm out of Europe’s top offshore energy-producing region amid frosty relations with Russia. L1 Energy – owned by Mikhail Fridman, founder of Russia’s largest non-state financial corporation, Alfa Group – said it may continue to spend several billion dollars on North Sea energy assets in the future. The assets lie in the Norwegian area of the North Sea, and were purchased from German energy and utility giant E.ON, according to a statement posted on L1 Energy’s website. The deal, which has been approved by the supervisory authorities of Norway and the European Union, means L1 receives 43 licenses and instantly becomes one of the biggest owners of oil and gas fields in the North Sea. “This is the largest transaction conducted by any business under the control of Russian businessmen in recent years,” said Ivan Kapitonov, associate professor of the Institute of Civil Service and Management at the Russian Presidential Academy of National Economy and Public Administration – a research institution close to the Russian government. Completing the North Sea purchase marks a victory for Mr. Fridman, who had previously been thwarted in his attempt to buy assets in the region by the British government. That rebuff last year underscored how suspect Russian firms have become in the eyes of the West since European countries and the United States placed restrictions on Russian state-controlled oil and gas producers as part of the sanctions imposed on Moscow over its role in Ukraine. L1 Energy is a private Russian company independent from the Kremlin. As a result of the deal, L1 Energy became the first Russian firm to make a significant acquisition in Europe since the conflict in Ukraine began last year.

communications satellites aboard Soviet-designed Proton rockets, the Roscosmos space agency website reported. Intelsat’s decision to use a Russian launch company comes after the satellite firm raised the alarm on a series of suspicious Russian satellite maneuvers near several Intelsat communications satellites in orbit over the past year.

Meat me in Moscow: A carnivore’s guide to the best steakhouses

Real Estate Russia’s great foreign property acquisition boom appears to be ending

Russian Demand For Foreign Real Estate Plummets ALEXEI SERGEYEV SPECIAL TO RBTH

When oil prices surged in the midto-late 2000s, newly-minted millionaires and billionaires from energy-rich Russia splashed out on condos and apartments from London to New York, helping drive up property prices in some of the world’s most desirable neighborhoods. The boom was epitomized when Russian fertilizer baron Dmitry Rybolovlev bought a 6.5-acre beachfront luxury estate in Florida’s Palm Beach from Donald Trump for a cool $95 million. While billionaires bagged the headlines, middle-class Russians got in on the action too, albeit with more modest acquisitions. But now, as Russia’s economy contracts and its currency flounders, the trend has reversed: Spending by Russians on foreign property has fallen precipitously throughout 2015.

Indeed, Russian purchases of foreign property seem to have peaked at an annual $2.15 billion in 2013 before sliding to $2.05 billion in 2014, according to figures from the Russian Central Bank. Since then, multiple indicators suggest that the dip in 2014 has turned into a collapse. Research produced by the Tranio.com real estate firm suggests that overall Russian demand for homes abroad declined this year by about 50%. “Most of the respondents interviewed in our study, or 74%, said that the number of deals has decreased,” said Yulia Kozhevnikova of Traino.ru, adding that Russian purchases of homes in practically all countries seem to have slumped. During the first quarter of 2015, $281 million was transferred outside of Russia for the purpose of making purchases in real estate, according to Russia’s Central Bank. That figure represents a 42% decrease from $484 million during the first three months of 2014. In the second quarter, Russian spending on foreign real estate fell 50% compared to a year earlier, to $229 million.

Read more: travel.rbth.com/2067 ALAMY/LEGION MEDIA

Russian purchases of real estate abroad, which once propelled markets in places like New York City, have fallen by half as the country’s currency has fallen.

Russian spending on foreign real estate has dropped by about half in 2015.

In the second quarter, however, Tranio.com research showed that investments in commercial property actually grew 30%. The firm said that the increase in commercial real estate purchases comes as“Russians move to protect their assets against local political and economic risks,” according to a statement on its web site. “The most popular destinations for commercial real estate are Germany and London.” Meanwhile, real estate prices in Moscow have slumped when compared with other major world cities. Between 2011 and 2015, total real estate price growth in Moscow was just 10.3%, according to Traino. com, while Hong Kong and Shanghai gained 20%. London and New York rose 40%, and prices in São Paulo and Istanbul more than doubled, the firm said.

“With the fall of the ruble, Russian buyers started buying in the most reliable European countries and demand is firstly related to investment objectives,”saidYekaterina Rumyantseva, chairwoman of Kalinka Group, one of the largest real estate companies in Russia. “Well-off Russian citizens are now investing in the commercial sector and aiming to maintain and increase their capital,”said Ms. Rumyantseva. Russian investors have also practically stopped buying foreign real estate for leisure purposes. “Demand among Russian investors for such property has declined by almost 80%. On the other hand, interest in real estate that helps preserve capital has remained on a more or less stable level in Russia,”said investment manager Igor Indriksons.

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in focus Russia in 2016

IN NUMBERS

Ruble Profits for Russian exporters

following a deep recession in 2015, russia is eyeing new sectors for growth as a cheaper ruble spurs exports

Due to last year’s depreciation of the Russian ruble against the U.S. dollar, net profits of companies that export products abroad, especially energy and mining companies, have risen when calculated in rubles. In the first nine months of the year, ruble profits rose 50% for gas giant Gazprom, 20% for gold miner Polyus, and 16% for oil giant Rosneft. Total physical output volumes for Russian stayed near the level of a year earlier.

Russia goes in search of new growth in 2016 Continued from page 1

But the decline in energy revenues has also pushed state policymakers to seek new avenues for growth in areas beyond raw materials exports, in areas as diverse as pharmaceuticals manufacturing, chemicals production, automotive exports and agriculture.

A Cheaper Ruble: Harbinger of Growth?

alyona repkina

The Russian Central Bank’s decision to let the ruble lose almost half of its value against the dollar over the past year had a profound impact on the Russian economy, with implications that rippled through many sectors. On the positive side, one key result has been to provide a boost to Russian exporters, slashing prices for Russian products and allowing them to compete favorably with foreign offerings. Indeed, production costs have fallen by almost 50% inside Russia, helping the producers aggressively lower wholesale prices. One example: The cheaper ruble has created a boom in agricultural exports to China. Russian sales of foodstuffs to China rose 33% in the second quarter of the year in terms of value. Overall, trade between Russia and China is still lower this year than in 2014, primarily due to the depressed value of Russia’s energy exports. Russian agriculture also got some backhanded assistance from the country’s sanctions war with Europe. Having blocked European food imports over the political standoff with Ukraine, Russian

farmers are now being tapped to fill the breach. As a result, Russian food output is surging. In the first nine months of the year, meat output grew 13.9%, cheese output rose 22% and poultry output increased 10%. Meanwhile, global automakers scrambled their plans for Russia as domestic demand fell, reworking their strategies towards exporting cars made in Russia to take advantage of the weaker currency. The Reuters news agency reported in September that Volkswagen, Ford, Nissan and Renault were all

“For us Russia is one of the key countries among the developing markets,” said Elchin Ergun from Merck. “We believe that inflation will decelerate more steeply into the year end,” said Uralsib analyst Olga Sterina. considering increasing exports from Russia, although final decisions have yet to be made. Nevertheless, German carmaker Volkswagen opened a 250-millioneuro engine manufacturing plant in Russia’s Kaluga region in September with a capacity of 150,000 engines a year, while America’s Ford produced its first car with a Russia-made engine in October. The falling ruble has also taken some of the pain away for Russian

oil companies, which sell crude onto international markets in dollars. The ruble has closely tracked the decline of oil, meaning oil exporters have had significant support to their profits when calculated in the domestic currency. Despite sanctions and recession, other sectors of Russia’s economy, such as healthcare, have also managed to attract foreign investment. Before the end of 2015 Merck, the German chemical and pharmaceutical giant, plans to open a production facility in Russia to produce medicine for treating diabetes and heart ailments. Merck’s full production cycle is scheduled to commence in the second half of 2016, with plans to produce up to 1.5 billion tablets a year, enough to meet the demand of the entire Russian market. “For us Russia is one of the key countries among the developing markets,” said Merck’s Executive Vice President Elcin Ergun. “We plan to strengthen our positions and create a long-term development strategy.” Another German company, Phoenix Contact is placing a bet on a recovery in Russian machine construction. Phoenix Contact, which specializes in automation technology, will spend 10 million euros opening its first factory near Moscow. “For Phoenix Contact, Russia is an important strategic market,”said Phoenix Contact President Frank Stuhrenberg.

Inflation Concerns

One major risk to the country’s recovery, however, is stubbornly persistent inflation, which has eaten

away at average Russians’ spending power. The Russian Central Bank held interest rates steady at 11% at a meeting on October 30, citing concerns over double-digit inflation, which hung at 15.6% as of midOctober. “We believe that inflation will decelerate more steeply into the year end, and expect it to reach 12.5% by the end of the year,”UralSib analyst Olga Sterina wrote in a note to investors in November. Getting control of inflation would allow the Russian Central Bank to begin cutting interest rates to spur the economy and promote lending. Mrs. Sterina said she expected the bank to cut the interest rate by half-a-percentage point in mid-December.

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During the sunset years of the Soviet Union’s great socialist experiment, the country remained a powerhouse of the global chemical production industry even as other parts of its economy unravelled. Despite the punishing recession of the 1980s, the Soviet Union held its position as the world’s secondlargest producer of chemicals, after the United States, until the day the country ceased to exist. During the economic tumult that followed the end of socialism, however, Russia lost its vaunted place in the industry, even after recovering from the immediate aftermath of the Soviet collapse. By 2006, Russia had fallen to 20th place. Now, Russia’s chemicals sector is showing peculiar resiliency once more, defying the country’s current economic malaise. The Kremlin is casting a hopeful eye over the sector, in expectation of seeing a new horizon for economic growth. According to the Ministry of Economic Development, investment in the chemical industry grew by 8.4% in the first six months of 2015 compared to the same period a year earlier., despite the country’s overall economic contraction. Meanwhile, in the first quarter of 2015, net profit margins in the chemical sector as a whole increased from 18.3% during the first nine months of last year to 38.4% during the first three quarters this year, propelled in part by higher export revenues. A weaker ruble boosted income calculated in the domestic currency from sales abroad, and Russian fertilizer groups like PhosAgro and Acron reported stronger financial results These increases come despite western sanctions that have re-

Chemicals may be one bright spot in the Russian economy in 2016.

THE numbers

38%

is the overall net profitability of Russia’s chemical sector during the first nine months of 2015, up from 18% in the same period a year earlier.

stricted Russian firms’ access to imports of western modern technology as well as to some raw materials used in chemical production. Yet the sanctions, combined with Russia’s focus on localizing production domestically as a replacement for imported supplies, may have a perverse effect of bolstering the sector. Imports of chemical products have fallen 30% in monetary terms, according to the Federal Customs Service, while domestic production in a variety of areas increased. Output of chemical plant protectors increased in the first quarter by 27%, household cleaning products output rose by 11% and pharmaceutical products output rose by

11%. Moscow’s RANEPA Institute notes that overall the supplies of non-oil products from Russia declined in 2015, but exports of equipment and chemical production fell even more.

Good Chemistry

Russia’s chemical sector has also caught the interest of foreign investors looking for a tie-up. In the beginning of September, Chinese state-owned oil producer Sinopec agreed to take a stake in SIBUR, Russia’s top petrochemical company. While details of the deal weren’t made public, the Reuters news agency reported Sinpec would take a 10% stake, citing an unnamed source familiar with negotiations. Other reports have put the size of the deal at roughly $1 billion. Meanwhile, Rosneft, Russia’s largest oil company, agreed to swap control of its Eastern Petrochemicals Company for a stake in a unit of China’s largest chemical company, ChemChina. According to an analyst at Premier Sergei Ilyn, Russian firms have been increasingly open to selling stakes to strategic investors in

order to attract investment. That way they can continue developing, despite U.S. and European sanctions that have made it more difficult for them to access funding. “China is interested in increasing its exposure over businesses that are oriented toward exporting to the Chinese market. That is why they are interested. As a rule, they are ready to continue investing in key projects in exchange receiving the ability to influence pricing, future equipment purchases and so on,” Mr. Ilyn said.

Import Substitution

Russia’s efforts at replacing foreign production for domestic output through a policy known as“import substitution,” have been limited by its lack of raw materials and by capital market instability, however. The effort is part of a wider initiative. In early April, Russia’s Ministry of Industry and Trade announced import substitution targets across a range of sectors, aiming to double or triple production in a host of industries while reducing imports to targeted levels. The program targets 19 civilian industrial sectors. Plans for the chemical industry include 35 groups of products such as titanium dioxide (used for producing paints), decorative cosmetics and plastics. “Russia, while a leader in the production of titanium, is satisfying only 10% of its domestic demand for dioxide. By 2020 that percentage should increase nine-fold,” notes the ministry’s press service. Yet critics of the plan say Russia will need a decade or longer to hit these targets. “The aim is not to have people buy only what is produced in Russia but to make the production of equipment in Russia cheaper. For now, this is impossible because Russian industry seriously lags behind in terms of technology,” says Georgy Vaschenko.

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Viewpoint

Russia’s Economy: Real Turnaround, Or Early Optimism? Dmitry Dokuchayev

alyona repkina

Russia Ups Purchases of Locally Made Drugs to Lure in Foreign Firms Russia is coaxing foreign firms to move pharmaceutical production inside its borders, as one global consultancy calls healthcare Russia’s “most optimistic” sector. kira egorova

t a meeting of government ministers devoted to economic issues in early November, Russian President Vladimir Putin told assembled officials that the Russian economy has achieved “the point of equilibrium and balance.” Thus, Mr. Putin waded chest-deep into a debate that has been raging both in Russia and abroad. The question being asked is this: Has the Russian economic decline finally reached the bottom? Mr. Putin is not alone. The Russian authorities’ alarming rhetoric regarding the crisis of 2015 has given way to rather optimistic statements. The main reason for this is the release, by the Ministry of Economic Development, of fresh data that showed Russia’s GDP, taking into account seasonal factors, increased by 0.3% in September compared to August. Such a monthly increase — even if just marginally higher than zero — gleams like a flickering light of hope in the dark tunnel of economic gloom. The optimism that began radiating from the Ministry of Economic Development was shared by, among others, Deputy Finance Minister Maxim Oreshkin, who confidently declared that Russia’s economic crisis is now in the past, citing new investment inflows into the Russian economy during the third quarter of 2015. But are Russian leaders getting ahead of themselves? In reality, the facts appear to be these: In roughly a year since the start of the crisis, the Russian economy has not yet experienced true growth, but has to some extent adapted to the new reality of low oil prices (around $50 per barrel), the significant decline of the ruble (down to 60-65 per dollar from a bit more than 30), and the closing of Western capital markets to borrowers. Little by little, Russia’s agricultural and food-production sector is beginning to play the role of economic “locomotive,” having received new focus and emphasis by the food import embargo implemented against Europe and America in August 2014. As a result, during this period, the production of cheese has increased by almost 30%, meat by 12-13%, and fish by 6-7%. In short, not all sectors of the domestic economy find themselves on the “minus” side. But perhaps the newfound optimism is about something other than the beginnings of a real economic turnaround. It has been exhausting, during this past year of crisis, to watch the ruble tumble, to see prices constantly rise in shops, to see friends have trouble finding work, and to note the level of Russian domestic wages and incomes. It is in this context that the announcements of high-ranking officials in the economic field can be understood. They are trying, with their statements, to breathe optimism into the population, and into the markets, and into businesses, both big and small. Dmitry Dokuchayev is a Russian journalist. This article was first published by Russia Direct.

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donat sorokin / tass

Currently Russian-made pharmaceuticals make up only 55% of the market for drugs in the country.

Russia’s Growing Pharma Business

alyona repkina

Russia aims to double-down on growth in its pharmaceutical manufacturing sector and tempt multinational firms to move production to the country by increasing the volume of locally-sourced drugs purchased by the state through social welfare programs. Officials may find a receptive audience in big pharma: In the context of a punishing recession and falling national energy export revenues, a recent study by British consutancy Global Counsel concluded that firms operating in Russia’s healthcare sector are the“most optimistic” among multinationals present in the country, in contrast to the pessimism in the energy and finance sectors. “Healthcare stands out as the sector that is the most optimistic and where many firms remain strongly committed to the Russian market,”the report, released in October, said. Russia’s pharmaceutical industry has not faced sanctions from the U.S. or Europe, and sales have continued to grow in spite of the recession. That has led policymakers to focus in on pursuing growth in the industry. A government plan announced in the spring by Prime Minister Dmitry Medvedev calls for increasing the share of domestically-produced drugs purchased by the state for its hospitals and pharmacies to 90% by 2018, up from the current level of 65%. There is potential for both drug companies already working in Russia as well as those exploring the market in the government’s import substitution drive, according toViktor Dmitriyev, general director of the Association of Russian Pharmaceutical Manufacturers. “For localized foreign companies, [the government plan to increase purchases of locally-sourced drugs] is an opportunity to recoup faster the investment they have made here; whereas for those who do not have plants [in Russia], it is an incentive to set up local production as soon as possible,”Dmitriyev says. Russian officials hope the policy will be the economic equivalent of pushing on an open door. Currently Russian-made medicines make up 55% of the product mix available on the market, and just 20% of the market value, according to the Russian State Statistics Service. Over 90% of innovative medicines consumed on the

journalist

Source: IMS Health (data without dietary supplements and natural pharmaceuticals)

Russian pharmaceutical market are foreign.

Great expectations

To be sure, while it may provide a new direction for growth, drug production stands a dim chance of being as lucrative as Russia’s energy production, which accounts for about two-thirds of the country’s total exports. Yet Russia remains hopeful it can replicate the success of India, which has earned billions by luring international pharma companies into its borders and by producing vast quantities of generic drugs that are sold all over the world. The report by Global Counsel noted that AstraZeneca, a BritishSwedish pharmaceutical firm, saw revenue in Russia grow 26% in the first half of last year, and 18% over the full year. Novartis, the Swiss multinational, saw double-digit growth in constant currency terms, although sales in Russia fell in dollar terms, the report said. Russia was the biggest driver of growth in the overthe-counter segment in common currency terms for Novartis, according to the report. Another study of pharmaceutical firms operating in Russia car-

ried out by London-based consultancy Ernst & Young late last year found that 70% believed that political conflict and sanctions had “no impact on their business.” A further 13% said changes were positive and opened up new opportunities, while 17% saw new risks and plan to scale down their investment programs. Of the firms polled, 53% said they plan to organize complete-cycle pharmaceutical manufacturing inside Russia, while 26% said they would consider buying facilities in Russia or organizing joint ventures with local firms. About three-quarters of the firms surveyed were foreign. “Bayer is pursuing its localization strategy through selective partnerships with Russian producers being focused on full-cycle production,”says head of Bayer CIA Niels Hessman. In 2012, Bayer entered into a partnership with the Russian manufacturer Medsintez for the production of pharmaceutical products. In 2015, the first commercial batch of anti-infective medicine Avelox was produced on the facilities of Medsintez, he added. France’s Sanofi Pasteur also sees potential in working with Russian

partners. “Under the import substitution strategy, we see additional opportunities for expanding business in Russia through cooperation with Russian companies,” says Thibault Crosnier Leconte, managing director of Sanofi Pasteur, the company’s vaccines division, in Russia. The French company is planning to establish the production of a popular children’s vaccine at the St Petersburg plant of the Russian company NANOLEK. Sanofi Pasteur plans to start localizing its vaccine production in 2016, by transferring technology know-how and the quality control system. The technology transfer is due to be completed by 2019, and the plant in St. Petersburg will produce up to 10 million doses a year, fully meeting the existing demand for this vaccine in Russia, Leconte says. American company Abbott recently carried out one of the biggest deals in the history of the Russian pharmaceutical business, purchasing the country’s second biggest manufacturer of medicines, the Veropharm company, for 16.7 billion rubles ($495 million at the 2014 exchange rate). “Right now our primary goal is to ensure a smooth transition of Veropharm into Abbott’s global organization without any disruption of the supply of products to patients and healthcare providers or to the Veropharm business in general,”says Irina Gushchina, public affairs director to Abbott Russia. According to Gushchina, Abbott is planning to further expandVeropharm’s R&D and production capabilities in gynaecology, neurolo g y, g a s t ro e n t e ro l o g y, a n d oncology, where demand for medication is particularly high.

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VIEWPOINT

Equities Amid sanctions and recession, Russian shares have been on a wild ride in 2015

Why the Doing Business Ranking Matters to Russia

Russian Stocks 2016: In Search of Respite

ver since the collapse of the Soviet Union in the early 1990s, Russian authorities have been, from their point of view at least, bending over backwards to attract foreign investors. To dothis, they realize, the Russian business environment must improve. In order to be sure they were making progress, they deemed it necessary to establish some objective criteria. Enter the World Bank’s official ranking system, known as Doing Business, which gave Moscow official benchmarks (and kept mid-level bureaucrats from moving the goalposts). Unlike other comparable programs, the World Bank’s methodology is far removed from politics. It analyzes specific indicators, such as how many days are required to obtain a construction permit, or how many documents must be processed to connect a new store to the power grid. The methodology is highly transparent, making it possible to assess the amount of red tape in a given economy In May 2012, Russian President Vladimir Putin signed a special order directing policymakers to work towards improving Russia’s ranking by 100 points, now known as the “100 steps.” Russia hopes to rise from 120th place in 2011 to 20th in 2018, with the interim target of 50th place by 2015. Officials in the Kremlin therefore quietly rejoiced this year when Russia clocked in at 51st place. To improve its standing in the Doing Business ranking, Russia undertook a broad range of activities. A new development institution, the Agency of Strategic Initiatives, has become fully operational. The agency began carrying out regional spot checks, sending representatives to report back on factors such as officials’ fluency in foreign languages. This year, the Doing Business ranking also reveals the weakest areas in the Russian business environment: mainly, construction and export-import operations. In the “Dealing with Construction Permits” category Russia ranks in lowly 119th place (although that marks an improvement versus 156th place a year ago). In “Trading Across Borders,” in 2015, Russia even slipped from 155th to 170th place, its poorest showing ever. Analysts said this bout of backsliding underscores the need for comprehensive reform of the country’s customs authority. Russia’s results suffered, in part, because the scope of this indicator was expanded to include transportation of goods by air and rail, in addition to seaborne shipping. The Doing Business ranking accounts for a host of factors in this area, including the effective use of electronic logistical systems, how long cargo waits at the border and the costs associated with processing paperwork. In each these parameters, Russia seems to have no progress to report. In OECD countries, documentary compliance takes no more than five hours and costs $36. By comparison, in Russia, these figures are 43 hours and $500.

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

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Russian markets may find calmer waters in 2016 after the waves of 2015 recede. But whether stocks sink or swim will depend largely on the price of oil. DAVID MILLER SPECIAL TO RBTH

Russia put investors through a volatile year of chutes and ladders in 2015, as stocks climbed and slid amid fluctuations in the oil market and the ruble, against a backdrop of geopolitical turmoil. Yet for investors who held on through 2015, the year brought surprisingly handsome returns, considering all the negative headlines, smoke and brimstone. As of late November, when this issue of RBTH was going to press, Russia’s ruble-denominated Micex stock index boasted gains of about 29% year-to-date amid emerging signs that Russia has passed the worst days of its deep, dark 2015 recession. Those overall returns were notable for big fluctuations, however, such as the 15% sharp decline in the index from late February to mid-March. Russian stocks traded in dollars fared worse but still chalked gains. Moscow’s dollar-based RTS Index was up about 11% for the year in late November. Nevertheless, the decline in the ruble wreaked havoc on some portfolios. Russian equities traded in NewYork fell 25% from their peak in April through mid-September this year as Russia’s currency plummeted in value. The year earlier, in 2014, the Micex ended down 6.5%. While the prospects for Russian equities for next year likely rest on the fortunes of Russia’s key export, crude oil, there are reasons to think that at least the volatility of the past year may recede during the next one, giving investors respite

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Russian stocks are on track to end the year with significant gains despite significant volatility in 2015.

from their white-knuckle ride. “In Russia we’re coming back to, I would say, ‘normal levels’ of volatility in comparison to what we had at the end of last year,”said Yevgeny Fetisov, Chief Financial Officer of Moscow Exchange, in an interview broadcast on CNBC. “Markets overreact to the oil price and they overestimate Russia’s link to the oil price,” Mr. Fetisov said.

But What About the Oil Price? Mr. Fetisov’s comments aside, looking ahead to 2016, many analysts have said the price of oil will be the single most crucial factor in determining the direction of both Russian stocks and the country’s economy. Predicting the price of oil may be a fool’s errand, but many of those who get paid to do so have fore-

cast that crude will rise in 2016. Oil prices staged an historic 60% collapse from June 2014 to January 2015, but are likely to recover to an average $62.30 per barrel in 2016, up from an average of about $57.60 per barrel in 2015, a Reuters news agency poll of 30 top market analysts concluded in September. The poll results indicate that the analysts believe oil prices have fallen too far, too fast, Reuters concluded. If so, a recovery for oil would provide much-needed comfort to Russian economic policymakers, since some two-thirds of Russian export revenues arise from sales of crude oil and natural gas. Meanwhile, Russian officials have cautiously predicted that the country’s overall economic prospects will brighten, if moderately, in 2016. Russia’s Economy Ministry has

forecast Russia will return to growth in the second quarter of 2016 after seeing its economy contract 3.3% in 2015. Some private analysts seconded the ministry’s cautious optimism. “We expect the Russian economy to stabilize next year,” wrote a team of Credit Suisse analysts led by Global Head Ric Deverall in a research note in November. Others, however, were less sanguine. “Things are no longer getting worse” for the Russian economy, Liza Ermolenko, a London-based analyst at Capital Economics Ltd., told the Bloomberg news agency in November, though she was reluctant to express optimism. “I don’t think we can talk about good news next year. Rather it’s kind of less bad news,”Mrs. Ermolenko said.

Banking Russians are facing rising difficulties repaying loans as the recession bites

Debt Trap Widening As Real Incomes Fall Straddled by recession and falling incomes, average Russians face mounting problems repaying their debts, a development that could imperil economic growth. ANNA KUCHMA RBTH

Arrears on loans have reached record levels in Russia as a sharp decline in real incomes reduces borrowers’ ability to repay debts and a recession undercuts businesses’ profits. As a result, Russian banks have begun to curtail lending, a move that could hamper prospects for future economic growth as the country fights desperately to pull itself out of its downturn. For average Russians, greater difficulty paying back loans has pushed many to cut back on personal expenses in favor of greater financial austerity. The most desperate are turning to“debtor anonymous” groups, seeking help in planning their finances as well as commiseration from the psychological stresses that accompany mounting piles of debt. According to the Gaidar Institute, one of Russia’s most important private economic think tanks, non-performing consumer loans in Russia hit a record level of 11% this year. Prior to the recent downturn, the record was 9.1%, according to figures from the institute. Moreover, delayed payments have risen to 20%, said Mikhail Khromov, director of the laboratory of financial studies at the Gaidar Institute. Overall non-performing loans, beyond just the consumer sector, may reach their 2009 record within the next year, Moscow-based Moody’s analyst Alexander Proklov said in September. “We anticipate a worsening of loan quality and expect that during the next six to 12 months problem loans will reach approximately the level of 2009,” Proklov told the news agency Reuters. “Banks haven’t created enough provisions, and in some cases this is becom-

“As a result of the deteriorating macroeconomic situation, the population’s real disposable income decreased by 1% in 2014, and in 2015 it is expected to decrease by 8%. Consequently, more resources are used for paying for primary goods, and less are left to repay loans,” said Yelena Dokuchyova, president of Sekvoya Credit Consolidation. The situation has led banks to start limiting loans and impose credit limits on retail borrowers. The volume of consumer credit in the January-October 2015 period declined by 35% to $51.8 billion in comparison with the same period last year, according to official statistics. AlexeiVolkov of Russia’s National Bureau of Credit Histories said many Russian borrowers appear to have inaccurately judged their own ability to repay their loans. “In order for this not to happen it is necessary to check your credit history, assess your potential and ask for credit only when it is really unavoidable,” said Mr. Volkov.

Some Turn to Homegrown Debtors Anonymous

GETTY IMAGES

Alexey Lossan

Many Russians are struggling with credit card and bank debts.

One Russian’s Struggle With Massive Debt Victoria, a young lady from Moscow, breathes a sigh of relief as she recounts how she was eventually able to dig herself out of a massive hole of debt. Several years ago Victoria decided to make investments through a Russian financial firm, FOREX MMCIS Group. Without any savings of her own to use, she instead took a bank loan and borrowed from friends. But in 2014, Victoria received a letter from MMCIS informing her that the

company no longer had the resources to repay its investors, and would go bankrupt. Together with interest, Victoria owed $77,000. She began attending the Society of Anonymous Debtors, which helped her fashion a plan to make small monthly payments to the bank and to her friends. “I have stopped considering myself a victim and my life has become less impulsive than before,” Victoria told Moscow’s RBC Daily newspaper.

ing critical... We expect a significant increase in loan-loss provisioning in 2015 and 2016,”he said. According to the National Bureau of Credit Histories (NBCH), Russians currently owe more than 10 trillion rubles ($154 billion) in retail debt, while arrears on loans currently stand at 1 trillion rubles.

Falling Incomes In the second quarter of 2015, the Sekvoya Credit Consolidation collecting agency conducted a survey of 3,000 individual debtors, asking why they missed their loan payments, with 43%of respondents attributing the problem to trouble with income amid the recession.

Meanwhile, some Russians are seeking help from organizations like the Society of Anonymous Debtors, founded in 2011 and modeled on the American Debtors Anonymous, which began in the 1970s. “We have found out that borrowing can be a sickness that doesn’t fade with time, but on the contrary, progresses. It may be impossible to cure the disease completely. Nevertheless, it can be stopped,”the society’s website says in bold font. The Moscow’s group’s meetings are held once a week at one of the Moscow drug dispensaries, which are special clinics normally serving drug addicts. Yet in comparison to other countries, especially the heavily-indebted United States, Russia is not a country that is historically prone to binge-borrowing. The overall credit volume owed by the Russian population is onefifth that of the U.S. But American borrowers have advantages like longer credit periods and lower interest rates, making repayment easier. Thus, the debt burden on the income at Russians’ disposal is 11.1%, while for Americans it is 9.9%.

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AFTER PARIS, A CALL FOR JOINT ACTION

RUSSIA AND THE NEW GEOPOLITICS OF OIL

Georgy Bovt POLITICAL SCIENTIST

NATALIA MIKHAYLENKO

Irina Mironova ACADEMIC

hanges in the structure of the global oil trade — including a new role for Saudi Arabia, and the rise of non-state actors such as ISIS — have important implications for the world’s biggest producer of energy: Russia. Russia’s top energy companies have already been grappling with the consequences of lower global oil prices. Now they face additional challenges brought on by the shifting structure of the global oil business. Most importantly, Saudi Arabia’s move to start shipping more crude oil to Europe is forcing Russia to accelerate its energy pivot to Asia. What we are witnessing is a change in the geography of the oil trade. Russia is turning to the East, winning market share from Middle Eastern oil producers. At the same time, Saudi Arabia is replacing Russia in the European oil market. As a result of increased tensions over Ukraine, European reprocessing plants cut their purchases of Russian crude and started to replace it with oil from Saudi Arabia, setting the stage for a titanic struggle for global market share between two of the world’s

most important oil suppliers. Holding on to market share is vital because room for crude suppliers is tightening. By contrast, the market for refined oil products (like gasoline and kerosene) continues to expand and globalize. Meanwhile, amid these changes, the backdrop of the energy industry is evolving as well. Refined oil products have taken a more central role in the globalization of trade flows. Major crude producers like Saudi Arabia and Russia are now focusing on developing their own refinery capacities and firming up their positions in refined products markets. And, increasingly, the main consumers for this output are located in Asia rather than the stagnating European market. The factors that explain this development are rooted in the energy security concerns of Asian oil importers, who have historically had a high degree of dependence on Middle Eastern crude and who turned to Russian supplies as a way to diversify. Moreover, the deteriation of relations between Russia and the West also has an impact on this process, as Russian companies reduce their presence the European refinery business, and international energy companies pull back from modernizing Russia’s oil refinery infrastructure.

The EU is the second largest producer of oil products after the U.S. After the economic crisis of 20082009, the European refinery industry experienced difficulties, including weak demand for its output and growing competition from export-oriented refineries in the Middle East, Russia, the United States and India. In recent years, Saudi Arabia has faced a decreasing role in Asian markets as buyers there strived to diversify a market heavily dependent on crude oil from the Middle East via Russia. Now in an effort to keep market share, Saudi Arabia plans to ship more crude oil to Europe. Recent reports show that light Saudi crude is a new favorite for energy importers in Europe, threatening the traditionally Russian-dominated market. Low prices, in addition to strained relations between Russia and the West, are factors that have led companies like Shell and Total to make the switch. There has long existed a desire for energy supply diversification in Europe, recently with Poland taking the lead by announcing a natural gas pipeline deal with Latvia, Lithuania and Estonia. An injection of Saudi oil into the European market would provide another much-desired avenue to achieve this goal. These moves are aggressive enough to have caused concern among the Russian leadership. So long as Saudi Arabia keeps prices sufficiently low by means of discounts, high production, or both, Russian market share in Europe will continue to be threatened. Meanwhile, there is another complicating factor: the emergence of the Islamic State of Iraq and Greater Syria (ISIS) has complicated the notion that the geopolitics of energy are traditionally set by sovereign states. ISIS enjoys a crude output of 34,00040,000 barrels per day, banking an estimated $1.5 million per day. Reportedly some of this oil is sold and consumed by both rebels fighting Syria’s al-Assad government and the al-Assad government itself. This strange interdependence between enemies further complicates the already labyrinthine set of allegiances in the region. The increased production from fields controlled by ISIS, indeed, signifies a serious change — the birth of a new geopolitics of oil in which non-state actors have increasing importance. As a result of all these changes, the notions of sovereignty over national resources, traditional trade barriers associated with national borders and trade agreements, and energy diplomacy are all taking on a very different meaning.

Friday, Nov. 13, 2015 will be remembered as France’s 9/11. And this is exactly what ISIS had in mind. On that day, ISIS demonstrated its ability to carry out a series of simultaneous attacks in multiple public places in a large European capital. Despite France’s strict gun control laws, the terrorists had not only explosive belts at their disposal (standard equipment for such attacks), but also Kalashnikov assault rifles. Some observers had pointed fingers at the Egyptian security services for failing to stop a bomb from being planted aboard a Russian passenger aircraft in Sharm el-Sheikh. But after Paris, they had to admit that a democratic country with well-equipped and well-trained security services had been powerless to preempt or detect a large-scale attack. Indeed, in this modern era, terrorist attacks are the price we pay for the fact that the current international system of economic and political relations is sadly not conducive to rooting out terrorism in individual countries or keeping it constrained abroad. Al Qaeda appeared to have been beaten when its leader was killed. However, the fact is that the group has since grown newer and even more fanatical and barbaric cells. Stability in the Middle East has been undermined. We now confront a whole terrorist quasi-state on the territory where, according to starryeyed plans, the tyranny of dictators like Saddam Hussein and Bashar al-Assad should have been replaced by electoral democracy. Except that “the electorate” in these countries is increasingly voting more in favor of terror and against Western civilization, while at the same time, thousands of volunteers leave Western countries to fight for ISIS. They fight for a new world order, as designed by barbarians and murderers. It is their idea of “justice” against the backdrop of their rejection of the injustice of modern capitalism and the true “liberty, equality and fraternity” that have never taken hold. In hindsight, of course, it should have been clear that a large-scale terrorist attack in Europe was imminent. First there was the crash of the Russian airliner in Egypt’s Sinai desert, which many outside Russia gloatingly interpreted as “revenge for Putin’s adventure in Syria.” Then, on Nov. 12, there was the double terrorist attack in a Shia neighborhood in Beirut, in which dozens of people were killed. In that instance, clearly, terrorists from ISIS or similar groups were taking revenge on the Shia group Hezbollah for fighting on Assad’s side in Syria. The international community shuddered, but, of course, the world’s reaction wasn’t as dramatic as it was after France. It would appear that 9/11 has happened all over again. All those who consider themselves to be a part of the civilized world should not only understand where we have gone wrong over the past 15 years in the fight against terror, but also create new forms of joint and coordinated action.

Irina Mironova is Senior Lecturer on the ENERPO Program at the European University in St. Petersburg. The article was first published by Russia Direct.

The author is a political scientist and a member of the Council for Foreign and Defense Policy, a Moscowbased independent think tank.

TRUMP: THE KREMLIN’S TOP PICK FOR U.S. PRESIDENT?

Read Vladimir Putin’s column on APEC at

Bryan Macdonald COMMENTATOR

lthough the U.S. presidential election is still more than a year away, the candidates have said enough about Russia to give some indication of where U.S.-Russia relations are

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KONSTANTIN MALER

headed. If Russia’s leaders could vote, they’d probably back Trump for the Republicans. And they’d support anybody but Clinton for the Democratic ticket. Bill Clinton remains popular in Russia. Rightly or wrongly, he’s perceived as having been less hostile to the country than his two successors, George W. Bush and Barack Obama. Although Bill’s wife Hillary Clinton is now the bookmaker’s odds-on favorite to take the Democratic nomination, Hillary is not Bill, and times have changed. It’s impossible to imagine the former Secretary of State laughing and joking with Vladimir Putin as her husband used to do with Boris Yeltsin. In fact, Mrs. Clinton is regarded as a hardliner on Russia. Indeed, she’s criticized Barack Obama’s handling of the Ukraine crisis and proposed far stronger measures to support Kiev. Of course, Clinton’s position might well be preelection bluster, designed to cast her as a strong figure. Hoping to become the first female president, Clinton probably feels that she has to appear even tougher than her male opponents at times. In that regard, she’s borrowing from the playbook of Angela Merkel and Margaret Thatcher, two phenomenally successful female leaders. The Kremlin naturally fears that a new Clinton presidency would be far more hawkish than the previous Clinton administration. Currently, Marco Rubio is the long-term favorite in the race for the Republican nomination. The 44-yearold Florida senator is potentially even tougher on Russia than John McCain, a notorious tormentor of Putin’s government. In fact, Rubio, who has strong links to the Tea Party movement, has even won support from former McCain donors such as George Seay and Jim Rubright, according to Fox News. In May, Rubio penned a Politico op-ed in which he

called for further NATO expansion, including the accession of Ukraine. The idea is anathema to Moscow. Responding to the notion that NATO might send miltary advisors to Ukraine, Alexander Grushko, Russia’s envoy to the North Atlantic Alliance, told news agency Tass that “Moscow will take all measures, including military-technical, to neutralize the possible threat from a NATO presence in Ukraine.” Most analysts agree that should full NATO membership for Ukraine be proposed, Moscow’s reaction would be less than pleasant. NATO expansion may be the one topic of agreement between Rubio and his former mentor Jeb Bush, who may yet make an impact in the race. Bush views Putin as a “bully” and has called for larger troop deployments to the NATO-member Baltic states. Then there’s Trump himself. Although the billionaire’s candidacy was orignally viewed as a joke, nobody’s laughing now. Of course, some U.S. allies in Europe might be alarmed at a putative President

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Trump’s warm feelings towards Russia. This doesn’t seem to bother the candidate, who doesn’t have much sympathy for the Europeans. Trump also believes that Crimea is Europe’s problem and that the U.S. has no role to play in the territorial dispute. The Kremlin’s worst nightmare would be a ClintonRubio battle. In such a contest, Russia would make a convenient whipping boy for their foreign policy tussles. Worryingly for Moscow, Clinton-Rubio remains far more likely than Trump or any Democrat alternative to Clinton. Russia could easily find itself used as the electoral bogeyman du jour. It could be a long year. Bryan MacDonald is a Moscow-based Irish journalist who focuses on Russia’s role in international geopolitics. Read more at www.rbth.ru/opinion

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