Russia India
...Marching towards a common future
The big issue: Eurobonds Russia returns to the sovereign debt market
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BUSINESS REPORT
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Wednesday, may 12, 2010
A Report from The Economic Times In association with Rossiyskaya Gazeta
Boom time for telecom
Interview $20 bn target in India-Russia trade by 2015 won’t be a problem
New economic chemistry
The race for the burgeoning Indian telecom pie just got hotter. Russian-owned Sistema Shayam Teleservices is making its India dream come true.
Contrary to popular stereotype about military supplies dominating bilateral trade, civilian products account for as much as 80 pc of the trade basket, says Grigory Sarishvili, Head of Department at Russia’s Ministry for Economic Development.
Natalia Fedotova
Rir
Vladislav Kuzmichev Swapan Parekh_fotobank
RIR
kata, Chennai, Bangalore and Delhi). The main“perk”that comes with both CDMA2000 and 3G is high-bandwidth Internet access and all the opportunities that it brings. Web browsing speed under these standards is much greater than in earlier mobile
networks; it nearly matches the performance of cable Internet. “The CDMA2000 standard, which we are promoting in India, allows us to offer data transfer services at a level that in GSM networks is only available to 3G users,” says SSTL’s president and CEO, Vsevolod
Rozanov. Russian media reports say that SSTL has already built cellular networks using the CDMA 2000/800 in 11 of India’s 22 districts; its subscriber base approaches one million customers. CONTINUEd on page 4
Economy A stronger domestic demand is expected in the next few quarters
Optimism grows, as unemployment rates dip Prime Minister Vladimir Putin was upbeat on Russia's prospects during his annual report to the Duma, calling an end to the crisis, but admitting there was still a long way to go before Russia returns to stable growth. ben aris RIR
Russia's underlying economy has recovered faster than what a majority of analysts had hoped
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this year. The biggest fear that unemployment would rise through until the autumn, has failed to materialise, as the jobless rate in March remained flat at about 8 pc of the working population, following a fall in February. Indeed, nearly all economic indicators have had surprising results.The Central Bank of Russia (CBR) dismissed its own warnings that the sector could face a second wave of the crisis
in April; the CBR chairman, Sergei Ignatyev declared on April 15 that "there will be no second wave of the financial crisis". As the recovery gathers pace, the feel-good factor is also starting to percolate into the popular consciousness, which is reflected in both, spending and consumer confidence, both of which have risen steadily in recent months. Consumer confidence had risen for three months in a row by the start of April and
more importantly, retail sales have also started to increase again. Consumer spending (not oil prices) have become the main economic driver in recent years. Real incomes were up over 7 pc in 2009; so despite the crisis, the man on the street actually has more roubles in his pocket than ever before. Even so, spending power has been curtailed by the collapse of consumer lending, though this is also showing signs of life after state-owned retail banking giant, Sberbank reported an increase in lending in March for the first time in almost a year. CONTINUEd on page 6
SS H A P E Y O U R O W N V I E W O F R U S S I A
How has trade between Russia and India changed over the last 5 years? In absolute terms, it grew by 150 pc and in 2009, it amounted to $7.5 bn. Civilian goods dominated, accounting for not less than 80 pc of Russian–Indian trade. Russia’s main export goods were aviation equipment and spare parts, mineral fertilizers, fossil fuels, nuclear power station equipment,rolled steel,monitoring and testing equipment, electric power equipment and power cables,diamonds,newsprint and printed products. Russia’s imports from India included medicines, tea, fruit and vegetables, tobacco products, knitwear and textiles, freight and passenger transport vehicles, telephone equipment,graphite and ferrous alloy products, and fish.
Which sectors of the Russian economy might be of interest to Indian investors? Indian companies such as OVL, GAIL, Indian Oil, Coal India, Reliance Industries and TATA are already driving the Indian investment in Russia. India’s ONGC is participating in developing oil and gas deposits in the Sakhalin-1 project. It has acquired Imperial Energy,which is engaged in exploiting oil deposits in Tomsk Region. The ICICI bank is developing its subsidiary bank in Russia. TATA Motors has set up an assembly plant of Indian low-tonnage trucks. KUMI International has started production of abrasives inVolgograd Region. CONTINUEd on page 3
alexander sidorov_kommersant
An auction that began in midspring will allow Indian and international companies to compete for the right to build third-generation mobile networks in India. However, a subsidiary of the Russian telecom giant AFK Sistema has begun offering services similar to 3G in the Indian market much before that. The race for a slice of India’s lucrative telecom pie has just got hotter. Last November, Sistema S hya m Te l e s e rv i c e s L t d (SSTL), a subsidiary of AFK Sistema, a major Russian holding company, began marketing MBlaze, a new type of Internet service allowing data transfer at 3.1 MB/sec. Highspeed Internet access under the MBlaze trademark is available to subscribers in 24 cities, including every major urban centre of India (Mumbai, Kol-
We would be happy if our trade and economic relations could develop this dynamically with many countries. Our leaders have set $20 bn trade target with India by 2015. According to Russia’s customs statistics, in January–February 2010, our trade grew by 39.3 pc. At the same time, there is virtually no imbalance in the trade: exports and imports are both growing equally.
India's ONGC has shown interest in partnering with Russian oil and gas majors to invest in different regions of Siberia and North Russia.
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Companies
bookmarks
Russia india BUSINESS report
in association with rossiyskaya gazeta, russia THE economic times wednesday_MAY 12_2010
www.rosatom.ru/en The State Atomic Energy Corporation "Rosatom" www.tvel.ru/en TVEL Fuel Company, one of the world leading manufacturers of nuclear fuel
Ranking Brands are becoming more valuable and powerful in driving business growth worldwide
Branding across borders Russia's largest mobile phone operator MTS has been ranked among the top 100 most powerful brands worldwide, according to the third annual BrandZ ranking. Rebeccah Billing
MTS enters the chart in 89th place with a brand value of around $8 bn, making it the first and only Russian brand to make the top 100. The ranking by global market research firm Millward Brown identifies the world's most powerful brands as measured by their dollar value based on market data from Datamonitor as well as interviews with over a million consumers around the world. The top spot in this year's ranking went to Google for the second year running, with a brand value of $86 bn, followed by General Electric ($71 bn), Microsoft ($71 bn) and Coca-Cola ($58 bn).Two notable absentees from the top ten were Citi and
oleg kharseev_kommersant
The moscow news
Strong brands generate superior returns and protect businesses from risk.
Wal-Mart; both companies claimed strong top ten positions in previous years but in 2008, ranking slipped to positions 15 and 13 respectively. The study found that domestic brands from emerging economies are gaining momentum.
Chinese brands performed particularly strongly; the value of the four Chinese brands that made this year's BrandZ Top 100 have increased by 51 pc since last year's ranking to $124 bn. China Mobile was one of only two non-US based compa-
The number of poor declines
nies to make the top ten with a brand value of over $57 bn. Although MTS was the only Russian brand to make the top 100, several other Russian brands came close including the beer brand Baltika, which made the global beer top 20, claiming the 15th spot with a value of $1.086 bn: "Baltika is a very strong brand. It achieved one of the highest scores in brand contribution, which is the measurement of brand strength; since we measured this last year, its value has risen 20 pc," Joanna Seddon, CEO of Millward Brown Optimor said. Another Russian brand, which missed the final cut by a whisker, was MTS rival operator Beeline: "According to our estimates, Beeline just missed it; we estimated their brand value at about $6.6 bn which is just under the ranking," Seddon explained. This indicates a reversal of fortunes since BusinessWeek Russia published the first Russian brand ranking in October 2005,
which put Beeline firmly in first place with a brand value of $5 bn and MTS trailing in second with a value of $4.7 bn. Although it did not make the grade this year, Russia's largest oil business group, Lukoil, is predicted to feature in future rankings.The brand was ranked 8th in the motor oil category with a value of $851 mn. Overall, this year's ranking indicates that brands are becoming more valuable and powerful in driving business growth. Companies that own brands in the BrandZ Top 100 have significantly outperformed the stock market when compared to the S&P 500. The combined value of all brands increased by 21 pc from $1.6 trln in 2007 to $1.94 trln in 2008, more than double the increase experienced the previous year. "This year's brand ranking demonstrates the importance of investing in brands, especially in times of market turmoil. Strong brands generate superior returns and protect businesses from risk," Seddon concludes.
Energy The corporation can provide state-of-the-art technologies for a fuel fabrication enterprise in India
TVEL fuel company on a leadership path JSC TVEL plans to become a global nuclear technology leader and intends to actively develop cooperation with Indian partners. julia ivanova rir
TVEL enterprises have capacities to operate the Russiandesign NPPs that are currently under construction in India
abroad that has led to a string of contracts last year. As part of Rosatom’s nuclear sector reform to improve both efficiency and safety, the government has decided to establish a Russian nuclear fuel company based on the joint stock companyTVEL that will include enterprises manufacturing gas centrifuges, separation and sublimation complexes and fuel fabrication plants. TVEL remains state-owned, but since it is in the front line of the Kremlin’s efforts to take Russia’s
energy expertise beyond simply digging for oil and gas, the company has been working hard to reduce costs and increase efficiency of the fuel fabrication enterprise through investment and development.Today, the companyTVEL has already achieved a high level of production cost-efficiency and world class levels of profitability. Streamlining costs and raising efficiency have been core parts of the strategy to develop the company’s presence in the international market. One of the key de-
pr department
Attitudes towards nuclear power have changed in recent years as concerns over energy security and global warming mount. Concerns about the safety of nuclear power have been overtaken by the worries that carbon emissions will cause irreversible environmental damage on a global scale. Add to that, the fact that experts agree the world will run out of fossil fuels in the next few decades and there is little choice other than nuclear power to replace them. Russia is already one of the world’s leaders in the peaceful use of atomic power and in the coming years,it intends to develop the national nuclear energy sector, led by the state agency Rosatom. Plans are already on the table to build 26 new nuclear power stations in Russia in the medium term and more will follow. At the same time, Rosatom has been actively offering Russian technology to its partners
velopments has been a programme to improve the effectiveness of the fuel for Russian-designed NPP reactors and increase their power output.The success of the investment and reforms has left the company with strong competitive advantages that has allowedTVEL to win all the open tenders it has competed for so far. The company has also won longterm contracts to supply fuel to nuclear power plants in Slovakia, the Czech Republic and Finland. In addition, the company
News in brief
supplies nuclear fuel to many Western-design reactors as a part of its cooperation with the leading French energy conglomerate AREVA. Now, TVEL is getting ready to scale up again as a part of its role as the national nuclear fuel company.The goal is to significantly increase the company’s presence in global nuclear fuel market from the current 17 pc to 25pc by 2025. In addition,TVEL intends to increase the number of customers on the uranium enrichment market. The Indian market is one of the company’s priorities and Russia already has partnered with India on nuclear programme for several decades. One of the first agreements concluded by India after the waive of the exportcontrol restrictions in atomic energy by the Group of Nuclear Suppliers was the agreement concluded in 2009 with the TVEL on supplies of 2000 tonnes of uranium dioxide fuel pellets for the Rajasthan NPP. Moreover, a single contract for the Tarapur NPP on the supply of pellets with the 235 uranium enrichment upto 2.66 pc amounting 58 tonnes was concluded the same year. In March 2010, Russian Prime
In 2009, the number of Russia’s poor had declined in comparison to the previous year by 400,000 people, or from 13.4 to 13.1 pc, reported Russia’s Federal State Statistics Service.Today, 18.5 mn people are living below the poverty line, defined as the minimum living wage of an average of 5,153 rubles ($178) per annum. This is the lowest level in Russia since 1992. Meanwhile, Igor Polyakov, an economist for the Center of Macroeconomic Analysis, says that Rosstat has painted an overly positive picture, his estimates of the country’s poverty level exceed the official statistics by 5-6 percentage points. RIR
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MinisterVladimir Putin visited India where the principle agreements on the cooperation in atomic energy were achieved, in particular a roadmap for the construction of more than 12 nuclear power units based on the Russian technologies.TVEL enterprises have sufficient capacities to operate the Russian-design NPPs during their life cycle that are currently under construction in India. One of the main objects of the bileteral cooperation in nuclear energy field today is the Kudankulam NPP with twoVVER1000 Units of the total capacity amounting to 2000 MW.In 20082009, the company delivered the initial fuel batch and the first reloading nuclear fuel batch to the NPP. Later, the second, third. fourth and fifth batches were made for NPP Units 1 and 2. In 2009,TVEL developed the technical and economic offer for the delivery of the new fuel type based onTVS-2M.The improved assemblies give opportunities to use prolonged fuel cycles, to increase the unit capacity upto 104 pc and to generate additional upto 500 thousand MWh of electricity per year. India and Russia have also explored the possibility to set up a fuel fabrication enterprise on the territory of India if cost-efficient. In case India considers the construction of such enterprise worthwhileTVEL is prepared to provide state-of-the-art technologies and equipment.
BOOKMARKS
Cooperation
RUSSIA INDIA BUSINESS REPORT
www.rusembassy.in Embassy of the Russian Federation in India www.russiancentre.org.in/eng Russian Centre of Culture and Science in New Delhi
IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA THE ECONOMIC TIMES WEDNESDAY_MAY 12_2010
New economic chemistry
Are any contracts for high-tech products being contemplated? There is an intergovernmental agreement on cooperation in the use of nuclear energy for peaceful purposes, and a“road map” was signed during Russian Prime Minister Vladimir Putin’s visit to India in March. Space cooperation is developing.A document has been signed on the creation of a joint venture to produce equipment to receive signals using the GLONASS system. A system of satellites will soon be put into orbit, and this will provide extensive coverage and access across the world. What’s more, GLONASS is cheaper than its main rival. Russia could also offer India an advanced telehealth system which has a range of competitive advantages. Will the outcome of the BRIC on April 15 change the global economic picture, and how will it influence the development of trade within the club? We believe that opportunities
NIKOLAY KOROLEV
Grigory Sarishvili, Head of the Department of Asian and African Countries at Russia’s Ministry for Economic Development.
will emerge in the areas of trade and investment cooperation, and also in improving mutual accounting in national currencies. We believe that the crisis has bottomed out and the BRIC countries are beginning to emerge from recession. Joint projects will not only have the most positive effect on trade within the club but will also create synergy – both for the economy of the group itself and for the global economy as a whole.
How is cooperation going to develop in agro-industry? In the last 2–3 years Russia has regained its position as a major world exporter of grain, which has been reinforced by its exports to India and China. India itself provides a lot of grain. However, because of climate instability and the rapid population growth, India is exploring
What’s behind Russia’s increased activity on the grain market? Only recently Moscow itself needed to import this type of produce. What helped this a lot was the bringing of order into the agroindustrial sector in Russia and fine-tuning of some specific financial instruments. Last year, we even increased the areas sown, improved the quality of storage and processing of agrarian produce, and ironed out the logistics. A discussion is under way with some foreign investors about the possibility of them being involved in work to create a port, an elevator and a trans-shipment base in the Far East. Plans are also being developed to expand the capacity of the TransSiberian Railway. There is a view that the BRIC countries regard Russia primarily as a source of energy resources. That’s not the case. For example, Russia’s relations with India include many joint projects in areas of telecommunications, space, and nuclear power station construction.We recently reached an agreement on the construction of new blocks at the power station in Koodankulam, and a site has been allocated for construction of a nuclear power station in Haripur (West Bengal).This pact also provided
PHOTOXPRESS
The Mahindra company is interested in building wheeled tractors in Russia.We have talked to the management of the Russian Tractors company and they confirmed that there are still niches in the tractor range in Russia that are not covered. But at the same time, our manufacturers are also interested in assembling tractors in India, although these would be heavy ones.This is a two-way street.
NEWS IN BRIEF
the possibility of a long-term agreement on grain supplies with Russia. There is also talk of doing this in China.
CONTINUED FROM PAGE 1
Russia can offer India an advanced tele-health system, which has a range of competitive advantages.
for the serial construction of reactors in India, which will not only make it more cost-effective for India, but will also spur localized production. Indian
companies will be involved not just in the construction work, but also in planning and construction the buildings and structures.
Import/export structure
ALEXEI CHICHKIN
ROSSIYSKAYA GAZETA
The Indian Business Alliance (IBA), an association of Indian businessmen in Russia, in April prepared a research report on the financial, economic and social trends in Russia’s regions. The report, signed by IBA Se-
nior Vice-President Atul Khurana, was entitled“Russia is more than just Moscow.” The report notes in particular: “Russian business is mainly concentrated in Moscow. But Russia effectively only starts outside the Moscow ring road…”Regarding post-crisis recovery, it notes: in the majority of regions this process will take much longer than in Moscow and St Petersburg, since these two megapolises are the biggest financial and economic centres in the country.“Moscow
was also ‘awash’ in ‘oil money’, and was one of the most noticeable centres of consumption on the planet.Yet many regions are literally bogged down in oppressive poverty…”According to the report, only 14 out of approximately 80 regions of Russia are still donors to the federal budget. In reality, the oil and gas regions – the Timan-Pechora basin,Tyumen Region, Bashkortostan and Tatarstan – earn big money, along with Moscow and St Petersburg. But this tends to aggravate the econom-
Investors sign off on anticorruption pact The leading foreign companies working in Russia pledged their support to the government's growing anticorruption drive by signing a pact in the middle of April. Corruption remains a cancer that is holding Russia's economic development back and costs the state upto $300 bn a year, according to some sources. Since the start of this year, the government has upped the stakes and started Russia's first serious drive to combat graft.The police force is being reformed and the state has set up two new anti-corruption units in both, the General Prosecutor's office and the Interior Ministry that oversees the police force. A total of 40 members of the Russian-German Foreign Trade Chamber, representing some of the leading foreign investors in Russia, came together and signed off on the non-binding pact. RIR
US, Canada and Denmark back Russia’s entry into WTO
SOURCE: WWW.ECONOMY.GOV.RU
Looking beyond the Moscow ring road Indian businessmen working in Russia have identified the nine constituent regions of the Russian Federation with the best climate for investment.
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ic imbalances between the regions and the problems in Russia’s overall anti-crisis policy. Regarding regional policy, the report notes that“the government is unhesitatingly putting financial resources into the poorest regions, because the economic recession has increased the pressure on their budgets by reducing their tax revenues. But such ‘injections’ of money into the regions may well make it more difficult to fulfil the government’s $1 trn programme to develop the re-
gional and inter-regional infrastructure.” Regarding the regional climate for investment, the report identifies the nine regions with the best investment climate, citing recent research by Deutsche Bank: Moscow, Moscow Region, Saint Petersburg, Samara Region, Krasnodar Region, Nizhny Novgorod Region, Tatarstan, Rostov Region and Bashkortostan. According to the Indian analysts’ date, these account for almost half of Russia’s GDP.
A number of countries, among them the United States and Canada have last week offered support for Russia's bid to accede to theWorldTrade Organisation (WTO). Washington is positive about Russia's plans to join the WTO, US Assistant Secretary of State Philip Crowley said at a daily press briefing in Washington. "The issue of Russia and the WTO did come up as a part of our efforts to deepen economic cooperation, not only with the United States but with other major trading countries around the world," he said. RIR
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Technologies
Russia india BUSINESS report
in association with rossiyskaya gazeta, russia THE economic times wednesday_MAY 12_2010
bookmarks
www.sistema.com AFK Sistema website www.mtsgsm.com Mobile TeleSystems website www.mtsindia.in MTS India brand of SSTL which operates on CDMA technology
telecommunication
It's boom time for telecom With an exploding demographics and a surging middle class, India is the dream destination for telecom companies. continued from PAGE 1
olga kirsanova_kommersant
But given the huge potential of the burgeoning Indian telecom market, the Russian state is reported to be interested in backing SSTL with cash to help scale up its presence in the Indian market. The Russian State Duma’s Budget and Tax Committee have recommended that the lower house of parliament okays the purchase of a stake in SSTL for $676 mn. The deal was supposed to go through last year. However, due to disagreements between Russian authorities, the money was not spent in 2009 and the 2010 budget does not mention any such expenditure. The competition is intense. Until 2018, capital expenditures by the Indian subsidiary of AFK Sistema will amount to $2.3 bn, “an insignificant amount", according to Ilya Fedotov, director of the stock market analysis department at Veles Capital Investment Company. In comparison, one year before,Vodafone, which is also working in India, said it would invest about $2 bn in the market in 2008–10.“It is important
to realise that an investment program implies not only application of funds, but also cost reduction. India is a very special country; a number of cellular operators work in the same state and there is a constant interplay of interests,” said Rozanov.“That’s why, for example, the joint use of infrastructural equipment is so widespread here: a number of operators can share one tower or one operator can buy traffic from another for subsequent resale to end users,”he added. The cash infusion in SSTL would go a long way.Vladislav Kochetkov from Finam Investment company, notes that the whole idea of the Russian government purchasing a share in SSTL emerged during the crisis and that now AFK Sistema could probably acquire debt financing.“But since Russia is India’s strategic partner, its holding a share of the Indian subsidiary is still on Sistema’s agenda, as it will simplify lobbying in India,”he said. According to plans made last year, after an additional share issue, the Russian government could own 20 pc of SSTL. Since local legislation does not allow
The “Big Three” group of cellular operators in Russia include MTS, Vimpelcom and Megafon (see their logos on the picture)
Understanding Russia’s demographic challenge
foreign investors to own over 74 pc of the shares in telecommunications companies, AFK Sistema will have to reduce its share to 54 pc. To this end, India’s Shyam Group, which sold the controlling stake in SSTL to Sistema and which now owns 24 pc of the operator’s shares, will also take part in issuing additional shares. The group will buy 7 pc of the operator’s shares for $47 mn; the preference price of one share for Shyam Group is Rs 10 rupees, whereas Russia will purchase the securities for 49.3 rupees ($0.93) a share. The transaction is to be credited against India’s Soviet-era debt, which approaches one billion dollars. According to an agreement signed by the two countries, Russia can use this credit solely for investments made on Indian territory. A spokesman for AFK Sistema noted that his company and other Russian firms do not work on Indian soil.This transaction is, therefore, a good opportunity for Russia to unfreeze funds that are currently of no use and invest them in a promising, developing business. The attractions of the exploding demographics and increasing upward mobility in India are added attractions. Russian experts are upbeat: the country’s population is expected to exceed 1.5 bn; the real GDP growth should continue at one of the world’s highest rates (about 10 pc); telecom market volumes should double to $60 billion by 2014 and mobile penetration should increase from 29 pc in 2008 to over 80 pc in 2014. India’s telecommunications market is highly competitive: 13 operators work in the country. AFK Sistema has, therefore, chosen a“double impact” strategy and placed its bets on
improving voice communication and developing data transfer services. With monthly growth rate of its subscriber base at 15 pc, SSTL has emerged as the most aggressive newcomer in India’s cellular market. This is an excellent performance, given the strong competition on India’s market, notes Boris Solovyov, deputy director general of ALOR Group. SSTL is the only company that holds an universal pan-Indian license for telecom services and frequency coverage of the entire area, with exposure to 1.13 bn people. However, at this point, the operator’s share, as estimated by the Telecom Regulatory Authority of India, does not exceed 1 pc. As of today, four billion subscribers use the services of SSTL. The biggest players in the Indian market are Bharti, with a share in excess of 22 pc and Reliance with 17.63 pc. SSTL has declared its intention to expand its subscriber base to 35 mn in 2012 and cover 7 pc of the market. “As of today, we can offer no predictions concerning the subscriber base. As far as financial indicators are concerned, we plan for SSTL to
achieve positive EBITDA by 2013 and an increase in revenues to $1.5 bn by 2014,” said SSTL’s president. During the fourth quarter, Sistema Shyam TeleServices Ltd’s revenues reached $14 mn; for 2009 as a whole, they reached $36.4 mn. This projected revenue growth would be possible only with a fresh influx of cash. AFK Sistema’s cash fund as of third quarter of 2009 was $7 bn with MTS accounting for $4.2 bn and Comstar contributing $290 m n . Fu n d s ava i l a b l e o n Sistema’s accounts, however, do not exceed $2.6 bn. Although indicators suggest that SSTL plays an insignificant role in AFK Sistema’s earnings profile, Fedotov says, “Sistema will have a hard time developing its business in India without the support of the government.” While different avenues are being explored to finance expansion plans of SSTL, it is still possible the Indian subsidiary may venture to raise funds on its own. Rozanov has indicated that an IPO is a possibility. AFK Sistema has stated that“company shareholders view an IPO as an instrument that could increase shareholder value. If a decision to con-
duct an IPO is made, a local stock exchange is likely be chosen as the primary exchange.” SSTL is not the only Indian project of the Russian holding. Last year, AFK Sistema registered Sitronics India, another Indian subsidiary. Shipments of RUIM cards (analogues of SIM cards in CDMA networks) for SSTL have already begun (the contract amount for 2009 was about $3 mn). In addition, a three-year CRM & Billing system contract with the operator worth $64.2 mn has been concluded. AFK Sistema is holding negotiations and consultations over the construction of emergency control centres, the establishment of coastal economic zone monitoring systems, security systems for municipal structures (“A Safe City”), and the introduction of state-of-theart technologies using the GLONASS satellite navigation system. AFK Sistema is determined to make a success of its India dream. “India is nearly the only country in the world where an impressive market potential is combined with unique opportunities for investors,”says Rozanov.
in@rbth.ru
in.rbth.ru/letters
bookmarks
Technologies
Russia india BUSINESS report
www.ictrussia.com IT and telecommunications sector in Russia eng.megafon.ru Megaphon website www.vimpelcom.com Vimpelcom website
in association with rossiyskaya gazeta, russia THE economic times wednesday_MAY 12_2010
Trends Mobile broadband services are driving the market
Russian telecom: gearing up for 4G New technology applications and diversified holding companies are the key future trends in Russian telecoms.
neighbouring Uzbekistan. The project should be completed by 2012. Expansion of 4G and broadband Internet access are the prevailing trends in the Russian telecommunications market. While the number of subscribers who use voice services appears to be no longer growing at the impressive pace it previously demonstrated, the army of mobile Internet users is swelling at double its earlier rate. In 2009, MTS expanded its broadband customer base by 39.8 pc over the 2008 level to a total of 1.3 mn subscribers. An analysis from Frost & Sullivan, Mobile Broadband in Cen-
Venera Reztsova rir
RIR Dossier: AFK Sistema and SSTL AFK Sistema is the largest diversified public company in Russia and the Commonwealth of Independent States. Its principal shareholder, Vladmir Evtushenkov, owns 62.13 pc of the holding’s stock. Its net profits in US GAAP at the end of the third quarter of 2009 totaled $1.684 bn (gross: $5.3 bn). Its overall assets exceed $41.9 bn. AFK Sistema owns assets in the telecommunications sphere, real estate, banking business, tourism, medicine and high technology. Its strategy has been to create leader-companies in promising markets. Its shares have been listed on the London Stock Exchange in the form of global depositary receipts under the SSA ticker. The holding’s ordinary stock is traded on the RTS and MMVB exchanges as well as on the Moscow Stock Exchange. Moody’s has given the company a rating of Ba3, prognosis “stable”; the Fitch Agency has given the company a similar prognosis, but with a rating of BB. AFK Sistema is one of the first private companies in Russia to open an office in India.
Sistema Shyam TeleServices Ltd (SSTL) is a daughter company of AFK Sistema holding and the Shyam Group. The Russian side owns 73.71 pc of the shares in this Indian operator. SSTL was created in 1998. On 30 September 1998 it began offering mobile telephone services with the CDMA2000 standards. Today SSTL is licensed in all 22 of India’s telecommunications districts. In March 2009. Sistema Shyam TeleServices was given the opportunity to use the MTS brand in its image and advertising communications within India. As of January 2010 the company had some 3 mn subscribers. SSTL’s services are used by residents of Rajasthan, Tamil Nadu (including Chennai), Kerala, Calcutta, West Bengal, Bihar, Delhi, Karnataka, Mumbai, Haryana and Maharashtra. The operator’s subscriber base is growing at a rate of roughly 15 pc a month. By 2012 SSTL plans to expand its base to 35 mn subscribers, and by 2013 to achieve a positive EBITDA (earnings before interest, taxes, depreciations and amortisation).
Expansion of 4G and broadband Internet access are the prevailing trends in the telecom market tral and Eastern Europe, notes that the market generated revenues of €1.1 bn in 2009 and forecasts that revenues will reach €5.2 bn in 2014, with Russia accounting for 50 pc of that growth. Broadband penetration in Russia is currently only 6 or 7 pc versus 30 pc in Europe and 15 pc in Hungary and Poland,
MAXIM MARMUR_afp
afp
India has become one of the fastest-growing mobile markets in the world.
Over the last ten to twelve years, the Russian mobile communications market has been booming. Before the 1998 public debt crisis, mobile phone ownership was a privilege of affluent consumers but today the number of registered SIM cards greatly exceeds the total Russian population. “This is not so surprising after all. Mobile phones are used even by pre-schoolers and grannies who no longer need to walk all the way downstairs for a chat with a neighbour,”says Ilya Fedotov, a telecommunications market specialist atVeles Capital. According to J'son & Partners Consulting, Russians have about 209.1 mn SIM cards.With a population of approximately 143 mn people, mobile market penetration has reached 147.3 pc in Russia. Today, the market is dominated by MTS, a subsidiary of the AFK Sistema group that serves 33 pc of Russian subscribers. The other members of the“Big Three”group of cellular operators include Vimpelcom and Megafon – each with a market share of 24 pc.The remaining 19 pc subscribe to smaller providers. Fighting for their clientele, Russian mobile operators have come up with increasingly comprehensive service packages and are now about to roll out their fourth-generation (4G) project.The main difference between 4G and 3G service is higher speed data transmission. On 28 May, the Russian State Radio Frequency Commission plans to approve pilot zones to test LTE (4G) technology in four federal regions that will tentatively include the Primorskiy Krai, Kostroma, Rostov and Sverdlovsk regions. LTE-based systems can support upto 326 Mbit/sec downlink speed (from base station to device), while handsets will be able to send out streams of data at upto 172 Mbit/sec. MTS was the first Russian operator to start building a 4G network in
which indicates vast potential for the market. "Most of the market participants start mobile broadband service development from large city centres, where they can count on relatively quick returns on investment," states Frost & Sullivan ICT Research Analyst Edyta Kosowska. This move is still economically justified, as the highest demand comes from people with increased mobility needs such as corporate employees and students. "However, in the near future, growth potential will be mainly visible within rural areas, where overall broadband penetration remains relatively low.Therefore, focusing on this target group can be a worthwhile consideration," adds Kosowska. Fitch Ratings also believes that the broadband focus of Russian companies makes very good sense and expects that line of business to drive revenue growth in the future. The Ebitda of Russian mobile operators, which hit historic highs in 2009 on the back of recession-forced cost optimisation, is likely to come under moderate pressure in 2010 as cost-cutting efforts lose momentum. Experts say mobile operators will be keen to expand their retail phone businesses, which have been weaker earners. Vimpelcom,
With a population of approximately 143 mn people, mobile market penetration has reached 147.3 pc in Russia.
05
one of the three Russian telecom giants, already took the first steps in this direction when last autumn, it bought a stake in Evroset, a major mobile device retailer in Russia. Another prominent trend is consolidation of mobile companies seeking to maximise their service offerings. In 2008, Vimpelcom bought two large Internet providers within the space of six months, Golden Telecom and Korbina. Another player from the Big Three cellular group, Megafon, decided to take a stronger foothold on the long-range communications and broadband market. To this end, the operator plans to acquire a 100 pc stake in Sinterra, a national fixed-line operator. In a similar vein, Svyazinvest, the government-controlled holding group, is undergoing a reorganisation to consolidate its seven regional subsidiaries within Rostelecom by May 2011. As a result, the Big Three will turn into the Big Four. AFK Sistema is also taking steps to keep up with the competition. In April 2010, it bought SkyLink, a mobile broadband and voice service provider. The deal is a part of a larger asset swap with Svyazinvest, in which Sistema will hand over SkyLink in exchange for the Moscow Telecommunications Network, a Moscow fixed-line operator. "The telecommunications sector stepped into 2010 in good shape after having sorted out liquidity, refinancing and exchange rate hassles inflicted by the credit crunch. And this positive trend is likely to continue," says Fitch spokesman Artyom Frolov.
06
Banking & Finance
Russia india BUSINESS report
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in association with rossiyskaya gazeta, russia THE economic times wednesday_MAY 12_2010
en.rian.ru/business RIA Novosti newswire www.businessneweurope.eu Stories on businessin Eastern Europe and the CIS www.minfin.ru/en Ministry of Finance of Russia
Borrowing Foreign cash waits in the wings as Russia launches its first Eurobond issue in 12 years
Keen international interest in Russia's Eurobond issue points towards an underrated economy with strong fundamentals. Clare Nuttall
Business New Europe
Russia made a sparkling return to international credit markets with its first sovereign Eurobond issue in 12 years to raise a total of $5.5bn - the second biggest dollar issue on record. What a difference a decade makes! The Russian government was forced to default on its international debt in the wake of the financial crisis that swept the country in the summer of 1998, costing international holders of its bonds some $40bn in losses. However, investors were champing at the bid to get a piece of the action this time round with the offer at least three times oversubscribed with record low yields for a Russian bond. On April 22, Russia sold $2 bn worth of five-year bonds and $3.5 bn in 10-year bonds. In terms of pricing, the fiveyear portion pays a coupon of 3.625 pc and spread of 125 basis points over US Treasuries, while the 10-year tranche pays a 5 pc coupon and spread of 135 basis points over Treasuries. The world has been turned upside down by the crisis. While Greece is sagging under heavy public debt, Russia not only has almost no debt to speak off (Capital Economics predict 9.5 pc of GDP by the end of this year), but also has well over $400 bn in hard currency reserves.That’s five times more than either the USA or Britain, making it the third richest country in the world in terms of cash. While Greece will struggle to pay off its bonds as it staggers under a 12 pc budget deficit, Russia has $24 in cash to cover each dollar the government plans to borrow. Russia is enjoying a mirror image of the problems its more developed peers are facing. For example, Britain is one of the most indebted countries in Europe after it borrowed a massive $245.8 bn last year, ratcheting up its debt against reserves. America is in similar dire straights. Nonetheless, Russia’s pubic finances are still under pressure. It needs to finance a budget
deficit that will come in-between 3 pc and 8 pc (depending on the price of oil) and needs to raise funds to get it through this lean patch. Russia’s finance officials are planning a tour of Asia, Europe and America to promote Russia’s first Eurobond sale since 1998 – 12 years after it defaulted on its bonds during its last big crisis – and they are confident that they will be able to tap the markets for relatively cheap money. “Borrowing terms will likely be very advantageous,”finance minister Alexei Kudrin told reporters earlier this month. The market understands that Russia is able to borrow domestically if the terms aren’t, “extremely favourable”. “Kudrin is right to be confident,” says Liam Halligan, chief economist with Prosperity Capital Management. “Since taking office in May 2000, he has built a massive reserve base and paid off almost all sovereign debts. Russia is launching this Eurobond as one of the world’s most fiscally secure nations – a reality likely to cause mainstream Western investors to reassess a range of Russian assets.” Kudrin has the authority to borrow upto $17.8 bn, but as oil prices breached the $85 per barrel level at the start of April, money is starting to pour into the country and most experts
16.6 Ukraine
12.5 Hungary
8.1
Russia
National average: 14
SOURCE: Bloomberg
P/E comparison emerging markets The price/earnings ratio measures a company’s stock value against its earnings. The lower the ratio, the better value a stock is seen to be.
vasily shaposchnikov_kommersant
Kudrin invites investors to a big, new bonding session
Optimism grows, unemployment rates dip continued from PAGE 1
The economy is creaking back to life as retail sales also rose for the third month in a row, up 2.9 pc over the first three months of the year, the State Statistics Service said Retail sales were up only 0.9 pc in February. "For the next few quarters, the downward unemployment trend and signs of a pick-up in bank lending point to stronger domestic demand; also, the external growth outlook is improving," says Anna Zadornova, an economist at Goldman Sachs. Companies are adding workers because of mounting confidence that demand and profits will continue to improve. Manufacturers cut jobs in March at the slowest pace since September, while employment in service industries stabilized and was unchanged from February, according to purchasing managers' indices published byVTB Capital. Russian finance minister Alexei Kudrin has been given a free hand to borrow billions of "Domestic demand is finally redollars abroad bounding," Alexei Moiseyev, a senior economist at Renaissance Capital, wrote in a note expect Russia to borrow half “bonus” for being too big to premiers, has spent 10 years on April 12. or even a quarter of this fail. trying to rebuild his country’s Renaissance Capital raised its amount. On the flip side, Russia is un- fiscal reputation. The idea of a second-quarter growth outlook to 8.3 pc from 7.9 pc in April on The price of the bond will high- derrated given the strength of deliberate default is absurd.” light the overly cautious stance its financial position. Consider There are already signs that in- the back of rising domestic deof most rating agencies on Rus- that on the day Iceland de- vestors are cottoning onto the mand while predictions for the sia. Currently, Russian sover- faulted on its debt at the start strength of the Russian bond size of the budget deficit at the eign debt has a BBB rating, of this crisis it enjoyed higher offering. After US investment end of this year have fallen from which is only three notches ratings than Russia. Today, bank Lehman Brothers col- 6.8 pc of GDP to a bit less than above junk-bond status. At the Russia’s BAA1 rating from lapsed, the spreads on British 2 pc now. same time, the US and Britain Moody’s is still the same as credit defaults swaps – a kind With the economy bouncing have (so far) kept their AAA bailout-dependent Iceland’s. of insurance against bond de- back more strongly than exratings, despite their worsen- Fitch and Standard & Poor’s faults by the issuer – have pected, Putin in his annual report chose to focus more on a ing situations. currently class Russian debt as soared by 281 pc. Most economists are predict- B B B – e v e n l o w e r t h a n “The government isn’t issuing raft of long-delayed social iniing Europe’s external debt to Moody’s. the bond to raise money. It al- tiatives designed to provide rise from 100 pc of GDP to 130 “These ratings seriously un- ready has plenty of money,” better social support to the poppc over the next five years, derstate Russia’s ability to ser- says Mr Halligan.“The main ulation and generally improve while that of Russia is expect- vice and repay its debts,” says reason they are issuing the people's standard of living. ed to start falling. Analysts say Mr Halligan.“Some say they bond is to draw attention to the Putin said that the healthy state that the ratings of developed reflect the risk that Russia Russian economy, force the finances (Russia remains the countries have disconnected might ‘choose to default’. government to explain its re- third richest country in the with reality, while countries “Yet Russia’s political elite was form agenda better and help world in terms of cash in the such as Russia are being pena- traumatised by 1998; Kudrin, ‘decontaminate’ Russia as a bank) allowed the government to move swiftly to avert the lised. with the blessing of successive place to do business.” worst shocks of the financial “On the basis of our model, the crisis without the need for ex[best possible] AAA rating for ternal funding. the US and Britain cannot be Despite a sharp drop in reveexplained, as these two counnues last year, budget spending tries are rated two to three (March 1, 2010) was not cut, and part of the outrating notches better than lays were redirected towards countries with comparable social spending, Putin said. fundamental data,” Ingo 5-year spread Since Lehman Brothers He used the speech to announce Jungwirth, an analyst with (basis points) collapse (change in pc) that the state was going to build Raiffeisen International wrote Russia 176.9 -17 11 state-of-the-art hospital fain a study in March. Portugal 165.2 +270 cilities around the country and This study found that, based on Ireland 144.3 +319 his comments follow those of the country’s finances, both the Italy 129.6 +176 Deputy Prime Minister Sergei USA and Britain should be Greece 369.1 +550 Ivanov who announced earlier downgraded three notches to a Spain 130.1 +195 that starting from this year, simple AA. However, if the ratUS 45.7 +117 Russia would "spend more on ings agencies actually went UK 86.5 +281 education than it does on its through with a downgrade, the Iceland 525.3 +90 military," or 4.4 pc of GDP. cost of borrowing to both counSOURCE: Bloomberg, PCM Putin also announced that the tries would spike, sparking a health insurance contributions financial crisis that could Credit default swaps measure the market's interest in bond inof employers would go up at the wreck the global economy for surance. The higher the number, the more likely the country – as start of next year by 2 percentdecades. Jungwirth suggests viewed by the global market – is to default. age points to 5.1pc. that these two countries earn a
Russia versus the West: credit default swaps
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www.cbr.ru/eng Central Bank of Russia www.rts.ru/en RTS stock exchange www.rencap.com/eng Renaissance Capital www.rbcnews.com English-language business news
in association with rossiyskaya gazeta, russia THE economic times wednesday_MAY 12_2010
Banking & Finance
07
Interview Retail and housing sectors could be the key drivers of economic growth
Major US oil fields returning to production will not satisfy global energy demand, says General Director of Zerich Capital Management Alexander Shcheglov. Vladislav Kuzmichev
The credit crunch is over but the RTS index is about 25 pc below its pre-crisis level. Why? It is important to recognise that the price peak before the collapse was driven by the bubble effect. As early as 2007, serious financial experts were warning that all financial markets had been heavily oversold. These were not simply alarmists who make it their business to horrify the public with apocalyptic predictions. In 2008, everybody understood that things were too overheated to buy any stock. Still, investors could not bring themselves to believe that the obviously soaring market would soon collapse. That
from personal archives
rir
Has the Russian stock market recovered? Yes. Based on all conventional indicators such as turnovers, price benchmarks, etc., we can confidently say that the Russian market has seen a rebound. We are past the global crisis and will see a growth trend for another 5-10 years until the next downturn. If you want to make long-term investments, it is just about time to enter the Russian stock market and start generating value.
Alexander Shcheglov, General Director of ZCM is why when trouble eventually struck as the fall was so steep. It will take some time before the market can scramble back to its historic highs. We won’t see it for another year or two, but the current level already reflects good progress.
Although Russia is moving in that direction, right now, our stock market is nothing but a minor auxiliary tool for attracting investment into the economy. The bulk of capital comes from oligarchs, the government or foreign investors. We are trying to make our economy public, but we have to overcome many challenges. One of them is the mindset of corporate leaders who prefer the model, under which businesses are controlled, either by a physical person or government agency. Therefore, even IPOs are seen as a way of tapping larger capital sources rather than increasing the value of the business.
What is happening in the IPO market? The Russian IPO market is already stirring to life. RusAL is a great example. Although the aluminum giant had government anchor investors to back it, the floatation did raise some public money.The bond market does not look bad, demonstrating even faster recovery. But I would rather not make any specific forecasts.
The Russian economy has been slower to recover than the stock market. What are the reasons for this? The Russian stock market is considerably different from the classic American model. The stock market in the United States is one of the major financial sources that fuel the economy. Most American companies are public corporations, private but owned by teams of shareholders, rather than one person. The stakes of the biggest shareholders hardly exceed several percentage points.
What issuers could be of interest to investors? The retail sector is getting back on track. It had to pay huge debts, but the business itself has not been affected because all people, wherever they are, have to eat. Consumers are about to start regaining their purchasing power. Salaries will
go up. Additionally, the share of retail chains on the Russian market is not as big as in Europe. So even if consumers do not get any richer, the big retailers will be able to grow by acquiring smaller competitors. Realty developers have brilliant prospects. Home ownership is limited in Russia and people will be looking to buy one. Russia did not have the subprime problem, which triggered the credit squeeze in the United States. American lenders offered mortgage loans to people who by definition could not have a home due to their marginalised situation in life. Russia, conversely, was short of housing even before the recession and the industry was struggling to catch up with demand. Companies had procurement problems with all kinds of supplies, including cement and construction vehicles. There are also conventional drivers such as commodity markets. As we can see, oil and gas prices have been recovering too.
Can the shale gas fever affect this recovery? Not much, really. The Americans have created excessive petroleum supply in the market. But let’s look beyond the shortterm horizon. Energy demand is bound to grow. There will be two centers of demand. The emerging Asian economies, the traditional pre-crisis demand
itar-tass
Stakes are high for stocks
The world's largest aluminium producer RusAl's successful IPO in Hong Kong opened doors for other Russian and CIS issuers
drivers, will be joined by the United States and Europe. In this context, bringing large hydrocarbon fields back online in the United States makes sense, as this will smooth over the spike, but it will not be able to satisfy all the demand. This dual-sourced increase may lead to substantial energy shortages that will take all kinds of resources, including shale gas and alternative energy, to alleviate. But the challenge is that shale gas has little time left to make it to the market, because the unconventional fields will be able to reach planned production targets only in 5 to 10 years. As for alternative fuel, its share is too small in the global energy mix. It is more of a political tool, which is used to put pressure on producers.
Fund Renaissance Group hopes to capture emerging markets' asset management franchise
Russia’s asset management business is up for grabs. The CEO of Renaissance Group, Stephen Jennings argues that Russia has just begun a new “super cycle” and is looking at about a decade of stellar returns. Ben Aris rir
New Zealand born and only foreigner to have been dubbed“oligarch”in Russia,Jennings founded the group in the mid-1990s and was worth over a billion dollars just before the crisis struck. But the banking group survived and on Febraury, he launched the new fund Renaissance Asset Management (RAM) with $800 mn in assets,which he hopes will be worth $10 bn in five years' time.
“RAM will be the pre-eminent asset manager in Russia, emerging Europe and Africa,”Jennings said in lilting accent of his homeland that is slightly out of place on the frozen streets of Moscow. “A huge amount of development already has been archived in Russia with equities, banks and the like, but asset management has yet to start.The largest firms in 5-7 years' time will be very large and valuable.” Predicting this kind of growth anywhere else in the world would raise scoffs of disbelief – but not in Russia. Over the last ten years, the Russian equity market returned just under 750 pc, easily beating out the second best performing market in the world, China, which was up 190 pc, according to equity rating company Morningstar (and that
yury martianov_kommersant
Cashing in on the growth prospects
CEO of Renaissance Group, Stephen Jennings is including the loses made in the recent crisis). The trouble is that over the last 13 years, Russia has always been in either the three best performing markets in the world – or the
bottom. Investing into Russian stocks is all about timing and if you get it right, the returns are huge. This is why Jennings has chosen now to launch the fund.The Russian stock market lost nearly 80 pc of its value in just a few weeks after a“death spiral”of selling began in September 2008. The market bounced back at the start of 2009 and returned nearly 150 pc for investors brave enough to go back in. But as RAM’s manager Bulgarian born Plamen Monovski points out, the market needs to rise 400 pc just to attain all the ground it lost last year.Thanks to Russia’s bad image, it remains the cheapest of all the world’s significant equity markets on a price to earnings basis. “The time to invest is now,”says
Monovski.“Emerging market discounts are currently at a all time high. Russia had a horrible crisis but unlike last time, this crisis didn’t decimate the economy.You will pay a lot less for growth and profits in Russia.We are certain that this market will grow for a long time.” And if anyone can realise Jenning’s dream,the London-based Monovski can. He joined RAM as a chief investment officer, got designated in February coming from leading US hedge fund Blackrock, where he built up their emerging Europe fund from a $80 mn exotic oddity into a $9 bn powerhouse and top ten performing fund in the world during the 1990s.And Monovski hopes to do it all over again; the crisis has knocked Russia’s equity market back several years
Another BRIC summit has been held in Argentina. How could it influence the global and Russian economy? What unites us, perhaps, is the fact that western countries who are so far the real global leaders have acknowledged our presence. Today, we are witnessing a dramatic transformation of the classic three-world model. Whereas the developed economies are happy with 2 or 3 pc growth, the third world is facing wider financial gaps between its members. One part of that world, including BRIC and such countries as Indonesia, Vietnam, South Africa and some others are edging closer to the leading nations. The other part, mostly in Africa, is degrading into even starker poverty.
of development and he argues that it will simply repeat the same performance of the last decade. “There will be a boom of unprecedented proportions,”says Monovski. “Russia is currently amongst the cheapest markets in the world and we have just started out on the next cycle. The market seems like it has done a lot already, but really it still has a lot to do. Currently, the funds in the company are being offered to institutional investors, but as the fund will receive UUU status approval in June, it will become available to retail investors around the world. “Building up the fund is going to be a long, slow process as we are in the business of winning trust and you can only do that by consistent long-term performance,” says Monovski.“The goal is to be the best in breed and give access to investors large and small to opportunities that are currently unavailable to them.”
08
Feature
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IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA THE ECONOMIC TIMES WEDNESDAY_MAY 12_2010
english.pobediteli.ru WWII in Russia eng.9may.ru Victory day. A RIA Novosti project on the history of the Great Patriotic war. en.paradpobedy.ru Victory parade mulimedia website
Interview A renowned military expert, economist and historian on the peculiarities of the war economy
The curse of mobilisation On the eve of Victory Day, 9 May, Vitaly Shlykov, an acknowledged expert on the Russian defense industry, spoke about the lessons of the Second World War.
And what were the secrets of the Soviet economy? The Soviet Union was a state that from the very beginning of its existence had been preparing for the inevitability of military confrontation with the rest of the world. Before the second half of the 1930s, there were no specialised military industries in the USSR. In peacetime, only a small proportion of the industrial capacity was used for military production, but in the event of war, it could all be rapidly switched to defence needs. It was only on the eve of war that specialised industries began to be marked out – the basis of the future military-industrial complex. The other “secret” was the planned economy. In 1943, the USSR was smelting only 8.5 mn tonnes of steel, compared to the 35 mn tonnes produced by Ger-
To advertise in this supplement contact Julia Golikova golikova@rg.ru ph. +7 (495) 755 3114
Vitaly Shlykov is a former Soviet Army intelligence officer, historian and economist. According to one expert poll, he is one of the ten most authoritative Russian military experts and one of the 80 most influential people in the country. Presently, he is a member of the Public Council of the Russian Defence Ministry.
RUSLAN SCHAMUKOV_ITAR-TASS
Did Hitler have a chance of winning the war? No. Commanders win on the field of battle, but it’s the economy that wins wars.The Soviet Union gained victory over Hitler’s Germany, above all, because of the superiority of its system for preparing the economy for war. As a result of its industrialisation policy, as early as 1937, the USSR produced about 3,000 tanks, i.e. more than all the other countries of the world put together. This was known to Hitler. But he was unaware of the main thing: in 1937, the USSR already had the capacity to produce 70,000 tanks and tens of thousands of planes per year. Hitler himself later admitted that if he had intelligence on the mobilization capacity of the Soviet economy, he would never have attacked the USSR.
OLEG LASTOCHKIN_RIA NOVOSTI
ALEXEI PANKIN EXPERT MAGAZINE
WWII veterans during the Victory Day celebrations.
many and its satellite countries, but we produced four times as many tanks as the Germans.
Let’s return for a moment to 1945, the year of victory… At the end of the war,Stalin,who was sure that new wars with world imperialism were approaching and was convinced of the effectiveness of the mobilisation model which had brought victory in the Great Patriotic War, continued to develop it. Subsequently, as nuclear weapons, ballistic missiles, nuclearpowered submarines and other arms appeared, which could no longer be produced by civilian factories, the Soviet model was supplemented by one geared towards the mobilisation-related production of arms already in service with the armed forces. Enormous reserve capacity for production of both these hightechnology and highly specialised arms began to be created. Incidentally, the Americans started off on the same path, be-
ginning with the war in Korea (1950–1953), but turned off it in time. In the mid-1960s, they gave up maintaining their mobilisation capacity, not just because it was meaningless in the context of nuclear war, but also, and mainly, because its expense was undermining their competitiveness in world markets in relation to Japan and Germany.That’s why it was we who were defeated in the Cold War, and not them.
So you agree with those who believe that the USSR could not cope with the burden of its military expenditure? Of course. If you produce 3,000 tanks but want to have the capability to rapidly scale up production to 70,000, you have to hold the appropriate industrial capacity and reserves: you must be able to extract the oil and coal and smelt the steel you need to produce and fuel 70,000 machines instead of 3,000.This was the Soviet model after the
War. The capital investment in the so-called primary industries, i.e. in power engineering, steel, aluminium and titanium smelting and so on, was many times higher than that in purely military production. Thus, the surpluses in raw material and other materials were also military expenditure. And all the so-called civilian machinebuilding and consumer goods production existed in capacities intended for military production and worked on the raw materials, which in peacetime could not be required for purely the defence industry. Thus, the real“black hole”in the Soviet economy was the excessively inflated raw material and primary industries, which gave nothing either to the military or to the population. In the final analysis, the Soviet economy collapsed not because of overproduction of arms but because of the inconceivable overproduction of raw materials and intermediate materials.
“A little growth would go a long way to earning Russia little more love...” “It’s about the atmophere of an oasis of recreation with delicious drinks, snacks, comfortable seats, wi-fi...” “My strategy has been to find the funnier side of life in Russia, and it works for me.”
Fine. I think we can see how the mobilisation economy at first saved the country in 1941–1945 and then ruined it in 1991. As far as I can see, for you, the concepts of “radical economic reform” and “defence conversion”, i.e. demilitarisation, are essentially synonymous? When the war started in 1939, America had 9.5 mn unemployed and its army had 170,000 people and 200 tanks. During the war, 12 mn people were called up to the armed forces. Military production grew to a vast level (the Americans produced 300,000 warplanes, 100,000 tanks and 124,000 warships) and with a shortage of manpower, it drew in women, who traditionally had not worked in America before then. At the same time, military requirements led to the emergence of a completely new, high-tech industry: radar, electronic valves, computers, penicillin, etc.The production facility for the atomic bomb was the
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world’s first fully automated factory and so on. The USA spent 45 pc of its GDP on military efforts and did not undermine its economy at all. So then, within two years, after victory, the Americans had practically ceased military production and sent their army home.There was neither unemployment nor a slump in production: just a small burst of inflation in 1948 and that was soon damped down. The economy began to grow rapidly, because all the resources and all the technologies that had accumulated in the military sector began to work on the domestic market. This occurred because during the war, an enormous level of deferred consumer demand had developed. During the war, the USA had a rationing system; the production of cars and many types of domestic equipment was banned and housing construction was severely restricted. But people were still earning money the same way and putting it in the bank.They were the ones who financed the economic upsurge, which in the twenty years after the war turned the USA into a superpower.
Which was exactly the Soviet situationattheendofthe1980sand the beginning of the 1990s… Yes, the public’s savings at that point were worth many trillions of today’s roubles. I suggested meeting this deferred demand by using the power of the military industrial complex. After all, our economy was built on the same pattern as the American economy of the 1940s. It had enormous reserves of cheap raw materials and huge excess capacity. Of course, in terms of its structure and technology, it did not have the characteristics of a market economy. However, by then, it already had the basic components from which a modern economy is built: a sustained high level of education, advanced applied and theoretical science, powerful transport and energy systems and a major technical and technological capacity, concentrated in the military sector. Thus in many respects our real socialism (in effect, state capitalism) had been a system parallel to western capitalism and is growing closer to it.
This issue has been conceptualised by INTERNATIONAL MEDIA MARKETING, RESPONSE adqueries@ timesgroup.com Co-ordinator: • Feature Mehernosh Gotla (mehernosh.gotla@ timesgroup.com)