A farmer checks ears of barley in a field near the village of Uzunovo in Moscow region.

VlAdislAV KUzMicheVRIR

The worst ever drought has slashed Russia’s grain harvest by a third, but Moscow fights back to curb prices and ease farmers' distress.

Russia’s hottest summer in decades and the worst ever drought have withered mil-lions of acres of crops, elbow-ing the world’s third largest exporter of wheat from the global grain market. The sharp dip in grain produc-tion, which has fallen to 60-67 million tonnes from 97 mil-lion tonnes last year, has led to a controversial export ban, driving up global as well as domestic prices. But there won’t be a serious food crunch for Russians, as in-ventory supplies of 17 to 20 million tonnes, shored up after last year’s bumper crops should take care of consump-tion expected to be around 71 to 75 million.The drought has, however, hit Russia’s hard-earned posi-tion in the global grain mar-ket hard. The country export-ed 21.4 million tonnes of grain abroad last year. Only a few months ago, the country was seeking out new grain markets and flaunting an ex-port potential of 30 to 40 mil-lion tonnes. Japan, Indonesia

Dousing flames of drought Grain Curbing prices and satisfying domestic demands are the government’s twin top priorities

and Brazil were set to be added to an impressive list of Russian grain buyers, which include countries in the Mid-dle East, Africa and Europe. Russia's grain share in the Egyptian market rose from virtually nothing in 2000 to 60% last season. But fearing domestic discontent over ris-ing prices, the government banned grain exports until the end of the year and tem-porarily froze its grain mar-ket expansion plans.“The searing heat and

drought have hit our export potential hard. We have been looking out for additional sales markets that would allow us to sell as much grain as possible to whomever we choose, but now, any possibil-ity of that happening has bit the dust,” Russian Grain Union president Arkady Zlochevsky told RIR. “If any export prospects come up, then, they will probably be for selling to the Middle East and Africa,” he says grimly.The recovery is not going to

Prime Minis-ter Vladimir Putin (2nd from the right) and deputy Prime Minis-ter sergei ivanov stand around Pu-tin's dog Ko-ni that wears a GlONAss device on its collar.

Navigation Transport and railway ministries, police in India keen on using GLONASS-based products; the market is worth $200 m

GlONAss to give GPs a run for money

The wildfires that ravaged Russia this summer had an unintended fall-out: it ignit-ed a new urgency about speeding up the decades-old GLONASS satellite naviga-tion system, Russia’s answer to American GPS. Relief ser-vices had a real tough time, as it was impossible to keep track of emergency situa-tions in so many different places at the same time. Rus-sian Prime Minister Vladi-mir Putin quickly seized the challenge to accelerate the development of GLONASS, which will help, among other things, to create a sin-gle navigation system of control and response to emergency situations.“GLONASS civil naviga-tion signals will be provided to customers at no cost and without restrictions,” Putin announced at a conference in Ryazan on Aug 11. “Before the end of the year, we plan to launch another six satel-

AlexANdRA PROKOPeNKOITAR-TASS

Russia is set to beat eU and china by making GlONAss, an alternative to GPs, operational by end of the year. india is enthusiastic about the new navigation system.

lites. No fewer than 24 to 28 systems will be permanent-ly in orbit.” Three weeks later, Russia put three more GLONASS satellites into orbit. If all goes well, the GLONASS navigation sat-ellite system will be fully operational by the year-end. India, an early backer of the project, will be able to use the free signal even for mili-tary purposes. The GLONASS’s big advan-tage is that it can receive signals simultaneously from both its own satellites and from those of the American GPS. This guarantees a non-stop signal and liberates the user from dependency on a monopolistic provider for navigational services. Using GLONASS, Russia has recently launched two major projects: the intro-duction of a single telephone number (112) for all rescue services, medical services and the police in emergency situations; and the creation of an emergency response system in case of car acci-dents (ERA-GLONASS), which should be fully devel-oped throughout Russia by 2014. Starting in 2012, all new cars sold in Russia may be equipped with this sys-tem.

To popularise GLONASS and to ensure what Putin has called “navigation satel-lite sovereignty”, the govern-ment is mulling a 25% im-port duty on consumer navigation devices that do not use GLONASS chipsets. Russia, which has spent $2 billion to develop GLO-NASS, plans to promote it globally, especially in India, the Middle East and Latin America. India’s interest in using GLONASS technology and in its joint commercialisa-tion was confirmed at Space Expo-2010 recently held in Bangalore. Vladimir Finov, Program Director for India-GLONASS (JSC Naviga-

along with the federal anti-trust service and prosecutor's office, is threatening to pun-ish anyone who hikes prices. Large retail chains are also trying to stand up to attempt-ed spike in prices, as they are the first to face customers' wrath. For example, The Sev-enth Continent, a grocery chain, has suspended its busi-ness with Danone and Unimilk, two dairy compa-nies that have sent prices soaring. Although Russia's dairy market is well diversi-fied, its options are not infi-nite: producers are using the drought to justify grain and flour price hikes, requiring chain retailers to follow suit.To cushion ordinary Russians from hardships, President Dmitry Medvedev has taken a slew of mitigating steps to control prices. He has asked the government and large state banks to provide finan-cial aid to drought-hit farm-ers. Efforts are on to firm up an economically efficient and viable agriculture risk-insur-ance system. Just one-fifth of Russian crops were insured this year. The president also ordered a review of possibili-ties for refinancing, recon-struction and extending ex-isting loans, in addition to prolonging lease payments.Although initial panic in the markets has died down, it could have been avoided had the goods' intervention mech-anism and fund had worked. But the government decided to put off intervention until October, by which time, it will become clearer how much grain had weathered the drought.

News iN BRief

The Indian-Russian joint venture BrahMos Aerospace Ltd. plans to produce engines for Brahmos missiles at its plant in Kerala, CEO Sivathanu Pillai said. Spurred by a growing demand for Brahmos missiles in the Indian Armed Forces, the Kerala plant hopes to surpass production of Russia's Orenburg plant in two years. The missile has a range of 290 km and can carry a conventional war-head of upto 300 kg. It boasts of Mach 2.8 speed, three times faster than U.S-made Tomahawk cruise missile. RiA Novosti

The Russian Federal Space Agency (Roscos-mos) will provide a lander for the Chan-drayaan-2 Russian-Indian lunar mission, which will be tested on the larger and closer of Mars’ two moons, Phobos. The launch ve-hicle and a lunar rover will be produced in India, Roscosmos deputy head Anatoly Shilov said in Bangalore. The new plan for Chandrayaan-2 involves India’s Geosyn-chronous Satellite Launch Vehicle (GSLV) taking an orbital module to the Moon, with a Russian-made lander carrying a small In-dian rover on board. The mission will ex-plore lunar soil at as far a distance away from the landing site as possible, Shilov said. He added that data on water molecules in lunar soil will allow researchers to move forward with Moon development plans. RiA Novosti

Brahmos to produce missile engines in india

Vodka snobs in India can rejoice. The famed Russian vodka brand Beluga, made with hy-aline artesian water from Siberian springs, has hit the Indian market. Synergy, one of the largest Russian vodka producers, has signed distribution agreements for exporting the award-winning Beluga to Iraq, Vietnam and India. Syngery, which churns out around 50 types of vodka and 20 types of liquor includ-ing rum, cognac, gin and wine, already has a presence in Libya, Jordan and Israel. The vodka accounted for 16% of the company's revenue last year. Nataliya fedotova

A new synergy, inspired by Beluga vodka

Moon mission: Russian lander for chandrayaan-2

tion-Information Systems) says Russia will begin work soon on a joint project with NIC and the Indian Space Research Organization (ISRO). It will implement projects on controlling and managing transportation with the use of GLONASS technologies. “India’s trans-portation and railway min-istries have shown great in-t e r e s t i n o u r GLONASS-based prod-ucts,” said Finov. “So have the police.” The Indian market for direc-tional systems based on the use of the GLONASS and GPS signal is estimated at $200 million over the next five to ten years. NIC has al-

ready found several part-ners, including Hyderabad-based HBL Power Systems Ltd, to promote and pro-duce different satellite sys-tems in India. “We believe GLONASS will offer better features that will be superi-or to the GPS. The system will operate on GPS and GLONASS,” said the com-pany's chairman Aluru Jag-adish Prasad. The use of GLONASS/GPS dual-sys-tem receivers will, he says, provide uninterrupted ser-vice. Prasad’s company is taking part in a tender to set up a comprehensive pro-gram for monitoring trans-portation from space using GLONASS/GPS for the mu-

nicipal authorities in Delhi, which have set over $40 mil-lion for this purpose. The GLONASS operator in India is expected to be a joint venture between NIC and the state corporation Antrix. (Antrix is in charge of commercialising the ser-vices of ISRO.) This joint en-terprise will develop the in-frastructure and allocation of navigation services in India; it will organise the joint production of telemat-ic terminals and personal navigation equipment on the GLONASS/GPS base in India for non-military users, including the production, sale and post-sale servicing of equipment and software.

The Russian K-152 Nerpa nuclear attack submarine, which is currently carrying out workup trials in the Russian Far East, will be transferred to one of Indian sea bases on a 10-year lease for $900 million by the end of the year, a spokesman for the Russian Pacif-ic Fleet fleet said. The trials included a train-ing programme for the Indian crew to ensure they can operate the submarine's systems. India agreed to fund a part of the Nerpa's construction as a part of the lease contract that followed an agreement between Mos-cow and New Delhi in January 2004. The Nerpa was scheduled to be introduced into the Indian Navy as INS Chakra by mid-2008, but technical problems came in the way. Twenty sailors and technical workers died onboard the submarine during sea trials in November 2008 due to a toxic gas leak when the automatic fire extinguishing system mal-functioned. The boat is now fully operation-al following repairs. RiA Novosti

india to get Russian nuke submarine by 2010 end

No global grain deficit on the cardsThe global grain prices will re-main stable unless another major upheaval occurs. Rus-sia's drought has already driven up world grain pric-es by $30. Russian grain im-ports, coming exclusively from Ukraine and Kazakhstan, will almost double upto 2.5 mil-

lion tonnes to meet domes-tic demand. A deficit in the global market is, however, un-likely. The bad news, from the drought in Russia and grain shortages in Western Europe and Ukraine, has been com-pensated for by good harvests in the US and France.

Twice a monTh in Two dailiesfrom september

September 8/October 13 September 29/October 27

The economic Times The Times of indiaRussia&india Report inRussia&india Business Report in

www.in.rbth.ru

wedNesdAy, sePTeMBeR 8, 2010

...Marching towards a common future

BUSINESS REPORT iN AssOciATiON wiTh ROssiysKAyA GAzeTA, RUssiA

The NUMBeR

is estimated crop losses due to the worst heatwave in nearly 130 years of record keeping.Drought wiped out crops across at least 12 million hect-ares (30 million acres).

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be easy and the country won’t be able to return to the global grain market before the next autumn. In case of bumper crop next year, of course. But the government is not un-duly worried about losing ex-port markets. Curbing prices and meeting domestic de-mands are its twin top priori-ties. Prices are rising, despite experts' claims that there is no grain deficit. If one looks closely, there is a sharp deficit in the buckwheat and feed grain markets. Buckwheat crops died out and there is re-ally nowhere to import the grain from. Retail prices for buckwheat, enjoyed by Rus-sians for breakfast or as an ac-companiment to meat, have more than doubled, and a number of large retailers have seen the grain disappear from their shelves. The feed grain deficit is esti-

mated to be roughly 3 to 6 million tonnes. The interven-tion fund holds just 3.5 mil-lion tonnes, while hay, the al-ternative, was not stored up because of the summer heat and drought. Domestic prices fell by 10% after grain exports were banned. The government,

ReuTeRS/VOSTOCk-phOTO

IVAN SekReTAReV_Ap

ROSCOSmOS

VLAdImIR pAVLOV_kOmmeRSANT

Energy

The idea of building more ef-ficient and environmentally-friendly nuclear reactors, which Rudolf Baklushin helped test in the Soviet Union decades ago, has had its ups and downs. As a deputy chief engineer, he oversaw the con-struction and the opening of the first Soviet fast breeder re-actor in 1973, which produces more fuel than it burns and yields less dangerous waste. "I volunteered because it prom-

Lukoil, Russia’s largest pri-vately-controlled oil produc-er, which launched the coun-try’s first oil and gas field in the Caspian Sea, is now cast-ing its net wider. The compa-ny is lobbying hard to revive tax breaks, abolished on July 1, to help it develop five other offshore fields in the waters.With the Caspian Sea becom-

The land here cools down quickly, nearing eternal cold, and plunges into utter dark-ness. The coldest place is Meg-acity, decked up with seduc-tive malls and garish advertising. But there is no trace of warmth and friend-ship in this icy materialist paradise. Only the children can save the world by being kind and helpful, unlike their egotistical parents. But can they do it?Check out ‘Come and See’, a scintillating musical per-formed by talented children of nuclear workers from Rus-sia, Ukraine, Bulgaria and

Power With a push from Medvedev's modernisation plan, the government pledges $3.6 bn for cutting-edge research in new generation nuclear technologies

Oil Lukoil to spend $11.2 billion to develop Filanovsky fieldProject Children of nuclear workers make music together

Beating recession, Russia has surged ahead in race to build fast breeder nuclear reactors, which could go commercial by 2020.

With the Caspian sea becoming a hotbed of an energy race in the region, Russia’s largest oil producer eyes offshore reserves.

Four talented Indian teens from Kudankulam visited Russia as a part of the NucKids international project. It turned out to be a feast of fun, learning and friendship.

ised new, interesting work and new prospects for the indus-try," said Baklushin, who is now a nuclear scientist at an institute near Moscow.But costs of building such re-actors were high, and when geologists discovered new, ex-tensive deposits of uranium, developing this technology was no longer a priority.But despite being at least half a century old, the idea has ac-quired a new sense of urgency recently since President Dmit-ry Medvedev made it a part of his modernisation agenda.If further tests of the technol-ogy succeed, Russia will seize its lead in this area and start to commercially produce the re-actors by 2020.

ing an arena of competition among energy-hungry Asian states such as China, and Rus-sia competing with Azerbai-jan and Turkmenistan for supply contracts, starting the pumps in the Caspian has be-come a top priority. The gov-ernment clearly wants to put the failed bid to develop East Siberia into a major produc-tion centre behind. The Filanovsky field, the big-gest find in Russia in the last quarter century, with as much as 4.5 billion tonnes of hydro-carbons beneath the water, has come as a shot in the arm for Lukoil. “That’s compara-

India. When they staged the musical in Moscow and Kiev last month, the impact was electrifying. The innocent children, with their wonder-ful voices, literally fired up the audiences with their enthusi-asm and energy. And believe it or not, they managed to cre-ate this enchanting spectacle in barely 35 days! Cutting across countries and conti-nents, a team of nuclear kids and experienced artists wrote the script and songs, staged the dances and finessed the musical, which ties youth problems to those faced by nuclear cities. For four children from Ku-dankulam - Giridharan Ra-jagowri, Ragupathy Jothisree, Rameshkumar Krithinku-mar and Sivagurunathan Sivaprakash – it was an expe-rience of a lifetime. They, along with 62 other chil-dren, got to sample the de-

"I would say Russia is certain-ly the leader in fast reactor technology," said Michael Driscoll, professor emeritus of nuclear engineering at Mas-sachusetts Institute of Tech-nology. "Second, I would say, is France."Some of the 26 reactors that Rosatom, the state nuclear corporation, plans to build before 2030 will use the new technology, Rosatom spokes-man Sergei Novikov said. With Medvedev backing the project, the government has allocated 110.4 billion rubles ($3.6 billion) for research in this and other nuclear energy areas until 2020 under the New Generation Nuclear Technologies program adopt-ed in February.

Gaining More FuelRosatom is making an effort to commercialise the fast breeder reactor because No-vikov feels that the world is set to run out of affordable uranium in at least 12 years, given the plans by Russia, China, India and other coun-tries to build more reactors. The price of uranium has shot up from at least $7 a pound in 2005 to $60 a pound (as of June 30) for long-term con-tracts.

The world may run out of ura-nium resources completely by the turn of the next century if there's no replacement for the current technology, said An-drei Mikshes, an industry an-alyst.The fast breeder reactor achieves what industry insid-ers call a closed fuel cycle, the ability to use byproducts from one nuclear reaction as fuel for another, allowing for a spectacular expansion of fuel reserves. It usually uses mixed

oxide fuel made up of about 20% plutonium and 80% plain, un-enriched uranium that transmutes into more plutonium as it burns. Typical fission reactors use urani-um-235, a fuel that constitutes less than 1% of uranium ore, which must be enriched in order to be used in existing re-actors.Traditionally, uranium-238, which constitutes much of the uranium ore, has been unus-able, but the fast breeder reac-tor would allow for its conver-sion to plutonium, thus making it reusable as a fuel.In pursuing the technology's development, Russia may hope to market the design in-ternationally before everyone else does, said Francis Slakey,

Playing for high stakes: The race to build fast reactors heats up

Lukoil casts its net offshore in Caspian

Indian kids star in a 'nuclear' play

Workers in white uniforms carrying out maintenance work at the Beloyarsk nuclear power plant in the Sverdlovsk region.

ANATOly MEdETSKythe MosCoW tiMes

ARTyOM AMElIN , TIM GOSlINGRiR

lIlIyA TRuShINA RiR

to build a small reactor unit — in addition to its existing one — come 2020, Kovalchuk and Driscoll said.India will start putting a series of fast breeder reactors into operation next year, while China is developing the tech-nology at a very rapid pace, Kovalchuk said. Japan and South Korea have a longer way to go, and they move slower, he said.

lower CostsFast breeder reactors were ini-tially at least one and a half times as expensive to con-struct as the conventional equipment. But the costs have been reduced, as the design gets simpler, said Baklushin, a researcher at the state-run Al-

exander Leipunsky Physics and Energy Institute. He esti-mated their cost at $1,600 per kilowatt of capacity at most.India offered the same amount of money to Russia to build pressurised water reactors, or PWRs, at Kudankulam, India, where work is ongoing. The reactors, also known by their Russian acronym VVER, have developed an increasingly complicated design over time, which has pushed up costs, Baklushin said. It was a VVER reactor that Russia launched recently in Bushehr, Iran. The government has plans to build them also in countries such as Turkey, the Czech Republic, Vietnam, Bangladesh and Ar-gentina. Russia has already tested the next generation of nuclear rectors at two sites. Baklushin's demonstration reactor, called BN-350, locat-ed near the city of Aktau on the Caspian Sea in Kazakh-stan, shut down in 1999, but Russia has been operating its successor, BN-600, at the Be-loyarsk Power Plant near Yekaterinburg since 1980. Ro-satom is now building an im-proved and more powerful BN-800 at Beloyarsk to con-tinue studies.

A More distant FutureRussia is researching thermo-nuclear fusion as well — a technology that does not re-quire a mineral fuel like ura-nium and may replace fast breeder reactors. The country is sharing the research with the European Union, the US, Japan, China, India and South Korea, with the goal to jointly build a test reactor in France.Despite delays and swelling budget, Russia will continue to participate in the Interna-tional Thermonuclear Exper-imental Reactor, or ITER, Medvedev said in his state-of-the-nation address in Novem-ber. "It is this technology that is the future."

Russia has already tested the next generation of nuclear rectors at two sites.

ble to Azerbaijan’s offshore reserves, and double the esti-mated reserves of Turkmeni-stan,” says Vagit Alekperov, Lukoil’s CEO. As harnessing those reserves require mas-sive investment, Lukoil will spend 340 billion rubles ($11.2 billion) to build 28 drilling platforms and lay over 1,000 km of pipeline over the next decade, says Alekperov. The company is banking on this field to halt its sliding produc-tion in recent years, as West-ern Siberian reserves dry up. A report for the first half of 2010 showed its oil output shrank by around 1% com-

lights of Moscow and were treated to a visit to a dolphi-narium. Like children in any summer camp, they also en-joyed discos and movies. Their charm infected even Russian popstars who came to inter-act with them. One of them, Lolita, even selected several songs from the musical for her new album. This was the second time Rus-sia’s Federal Atomic Energy Agency (Rosatom) brought together the most talented children of atomic industry employees from different countries in a creative camp to promote friendship and popularise ideas linked to nu-clear energy among the younger generation. The NucKids project participants are now better informed than many adults about Russia’s atomic facilities and what people live there. Just like them, in so many ways.

pared with the same period in the previous year. Experts say the full-fledged operation of the Caspian fields could stop this reversal. Alexander Burgansky of Re-naissance Capital points out that the Caspian fields will account for 13% of Lukoil’s total Russian crude output by 2015. For now, only the rela-tively small Yuri Korchagin field is up and running, with oil planned to flow from Fi-lanovsky in 2014.The Gulf of Mexico oil spill could not come have come at a worse time for Lukoil, as offshore drilling is seen as not only a financial and technical challenge for relatively inex-perienced Russia companies, but also one of safety and en-vironmental concerns. "Against this backdrop, Lu-koil is currently building Rus-sia’s first training centre for experts who work on offshore rigs, and emergency situa-tions training will feature heavily”, says Alekperov.

a professor of physics at Georgetown University."They may see that there's an inevitable market for the fast reactor and they want to get ahead of where the other com-petitors are," he said. International sales of such re-actors, however, would come under the regulations of the Nuclear Nonproliferation Treaty because of the weap-ons-grade plutonium that they generate, said Mikhail Kovalchuk, director of the Kurchatov Institute, the coun-try's leading nuclear research establishment. And France, one of the potential buyers, has already mastered the technology of the closed fuel cycle, according to the insti-tute. The country is committed

NEWS IN BRIEF

India’s ONGC has suggest-ed to Rosneft Oil Company that the companies will jointly bid in the tender for the Trebs and Titov oilfields, two sources close to both companies told Vedomosti. No final decision has yet been taken, and negotia-tions continue, a Rosneft of-ficial confirmed, refusing to elaborate. The Trebs and Titov fields will be sold in a single lot. The tender is scheduled for the fourth quarter of 2010, although neither an exact date nor a starting price has been set. Russia’s Natural Resources Ministry esti-mates the starting price at 17.8 billion roubles, while the Energy Ministry puts it at between 22.9 billion and 101.6 billion roubles. Both oilfields are strategic depos-its, holding 78.1m and 132.8m tonnes of АВС1 re-serves respectively. Foreign investors are welcome to participate, but only as a part of a consortium with a Russian state-owned com-pany, which would retain control. Vedomosti

TNK-BP and Vietnam's state-owned oil and gas cor-poration PetroVietnam are in talks over setting up a joint venture for explora-tion and production in Rus-sia. Media reports say that BP could sell its assets in Vietnam. Stan Polovets, chief executive of AAR con-sortium, which represents TNK-BP's Russian part-ners, has said TNK-BP will be discussing the purchase of BP assets, which may give strategic and operational advantages. RIA Novosti

ONGC looks to Russia for oil

TNK-BP and PetroVietnam to set up JV

Sergei Kirienko, director General of Rosatom says the num-ber of nuclear power plants globally will double by 2030.

WEdNESdAy, SEPTEMBER 8, 2010

BUSINESS REPORT IN ASSOCIATION WITh ROSSIySKAyA GAzETA, RuSSIA

Sivagurunathan Sivaprakash, Rameshkumar Krithinkumar, Ragupathy Jothisree, Giridha-ran Rajagowri from Kudankulam visited Russia.

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Business in Brief

Russia’s unemployment rates have returned to pre-crisis levels, prompting hope that the economic re-covery is robust. In June, the number of unemployed peo-ple fell to 347,000 from May, meaning 5.2 million of the worforce – or 6.8% - are looking for a job, the Feder-al State Statistics Service reported in August. June’s

figure is the lowest seen since November 2008. Unemployment amongst the young however remains high, with 16% of 15 to 24- year-olds jobless. Unemployment peaked in February 2009, reaching 7.5 million, and has been stub-born since; it was still stuck at 9.2% in January. rir

russia returns to pre-crisis em-ployment levels

Tim GoslinGrir

Ben arisBusiness new europe

The prophecy of BriC overtaking the world is turning real with the world's biggest iPos coming from emerging markets.

insider trading will become a crime under a new bill, a part of the government's drive to turn moscow into a global financial hub.

Jim O'Neill, chief economist at Goldman Sachs, famously predicted that the GDP of the fast-growing BRIC coun-tries (Brazil, Russia, India, China) will overtake the de-veloped world in the next 15 years, but following the $22 billion IPO of China’s Ag-Bank in June, the biggest ever, emerging markets’ IPOs have already overtaken the West in terms of issuances.Public offerings in the West have been decimated by the crisis, as money is scarce and investors continue to dread a second round of the crisis. But the so-called “global” crisis is a misnomer; in that, the only countries facing a real crisis are almost exclu-sively in the developed coun-tries of the northern hemi-sphere; the rest of the world experienced a nasty external shock, but even Russia, which suffered worst among its peers, is now bouncing back, while China and India barely missed a stride.

Gordon Gekko would have loved Russia. As the sequel to Oliver Stone’s movie Wall Street is getting set to hit the cinemas, Russia’s Duma signed off on a law to ban the kind of shenanigans that put Gekko, and his protégé Bud Fox, in jail. The debate on a basic law for regulating the stock market has been raging for more than a decade, but vested interests had blocked progress. The new law is a part of President Dmitry Medvedev’s drive to turn Moscow into an interna-tional financial centre, a plan launched in April 2008, just before the mar-kets crashed.“Medvedev needs to push through a much stricter and sounder set of financial rules and regulations,” says Kim Iskyan, a director at Eurasia Group, a Washing-

Trend Capital set to flow from western markets to east Bill stiff fines, prison term foreseen

Emerging markets score in IPO

Insider trading binge headed for rough times

This year, the world’s largest IPOs have come from Asian and developing countries. The top 10 offerings of the year include firms from China, Russia, Poland and India, none from the US and only one from western Eu-rope, in Spain.AgBank was the biggest but Russia’s aluminium giant United Company RusAl also pulled off a record-breaking

$3.2 billion IPO in February. Capital is moving eastwards rather than float in London or New York. RusAl chose to list its shares on the Hong Kong exchange.The IPOs are only the tip of the iceberg. Analysts in east-ern capitals predict that the capital will start flowing down from the large Western markets to the East in the second half of this year.

Emerging market funds eas-ily outperformed the devel-oped world in the last decade with most putting in triple-digit returns, while the es-tablished markets lost an av-erage of 20%, according to fund managers in Moscow. Despite the strong growth and far superior macroeco-nomic fundamentals, stocks in emerging markets suffer disproportionately from the instability that has wracked most bourses over the last six months; when sentiment turns sour and portfolio in-vestors tend to sell their emerging market shares first.The MSCI BRIC index has lost 9% this year, weighed down by the 26% decline in Chinese stocks due to fears of overheating and tighter monetary conditions.However, the funds investing into these countries have outperformed the indices with Russian funds return-ing the most. Russia-focused funds broke a four-week streak of inflows in July but still finished at the top of their peer group for the first half of 2010, data from Emerging Portfolio Fund Re-search shows. Over the first six months, Russia has drawn in the most money among the BRIC countries, attracting $2 bil-lion in new money against China’s $1.2 billion. “On an average, Russian eq-uities are more lowly rated relative to their emerging market peers,” Uralsib re-search report said. “The low valuation does not, in many cases, reflect the recovery now taking place.”

The stock market shoots upexchange economy bounces back; per capita income surges to $10,000, but corporate governance still a risk

liam HalliGan, Denis sPirin Business new europe

Defying recession, russia’s rTs has outperformed major stock markets in the world. But despite a seven-fold increase, it remains underrated.

International investors rightly complain that Rus-sia's stock market is rather volatile. What's less widely appreciated is that, amidst the mood swings, the overall trajectory of the RTS index of leading Russian shares has shown an upward curve.Between the start of 2000 and the end of 2009, the RTS shot up no less than 724% in dollar terms - including the sub-prime related lurch. During the same period, the S&P500 and the FTSE-100 lost more than a fifth of their value. Mainstream investors should keep that in mind, given the near-constant drumbeat of negative media coverage associated with Russia. Other big emerging markets also posted strong returns during the "noughties". Chi-na's Shanghai A index and India's Sensex gained 191% and 226% respectively. But none did as well as the RTS - which easily outperformed

China at 15.1x, but Russia at only 8.2x? One reason is that the RTS comprises some big oil and gas companies that are heavily taxed and oper-ate on a low profit "cost-plus" basis, weighing down aver-age valuations. Even after last year's meteoric 129% rise, the market is also still recovering from the 2008 credit crunch - when bouts of forced selling by leveraged investors pushed stocks way below "fundamental value". The main reason for the "Russia discount", though, is that many view this country as "dangerous". Over the last 14 years, our flagship Russian Prosperity Fund has gained an annual average of 25% in dollar terms, while the Prosperity Quest Fund, launched in 1999 and with a lower-tier restructuring emphasis, has returned an unmatched 46% a year. It's our experience that most of the reasons put forward for Russia's low valuation don't stand up to scrutiny. Global investors generally cite macro, political, liquid-ity and corporate gover-nance risks when explaining why they "won't touch Rus-sia". The first three are heav-ily exaggerated. Russia's macro economy is strong and political risks are also over-stated. The corporate governance risks, though, are real. Even though most of the bad things you hear about in-vesting in Russia aren't true, corporate governance in this country, while improving, re-mains a major impediment to commercial progress.

Between 2000 and the end of 2009, the rTs (russian Trading system) shot up no less than 724% in dollar terms.

The ruble will weaken this year, spurring capital out-flows, and inflation will be faster than previously ex-pected, Deputy Economic Development Minister An-drei Klepach said. The cur-rency will probably average 30.4 per dollar this year and 30.5 against the greenback in 2011. The ruble has averaged about 30.2 against the dollar this year. A weaker ruble will result in a "pause" in capital inflows, Klepach said. "We are not predicting substan-tial capital inflows, which we've seen in pre-crisis years,

for the period from 2010 through 2013," he said. Rus-sia may post a net capital outflow this year of about $10 billion, Klepach said, re-versing the government's forecast for capital inflow. Net outflows amounted to $1.1 billion in August, Gold-man Sachs Group said ear-lier, compared with $4.5 bil-lion of inflows in the second quarter, Central Bank data show. Inflows may reach $10 billion next year and $5 bil-lion in 2012, before flattening out to zero in 2013, Klepach said. ria novosti

ruble to weaken, inflation to pick up - forecast

finance

though, would it really have been "so silly" to have invest-ed some of your money in Russia? More important than previ-

ous returns is the market's current valuation. Despite rising seven-fold since 1999, the RTS is still trading at a composite multiple of 8x 2010 earnings - similar to 10 years ago. That's astonishing. In 1999, Russia had just defaulted and was still shouldering huge Soviet-era debts. The country had no reserves, an-nual inflation was almost in triple-digits and oil was below $20 a barrel. Spool forward a decade and Russia has paid off almost all state debts and still boasts the world's third biggest for-eign exchange haul. Per-cap-ita incomes have ballooned from $1,200 to $10,000. An-nual inflation is 6%, global

commodity demand is accel-erating and burgeoning ser-vice sector now accounts for 2/3 of GDP. The general busi-ness environment - while still tough – has changed for better than 10 years ago. Yet, despite such progress, the RTS has the same valuation now as during the chaos of 1999.

under-rated Why do global investors value India at 17.9x and

Most of the reasons put forward for russia's low valuation don't stand up to scrutiny.

Liam Halligan and Denis Spirin are, respectively, Chief Economist and Direc-tor of Corporate Gover-nance at Prosperity Capital Management.

ton-based global political risk consulting firm. “This will guide the attitudes and approaches of regulators operating in the future fi-nancial centre, and poten-tial participants.”Until now, far too many have been making too much money on the back of privi-leged information for it to be outlawed without a big push from the top. Scams such as “front loading” were commonplace. Now mar-kets will define what infor-mation should be restrict-ed, and which people and institutions can be regard-ed as 'insiders'.The bill sets out fines upto 1 million roubles ($333,000) or a prison term of between two and six years for an im-proper use or disclosure of insider information.“The new law is a big step forward, but investors will want to see a solid track re-cord over an extended pe-riod, proving that Moscow is a stable, effective and re-liable financial centre, be-fore they place any faith in a new investment regime,” says Iskyan.

Sistema Shyam TeleServic-es Limited (SSTL), a joint venture between JSFC Sistema and Shyam Group of India, is getting ready to hold an initial public offer-ing of its shares in 2011 hoping to raise $300-350 million.Sistema Shyam will most likely enter the stock mar-ket only after the Russian government becomes a shareholder. Russia is gear-ing up to invest around $676 million in the Indian com-pany. The shares purchase will be financed by India’s rupee debt to the Soviet Union. The Indian mobile operator also intends to take out a $280 million loan from the State Bank of India. Tibor Bokor, an analyst at Finan-cial Corporation "Otkritie", says Shyam’s operations re-quire around $50 million a month. “This loan will help the company stay afloat until a deal is struck to sell roughly 20% of its shares to the Russian government.” Vsevolod Rozanov, Sistema Shyam TeleServices (SSTL) president, in an interview with RIBR talked about the Indian mobile market’s prospects.

sistema shyam is coming with an iPo soon

How do you foresee the pros-pects for the russian telecom project in india?The prospects are pretty big, considering that 3G is unlike-ly to hit the Indian market any earlier than the end of 2010 or beginning of 2011. Landline service in the country, while available in key cities, is very limited. You have a lot of de-mand outside of these cities since modern services and speed are already in demand, but only mobile operators are up to the task in providing it.

Will 4G come to india? Yes, I think so, but that’s while keeping in mind that 3G is only now starting to make headway here. We are having certain problems in getting across to the consum-er the value of having high-speed Internet access. My subscribers still use their phones for checking their email, and you do not exactly need high-band speeds for that. 4G, of course, will come around eventually.

Vladislav Kuzmichevnatalya fedotova

Full version onwww.in.rbth.ru

in@rbth.ru in.rbth.ru/letters

This year's inflation in russia could reach 7% or even slightly higher, says minister of finance alexei Kudrin.

unemployment amongst the young is still high

inDiCaTors

ruB/usD, ruB/inr rates rTs index dynamics

every other major stock index in the world. This mar-ket isn't for the faint-heart-ed or impatient. Looking back over the last 10 years,

BUSINESS REPORT in assoCiaTion WiTH rossiysKaya GazeTa, russia

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Lifestyle

alcohol level for drivers only.With these steps, Russian au-thorities are expecting a sharp drop in the alchohol consumption and a complete elimination of the illegal pro-duction of alcohol in the country by 2020. Meanwhile, by 2012, they are hopeful of cutting the consumption of strong drinks by at least 15%. The same strategies have been tried by a slew of countries, including Sweden and the UK. The campaigns have been highly successful.

A new ban on selling hard alcohol in Moscow between 10 pm and 10 am came into force in September, extend-ing the current non-alcohol gap by some hours. Until re-cently, it was not allowed to buy strong drinks – any bev-erages containing more than 15% alcohol – between 11 pm and 8 am only.The veto does not affect beer and wine, and it concerns re-tail sales only – clubs and res-taurants will be able to serve strong drinks 24 hours a day.Experts believe that the night alcohol ban will help curb the number of alcohol-related crimes.“The ban of alcohol sales dur-ing the night time is very ef-fective,” Kirill Danishevsky, chairman of the Evidence-Based Medicine Society said. “Not only this helps to rule out a lot of problems – like drunk violence, drunk mur-der, car accidents – but also reduces the number of alco-hol poisonings. When people

For Victoria Sherbakova, a doctor at a private liposuction clinic in Moscow, the hunt for a new home started in rather unusual circumstances. Like many Muscovites, she and her husband plumped for a house in the Moscow Region rather than the city as, “you get more for less". Everything was going on well till she discov-ered that her three-year-old daughter Sasha was going blind and badly needed qual-ity medical care. But much to her dismay, the city hospitals won’t treat her daughter as medical services are supposed to be provided by the regional authorities. Sasha was, there-fore, not eligible to be treated at the hospitals in the capi-tal. “The hospitals in Moscow are the best in the country, but you have to have a city regis-tration to be admitted,” says the 36-year-old Sherbakova. “So we decided to give up our place in the region and move into the city.” Finding an apartment was easy. Raising the money to pay for it turned out to be more complicated, despite $5,200 a month she and her husband made be-tween them – nearly four times the national average. Sherbakova’s is a typical story of Russia’s emerging middle-class hunting for a new house. Adding to their woes is the

Want a strong drink after 10 pm? Forget it!

Mortgage market revives, home dreams take new wings

ponderous paper work need-ed to convince the bank to lend to you. She was lucky, as her clinic was prepared to give her all the documents that prove her income; many companies still operate in the grey economy and officially pay only a small part of their employees’ salary through the bank, with the rest paid in cash to dodge taxes. It’s a big problem for apartment buy-ers, as they can’t prove their income.

Next, after searching for a mortgage lender for a month, Sherbakova stum-bled across Kreditmart, Russia’s mortgage broker, a company founded by James Cook, an American who pi-oneered the mortgage busi-ness at the start of the last decade as CEO of Delta Credit. Kreditmart resells mortgages for a dozen com-mercial banks and because it gets a discount, it can offer punters better interest

rates than the banks them-selves. Thanks to her job and healthy family savings, Sherbakova is an ideal customer for Russian banks and sailed through the process relatively easily. “It all went very quickly. We got the documents from the clinic in a week and the bank loan was approved even faster.” But not everyone is so lucky. The demand for new housing is huge and eight out of 10 Russians want to move house,

says Cook. The 2008 � nancial global crisis hurt the mort-gage business badly. Previ-ously, there were a dozen com-mercial banks giving loans, but most put their mortgage programmes on ice in 2009, leaving the two state-owned banks -- Sberbank and VTB Bank -- with some 80% of the business. However, the mar-ket is picking up fast now. “The number of loans made has gone up dramatically in the last two months,” says

Call it sentimentality or the afterglow of love. Despite a 58% divorce rate, most Russians are loath to ink a prenuptial contract that lays down conditions for splitting property in case they go in for divorce. In a country where marriages still have an aura of sacred-ness, the idea of bargaining over the affairs of the heart even before a marriage sounds like a bad omen. Of-ficial data reveal that of nearly 1.2 million Russian couples who registered marriages in 2009, only about 25,000 — or about 2% — sealed marriage con-tracts. The 28-year-old Yekateri-na, a Moscow-based mar-keting expert, only signed a marriage contract with her husband after they de-cided to divorce and need-ed to split their apartment.

Blinded by love? Wake up to marriage contracts

Luckily, it ended amicably, with her husband deciding to leave her with the apart-ment, says she. “Russians believe that love and a marriage contract are incompatible,” says Al-exander Tesler, a Moscow-based psychotherapist. Agrees Kirill Podyachev, a researcher: “A prenuptial agreement treats the wife and husband as equal par-ties, which is unacceptable for Russia’s traditional pa-triarchal view of the fami-ly.” The country’s legal system only introduced a prenup-tial agreement — or mar-riage contract, as it is known in Russia — in 1996, says Alexander Latseiko, a spokesman for the Federal Notary Chamber. In the So-viet era, there was little need for this, as most peo-ple had very little property to contest in a divorce, he added. But this attitude is slowly changing, especially with a growing number of afflu-ent Russians. In the last � ve years, the number of new marriage contracts has

quadrupled from about 5,000 in 2005 to 25,000 in 2009. “Marriage contracts are the evidence of the country’s prosperity,” says Tesler. Legislation on the con-tracts, however, remains imperfect, as it only covers property rights, opines Ole-sya Yermolenko, a lawyer at the Moscow � rm Annexus. Her law firm drafts mar-riage contracts — which can be signed after the wedding as well — for two or three couples a week. The business picks up in the nuptial season - March, April, August and Septem-ber. The idea is gradually tak-ing hold, says a 2008 sur-vey. Of the 1,000 urbanites polled in Moscow, St. Pe-tersburg, Yekaterinburg and Novosibirsk, 59% ap-proved of splitting proper-ty in a marriage contract. Headline news about ce-lebrity couples wrestling over property, too, have in-� uenced the trend. Billion-aire Dmitry Rybolovlev’s fortune in fertilizers is set to shrink with his divorc-ing wife demanding a hefty share. Two years ago, Mos-cow tabloids had a � eld day reporting the divorce of Viktor Baturin, a promi-nent businessman and brother-in-law of Mayor Yury Luzhkov, from his wife, pop producer Yana Rudkovskaya.

NATALYA KRAINOVATHE MOSCOW TIMES

BEN ARIS BUSINESS NEW EUROPE

The night ban on selling hard liquor is expected to bring down drunk driving and eliminate other drinks-induced vices.

Marriage contracts are not popular in Russia. But with a surge in divorce rates, the attitude towards marriage is changing.

After a prolonged recession, Russia’s mortgage market is showing green shoots of recovery, giving a shot to middle-class Russians dreaming of a new house.

Drinks Ban on night alchohol sale will help curb crimes

Habitation Lending set to cross $7 bn, but high interest rates and fat down-payments remain barriers to an evolving segment of middle-class home owners

Wedlock Of the nearly 1.2 million Russian couples, only about 25,000 sealed contracts last year

Russians believe that love and a marriage contract are in-compatible

POll: smoking ban in public places

The volume of mortgage deals expected this year in Russia is about 220 billion rubles ($7.3 billion).

are sober, they buy the quan-tity of alcohol, which is okay for them. But when they get drunk, they think that was not enough and at night, they go to get another bottle. We al-ready introduced the ban in some Russian regions and the result was really positive.”The extended night booze ban, however, will only be the first step towards reforma-tion. Starting on January 1, 2011, a bottle of vodka will be sold at a minimum price of 89 rubles (about $3).The government also intro-duced a law permitting a zero

A majority of Russians sup-port the idea of a ban on smoking and drinking beer in public places, a public opinion poll by the Levada Center re-veals. The number of smokers is about 37% (adult respon-dents) and most often they were men aged from 18 to 39 years. As for beer, the number of its consumers in Russia has decreased from 55% in 2007 to 51% in 2010.

Cook. “We are still expecting a wobbly six months, but most people believe the worst of the crisis is behind them. Europe is the wildcard that will de-termine what happens in the rest of the year.” Russia's state-owned Mort-gage Agency (AIZhK) fore-casts that mortgage lending in Russia will increase to 70-85 billion rubles ($2.3-2.8 billion) between April and June from 28-34 billion ($900 million-1.1 billion) in the

same period of 2009. Still, the market has some way to go to recover all the ground lost in 2009: the mortgage business reached a peak volume of 685 billion rubles ($22.8 billion) in 2008 (including the last quar-ter where almost no business was done at all), but the vol-ume of deals expected this year is about 220 billion ru-bles ($7.3 billion). The most onerous part of buy-ing an apartment in Russia is that the banks ask for fat down-payments, which could go upto 40% on a 6 million loan ($200,000), as it was in Sherbakova’s case. But it was not the end of her ordeal. She discovered that the owner of the apartment was willing to sell, but only wanted to put the sum of 2 million rubles on the contract. The state offers tax breaks on the � rst 2 mil-lion, but taxes the rest. Cook says it is a very common prob-lem and many sellers insist on only declaring a part of the sale to the authorities and the rest is done on trust – off the books. As everyone in Russia was given their apartment after the collapse of the Sovi-et Union and most people sell their communist-era home to � nance the purchase of a new one, few people need to bor-row and, as a result, the bulk of private real estate deals are done in cash.

Russia’s real estate blitzSensing a growing demand for housing, the Central Bank of Russia has been aggressive-ly driving down interest rates, reviving the real estate mar-ket, which was badly hit by the recession. There is a des-perate lack of housing – espe-cially new housing, as a few Russians want to move into a Soviet-era apartment block. The transfer of apartments to the occupants in the early 1990s was one of the biggest transfers of wealth by any government worth hundreds of billions of dollars on paper, but until the emergence of the mortgage market, homeown-

ers had no way to tap the value of their bricks and mortar. With a population of about 12 million, Moscow is by far the largest city in Europe, but Ro-land Nash, head of research at Renaissance Capital, says that to meet the burgeoning de-mand for new housing, anoth-er Moscow would have to be built. “Between 2005 and the � rst half of 2008, we were see-ing triple-digit growth in the mortgage market, but by the end of that year, the crisis kicked in and the business fell off a cliff,” says Cook. “Busi-ness restarted in 2009 and has been building from there.” Even at its peak, Russia’s mortgage business was equiv-alent to 3% of GDP, compared to mortgages in Poland (10% of GDP) and in the UK (60% of GDP.)But prices have recovered fast. Buyers were expecting prices to fall sharply last year in the midst of the crisis, but most sellers shrewdly took their properties off the mar-ket. The development of the mortgage market in Russia, which emerged only in 2003, has been held back by high in-terest rates that were kept up in an effort to combat high in-� ation rates. Punters wanting to buy a home were looking to pay 14-16% on a 20-year loan. “One of the quirks of Russia’s mortgage business is that the first loan is not actually a mortgage at all, but a contract where the buyer borrows money from the bank that is given to a developer, who then uses the money to finish the building. Only once the con-struction is completed, is the loan converted to a tradition-al mortgage,” says Cook. This sounds like a hair-rais-ing way of buying a home, but Cook says that demand is so high that if the buyer changes their mind, it is easy to sell the contract. And Russians like this deal, as developers offer big discounts if the buyer is willing to pay for an unfin-ished property sight.

Bricks & mortar sans cash!Russians are among the wealthiest people in Eu-rope, thanks to the transfer of apartment ownership from state to occupants following the fall of the Soviet Union. While this property is worth hundreds of billions of dol-lars, few have been able to tap into their wealth without a functioning mortgage mar-ket. The wealth is tied up in bricks and mortar they strug-gle to sell. Around a dozen commercial banks were offering mortgag-es before the crisis hit in Sep-tember 2008, but most have withdrawn since, leaving 80% of the business in the hands of Russia’s two biggest state-owned banks, Sberbank and VTB Bank. Banks can typically ask for upto 30% of the cost of an apartment as a down payment, although in the last few months, more banks are offering 80-90% mortgages as the market revives.

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“I have seen so many surreal things in my time in Russia: a single-stemmed rose auctioned off for thousands of dollars, eight-hour traffic gridlock, and a nine dollar can of Dr. Pepper.”

“This is the best holiday of them all!” I gushed, “I’ve had three marriage proposals, ten invita-tions to go for a beer, and two guys asked me to swim with them.”

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