John Besemeres’ article “Ukraine conflict exposes Western weakness on Russia” published on the Lowy Institute for International Policy” internet site (10 April) shows a fundamental and reckless ignorance about Russia.

See: http://www.lowyinterpreter.org

Besemeres writes that Russia “claims to be afraid of being encircled by hostile states, and to have been humiliated by the West’s supposedly triumphalist expansion into its backyard (its ‘sphere of privileged interests’). This is largely a propaganda myth; the Western expansion was a bit reluctant and apologetic, caused above all by the desperation of former Soviet vassals for protection from any Russian recidivism. Russia’s volatile opinion polls suggest, however, that after years of intense propaganda most of Putin’s subjects have come to believe the hostile encirclement narrative. Some who spend a lot of time talking to Russian officials and propagandists start to repeat these claims of encirclement and humiliation, and present them as their own superior insight into the Russian mind. They would do better to reflect on them more critically.”

Besemeres is right that “propaganda” has played a role in the “hostile encirclement narrative”, however that does not mean that there is not some basis for it nor that the “some” that he mentions have no insight into “the Russian mind”.

During the 7 years or so that I have spent in Russia since I first visited Moscow in 1991, I have often been reminded by quite ordinary people (not “Russian officials and propagandists”) about the Nazi invasion and, even occasionally about Napoleon.

The “Russian mind” clearly has this feeling of “never again” etched into it.

For example, on 25 February 2008, I wrote that that about 6 months earlier I was in a park in Pushkin on the outskirts of St. Petersburg when a 10-year old girl pointed out to me that “this is where the Germans were beaten”. Several days later, in the evening, I hailed down a private car to take me to Pushkin. The driver, a lawyer looking for a little extra money by acting as a taxi for me, volunteered the same point about the Germans.

See: http://www.jeffschubert.com/index.php?id=55

I also covered some such issues in a 5 March 2001 (ie 14 years ago, Besemeres should note!) presentation to the Australian Institute of International Affairs (Sydney Branch) on the subject of “Missile Defence”.

See: http://www.jeffschubert.com/index.php?id=57

It should be remembered that as a real event which affected a nation, the Nazi invasion is much more significant than Gallipoli in 1915 or the 9/11 attacks in the US; but look at how the ANZAC story has come to have meaning in Australia and the US has responded around the world to the terrorist attacks. The mind is not always totally logical and devoid of feelings.

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Today, I will attended (as an observer because as a foreigner, who does not have to live in this country, I feel that I can comment on Russia but I must let Russians run their own affairs) the mourning procession for Boris Nemtsov in Moscow. In some ways the murder of Nemtsov is the most significant event in Moscow since Boris Yeltsin used tanks to blast the White House in October 1993 (I was also in Moscow at that time).

Of course, the murder of one man (even a man of Nemstov’s stature) does not compare to the hundreds of people killed in 1993.

What makes the Nemtsov murder so significant is that it has occurred against the present back-ground of the events in the Ukraine and strong anti-Putin sentiment in most “Western” countries, and is the latest in a series of such killings of Putin critics — including Anna Politkovskaya (an investigative journalist, was shot dead outside her Moscow apartment on Putin’s birthday in 2006) and Alexander Litvinenko (by radiation poisoning in London, also in 2006).

Putin has already totally lost the trust of “Western” political leaders. The additional negative feelings resulting from the Nemtsov murder will mean that even if the situation in the Ukraine improves it will be very difficult for “Western” sanctions to be eased. Positive sentiment toward Russia will be zero; indeed, any sentiment will be negative!

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In the week beginning 1 February, I emailed a survey to 1,750 of my Russian connections on LinkedIn (about 1,500 are “finance executives”). It should be borne-in-mind that these people will be much more “Western”-orientated than the general Russian population – a fact attested to by the extensive use of English in their profiles. You can see the profiles of the 1,750 here:

https://www.linkedin.com/profile/view?id=330346389

I also emailed the same survey to about 200 academics and journalists living outside Russia, but whom I knew had an interest in Russian issues.

The questions covered the Alexander Litvinenko murder Inquiry, the situations of ex-Russian bankers Andrei Borodin and Sergei Pugachev, and the Hague-based Permanent Court of Arbitration award of $US50bn to former Yukos shareholders.

Most of the questions asked could be answered within a “yes”, “no” or “don’t know” format. Not surprisingly, given the politically-charged nature of the issues, both Russians and those living outside Russia gave a hefty dose of “don’t know” to many of the questions. So, I will focus first on those questions where there were the fewest of such answers – and, I will provide some of my own views!

I asked whether former Russian bankers Andrei Borodin (formerly Bank of Moscow) and Sergei Pugachev (formerly of Mezhprombank), who now live in the UK, were criminals guilty of fraud. In Borodin’s case, 46% of Russian respondents said he was guilty, 11% said no, and 37% answered “don’t know”. In Pugachev’s case the corresponding numbers were 46%, 8% and 38%.

I do not claim to know a great deal about the Pugachev case, but in my view Borodin in clearly a crook – so, I was surprised that the “yes” vote was not much higher. But then, to my additional surprise, not one of the non-Russian respondent answered “yes”!

I drew two conclusions from the Borodin results. Firstly, financially savvy Russians themselves often do not know whom to believe – thus the high proportion of “don’t know” answers – because of a considerable distrust of the government, and that this can more generally distort good thinking. Secondly, many non-Russians either know very little about Russian financial issues, or they have a bias against the Russian authorities – indeed, how else could I explain the fact that Borodin has been granted political asylum in the UK!!

Ever since I first visited Russia in 1991, I have felt that the British (including most of its mass media) are generally quite unsophisticated when considering Russian issues – and the same goes for British economists (see left hand column entitled 1992 Article: “Russian Reformers and the IMF Get It Wrong.”).

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This article initially appeared in the December 2014 issue of “Baltic Rim Economies” published by Pan-European Institute.

In 2010 the Russian government launched the Moscow International Financial Centre (MIFC) project and sought international assistance, including from TheCityUK (the self-described “representative voice of Financial Services in the UK”). A Memorandum of Understanding between the MIFC Taskforce, TheCityUK and Vnesheconombank was signed in Moscow in 2011 in the presence of President Dmitri Medvedev and Prime Minister David Cameron.

Subsequently a number of reports were produced, mainly by TheCityUK and the IBRD.

Right from the beginning there were fundamental delusions. An early 2011 survey of “260 participants from leading Russian and foreign entities active in the Russian financial market” reported such views as Moscow as a “regional financial centre for CIS”, and “Moscow is where East meets West. It is a blend of different cultures and nationalities. It will be easy for everyone to come to do business”.

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Ukraine President Petro Poroshenko will speak in Sydney on 12 December at a Lowy Institute function:

http://www.lowyinstitute.org/events/event-address-his-excellency-mr-petro-poroshenko-president-ukraine

Why is he doing this?  And why it is a bad idea!

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According to press reports last week, the Medvedev government will this week try to firm up various aspects of planned privatizations in the period to 2017. At this stage, the privatization plan is basically the same as was approved by then president Medvedev in August last year – with the exception of companies in the “fuel and energy” sector.

(For more background, see my 18 July 2011 article entitled “Medvedev should ease up on ‘privatization’!” and my 31 July 2011 article entitled “Privatization – ‘what to’ and ‘how to’!” by clicking on “Expert Group 15: Managing government property and privatization” in the right-hand column.)

It appears that the great majority of state assets in the “fuel and energy” sector (with the exception of Gasprom) are going to be consolidated under the control of 100% owned Rosneftgas, whose chairman of the board is likely to be Igor Sechin.

Rosneftgas already owns about 77% of Rosneft, whose CEO is also Sechin, and about 11% of Gasprom. Rosneftgas will now also take equity positions in a number of other large “fuel and energy” sector companies which are fully or partly owned by the state.

According to Elvira Nabiullina, assistant to President Putin (and former Minister of Economic Developmemt), the idea is that Rosneftgas will be an “investor at the stage of pre-sale development”. That is, Rosneftgas will inject capital into these companies and prepare them for privatization when market conditions are better and/or when the companies themselves are in a better financial condition.

These companies will issue additional shares (so boosting their own capital) to Rosneftgas which will finance their purchase with its present cash holdings and dividend flow (from its shares in Rosneft and Gasprom). As well, it has the capacity to borrow significant funds in the market (if necessary, using its shareholdings as collateral).

The Ministry of Economic Development has, according to an “Vedomosti” article last week, suggested that by 2017 the state exit from shareholdings in the following way:

completely (with the exception of a “golden share” which will permit state representatives on the board of directors to veto certain types of transactions) from Rosneft, RusHydro (hydro-electricity producer in which state shareholding is about 60%), Zarubezhneft (state controlled, and engaged in the oil sector outside of Russia), and subsidiaries of MRSK-Holding (the Inter-regional Electricity Distribution Grid of which the state owns about 54%);
completely (with no-golden share) from Inter-RAO (which mainly has various energy producing assets);
and sell the state holding in Transneft (oil pipeline monopoly) down to 75% (is presently about 78%).

A sale of a small packet of FGC (Federal Electricity Grid in which the shareholding is about 79%) shares is foreseen in the privatization program for the next year or so, and there will supposedly be an eventual sale of 25% of Russian Railways (presently owned 100% by the state).

There are also ports. The state’s 20% share in Novorossiysk Sea Port, the country’s biggest sea port, is planned for this year — although Sechin has reportedly being trying to get it included under the Rosneft or Rosneftgas umbrella. Also reportedly slated for sale are 55% of Vanino port and about 25% of Murmansk port.

According to the “Vedomosti” article, Vanino is one of “the largest” ports in Russia and four companies have received Federal Anti-monopoly Service (FAS) approval to bid.

The state share in Rosnano will be reduced to 90%, and the state will also eventually sell additional or all shares in Sberbank,VTB, Aeroflot, Sheremetyevo, Sovcomflot, Alrosa and Rostelecom.

There are thus a lot – and it is a very mixed bag – of assets to be sold. However, there does not seem to be much of an overall strategy – perhaps other than reducing the state share in the economy (which is clearly desirable) and exchanging equity assets for cash (which, in itself, is less clearly desirable in economic terms).

Or, maybe there is a sort of “strategy”!

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Vladimir Putin and Dimitry Medvedev are two very different men in their basic psychological make-up and approach to government, and I find it difficult to believe that they will now be able to work together for a full Putin presidential term.

The tension between them has now been relieved by the final  announcement about the coming election — but it will eventually return in a slightly different form.

As I relate below, last week’s revelations about the draft Russian federal budget for 2012 and plans for later years – both composition and controversies – provides a basis for examining the way forward for the relationship between Medvedev and Putin and also for the Russian economy.

While Putin is now triumphant, Medvedev will be a diminished man in the eyes of many Russians who supported his “modernization” view of the way forward and also a diminished man in the eyes of his colleagues in government. Alexei Kudrin, who will almost certainly remain as Finance Minister, will treat Medvedev with contempt — both now and after March 2012.

Medvedev will also begin to see himself in a diminished light. Much as he wanted to, and in spite of the possibilities and his achievements, he could not summon the psychological strength to go against the man to whom he owed so much. The passing of time is likely to build a sense of regret – and even resentment — in Medvedev.

Putin will display loyalty to Medvedev because it is both his natural style and because Medvedev has demonstrated loyalty to him.

Nevertheless, I will be very surprised if Medvedev is prime minister at the end of Putin’s presidential term. Long before this the situation will be untenable for both men.

Budgets have income and expenditure sides to give a result.

On the expenditure side “Vedomosti” last Wednesday (21 September) carried an article that added force to the notion that Putin is a “hands-on” manager/leader and that Medvedev is more “principles” based.

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It is now some months since President Medvedev directed that some way be found to lower the 34% “insurance contribution” on wages up to the threshold – in 2011 – of 463,000 rubles per year.

How to achieve this has turned into a protracted dispute between ministers and officials from the ministries of “Health and Social Development”, “Economic Development” and “Finance”. The latter has finally gained the support of Deputy Premier Igor Shuvalov and Vladimir Putin for its variant, and a report has been prepared for Medvedev.

The Ministry of Finance, under Alexi Kudrin, suggested a new scale with the general rate being lowered from 34% to 30%, and with the introduction of a new 10% rate for wage payments about the threshold limit (which will rise to 512,000 in 2012 because of indexation for inflation associated wages growth). “Small business” will get a “discount”, in the form of a general scale of 20%, and a 7% rate above the threshold.

The Ministry of Economic Development had opposed the addition contribution and wanted this amount to be compensated from the Federal Budget. The Ministry of Health and Social Development had opposed the additional contribution by small business, but not for medium and large business.

The president’s assistant for economic issues, Arkady Dvorkovich, has reportedly “promised to fight to the bitter end” against the Ministry of Finance idea of the additional contributions of 10% and 7%. (He earlier had accepted, it was reported, the idea of an additional 5% contribution as part of a variant that included compensating the Pension Fund from, among other ways, privatization receipts.)

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Expert Group 2, which is concerned with “Budgetary and monetary policy and macro-economic parameters for developing the Russian economy”, has been one of the least active of the 21 Groups. Budgetary and monetary policy can be quite technical issues and it is essential to get these right, but Group 2 might also consider helping the Ministry of Finance understand the PR side of macro-economic policy – after all, isn’t the idea of managing “inflationary expectations” really based on a PR stunt?

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This Group has been very busy and considered a large number of detailed reports, surveys etc, one of which has striking estimates of the costs of “poor institutions”. “Badly functioning institutions” are said to be responsible for 25-30% of the cost of residential and commercial real-estate (in Moscow up to 60%); about 15% additional mark-up in retail trade, and about 10% in communication services. There are also reports of a round-table on “Business Associations and their role in the process of modernization in Russia”, and a report titled “Development and Application of Anti-Monopoly Legislation in Russia: Results and Problems” where the main identified issues are: too much emphasis on a “regulation” approach (for example cost plus) when considering the extent of monopoly price behavior rather than a more “protection of competition” approach; and a lack of independence of anti-monopoly authorities and courts.  

Jeff says that ….

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