From Volume 37, Issue 41 of EIR Online, Published Oct. 22, 2010
Russia and the CIS News Digest

Russian Economy Still Depends on Energy Exports

Oct. 11 (EIRNS)—The economy of Russia is even more dependent upon oil and gas export prices and foreign capital than ever, Deputy Minister of Economic Development Andrei Klepach had to admit at an investment forum on Oct. 6, Novye Izvestia reported. Russia has not broken the power of the "Pirates of the Caribbean" crowd which has run looting operations against the country since the 1990s.

Russia's economic vulnerability is growing, Klepach said. Weakening oil and gas prices could cut Russian economic growth in half, down to just 2% (in GDP terms), rather than the 4-4.5% predicted by the Economic Development Ministry, and Russia "will have to fight for even this growth." The effect of the global financial and hydrocarbons market on the Russian economy these days was even more formidable than during the crisis of 1998, Klepach said. The only option is to modernize as fast as possible, he added.

If that means a leap into Silicon Valley, as is now being planned in Moscow, Russia will be in far worse shape than it is even now.

Free-market liberal Finance Minister Alexei Kudrin admitted that Russia needs for oil to average more than $60 a barrel in 2011, to get over the devastation of 2009, speaking at the IMF meeting Oct. 8.

Despite the danger, Russia is only upping its investment in the energy export sector: Economic Development Minister Elvira Nabiullina told journalists Oct. 6 that investment in the energy sector, including supporting infrastructure, could rise to 50% of overall Russian investments in 2011, RBC reported. Currently, 30% of investment goes to the energy sector, and this could rise to 38% by the end of 2010. Nabiullina said that investment in mechanical engineering and human capital were seven times lower than in energy, just 6.3% of Russian investment.

On top of refusing to break from the energy-export addiction, the liberal reform crowd in Russia is promoting a new wave of privatization. While the scale of Russia state enterprises is still considerably larger than in the United States, that could change. Sales of government stocks in the largest oil-producing company Rosneft, the leading infrastructure company Transneft, the power-generating company Rushydro, and the largest banks, Sberbank and VTB, are planned for this year, the "Voice of Russia" reported today. VoR quoted Alexei Kudrin calling the interest of U.S. banks in the privatization of Russian state companies a good sign, since, he claims, American banks are known for their ability to detect a profitable project earlier than other banks! Moscow city assets could be the next on the privatization block, the Moscow Times reported today.

Kudrin received the Finance Minister of the Year 2010 award from Euromoney magazine at the IMF meeting last week, for his support for free markets, joining the WTO, and privatization.

Russian Project Begins 'Virtual Existence,' as Arnie Drools Over 'Bags Of Gold'

Oct. 11 (EIRNS)—The Pirates of the Caribbean are ramping up operations in Russia, amidst illusions in Moscow about recovery from the world economic crisis. Today, President Dmitri Medvedev attended the meeting of the Global Innovation Partnerships Forum, to promote Skolkovo, the yet-to-be-built Russian "innovation center" intended to be Russia's very own Silicon Valley. One of the featured guests was California Gov. Arnie Schwarzenegger, who is leading a delegation of U.S. venture capitalists and Silicon Valley hotshots to Moscow and Kazan. Medvedev complained today that "sadly," Russian businessmen are not yet ready to invest in risky innovation projects; hence, Arnie's visit, which is returning Medvedev's visit to California in June, when he visited Apple, Inc., Cisco Systems, Inc., and Twitter, Inc., in Silicon Valley. Medvedev joked that perhaps Arnie could become Mayor of Moscow, to replace the ousted Yuri Luzhkov.

On Oct. 8, deputy head of the Presidential Administration Vladislav Surkov announced that the Ministry of Finance has allocated funds for Skolkovo, and today, the Skolkovo Foundation will sign all the papers, so that, as Izvestia reported Oct. 8, "the innovation city outside of Moscow, which still does not physically exist, will begin operating virtually."

Schwarzenegger is licking his lips. "The potential for growth [in Russia] is so extraordinary, it's like looking at a gold or diamond mine," he told the innovation forum. "All you've got to do is to go in there and get it." Arnie praised Medvedev as "one of those great visionaries." Accompanying Schwarzenegger are officials from Google, Inc., Oracle Corp., and Microsoft Corp., biotechnology company Amgen Inc., and fuel-cell technology startup Bloom Energy.

Viktor Vekselberg, a Russian energy and metals entrepreneur who is running the Skolkovo project, said it will need 180-200 billion rubles ($6-6.7 billion) over the next five years, public and private. But Russian small enterprises are in no situation to invest: Despite government subsidies, the number of SMEs (small and medium-size enterprises) has fallen 6% in the past year, and at rates three and four times that in central and south Russia.

A key operative in the Skolkovo project is Anatoly Chubais, who ran the privatization (mass looting) of the Russian economy for President Boris Yeltsin in the 1990s. As head of the Russian Corporation of Nanotechnologies (Rosnano), Chubais today announced that they will be buying into Silicon Valley this year. "We are considering one of the most reputable microelectronics companies in the Silicon Valley, with which we are working on such deals," Chubais said. "We are talking about directly acquiring a share package in the parent company based in the Silicon Valley and, correspondingly, accommodating real business as part of the project's expansion in Russia." Rusnano will be negotiating with the venture capitalists accompanying Schwarzenegger. "The deals relate to production projects worth $1 billion and one serious venture capital fund with the potential volume of $400 million," he said.

'Shadow Economy' Is 25-45% of Russian GDP

Oct. 14 (EIRNS)—The head of the Russian State Statistics Service estimates that the revenues of the shadow economy—drugs, prostitution, illegal arms, tax-evading enterprises—make up about 25% of Russia's GDP, Russia Today reported yesterday. State Statistics head Aleksandr Surinov said told the newspaper: "Strictly speaking, all countries have to take into account illegal business, such as drug dealing, prostitution, counterfeiting, and arms sales. But only a few really do."

The Statistics Service estimates that the black economy accounted for 14-16% of Russian GDP during 2006-08, but surged to 20-25% in 2009. Other economists put the figure much higher: Mikhail Delyagin, head of the Globalization Issues Institute, was quoted by Novye Izvestia saying that the "figures presented by State Statistics are enough to make a cat laugh. On the other hand, 49% [an estimate of the black economy share of Russian GDP by some World Bank economists] is more about 2008, when a big part of Russian economy went into the shadows. The real figure, I believe, is around 44%. It is evident that the shadow economy still makes up a very big part of the Russian economy."

Russia Impatient Over U.S./NATO Inaction Against Afghan Opium

Oct. 15 (EIRNS)—Having received no real help from the United States and NATO against the Afghan opium/heroin flooding into Russia, Moscow is becoming increasingly impatient. For years, Victor Ivanov, the director of Federal Drug Circulation Control Services, has urged the United States and NATO to interdict huge amounts of drugs flowing into Russia through Central Asia. The narcotics are coming through northern Afghanistan, where the Taliban is not a dominant force. Recently, Ivanov announced that Russia, Iran, Azerbaijan, Turkmenistan, and Kazakhstan will form what will be known as the Caspian 5, a coalition to fight the inflow of Afghan drugs.

In addition, some Russian Members of the Duma are now contemplating the deployment of Russian military units in Central Asian states to wage an anti-drug campaign. Speaking at a security conference in Moscow in early October, Semyon Bagdasarov, a member of the State Duma's International Affairs Committee, called on Russia to seize the initiative. The United States, he hinted, can't be trusted to defend Russian interests.

A permanent representative of the Russian Defense Ministry may enter the Russian State Anti-Drug Committee soon. Until now, all Ministries except the Defense Ministry were represented in this office.

The use of the Army to interdict drugs has also been mooted in Moscow. Many countries use their Army in the struggle against drug distribution, Dmitri Rogozin, the Russian permanent emissary to NATO, told the Voice of Russia last month. "For example, Americans, in cooperation with the Colombian authorities, often organize raids of the U.S. Special Operations Troops against the Colombian drug mafia," Rogozin pointed out.

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