From Volume 7, Issue 7 of EIR Online, Published Feb. 12, 2008
Russia and the CIS News Digest

Putin Addresses State Council on Development Strategy

Feb. 8 (EIRNS)—Russian President Vladimir Putin today addressed an expanded session of the Russian State Council, which convened to discuss "Russia's Development Strategy Till the Year 2020." Just over three weeks before the March 2 Russian Presidential election, he spoke to that topic in terms of his and his team's commitment—as the Kremlin video cameras repeatedly cut to Presidential candidate Dmitri Medvedev—to high-technology growth and to enabling the Russian population to have a standard of living that is adequate for an "innovation economy."

Though Putin only alluded to the global financial and economic crisis, in terms of ensuring Russian "macroeconomic stability under conditions of instability in world markets," he talked about Russia's leaders needing to persevere under conditions of an existential threat. Summing up his eight years in power, Putin described the conditions when he took power in 1999-2000 as disastrous, with "civil war" in the Caucasus, financial default, soaring mortality, and externally instigated threats to Russia's unity as a state. He said that he and his team had "shaped and implemented our plan—a plan to bring Russia through a systemic crisis." Putin called Russia a "self-sufficient" country, which is interested in there being calm international conditions in which it may develop, but which will not bow to attempts to "force upon us unfair competition and gain access to our resources in that way."

The speech came nearly one year after Putin's Feb. 10, 2007 speech at the Munich Security Conference startled the world, with his insistence that Russia remains a great power and will not be pushed around. Putin echoed that Munich speech when he turned to foreign policy, but he did not repeat the offers he had made a year ago (or laid the groundwork for, in the case of his later, dramatic Kennebunkport offer to the United States for shared work on missile defense). Rather, he cited NATO postures regarding Conventional Forces in Europe and U.S./NATO behavior on ballistic-missile defense, as being not in good faith. "They try to convince us," said Putin, "that none of this is directed against Russia. But there has been no constructive response to our well-founded concerns. There are plenty of talks on these topics. But our partners unfortunately use all of this—and I am forced to take stock of this, with a heavy heart—as no more than a diplomatic and propaganda screen for carrying out their own plans. And we are effectively forced to react, to take the relevant decisions. Russia has, and will always have, an answer to these new challenges." Putin went on to talk about the contours of a new arms race, under these conditions.

Medvedev Wants Firms To Acquire Tangible Assets Abroad

Feb. 6 (EIRNS)—First Deputy Prime Minister Dmitri Medvedev, the leading candidate for the Russian Presidency, wants Russian state-owned and private companies to push ahead with the acquisition of resource and manufacturing companies abroad, he told a Jan. 31 conference of the Russian Union of Industrialists and Entrepreneurs in Krasnodar. "The majority of powerful countries are engaged in this," Medvedev said, "Many of them are very active, like China. And we should be active, too. This will allow us to re-tool Russian enterprises with technology, boost their production culture, and grant them the opportunity to diversify investments and win new markets."

The Financial Times of London, on Feb. 1 and 2, ran two articles on Medvedev's speech, reflecting anxiety in crisis-gripped financier circles over the acquisition of real assets by China, Russia, and other nations that have so-called "sovereign wealth funds," accumulated through amassing currency reserves, including from oil and gas export revenues. The current issue of Foreign Affairs, journal of the New York Council on Foreign Relations, includes a call by U.S. Deputy Treasury Secretary Robert Kimmit for regulation of these government-owned funds' activity.

The Financial Times noted some of Russia's acquisitions to date, including state-owned Gazprom's takeover of all or part of the national pipeline networks in Serbia and Belarus, but also the acquisition by Russian privately owned metals producers of mining, auto, and construction companies in the U.S.A., Canada, Germany, and Austria. "Russia is considering a plan to invest part of its $157 billion oil windfall fund in foreign companies," worried the paper. Such Russian acquisitions abroad more than doubled, year-on-year, in 2007, to the level of $18.7 billion.

The $157 billion figure refers to Russia's so-called Stabilization Fund, comprised of oil export tax revenues withheld from circulation inside Russia. As of Feb. 1, it was divided into a similar $125 billion Reserve Fund, and a National Welfare Fund of $32 billion. There is an intense battle going on in Russian government and related circles, over how to handle those latter monies. Former Economics Minister German Gref, who now heads the state savings bank Sberbank, wants the government to purchase stock in Russia's own banks, because of the current liquidity crisis they have caught from the global one. Finance Minister Alexei Kudrin last week advocated more Russian investment in Western stock markets, while today, in a Japanese press interview on the eve of traveling to Tokyo to attend the G-7 finance ministers' meeting on Feb. 8, he suggested Russia should accumulate Japanese yen (as against only dollars, euros, and British pounds, at present). Now Medvedev has weighed in, with his call for acquiring foreign bricks and mortar, and resources and machinery, through corporate takeovers.

Equally intense is Russian turmoil over what to do about inflation. Russian TV and other media played up public clips from a Jan. 31 cabinet meeting, during which Prime Minister Victor Zubkov took to task the finance ministry, economics ministry, and central bank (all institutions at which liberal free-market economists have remained in charge) for allowing inflation to careen upwards. Zubkov demanded that "capital inflows," such as the foreign borrowing through which Russian firms have run up nearly half a trillion dollars in foreign debt, should be monitored in such a way as to "encourage investment capital," as against "speculative capital." This remark, too, grabbed the attention of British media, with Reuters quoting unnamed "economists" who lied that "it is impossible to make a difference between speculative and non-speculative capital"!

Russian 'Safe Haven' Notion Collides with Reality

Feb. 8 (EIRNS)—Despite a Russian Central Bank official's warning last week that Russian banks face a potentially lethal liquidity shortage, the same Central Bank on Feb. 4 implemented a hike in its benchmark refinancing rate for the first time in a decade, from 10% to 10.25%. Announcement of the move came late Feb. 1, just hours after the daily Kommersant had leaked Central Bank deputy chairman Alexei Ulyukayev's warning that the bank liquidity crisis was a higher priority to address than the currently rampant inflation. Ulyukayev, Finance Minister Alexei Kudrin, and other officials who made their careers integrating Russia into the global financial system, are now damned if they do, damned if they don't—just like their role-models at the U.S. Fed and other institutions of the Anglo-Dutch model central banking system.

Also citing the liquidity crisis was former economics minister and current head of the State Savings Bank (Sberbank) German Gref, who told the Troika Dialogue Russian Forum that Russia's new sovereign wealth funds might have to be used to bail out second-tier Russian banks that are facing a "threat"—$80 billion in short-term foreign loans that they have coming due this year. While Russia paid down its state debt to $37 billion, using oil revenues, corporate foreign borrowing has skyrocketed. In coverage of the Troika Dialogue event, Ambrose Evans-Pritchard of the London Daily Telegraph quoted Anton Kozhinov, head of finances for the state oil company Rosneft, on the continuing paralysis of Russian debt markets. "We haven't seen a single Russian company rolling over its Eurobonds, even those with high credit ratings," Kozhinov said.

On Feb. 7, fifteen members of the Russian Bank Association Board called on Prime Minister Victor Zubkov, demanding assurances of government support if the liquidity crisis continues. With them at the meeting were Central Bank Chairman Sergei Ignatyev, Alexei Kudrin, Gref, and Kremlin advisor Arkadi Dvorkovich, among others. Kommersant daily, which expresses the views of Moscow business circles, reported that Zubkov did not want to recognize the potential for further crisis, telling the group that the banking system "has proven stability and independence from the external environment" and focussing on "ensuring stability in the long term."

Gref stated afterwards that Russian banks will be forced to raise rates and cut lending in the second quarter of this year, which will hit investment rates and overall economic growth, reported. He repeated his call for the new National Welfare Fund to put money into Russian banks by purchasing their stock. Gref linked the growing costs of financing to the global credit crunch.

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