22

Chapter 2

REVIEW OF LITERATURE: A PROFILE OF THE RUSSIAN FEDERATION

Chapter Contents

Sections Contents Pages 2 .1 Introductory 23

2 .2 A Brief Historical Perspective of Russia 23-28 Geographical Expanse of the Russian Federation and its 2.3 28-31 Division for Administration 2.4 Demographic and Ethnic Profile of Russia 31-33 2.5 Political Parties and State of Democracy in Russia 33-34

2 .6 Structure of Russian Government and Judiciary 34-35 2.7 Russian Media and External Exposure 36-38

2 .8 Ethical and Human Rights Record in Russia 38 2.9 Ecological and Environmental Factors Relevant to Russia 38-39

2 .1 0 Russia’s Geostrategic Orientation 39-43 2 .1 1 Russia’s Defence and Resurgent Defence Industry 43-46

2 .1 2 State of Economy in Russia 46-55 2.13 Russia’s Trade and Commerce 55-63 2.14 Russia’s Relations with China 64-69 2.15 Russia’s Relations with India 69-81 Potentials and Global Competitiveness Ranking of Russia 2.16 81-82 by World Economic Forum 2.17 Chapter Summary 82-84 Chapter End Notes 84-86 23

C h ap ter 2

REVIEW OF LITERATURE:

A PROFILE OF THE RUSSIAN FEDERATION

2.1 Introductory

2.1.1 Russia was seen as “a riddle wrapped in a mystery inside an enigma”.' Today, a news website claims to be “un-wrapping the mystery inside the enigma”.^ An eminent western weekly fmds the currently resurgent Russian Federation with enigma variations, “Russia is both a recovering world and a corrupt oligopoly with a market economy of sorts’’.^

2.1.2 During the twentieth century Russia was a platform for the most eventful socio­ economic experiment of communism and ascended to the status of a reckonable geo-strategic power. By its last decade the disintegration of the former Union of the Soviets Socialist

Republics (USSR) and a more painfiil economic crisis had to be endured by its people. Russia lost its glory and the world a balancing super power.

2.1.3 The dawn of twenty first century was beheld by a uni-polar world along with unwarranted global militancy and preventable regional terrorism. This chapter seeks to bring out some salient facts about Russia for benefit of those who may be seeking better harmony in the world with a special focus to its relations with China, hidia and rest of the world.

2.2 A Brief Historical Perspective of Russia

2.2.1 The Slavs. During the first century, the Roman Empire is recorded to have traded

Russian and Germanic furs, amber and slaves in return of oil and wine.*’ In the sixth century, after decline of the Western Roman Empire due to barbaric attacks and rise of the Eastern

Byzantine Empire, the Slavs, agricultural people, generous, hospitable, religious and fond of music, living on the land of present European Russia migrated to Danube and Balkan

Regions. Slavs and Mohammedans reduced the Byzantine Empire to an area around

Constantinople (Istanbul). The Greek Orthodox Church followed by the Byzantine and the

Slav people got separated from the Western Roman Church.' Later, as the Western Europe adopted Roman Catholicism, the Slav people settled in the Eastern areas and Balkans continued to look to Byzantium for religious and cultural leadership of the Greek Orthodox 24

Church. Even their writing was based on Greek alphabet and literature, art and architecture was strongly Byzantine in character. Their foreign trade was mostly with the empire.

2.2.2 The Rus. During the period of invasion of England by the Vikings, certain elements from Norway, Sweden and Denmark, called as “Russ” by the Slavs invaded and settled down in areas of Novgorod and Kiev and their chieftain named ‘Rurick’ carved a kingdom which was to become the first Russian State. They traded from the Baltic to the Black Sea and kept up commercial relationship with Constantinople and Bagdad. Subsequently the Vikings revived the trade between England, Normandy and Russia. While interactions and conversions of faith and exchange of territory between believers of the Roman and Greek

Orthodox Churches carried on for centuries, fierce Tartars from Central Asia also known as the “Golden Hordes” and Islamic Turks from Asia Minor (currently Turkey) reduced the

Byzantine empire and forced the Russian to look more towards the East rather than to the

W est.

2.2.3 Rise of Moscow. During the Tartar/Mongol rule (13*'’ to 15*’’ century), the Russian princes governed the people in their territories, collected taxes from them and paid tribute to their Sovereign Masters, the Khans who had created Khanates for the purpose. One Prince of

Muscovite family was commissioned by the Khan to collect tributes and his authority was delegated through generations. Moscow thus became the Centre of Russian Culture and after the fall of Constantinople, of the Orthodox Church. It traded with the West and expanded in territory due North and South. In 1480 Prince Ivan III, the Great (1462-1505) declared his independence breaking the supremacy of Golden Horde and laying the foundation for the modem R ussia.Ivan married the niece of last Byzantine emperor and proclaimed himself

Tsar (Caesar) and protector of Greek Orthodox Church. Moscow became the third Rome.

Ivan promulgated a law code {siiclebnik) and his immediate successors expanded the territory eastwards beyond Ural Mountains. Europeans however thought of Russians as Asian rather than a European state.^

2.2.4 Peter the G reat (bom 1672, ruled 1689-1725). Anxious to see his subjects acquire the institutions which made France, England and Netherlands respected nations, Peter embarked on a plan of Europeanization of Russia by opening the window to the West, i.e. ice free ports through which European goods, travelers and culture could enter Russia. He visited West

European countries, established embassies and invited scientists and mathematicians.

Established the port city of St Petersburg, Schools, hospitals, the Russian Academy of 25

Sciences, started publication of first newspaper “ VedomostC and introduced a calendar. He

also expanded territory. Moscow the symbol of old Russia was humbled before the splendor

of this W estern City, where Peter established his court and assumed the title, “Emperor of all

the Russias”. This opposition between a pro-Russian Party and Pro-European Party remained

a permanent heritage in Russian politics from the time of Peter the Great, for many Russians

felt that their country possessed a peculiar and distinct culture of its own which could not

successfully be blended with or remodeled on that of the W estern European Nations.*

2.2.5 Napoleon’s Defeat in Russia. After a Franco-Russian alliance framed in 1807, the relations between them got strained over dominance of territories, heritance and family discords. Napoleon invaded Russia in September 1812 hoping that the Russian ruler

Alexander I (1801-1825) would submit. However the Russians scorched earth policy and

fortitude compelled Napoleon to withdraw having lost 7, 50, 000 men in the fierce winter.

This broke the m yth that Napoleon was invincible.^

2.2.6 Reverses in the Crimean W ar (1853-56). Tsar Nicholas I (ruled, 1825-55) wanted an

access to the Black Sea Port of Sevastopol (later to be part of Russia and now lost again to

Ukraine) and control of Constantinople. There were differences between the Roman Catholic

and Greek Orthodox Churches. Austria wanted control over the Balkans. Russia had occupied

Moldova and Wallachia (currently Romania) and later evacuated. An alliance between

Russia, France and Britain against the Austrians broke and Russians had to withdraw losing

that war and access to Black Sea."’

2.2.7 Industrialization. The Industry in Russia grew after in Europe because Russia had

vast indigenous resources like agriculture, forests, iron and coal. "With its large domestic

market and vast natural resources, Russia threatened to become a serious rival to the older

industrial powers, especially if its lethargic government became more alert and efficient and

encouraged development of Russian economic resources more intelligently and more

vigorously."" The Trans-Siberian railway came up during 1891-1903.

2.2.8 Defeat in Russo-Japanese W ar (1904-05). The Japanese empire, an obscure country

of Asia rose through a political upheaval to commercial prominence after its ports were

activated by USA in mid-nineteenth century. The conflicting interests in Manchuria led

Russia to a war with Japan which provided geostrategic advantage to Japan both over Russia

as well as over China in the region. 26

2.2.9 Agitation, World War I, the Revolution and Formation of Soviet Union. A lo n g with the industrialization in Europe, and as an outcome of ideas of Karl Marx (bom in Trier,

Germany, 1818-83), “the agitator with a pen” who fathered the concepts of modem socialism and communism, a Social Democratic Party was created with two divisions, the B olsheviki o r the people in majority led by Vladimir Ilyich Lenin (1870-1924) who won the majority at the party congress held in London in 1903, believing in a centrally controlled bloody revolution to replace stardom by the peasants and workers and M ensheviki or the people in minority led by Martov believing in democratically organized party to bring the change in a slow process.

For nearly three decades, there were hectic administrative reforms, bloodshed, abdication and assassination of Tsar Nicholas II. Russian Empire became Russian Federation and with

Belarussian, Ukarainian and Trans Caucacian Republics joining it Union of Soviet Socialist

Republics (USSR) was formed in 1922. The Church was separated from the State without compensation resulting in its decline. Lenin instituted the first Soviet Constitution, the

Communist International and a New Economic Policy, a compromise between capitalism and communism, which after his death in 1924 were ruthlessly, carried forward by his successor losiph Dzugashvili (Joseph Stalin).

2.2.10 Stalin Era, World W ar II (1939-45), Cold W ar and Stagnation. Joseph Stalin remained a central figure in the Soviet Russia for a long time from 1922 to 1953, assuming and consolidating his political power, ruthless collectivization, five years plans, leading intemational communism, the world war against the Axis Powers (Germany, Italy and

Japan), expansion of territory and building a military strength to become a super power.

Soviet atom bomb was tested in August 1949. The world powers were divided in two military blocks the North Atlantic Treaty organization (NATO) and its countervailing organization Warsaw Pact. USSR got engaged to a cold war. After Stalin's death his successor Nikita Khrushchev (Party First Secretary, 1953-64) started de-Stalinization, decentralization and some agricultural refomis. First space satellite was launched in Oct 1957 and first manned space flight was taken by Yuri Gagarin in 1961 proving to the world

USSR's leadership in scientific and technological field. Soviet Union intervened in

Afghanistan in 1979 to roll back in 1989. USSR continued with the command economy, poor productivity, tactless management, hidden inflation, black economy, rampant corruption, hyper alcoholism and anarchy. 27

2.2.11 Perestroika (Restructuring), G lasnost (Openness). Mikhail Gorbachev came up with the bold idea of reconstruction of socio-economic system away from centrally planned

economy and bringing transparency in governance in 1980s. The world wondered about this revolutionary idea. There was a debate about fast and slow processes to carry out the reconstruction. Financial Institutions and consulting firms intervened to hasten the change.

Several entrepreneurs went for investment and expansion of their businesses. However, there

was a gross deficiency in financial and legal systems. The reconstruction experiment faced

bitter resistance. After elections of Peoples Deputies of Russian Federation a Communist

Party of Russian Federation was formed in 1990 and Boris Yeltsin was elected as President

of the Russian Federation in June 91. Communists attempted a coup against Gorbachev in

Aug 91. Yeltsin led a brave opposition of the coup {putsch) and announced plans for

economic reforms. Estonia, Latvia, Ukraine, Belarus, Moldova, Azerbaijan and Chechnya

declared independence. Russia Ukraine and Belarus agreed to form a Commonwealth of

Independent States (CIS) formally constituted in Alma-Ata, Kazakhstan on 21 Dec 91 to be joined by Armenia, Azerbaizan, Belarus, Georgia, Kazakhstan, Kyrgyzstan and MoldoVa.

2.2.12. Disintegration of the USSR. Gorbachev resigned on 25 Dec 1991 and USSR got

formally dissolved on 31 Dec 1991. The principal legal successor to USSR was Russian

Federation which formally assumed the Soviet seat in the UN assembly took control of Soviet

embassies around the world and property and took responsibility of Soviet debt of 60 billion

US dollars.

2.2.13 Rossiyskaya Federatsiya or The Russian Federation under its First President Boris Yeltsin. Soon after its fomiation Russian Federation became member of the World Bank, the International Monetary Fund (IMF) and European Bank for Reconstruction and Development (EBRD). Boris Yeltsin, the first Russian President saw through several political upheavals, rise of oligarchs (especially in hydrocarbon and media sectors) and economic decline including crash of dollar in 1994. His Prime Minister Egor Gaidar resigned, followed by Viktor Cheraomyrdin. Yeltsin got elected for second tenure in 1996, but due to his ill health appointed Vladimir Vladimirovich Putin as his successor.

2.2.14 Stability under Vladimir Putin and Dmitri Medvedev. Putin mostly with his colleagues called as siloviki, being drawn from Komitet Gosiidarslve?moy Bezopasnosti (KGB), i.e., Soviet Committee for State Security, a Secret Police and its successor Federal Security Bureau (FSB) fomied a strong government and scr\ ed for two tenures as President. Dmitri Anatolyevich Medvedev, with support of Vladimir Putin has succeeded as President. Putin serving as his Premier. This arrangement offers the much desired continuity in 28

governance by an integrated team, as desired by Boris Yeltsin, Russia, albeit severe criticism of this arrangement from several quarters.

2.2.15 During Vladimir Putin's presidency, Russia recovered from the loss of confidence that had affected the country since the break-up of the Soviet Union and acquired a renewed sense of national pride, bolstered by a booming economy and an assertive foreign policy. Russia joined several regional groups, came close to G7 (Canada, France, Germany, Italy, Japan,

United Kingdom and USA) to form 08 and became member of Asia Pacific Economic

Cooperation (APEC) in 1998. Now it is aspiring to membership of Organization for

Economic Cooperation and Development (OECD) and the World Trade Organization

(W TO), with its economy to be integrated with the rest of the world in real sense. To a large extent the old image of Russia has been recovered. A lot needs to be done still.

2.3 Geographical Expanse of Russia and its Administrative Divisions

2.3.1 Area and Time Zones. Russia with i|s area of 17,075,400 square kilometres

(approximately 1.8 times size of USA) contained in Europe and Asia covering 11 time zones

(Kaliningrad GMT plus 2 to Anadyr Range GMT plus 12 hpurs) and a diverse terrain of

inhospitable, frozen and sparsely populated Arctic north to the generally temperate south.

European and Asian parts are divided by the Ural Mountains.

2.3.2 The European Part. The vast monotonous plain from the Baltic to the Black and

Caspian Seas and from Carpathian Mountain on the border of Hungary to the Urals is the

most developed and part of significance to Russia. In the North there are many swamps and

thick forests of coniferous trees, the central belt produces a mixed deciduous growth whereas

the plains of south are semi arid and bare. The bare uncultivated steppes of the south,

stretching towards North of the Black and Caspian Seas into the heart of Asia provided an

undefended route down which the Asiatic nomads swept at intervals. The Romans did not

venture to the frozen east beyond their normal interest of fir and amber which left the region

underdeveloped for centuries. 29

Sketch 1: Russian Federation - Federation subjects: Not to Scale (Courtesy: Anamika; Source: http://www.lib.utexas.edu/maps/commonwealth/Rissiaaddivisions.ipg )

S IKAS \ nJ S I'AXy^C^i ' ' I ) J^^TAJIKISJ^N CHINA 1. Chukotka 22. Khantia- 44. Tatarstan 67. Mordovia 2. Kamchatka Mansia 45. Chuvashia 68. Ulyanovsk 3. Magadan 23. Omsk 46. Mari El 69. Samara 4. Sakha 24. Tyumen 47. Nizhny 70. Saratov (Yakutia) 25. Kurgan Novogorod 71. Volgograd 5. Khabarovsk 26. Sverdlovsk 48. Vladimir 72. Rostov 6. Sakhalin 27. Perm 4 9 .Ivanovo 73. Krasnodar 7. Primorsky 28. Komi 50. Kostroma 74. Adygea 8. Birobijan 29. Nenetsia 51. Yaroslavl 75. Stavropol 9. Amur 30. Novaya 52. Tver 76. Kalmykia 10. Chita/ Zemlya 53. Smolensk 77. Astrakhan Zabaykalsk 31. Arkhangelsk 54. Bryansk 78. Dagestan 11. Buryatiya 32. Murmansk 55. Kaluga 79. Chechnya 12. Irkutsk 33. Karelia 56. Adygaya 80. Ingushetia 13. Tuva 34. St. Petersburg 57. Moscow 81. North Ossetia 14. Krasnoyarsk 35. Leningrad 58. Tula 82. Kabardino - 15. Khakassia 36. Pskov 59. Oryal Balkaria 16. Gomo- Altay 37. Novgorod 60. Kursk 83. Karachay - 17. Altay 38. Vologda 61. Belgorod Cherkessia 18. Kemerovo 39. Kirov 62. Voronezh 84. Kaliningrad 19. Novosibirsk 40. Udmurtia 63. Lipetsk 85. Yamalo 20. Tomsk 41. Bashkortostan 64. Ryazan Nenets 21. Yamalia 42. Chelyabinsk 65. Tamhov 43. Orenburg 66. Penza 30

2 .3 .3 The Asian Part. The vast area bounded by and containing parts of Ural mountains in the West, the Arctic Ocean on the North, the Bering sea and seas of Okhotsk and Japan in the Pacific on the on the East, Yablonoi and Sikhote ranges on the South East and regions of China, Mongolia and Kazakhstan due South constitutes the Asian part of Russia.

It is sparsely populated but is rich in natural and mineral resources and is assuming increasing importance for development.

2 .3 .4 Republics and Divisions. (Refer to Sketch 1) The Russian Federation comprises 85 administrative entities or federal subjects in the Russian Federation as follows:-

2.3.4.1 Nominally Autonomous Republics representatives of ethnic groups: 21 to

include Adygeya (Maykop), Ahay (Gorno-Altaysk), Bashkortostan (Ufa),

Buryatiya (Ulan-Ude), Chechnya (Groznyy), Chuvashiya (Cheboksary), Dagestan

(Makhachkala), Ingushetiya (Magas), Kabardino-Balkariya (Nal'chik), Kalmykiya

(Elista), Karachayevo-Cherkesiya (Cherkessk), Kareliya (Petrozavodsk), Khakasiya

(Abakan), Komi (Syktyvkar), Mariy-El (Yoshkar-Ola), Mordoviya (Saransk),

North Ossetia (Vladikavkaz), Sakha [Yakutiya] (Yakutsk), Tatarstan (Kazan'),

Tyva (Kyzyl) and Udmurtiya (Izhevsk).

2.3.4.2 One autonomous Oblast (Region): 1, that is, Yevrey [Jewish]

(Birobidzhan)

2.3.4.3 Administrative Oblasts: 46 to include Amur (Blagoveshchensk),

Arkhangelsk, Astrakhan, Belgorod, Bryansk. Chelyabinsk, Irkutsk, Ivanovo,

Kaliningrad, Kaluga, Kemerovo, Kirov, Kostroma, Kurgan, Kursk, Leningrad,

Lipetsk, Magadan, Moscow, Murmansk, Nizhniy Novgorod, Novgorod,

Novosibirsk, Omsk, Orenburg, Orel, Penza, Pskov, Rostov, Ryazan', Sakhalin

(Yuzhno-Sakhalinsk), Samara, Saratov, Smolensk, Sverdlovsk (Yekaterinburg),

Tambov, Tomsk, Tula, Tver, Tyumen, Ul'yanovsk, Vladimir, Volgograd, Vologda

Voronezh and Yaroslavl.

Z.3.4.4 Krais (Provinces): 9 to include Altay (Barnaul), Kamchatka

(Petropavlovsk-Kamchatskiy), Khabarovsk, Krasnodar, Ki'asnoyarsk, Perm,

Primorskiy [Maritime] (Vladivostok), Stavropol and Zabaykal'sk (Chita). 31

23.4.5 Autonomous Okrugs (Districts): 4 to include Chukotka (Anadyr), Khanty- Mansi (Khanty-Mansiysk), Nenets (Nar'yan-Mar) and Yamalo-Nenets (Salekhard).

2.3.4.6 Cities of special Adm inistrative status: 2 to include Moscow {Mosk\'ci), Saint Petersburg {Sankt-Peterhiirg).

2.3.5 Chechnya. The Chechen people had never willingly accepted Russian mle, and with the dissolution of the Soviet Union, had declared independence in November 1991 under a foiTner Air Forces officer. General Dzhokar Dudayev. With the continuation of Chechen

"independence" seen as reducing Moscow's authority, a widespread perception of

Chechnya becoming a haven for criminals, and the emergence of a hard-line group within the Kremlin advocating war, Yeltsin decided in November 1994 to use air strikes and military operations. After fierce fighting, seizing the Chechen capital Grozny, amid fierce resistance, troops moved on to other Chechen strongholds. A ceasefire was signed in the

Dagestani town of Khasavyuit on 31 August 1996.

2.3.6. The Second Chechen War began in August 1999 after Chechen militias invaded neighboring Dagestan, followed quickly in early September by a series of four terrorist bombings across Russia, which prompted Russian military action against the alleged

Chechen culprits. Initialh’ the main Russian technique used was to lay waste an area with artillery and airstrikcs before the land forces ad\ances. Most of the prominent past

Chechen separatist leaders have died or have been killed, including former president Aslan

Maskhadov and leading warlord and terrorist attack mastermind Shamil Basayev.

However, small scale conflict has continued to drag on and is possibly spreading across other parts of the Russian Caucasus.

2.4 Demographic and Ethnic Profile of the Russian Federation

2.4.1 Population. The Russian population of 142.5 million people in 2007 has been observed to be alarmingly declining due lower life expectancy of men (59 years) and inadequate health conditions for \\omen (life e.xpectancv' 73 years). The pattern of declining population is shown in figure 2.1.

2.4.2 Demographic Dilemmas. In order to keep the population and required work force to sustain its economy, according to an estimate, Russia needs to accept on the average more 32 than 70.000 immigrants per year. However immigration in Russia is resented for fear of loss of jobs to Russians. There are frequent media reports of forceftjl harassment even of

Indian students in cities Hke St Petersburg. The influx of Chinese population (called the

‘yellow hordes’) in the far eastern provinces of Russia and putting a claim on the Russian territory is being favourably considered and resolved by the Russian Government.'^

Fig 2.1 Declining Population of the Russian Federation in million persons

■1 Urban ------2 Rural 3 Total

146.3 147.2 145.8 1 4 5 .1 1 4 5 1 l4 3 .r 142.2 142 108.3 106.7 107.1 107.1 106.3 105.8 103.8 103.8

38.8 38.7 " ...... 38.4 ” ^ ...... ’38~4 38.2

2001 2002 2003 2004 2005 2006 2007 2008

Years

(Excel sheet chart by the Researcher based on data extracted and processed from 14 Russian Federal State Statistical sei-vices)

2.4.3 Religious and Ethnic Division. Majority 81.5 per cent people are Russian Orthodox Christians. 3.8 per cent are Tatars, 3 percent Ukrainians, much smaller proportion of

Jewish, Buddhist and more than a hundred nationalities in all to include Chuvash, Bashkir.

BelaiTJSsian, Mordovian, Chechen. German, Udmurt. Mari, Kazhak, Avar. .lewish and

Armenian. Under the Communist rule religion although not forbidden was not encouraged. Russian Orthodox Christmas was made an official holiday first time in 1991 after perestroika.

2.4.4 State of Russian Orthodox Christianity. The Russians are gradually returning to the old faith. To quote from a recent remark in Russia Profile, "Russia The new Patriarch of Moscow 33 and All Russia is about to be elected, and Alexander Arkhangelsky has a few favors to ask of him, mainly - to restore the Russian people’s faith in themselves and in their ability to change things for the better. It has been this lack of faith, Arkhangelsky argues, that has been the most detrimental to the Russian society, and now a new, authoritative figure can inspire some historical change.”^^

2.4.5 State of Islam in Russia. Farit Farisov, the Chairman of the Committee of Trustees at the Religious Board of Muslims of Russia’s European Region speaking about the difficulties in relationship between the regime and Islam in Russia says, "Islam is a religion that is as much a “backbone" in Russia as Orthodoxy is. Without Islam there would be no Russia, because there is not one significant area of life in our country that

Muslims don’t participate in ... Islam appeared on the territory of modem Russia a hundred years before the Kiev prince, Vladimir the Saint, made the decision for his subjects to adopt the Orthodox religion. Islam is very deeply rooted in Russian land and soil.”'^

2.4.6 Languages Spoken. There are over a hundred languages and dialects spoken across the Russian Federation and in neighboring countries. Russian however is used in official transactions and use of foreign words where their Russian equivalents are available is av o id ed .

2.5 Political Parties and State of Democracy in Russia

2 .5.1 Yedinaya Rossiya (United Russia) is the political parly fomicd in Dec 2001 by m e rg e r o f Mezhregioncil'noye Dris/icnic Yedinstvu (Inter-Regional Movement Unity)

(Medved) and the Otechestvo-Vsya Rossia (OVR) (Fatherland all Russia) is the largest in state duma.

2 .5 .2 Kommiinisticheskaya Partiya Rossiiskoi Federatsii (KPRF) or Communist

Party of the Russian Federation (CPRF) led by Gennadiy Andreyevich Zyuganov is the main opposition party.

2 .5 .3 Soyuz Pravikit Sil (SPS) (Union of Right Forces) the right wing opposition party led by Boris Nemtsev.

2.5.4 Just Russia led by Sergey Mironov. 34

2 .5.5 Liberal Democratic Party of Russia (LDPR) led by Vladimir Volfovich

Zhirinovskiy.

2.5.6 Patriots of Russia led by Gennadiy Semigin.

2.5.7 People's Union led by Sergey Baburin.

2.5.8 Right Cause comprising Leonid Yakovlevich Gozman, Boris Yuriyevich Titov, and

Georgiy Georgiyevich Bovt (registration pending, fonned from merger of Union of Right

Forces Democratic Party of Russia, and Civic Force).

2.5.9 United Russia led by Vladimir Vladimirovich Putin.

2 .5.10 Yabloko Party led by Sergey Sergeyevich Mitrokhin.

2.5.11 Present Status of Democracy and'Challenge to the Political Party in Power. Since adoption of the constitution in 1993, there have been four parliamentary and five

Presidential elections. However the skeptics feel that the "tandem" governing an'angement between the president, Dmitry Medvedev, and the prime minister, Vladimir Putin, will face a serious test in attempting to prevent financial turbulence from developing into an economic crisis. This would present a threat to Russia's hitherto stable political scene.

2.6 Structure of Government and Judiciary in the Russian Federation.

2.6.1 Under constitution of December 1993, Russian Federation is a democratic, federative, multi-ethnic republic, in which state power is divided between the legislative, executive and judiciary, which are independent of each other.

2.6.2 President (Head of the State and Commander in Chief of Armed Forces). Elected for a term of ibui' years (now six years through a constitutional amendment), renewable once by universal direct sufl'rage and holds broad Executive Powers. Executive power is held by the president who has the right to veto parliamentary legislation, while issuing decree on which the Federal Assembly may advise but not veto. 35

2.6.3 Prime Minister Appointed by the President functions as Chainnan of the

Government. The Prime Minister appoints the cabinet.

2.6.4 The Bicameral Federalnoe Sobranie (Federal Assembly) enjoys supreme

Legislative Power in Russian Fedration and comprises the following:-

2.6.4.1 Sovet Federatsii (Federation Council or Upper Chamber of Assembly)

is formed of 178 Members comprising two deputies (representatives) from each of

the federal territorial units appointed by the legislature and the executive in each

region.

2.6.4.2 Gosudarstvennaya Duma (State Council or Lower House). 450 Member

Half of the state duma members are elected from party list and half in a simple

'majority contest from territorial constituencies for a period of four years. A party

failing to gain at least 5 per cent of the total vote cannot win parliamentary seats.

The duma has the consultative function only advising the President on issues

concerning the relationship between central administration and the states.

2.6.5 Judicial branch at top level comprises the following:-

2.6.5.1 The Constitutional Court reviews the constitutionality of federal legislation.

2.6.5.2 The Supreme Court is the highest civil and criminal judiciary body.

2.6.5.3 The Supreme Arbitration Court resolves economic disputes between subjects of federation.

2.6.5.4 The Supreme Court and the Supreme Arbitration Court preside over a federal System of lower criminal and civil courts. 36

2.7 Russian Media and Outward Exposure

2.7.1 News. Russian State Television and Radio Broadcasting Company (VGTRK) control all national networks of broadcasting.

2.7.2 TV. There are several TV Channels The prominent amongst them are Russia TV

(National network), Channel One ( national network, 51% owned by state, 49% by private shareholders), NTV (national network, owned by state-run Gazprom), Centre TV (ow ned by Moscow city government), Ren TV (Moscow-based commercial station with strong regional network) and Russia Today ( state-funded, international English-language news channel, launched in 2005 via satellite, which aims to present "global news from a Russian perspective").

2.7.3 Radio. There are hundreds of radio stations operating in Russiai. Federarion where state-run networks compete with music-based commercial FM stations. A few important stations are Radio Russia, the national network run by state-owned Russian State

Television and Radio Broadcasting Company (VGTRK); Ekho Moskvy, an editorially- independent station with its majority share owned by state-run Gazprom; Radio Mayak , a slate-mn national network. Russkoye Radio, primarily a music-based private network and

Voice of Russia, the state-run external service broadcasting in English and other languages.

2.7.4 The press.

2.7.4.1 News Agencies. /^rt/--7'tf.v.v_(Information Telegraph Agency, the state- owned official news agcncy), RIA-Novosti (state-owned) and Interfax (private) are important News agencies.

2.7.4.2 Dailies. Izvestia (a popular daily mn by state run gas monopoly Gazprom),

Ekstra M, Centre, Moskovskii Komsomolets (Privately owned), Kommersant (a

business oriented daily controlled by Steel tycoon Alisher Usmanov),

Nezavisimaya Gazeta (influential, privately owned), Novosti, Pravda (both in

Russian and in English), Trud (meaning labour, a left leaning daily, owned by

Promsvyazbank), Spid Info, Argiimenty y Fact)’, Sovershenno Sekretno,

Megapolis Express. Iz Ritk v Riiky, Komsomolskaya Pravda (mass circulation left 37

leaning daily controlled by Energy Group YeSN), Rossiyskaya Gazeta (a

government-owned daily), Moscow Times (English), Moscow News (English) and

the most import Russia Today, the English Language Daily.

2.7.4.3 Weeklies. Argumenty i Fakty (meaning Arguments and Facts, popular

weekly containing in depth analysis of the latest political and economic events,

owned by Promsvyazbank), The Russia Journal a n d Russia News Journal

(containing news, analysis and political opinion), Moskovskie Novosti (an

international socio-political newspaper), Novaya Gazeta ( twice-weekly,

investigative journal with English-language pages), St Petersburg Times

(English language Weekly), Vladivostok News (English language periodical

covering political and business information in the Primorie) and Delovoj

Petersburg (in Russian English and German).'^

2.7.5 Outward Exposure. The Western Press as well as the internal dissident groups have

historically attempted to expose darker side of the close governance in Russia and its poor

state of social life. It is evident from the following lines by a historian from his article

“End of Russia?”:

2.7.5.1 "Rather than revenues from oil and gas flowing in as usual, capital is

flowing out. Production is dropping, unemployment is growing. Unresolved

problems of health, education and housing ha\ e been drastically aggra\ ated. With

oil prices below the $70 that was allowed for in the budget, the government will

have to wring money out of the population, as the reserve fund and the gold supply

is not going to last long.

2.1.5.2 "How is the regime going to manage to do this while maintaining its

strategy of facing down the West and America? How can the population be

controlled, when 40% live in poverty, and 15-20% of this 40% are practically

beggars? More than 60% of our fellow citizens live in small towns and villages. It

is there, on the social periphery, that paternalistic attitudes are most entrenched.

This population is almost totally lacking in the material or spiritual resources, or

the social means to change its position and lift itself out of its chronic depression. 38

2.7.S.3 'This chaotic mass of people is the bedrock of our corruption. This is

inevitable, constantly driven back into poverty as it is, swelling the ranks of the

unemployed, lacking all political organization, sustained by none of the structures

of a civil society. Corruption is increasing almost exponentially. It dominates

almost all sectors of society and all levels of power, including (so we are being

told) the highest levels, headed by the president and prime minister. It is one of the

most destructive consequences of the lack of structural and functional

differentiation in contemporary public life.”

2.8 Ethical and Human Rights Record in Russia.

2.8.1 Human Rights Status. While human rights and civil freedoms have improved dramatically since the collapse of the USSR, some concerns remain which continue to attract public and parliamentary interest. These include human rights violations in

Chechnya and the North Caucasus, the rule of law, torture, the development of civil society, media freedom, xenophobic or racially motivated attacks and conditions in the armed forces.'*’

2.9 Ecological and Environmental Concerns.

2.9.1 Strain of Environment due to Economic Crisis. The speedy economic recovery that Russia underwent after the 1998 crisis has had a negative impact on the environment that has been suffering from a lack of concern on the part of the authorities and businesses.

Industrial waste has been allowed to damage the environment, particularly the rivers. The oil and gas boom was as hannful as anything.

2.9.2 Nuclear Waste. The Chernobyl nuclear leak has left an indelible mark in peoples minds. After decades the nuclear fuel is showing a comeback globally. This needs paramount attention.

2.9.3 Polluting Oil Industry. Oil and gas ar the basic sources of revenue for Russia.

According to an estimate, the direct damage inHictcd by the Sakhalin-11 project alone was over S500 million, including losses from the 46 tons of fish that died as a result of the implementation of the project. 39

2.9.4 Polluted Imports. Considerable amount of foodstuff including chicken from USA and toys from China or Turkey are a threat to the environment.

2.9.5 Positive Outlook towards Ecology.

2.9.5.1 East Siberia - Pacific Ocean Pipeline. The earlier alignment of East

Siberia - Pacific Ocean Pipeline planned by its operator Transneft, for shipment of

Russian Oil to China was running close to the Lake Baikal. It was shifted by some

40 kilometers away.

2.9.5.2 Uvekskaya Petroleum Installation of TNK-BP in Saratov h a s b een

heavily damaging the Volga River with oil and oil product waste. In 2008, when

the economy was still on the rise, the company put forward a plan for the adjacent

territories with an announced annual spending of over a million dollars.

2.9.6 The new ecology councils established in various goveming bodies and corporations have been taking environmental issues to the top of the agenda. To quote Vyacheslav

Fedorov, head of the environmental rating of Russian regions project, “Businesses have been aggressive, we had a phase of active economic growth and the economy was the number one priority while the citizens' rights to a positive environment were neglected; due to the crisis w e’re seeing further deterioration"’'

2.10 Russia’s Geostrategic Orientation

2.10.1 Participation in International organizations. Russian has been a party to major world organizations like the APEC, Arctic Council, ARF, ASEAN (dialogue partner), BIS,

BSEC, CBSS. CE, CERN (observer), CIS, CSTO, EAEC, EAPC. EBRD, G-20, G-8,

GCTU, IAEA, IBRD, ICAO, ICC, ICCt (signatory). ICRM, IDA, IFC, IFRCS. IHO, ILO,

IMF, IMO, IMSO, Interpol, IOC, lOM (observer), IPU, ISO, ITSO. ITU, ITUC, LAIA

(observer), MIGA, NAM (guest), NSG, OAS (observer), OIC (observer), OPCW, OSCE,

Paris Club. SCO, UN, UN Security Council. UNCTAD, UNESCO, UNHCR, UNIDO,

UNITAR, UNMIL, UNMIS, UNOCI. UNOMIG, UNTSO, UNWTO, UPU. WCO, WFTU.

WHO, WIPO. WMO, WTO (observer) and ZC ." (Refer to Appendix E for acronyms and explanations). 40

2.10.2 Case of Accession to WTO. As Russian companies are increasingly interested in foreign acquisitions, foreign direct investment in Russia has been increasing as well.

Russia is continuing talks on its accession to the World Trade Organisation (WTO). It has completed bilateral negotiations with almost all member countries, and is now at the multilateral phase. Member states of the Organisation for Economic Cooperation and

Development OECD's annual ministerial meeting in May 2007 agreed to open accession

talks with Russia”^.

2.10.3 Foreign Policy Concept. The Russian Federation has a well laid out policy on its international relations in a document ’The Foreign Policy Concept of The Russian

Federation.

2.10.4 Integritj' with the UNO. Russia intends to achieve a multi-polar system of international relations that really reflects the diversity of the modem world with its great

variety of interests. According to them. The United Nations must remain the main center

for regulating international relations in the 21*‘ century and "The Russian Federation shall

resolutely oppose attempts to belittle the role of the United Nations and its Security

Council in world a f f a i r s " . _ TVv \ M ' ^ 7 2.10.5 Attitude towards North Atlantic Treaty Organization (NATO), USA and EU. Russia has been critical of increasing US influence oveniding the UN statute and

involvement in Iraq. In .lune 1994 Russia joined NATO's ‘Partnership for Peace' program

for military cooperation with former eastern block states. A "Founding Act' on mutual

Relations, Cooperation and Security between NATO and Russian federation was signed in

May 1997. Howev er the relations became strained in 1999 after failure of Russian attempts

to achieve diplomatic solution to the situation in the predominantly ethnic Albanian

province of Kosovo and Metihija in the Republic of Serbia, Yugoslavia (now Serbia and

Montenegro), aerial bombardment of Yugoslav targets by NATO forces and later Russia's military operations in Chechnya and Georgia. Moscow was angered by a US plan to

develop an anti-missile system in Eastern Europe, and said it may respond by pointing its

own missiles at the defence shield installations.

2.10.6 Dependence on Russian Energy. At a lime of increased concern over energy security, Moscow has more than once reminded the rest of the world of the power it wields 41 as a major energy supplier. In 2006 and 2008, it cut gas to Ukraine after a row between the countries, a move that also affected the supply of gas to Western Europe.

2.10.7 NATO’s Aggressive Posture. Realistically assessing the role of the North Atlantic Treaty Organization (NATO), Russia proceeds from the importance of cooperation with it in the interests of maintaining security and stability in the continent and is open to constructive interaction. The necessary basis for that was laid in the Founding Act on

Mutual Relations, Cooperation and Security between the Russian Federation and the North

Atlantic Treaty Organization of May 27, 1997. The intensity of cooperation with NATO will depend on its compliance with key clauses of this document, primarily those concerning non-use or threat of force, and non-deployment of conventional armed forces groupings, nuclear weapons and their delivery vehicles in the territories of the new members.

2.10.8 At the same time, on a number of parameters, NATO's present-day political and military guidelines do not coincide with security interests of the Russian Federation and occasionally directly contradict them. This primarily concerns the provisions of NATO's new strategic concept, which do not exclude the conduct of use-of-force operations outside of the zone of application of the Washington Treaty without the sanction of the UN

Security Council. Russia retains its negative attitude towards the expansion of NATO.

2.10.9 Relations with European Union. The character of relations with the EU is determined by the framework of the .June 24. 1994 Agreement on Partnership and

Cooperation, establishing partnership between the Russian Federation, on the one hand, and the European communities and their member states on the other, which is yet to achieve its full effectiveness.

2.10.10 Conflict in Georgia. In August 2008, a protracted row over two Georgian breakaway regions escalated into a military conllict between Russia and Georgia. Russia sent troops into Georgia and declared that it was recognizing the independence of

Abkhazia and South Ossetia, sparking angry reactions in the West and giving rise to fears that a new Cold War was under way 42

2.10.11 Mongolia. The erstwhile Soviet Union used to consider Mongolia like its own dominion. A famous saying goes, "Kuritsa niptitsa, Mongolia ni zagranitsa” (A chicken is not a bird and Mongolia is not an international territory!). However, after the cold war era Mongolia has drifted more towards China.

2.10.12 Iran and other Middle Eastern Countries. Russia agreed to assist Iran in setting up a nuclear power unit in Bushehr and sale of conventional weapons and civil nuclear technology.

2.10.13 Japan. Relations are complicated due to continued occupation by Russia after the second world war of Southern Kurile Islands of Etorofu, Kunashiri, Shikotan, and the Habomai group claimed by and known in Japan as Northern Territories are the hurdle to signing a peace treaty formally ending World War II hostilities

2.10.14 Relations with Republics of Erstwhile Soviet Nations and CIS. \ 2.10.14.1 EurAsEC. The Presidents of Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan (formerly called Custom Five) established the Eurasian Economic

Community in 2000. In 2001 the Federation Council approved introduction of a

new mble in Belarus as of 1 Jan 2005 in preparation for a new single currency in Russia and Belams by 2008.

2.10.14.2 Belarus. A treaty on union of Belams and Russia to increase political and

economic cooperation betw'een two states was signed in 1997 between the

Presidents Aleksander Lukashenko and Boris Yeltsin. Cuirently they are having

dialogues about having common currency.

2.10.14.3 Ukraine. "Russia and Ukraine should have special relations brotherly

relations based on our more than 1,000 years of shared history, our common values,

close economic ties, and the genetic link between our peoples... The problem is

that there is no effective go\crnment in Ukraine. The Ukrainian political

establishment is unfortunately locked in endless confrontation between themselves.

Ordinary Ukrainian people suffer as a result, and so do Russian-Ukrainian

relations.” Dmitri Med\cdev"^ 43

2.10.14.4 CSTO. The Collective Security Treaty Organization (CSTO) is a very

important organization that really does protect Russia’s interests and acts against

international threats such as drug trafficking and terrorism.

2.10.15 Involvement in ASEAN. Asia enjoys a steadily growing importance in the context of the entire foreign policy of the Russian Federation, something which is due to Russia’s direct affinity with this dynamically developing region and the need for an economic upturn in Siberia and the Far East. The emphasis will be on its increased participation in the main integration efforts of the Asia-Pacific Region - the Asia-Pacific Economic

Cooperation forum, the regional forum on security of the Association of South East Asian

Nations (ASEAN), and the Shanghai Five (Russia, China, Kazakhstan, Kirghizia,

Tajikistan), in whose creation Russia played an active role.

2.10.16 Russia’s Priorities for China and India. One of the crucial directions in the

Russian foreign policy in Asia is developing friendly relations with the leading Asian states, primarily with China and India. The concuixence of the fundamental approaches of

Russia and the PRC to the key issues of world politics is one of the basic mainstays of regional and global stability. Russia seeks to develop mutually advantageous cooperation with China in all areas. The main task is, as before, bringing the scale of economic interaction in conformity with the level oi’political relations."'

2.10.17 Shanghai Cooperation Organization (SCO). The SCO has recently gained considerable momentum and is now woi king out modalities of cooperation with obsei“vers like India among them. This process will take some time since it requires broad consensus between the member-staies. Some of the SCO institutions are already open for New Delhi-

Business Council, Inter-banking Association and in the near future Energy Club are going to facilitate India's rapid engagement in the activities of this organization.

2.11 Defence and Resurgent Defence Industry of Russia

2.11.1 Control of Nuclear Arms Race. A Strategic Arms Reduction Talks (START 1) between US President George Bush and Soviet President Mikhail Gorbachev on 3T' July

1991 and ratified by US Congress in Dec 1991 led to reduction of nuclear arsenals. Ukraine, Belarus and Kazakhstan transferred their nuclear weapons to Russia and signed 44 the Non Proliferation Treaty. Later S T A R T II was ratified by the Russian Dum a in April

2001.^’

2.11.2 Transformation of Soviet Army to Russian Army. After disintegration of the

USSR, some efforts were made to keep the erstwhile Soviet Armed Forces together as a single military for the new Commonwealth of Independent States (CIS). The last Minister of Defence of Soviet Union, Marshal Yevgeny Shaposhnikov, was appointed supreme commander of the CIS Armed Forces in December 1991. Among the numerous treaties signed by varying republics in order to direct the transition period was a temporary agreement on general purpose forces, signed in Minsk on 14 February 1992. However

Ukraine and some other republics were determined to form their own armed forces, the new Russian government had to consider relocation, redeployment and restructuring of their armed forces on ad hoc basis paying attention more toward keeping them loyal to the

Russian Federation rather than their operational effectiveness.

2.11.3 Formation of New Military Districts. The Russian Federation was divided in six

Military Districts, that is, Moscow, Leningrad, North Caucasus, Volga-Urals, Siberian and

Far East, besides Specialized Branches of Missile/Artillery Agency and Spetsnaz GRU.

2.11.4 Current Threat Perception. In the changed scenario of Post Cold War Era, there is no threat of an unexpected, large-scale land invasion of Russia's territory for the foreseeable future. Any enemy, even if potentially capable of canying out such an invasion

(United States and NATO, China) would require a lengthy period for mobilization, deployment, and concentration of ground forces on Russia's borders.^”

2.11.5 Restructuring of Post Soviet Russian Armed Forces. The reforms planned will mark the most radical transformation of the Russian military system since 1945, touching upon every aspect of the armed forces, including service strength, central command and control bodies, tables of organization, and the officer training system. It involves primarily downsizing of the armed forces and reorganizing the ground forces into a brigade system, eliminating the regiment, division, coips, and army echelons.

2.11.6 Reorganization of the Airborne Troops, eliminating Divisions. Restaicturing across the entire defense organization is under active consideration with a view to reducing the administrative component and increasing combat potential and mobility of 45 forces to undertake operations at short notice. This will impact the non combatant elements like lawyers, teachers and doctors.

2.11.7 Conscription and Better Amenities for Defence Forces. Conscription for 18 to 24 months for all males after 18 years of age has been imposed. The Russian Army is likely to be paid like the armies of most advanced countries.

2.11.8 Resurgent Defence Industry of Russia. With the reduced requirement of defence equipment in post Soviet Russia, the defence production capacity has been under utilized.

In order to exploit the installed capacity to its full extent there is a need to find markets for the defence equipment produced in Russia. The Asian and African countries which cannot afford the higher prices of western equipment have been attracted by the Russian products.

Major buyers of Russian equipment have been China and India. The most popular equipment is the Illushin 96 M Long Range strategic Bomber, MIG 35, Sukhoi series and \ Fifth Generation of fighter aircrafts. Direct access to Original Equipment Manufacturers

(OEMs) is the issue as Federal Services for Military Technical Cooperation FSMTC controls the OEMs and any queries on them. Part of the problem lies in the complex structure of the Russian defence Supply sector. One agency deals with process of export licensing, another for custom clearing and a third for production and delivery, a legacy of the Soviet system. With volumes of orders, Russians are addressing to newer systems and increasing geopolitical tensions in the region are likely to boost the Russian Defence

Production Industry.

2.11.9 Impact of Falling value of Dollar on Russian Defence Exports. Currently, some 45 percent of Russia's arms exports go to China. Since 2000, Russia has delivered weapon systems to China — including fighter aircraft, submarines and destroyers — amounting to an average of US $ 2 billion annually. China has been the largest consumer of Russian military equipment for a number of years. Russia's arms trade to China is an important factor in the cooperation between the two countries. Aside from the Gorshkov, whose delivery to India has been over due caught up by price escalation, the fall of the dollar is likely also have a negative impact on the profitabilily of the 2003 Malaysian contract tor the delivery of 18 Su-30MKM fighters, programs for the licensed production of the Su- 46

30MKI in India, as well as contracts for the delivery of eight divisions of S-300PMU2

Surface-to-air-missile (SAM) systems to China.

2.12 State of Economy in Russia

2.12.1 Painful Transition from Controlled Economy of Russia towards Free Market. During the Soviet Revolution in the beginning of tw'entieth century there were two schools of thought; one of the Bolsheviki believing in quick bloody transition from bourgeoisie to communist society and the other Mensheviki believing in slow and deliberate process. The Bolsheviki had taken over. Similarly after the concept of perestroika was adopted, there were primarily two schools of thought for shift to ‘market economy’ - the shock therapy

(followed by Egor Gaidar) and the slow restructuring (professed by Viktor Chernomyrdin).

2.12.1.1 Price deregulation resulted in state oligopoly.

2.12.1.2 Loss of Banks Control over Monby Supply. State bank lost control over money supply. In 1990 supply was expected to be 10 billion rubles, it mrned out to be 28 billion rubles.

2.12.1.3 Soaring Inflation. Inflation was @ 300% in January, rose to 2591% in 1992, 840% in 93, 215% in 94, 13 per cent in 95 and 22% in 96.

2.12.1.4 Higher Social Benefit Expectations. Social benefits demands sky­ rocketed putting pressure on state exchequer.

2.12.1.5 Higher planned Growth Rate and Increased Deficit. After 1985 Gorbachev had wanted higher growth rate during the 12* Five Year Plan (86-90).

Deficit increased to 6% (86 to 10% in 88.

2.12.1.6 Higher Defence Expenditure. The disintegration of the USSR and limitations on strategic arms as deterrents, there was a need for increase in

conventional defence and investment requirement.

2.12.1.7 Compulsion of Exporting at Lower Prices had a reducing effect on country's economy.

2.12.1.8 Loss of Revenue due to anti alcohol campaign. 47

2.12.2 Loss of Control in Governance. In 1991, the economy was on the verge of collapse. Government was in no power to intervene decisively because law on state enterprises had reduced the personnel in central ministries and transferred greater powers to enterprise management. As the central distributive network broke down, reigns were increasingly left to their own devices. The State planning agency Gosplan had operational model of how the planned economy had in fact functioned. Fall of GDP due to lack of investment due to red tape, corruption, legal chaos and political instability.90 percent grain still came from collective farms, as privatization of land was not done. Per capita income of Russia was 43 % of USA’s in 89 and 10% in 95.

2.12.3 Fundamental Shortcomings. The country faced the following situation:-

2.12.3.1 Favoritism. In privatization, property was sold below market prices to special insiders at slow pace. \ 2.12.3.2 Ineffectiveness of Domestic Capital. There was no mobilization of the domestic capital because of inflation, discouraging long tenn investment.

2.12.3.3 Loss of Banking Regulatory. The banks lost public confidence in commercial banks due to their scandalous reputation and considerable amounts

held in overseas banks.

2.12.3.4 Inefficient Corporate Governance. The State enteiprises failed to convert to sleek Western Coiporatization. About 50 percent were in profitable and

in to employees as there were no wages paid up to 1997.

2.12.3.5 Drop in Life Expectancy. Life expectancy dropped during 90 to 95 from 64 to 58 years (men) and from 74 to 70 years for women.

2.12.3.6 Increasing Unemployment. Unemployment reached high levels up to 13- 15% including massive hidden underemployment.

2.12.3.7 Decline in Public Services. A drastic drop in basic public services, health, education and public assistance was felt by the population.

2.12.3.8 Crime and Mafia. There was increase in crime including contract murders and mafia activities competing for power and wealth. 48

2.12.4 Slow Recovery of Economyand Shock of Asian Economic Crisis of 1997-98. Large private sector in industrial/service sector across 1, 20, 000 enterprises in 1997 contributed to 70 percent of GDP of Russia. The Economic Crisis of East Asian markets brought the oil prices down by 40 percent leading to a collapse of the Russian Economy. In

January 1998 a new ruble equivalent to 1000 of the former units was introduced.

Following a severe financial crisis, in August 1998 Russia defaulted on its ruble denominated bonds and announced unilateral terms for debt conversion. Slowly the trade surplus increased due to principal exports rather than structural reforms. The audit of central bank conducted in 1999 revealed that some US $ 50 billion had been diverted into an offshore company in previous five years for personal gain of bank staff facilitated by the opening of Capital accounts induced by the International Monetary Fund.

2.12.5 Failed Attempts to attract Foreign Investment. Gorbachev travelled the whole world to attract foreign investment in vain. He banked on IMF and G7 but no one came to rescue. Japan refused to help until Kurile island issue was resolved.On the contrary there was a flight of Russian money overseas.

2.12.6 Current State of Economy.

2.12.6.1 An Overview. Russia ended 2008 with its tenth straight year of growth, averaging 7% annually since the financial crisis of 1998. Over the last six years,

fixed capital investment growth and personal income growth have averaged above

10%, but both grew at slower rates in 2008. During the past decade, poverty has

declined steadily and the middle class has continued to expand. Russia has also

improved its international financial position, running suipluses since 2000. The

government saved these suipluses in two sovereign wealth funds, together valued at

over $200 billion: a reserve fund to support budgetary expenditures in case of a fall

in the price of oil and a national welfare fund to help fund pensions and

infrastmcture development.

2.12.6.2 The GDP. The estimates of GDP for 2008 are 2,225 billion US Dollars (n

Purchasing Power Parity (PPP) and 17.570 billion Dollars at Official Exchange

Rates. Per capita GDP at PPP is estimated to be 15,800 US Dollars. Real growth of

GDP in 2008 declined to 6 percent from last ten year's average of 7 percent There 49 was a further drop by 1 percent up to February 2009.^^ The GDP, however was led by non-tradable services and goods for the domestic market, as opposed to oil or mineral extraction and exports. The composition of GDP for 2007 was 41.1 percent

Industry, 54.8 percent for Services and 4.1 percent for agriculture.

2.12.6.3 Foreign Reserves and Debts. Oil export earnings had allowed Russia to increase its foreign reserves, the world's third largest, from $12 billion in 1999 to almost $600 billion in August 2008, but a 70% drop in the price of oil since mid-

July and central bank intervention to defend the ruble during the last quarter of the year, reduced reserves to around $435 billion. External Debt during June 2008 was assessed to be $527.1 billion. Foreign debt is approximately one-third of GDP. The state component of foreign debt has declined, but commercial debt to foreigners has risen strongly.

2.12.6.4 Stock Market. Investor concerns over the Russia-Georgia conflict, corporate governance issues, and the global financial crisis caused the Russian stock market to fall by roughly 80%. Market value of public shares was estimated to be $450 billion in December 2008.

2.12.6.5 Effect of Global Turn down of Economy (2008-09). The global crisis has affected Russia's banking system facing liquidity problems against short-term external repayment obligations. In response to these issues, Russia initiated a larger than $200 billion rescue plan designed to increase liquidity in the financial sector, to help finns refinance foreign debt and to support the stock market. The government also unveiled a $20 billion tax cut plan and other fiscal supports for society and industry. "Russia has spent one third of its forex reserves to defend the mble, which is nevertheless down from 25 to 35 to the dollar."’''

2.12.6.6 Inflation Rate. The infialion rate estimated for 2008 on consumer prices was 13.9 percent. This high inflation rate has been the real challenge for the Russia banks, because they cannot lower the lending rates, so very necessary to provide liquidity to firms facing the current global economic dow nturn of 2008-09.

2.12.6.7 Lending and Discount Rates. 13 percent during December 2008. 50

2.12.6.8 Foreign Direct Investments (FDI). In 2007 the Stock of direct foreign investment in Russia was estimated to be US $491.2 billion, whereas Russian FDI

abroad for same period was estimated as US $370.2 billion. 2.12.6.9 Current Account Balance. During 2008 Cuixent account balance was estimated to be $97.6 billion with Exports amounting to $476 billion and Imports $302 billion.

2.12.6.10 Exchange Rates. The strong ruble has put the manufacturing sector at a disadvantage because it buys more items denominated in weaker foreign currencies

and attracts imports. At the same time the central bank’s emission in exchange for

its acquisition of foreign exchange has added to inflationary pressure. The

movement of exchange rates of Russian Ruble with a US Dollar is shown in Figure

2.2.

Figure 2.2 Exchange Rates of Russian Rubles with a US Dollar.

2.12.7 Oil and Gas Resources. Russia's main source of burgeoning economy is its oil and gas. The data in Table 2.1 (estimated for 2007) is noticeable. 51

Table 2.1 Data on Russian Oil and Natural Gas Resources

O il Natural Gas P ro d u c tio n 9.98 million bbl/day 654 billion cu m Consumption 2.699 million 481 billion cu m bbl/day Exports 5.17 million bbl/day 173 billion cu m Imports 54,000 bbl/day 68.2 billion cu m (2005 estimate) Proven Reserves 79 billion bbl 44.65 trillion cu m (Jan 2008 esimate) (Jan 2008 estimate)

Data Source: CIA World Fact Book.^^

2.12.8 Main Components of Economy. Hydrocarbons remain a crucial component of the Russian economy, accounting for over 20% of GDP, 50% of federal budget revenues and

60% of exports. Oil, gas and metals together comprise 80% of Russia’s exports. These figures underline Russia’s exposure to global commodity markets. But booming imports are already eroding the trade surplus, while the budget surplus is falling under the weight of fiscal loosening. The Russian Ministry of Economic Development and Trade believes that both will be close to zero by 2010. These trends are likely to constrain liquidity, squeezing the expansion of credit, and hence consumption growth. From 2010, the government is likely to face shaiply constrained macroeconomic conditions.

2.12.9 Inadequate Fiscal Policy. To date Russia has dealt with its massive oil windfalls in a fiscally sound, responsible manner. In 2004 the Ministry of Finance created the

Stabilisation Fund, which was designed to protect the country from the negative impacts of high inflow of oil related capital (so-called Dutch disease) and to create a resei-ve in the case of a future financial crisis. By the end of Febmary 2008 the Fund had accumulated over $156 billion. The Fund has also been used to pay off foreign debt. Russia's outstanding Paris Club debt of US $ 22.5 billion was paid off early in August 2006, the largest single debt repayment in history. In his budget address in 2007, President Putin announced that from 2008 the Stabilisation Fund would be split into two components - a

Reserve Fund, to protect against a possible economic downturn, and a Fund tor National

Wellbeing, focused on social spending, including future pensions. Since 2001, there has been a marked increase in the state's involvement in the economy, particularly in the 52 energy sector. Growth in the energy sector has slowed significantly, from around 9% between 1999 and 2004, to around 3%.

2.12.10 Lack o f Private Investment. It is also state-dominated firms that are leading the investment boom. For example, Gazprom’s investment budget in 2008 was $29 billion.

But, as a World Bank report recently noted, the Russian State has barely reformed in the last decade. In the medium-term, the World Bank warned that inefficiency in the state sector may weigh heavily on economic growth.

2.12.11 Agriculture. Private fanning was encouraged in 1990s. However the old cult of collectivization has not yet been uprooted resulting into lack of motivation to produce more.

2.12.12 Infrastructure. The sad story is that the profits generated by oil and gas exports have not been properly invested in development of infrastructure. Russian infrastructure \ has been crumbling. The transportation and railroad stock, the ports and bridges and the electric power generators and turbines of Soviet days need to be replaced calling for investments. However, the following projects are remarkable and will assist Russia in long teiTn.

2.12.8.1 Blue Stream Pipeline carrying natural gas from Novorossiisk, Krasnodar

Krai in Southern Russia to Ankara, Turkey completed in 2002.

2.12.8.2 Siberia to China pipeline under planning.

2.12.8.3 Development of Astrakhan region as a hub of North South Corridor.

2.12.8.4 Consideration of a Exension of International Transport Corridor (No

2) Berlin-Warsaw-Minsk-Moscow-Nizhniy Novgorod-Yekatinbourg-Trns

Siberian Railway.

2.12.13 Current Status of Economy. Since 2000 the country has run large fiscal and trade suipluses, accumulating international reser\ es in excess of $400 billion. Inflation in 2007 slowed to 9%, the lowest post-Soviet reading, but picked up in 2007, due to high global commodity prices, and some fiscal loosening. Today Russia is the tenth largest economy in the world, with a GDP of $ 1.3 trillion (2007, IMF) 53

2.12.14 A Critique. Anders Aslund, a senior fellow of the Peterson Institute for

International Economics, the author of "Russia's Capitalist Revolution: Why Market

Reform Succeeded and Democracy Failed." Brings out following aspects of current

Russian economy under the term “Putinonomics”^^

2.12.14.1 Nationalistic Energy Policy. Russia's nationalistic energy policy after

2003 has stalled the development of major new energy investments (apart from the

Sakhalin projects, which date back to the Boris Yeltsin era). Gazprom and Rosneft

have financed themselves with foreign debt rather than with equity capital,

accounting for almost one-fifth of Russia's coiporate foreign debt of S490 billion.

Gazprom's aggressive pricing and delivery disaiptions have scared away

customers, reducing the demand for its gas.

2.12.14.2 Diversion of Public Funds. Huge public funds are being diverted to slate \ corporations, whicli cither hoaixi the monc\ or siphon it off In their new book

"Putin anti Gazprom," Boris Nemtsov and Vladimir Milov have offered a

staggering and credible account of how Putin and his friends pilfered assets of S80

billion Irom (ia/pi'om during his sccond term as president. Investors have taken

notice, shishing Ci.i/proni's nuiikci Ccipil;ih/aiion fiom S350 billion last spring to

S"() hillu :ii i!s 1‘uui !' AUhou^:, i\i-.Ma in iiic 4()tli-riclic>t ct>unu> in the uoild in

T'cr cji':,.- K-i.ins, i; is I'ank^Ai i-♦ cu; n; iMi LiiuiUncs uii 1 rans|'iui’cnc_\

internatii eorrupunn percept ion iiuie' lor 200S. ( )nl\ Equatorial Chiinca is

both richer and mure ci>rriipt tr.;,:; Klissia's largest coqx>rations ha\ e turned

out to i). ihucb mull. lc\eragcii o.aii an\brii\ had thought. The go\cmmcnt has

made ck .r ;ha! it v> ;ii reiinaiice '.iicn I'.'iei;j;i io.itis to secure "strategic" ow nersiiip.

.So far. • biiiio;-, i:>is been p, ;J. out o| wlneh l.'nited Company Rus.\! has

receixcvi S 1.5 billicn and Altiiri;. SJ iiiilii.n. but such private pledges are huge.

\ !K'sliek'>;ioinbank h,:s S37 hillu^ri left to -p-end, but il has ahead}' asked for $30

l^ilhoii iruTe from the ;.hi\ernnieni. .ukI nunc i^- likch'. Thus. Russia can s\\ittl\ lose

ri;oie Uuni I

2.12.14.3 Loss of Trust in (.oM'niniciit, I'lulcr Putin. lransparenc\ has

sxsteniaticalK been reduced, and there is a loss in trust in the government's public 54 statements on its currency reserves. Officially, they have declined by S I63 billion, or 28 percent, from $598 billion in early August to $435 billion in early December

2008. But when Vneshekonombank was given $50 billion of state reserves to help

Russian oligarchs with refinancing, nothing was deducted from the official reserves as it should have been. In an article on Gazeta.ru on Oct. 24, Alexei Mikhailov plausibly claimed that another $100 billion or $110 billion of "other reserves" had been transferred to the banking system and were nothing but rubles. If that was correct, the reserves have fallen by more than hall'to less than $300 billion, but the government sheds no light on this.

2.12.14.4 Pegged Exchange Rates. Incredibly, the government is repeating its mistake from 1998 to maintain a pegged exchange rate in the face of falling commodity prices. Until 2008 summer, this policy provoked speculative capital ii^flows that boosted the money supply excessively and propelled inllation to 15 percent. Now, the pegged exchange rate, which is probably o\ cr\ alued by up to 25 perccnt. promotes specuiatixc capital outtlows. quickly reducing the currencv rescr\ es. Devaluations in very small steps only con\ ince the market that a major depreciation is ii!c\itable. '(he comiiiu coinbinalii .n of loose fiscal polic\. negative real interest ratc^. current and capital account clctlcits aiul ;!ii o\\.T\aluci! ruble is unMi'-iainablc. 1 lie incentixes lorcajiilal lliyht arc ci\cr\\ helnv.iiu.

2.12.14.5 Nccissity of Shill t(i Floalin'j i;\clian<>c Kaic Mcchanisni. ( »iic of the few polic\’ ineaNurcs that can be uni.krtaken v. itii i'liiin stili pnucr In l<' let the ruble ill Ml lVce;>. nun'c lo inllation tai-.ciiag and uiieu-: r.iU s to p-..si!i\e real iiucicsi rales. ,\ commoditv -cxportui;, (.'Ufiir> ne^ii> to let i: - exchariUL r.ae lloat up and down w ith global I'aw matei i.il pricc.s i<' balance n - uircign paMiients. At present, all speculators scn-'ihK' bet or- a ruble dc\aluation. i i>! like in which quickly deplete.^ the countr\-'s currencx ic--er\es. W iicn the rai-.ic is allowed to float, it is likel\- to plummet. But after that, iiohody know s whether ;i will rise or fall and this wili I'cclucL' speculation and losses oi curreiicx '.l'-cia cs. 55

2.12.15 A Forecast of the Future of Russian Economy. Certain data for the future of Russian economy have been projected by the Economic

Intelligence Unit of The Economist and are placed in Table 2.2. Table 2.2: A Forecast of the Future of Russian Economy

Key indicators 2008 2009 2010 2011 2012 2013 Real GDP growth (%) 6.7 3.0 4.5 5.0 4.7 4.6

Consumer price inflation (av; %) 14.1 11.7 9.4 8.0 7.2 7.0

Budget balance (% of GDP) 5.7 0.3 0.8 0.3 0.0 -0.3

Current-account balance (% of GDP) 6.7 1.0 0.0 -0.1 -0.9 -2.7

Central bank refinancing rate (end- 13.0 12.0 11.0 9.0 8.5 8.0 period; %) Exchange rate Rb:US$ (average) 25.0 29.5 30.2 30.4 30.4 30.5 Exchange rate Rb:€(average) 36.6 37.9 39.3 40.3 41.1 41.

Source: Country Data from the Economist Intelligence Unit, Dec 16th 2008. 39

2.12. Russian Debt. The mountain of Russian debt is so huge-the Central Bank calculates that corporations and banks of Russia must repay $128 billion this year alone that the oligarchs will be unable to pay the loans and some companies may have to declare bankmptcy or may be taken over by the govemment."**’

2.13 Russia’s Trade and Commerce

2.13.1 During the Era of Controlled Economy. All trade and commerce during the Soviet regime was conducted through the state. The countries with whom the trading was conducted were to be politically and ideologically aligned with the Soviet Union. There were rigid procedures laid down which could not be avoided. Bureaucratic controls were not conducive for efficient business in free market enviromnent.

2.13.2 Liberalization. The policy of liberalization was adopted without putting in place the revised market mechanism including banking and logistics. This adversely affected not only the trade and commerce of Russian Federation but also impacted the overall economy.

2.13.3 Exports. The commodities exported by the Russian Federations are in Figure 2.2 below. Evidently oil, gas and the raw minerals fomi the major component leaving 56 processed goods proportions far behind. This is due to the inadequacy of manufacturing installations and lack of infrastructure to promote export of value added goods.

Figure 2.3: Commodities Exported by Russia in 2007 (Billion US Dollars)

Metals, preciou Foodstuffs and s stones and Machinery, equ ^ Others, 4.4 Textiles, ipment and .agricultural raw articles an( j. transport materials footwear, 0.9 ’ means, 19.7 (excluding textile), 9.1 Wood, and- pa )i products

Chemical Mineral products, rubber products, 228 , 20.8 Leather raw materials. Fur and articles there of, 0.3

(Excel chart by researcher based on data from Goskomstat (Federal State Statistical 41 Services)

2.13.4 Over-dependence on Oil and (las. Russian economy has been primarily based on its natural resources, primarily oil and gas. Major recipients have been the European countries. Emergence of China as the world's manufacturing hub boosted its energy demand and Russian oil. gas and electrical energy have been continuously increasing.

2.13.5 Difficulties in Exports of Russian Gas to Europe through Ukraine. The Soviet gas industry was born in LIkraine in the 1930s. and the infrastructure built from there and

Ukraine is still a central part of the gas pipeline network even as the focus of activity 57 moved to Western Siberia. Splitting the Soviet Union along Republic borders made for an often unworkable allocation of physical assets. The consequence is that vital assets for

Gazprom are located in Ukraine and thus no longer under its direct control. The ties between the industries in the two countries are thus massive, impossible to unwound, and highly constraining. Effectively, as soon as there is a conflict between the two countries, the temptation to use the "gas weapon" (i.e. to hurt the other by, in the case of Russia, withholding gas or, in the case of Ukraine, withholding export infrastructure) is large - and it has happened repeatedly, until, each time, cooler heads prevail.

2.13.6 Complicated Inter-dependencies of Infrastructure. Western Europe has been importing Russian gas for 40 years and that companies like GDF and Ruhrgas have been

aware of the delicate situation of Ukrainian transit for 15 years. During this time, 10

Central and Eastern European countries joined the EU. As the majority were former Soviet

satellites (or even Soviet Republics), they are very wary of Russia and most of them are highly dependent on Russian gas, because their supply infrastructure was built in the context of the COMECON. There is a strong co-dependency, with Russia needing

Ukrainian infrastructure to honor its export contracts to Europe, and Ukraine needing

Russian gas. Earlier, there were additional constraints, such as the only Soviet manufacturer of large pipes used by Gazprom being in Ukraine, the only manufacturer of medium sized pipes (needed by the Ukrainians) being in Russia, and gas going to Southern

Russia needing to flow through Ukrainian teixitory.

2.13.7 Difficult Bilateral Trade Relations between Russia and Ukaine. Ukraine used to get its gas allocation from Soviet planners, and continued to expect the same after independence. When Russia first tried to get payment for its deliveries in the early 90s, it failed; when it first cut off gas to Uki'aine to enforce payments, Ukraine simply tapped the gas sent for export puiposes in Ukrainian-controlled pipelines; when European buyers howled, Russia relented and restored gas supplies without having managed to be paid by

Ukraine. This happened repeatedly in 1992-1994 until both sides learnt not to make their disputes as public

2.13.8 Disingenuous Payment System. The leadership of Gazprom has long ago understood that it could not get any money out of official deliveries to Ukraine. It "solved" 58 that problem in a completely different way, by privatizing a portion of the gas trade to

Ukraine - the portion going to customers able to pay for their gas. These customers used to pay the central Ukrainian gas company, which did not pass on that money to Gazprom; what was put in place w'as a mechanism whereby these customers would pay less for their gas, but would pay directly another supplier, formally unrelated to either Ukrainian gas authorities or Gazprom. Of course, only gas coming from Russia could be delivered, and it still needed to use Ukraine's gas infrastructure, so the active cooperation of Gazprom,

Russian and Ukrainian senior people was required to put that trade of 30 billion cubic meters of gas per year, but the very real money generated did not need to go either to Kiev or to Moscow. Thus the top people that enable that trade are able to personally benefit massively from it - and effectively cut out both Kiev and Gazprom.'^'

2.13.9 Direction of Russia’s Exports by Continents. Russian Federation has been exporting its commodities to countries in its clo.se geographic proximity, that is, to Europe and Asia, as evident from the Figure 2.3.

2.13.10 Direction of Russia’s Exports within Asian Countries. Russia’s largest share of exports are directed to Turkey, followed closely by China and distantly by Republic of

Korea, Japan, Cyprus and hidia in that order as evident from Figure 2.4. Figure 2.4: Direction of Russian Exports in 2007 to Various Continents (Amounts in Million US Dollars)

America, 10291 Australia and Africa, 3951 Oceania

Asia, 67624

Europe, 195097

Excel chart by researcher based on data from Goskomstat (Federal State Statistical 43 Services) 59

Hgure 2.5: Direction of Russia’s Export in 2007 within Asian Countries (Amounts in Million US Dollars)

Israel, 2031 Afghanistan, 1 21 'Vietnam India, 4012 Japan,7383 Turkey, 183 Ira n ,2947 32 Cyprus, 4838

Taiwan (China), 895 Korean Thailand, 330 People's Democratic Republic, 86.9 Syria, 1015. Singapore, 10 Mongolia, 629 88 Pakistan, 247 j Excel chart by researcher based on data from Goskomstat (Federal State Statistical Services) 44

2.13.11 Imports. Due to inadequate production capability and dilapidated agrarian infrastructure, the Russian Federation has to resort to importing machinery, equipment and foodstuff from overseas.

2.13.12 Commodities Imported by Russia. As evident from Figure 2.5. machinery equipment, transport means comprise the largest share if imports. It is followed by foodstuff, chemical products and precious metals as major items. 60

Figure 2.6: Commodities Imported by Russia (Amounts in Billion US Dollars)

F'oodstuffs Mineral and products, 4.7 agricultural raw materials Machinery, eq (excluding Chemical uipment and Others, 7.1 textile), 27.6 transport products, rubb means, 1 02 er, 27.5

LeMher raw Metals, prec rials, fur us stones and an(J articles articles there re of, 0.7 of, 16.4 Wood, pulp- Textiles, textil. and- e articles and paper products footwear, 8 .6 ,5.3

Excel chiirt by researcher based on data from Goskomstat (Federal State Statistical Services) 45

2.13.13 Resourcing of Russia’s Imports by Continents. As evident from figure 2.6. dependence of Russian imports on Europe is highest, closely followed by Asia and distantly by America, Oceania and Africa. It is worth noting that Russia's dependence on

Europe for import of goods is lower than its preference of exports to Europe, vis-a-vis similar consideration for Asia (compare figures 2.3 and 2.6). Figure 2.7: Resourcing of Russia’s Imports by Continents in 2007 (Amounts in Billion US Dollars)

America, 1514 Australia & Africa, 504^ 9 Oceania, 742

Asia, 55932 Europe, 86862

Excel sheet chart by researcher based on data from Goskomstat (Federal State Statistical Services 46

2.13.14 Resourcing of Russia’s Imports within Asian Countries. As far as resourcing within Asian countries is concerned, China enjoys the largest share followed by Japan,

Korea, Turkey and India although at very small proportion. 62

Figure 2.8; Resourcing of Russia’s Imports from Asian Countries in 2007 (Amounts in Million US Dollars)

Hong Kong, 105 p Israel, 531

Afghanistan, 9 Vietnam, 521 j *ndia, 1310 Iran,350 Japan,12712 Cyprus, 34.6

Turkey, 4180

Taiwan China, 24401 (China), 12

Thailand, Korean Syria, 37. People's Democratic llnited Arab Republic, 33.4 Singapore, 452 Emirates, 49

Excel sheet chart by researcher based on data from Goskomstat (Federal State Statistical Services) 47

2.13.15 Pattern of Growth of Russia’s Trade within CIS and outside CIS Countries. Figures 2.8 and 2.9 indicate the pattern of growth of Russia’s Exports and Imports to CIS and Non CIS countries. These clearly indicate that Russia’s Mercantile trade is expanding beyond the erstwhile Soviet and now CIS countries and Russia is opening its markets to outside world. 63

Figure 2.8 Pattern of Growth of Russia’s Exports of Merchandise Trade within CIS and with Non-CIS Countries

Russia's Exports of Merchandise 350000 300000 a ■with non- 250000 CIS s 200000 countries o 150000 ■with CIS 100000 countries 50000

0

3^s^0^0^0^s^©00000®0— — — — — — M f'l r)

(Excel sheet Chart by Researcher based on data from Federal Bank of Russia)

Figure 2.9: Pattern of Growth of Russia’s Imports of Merchandise Trade within CIS and with Non-CIS Countries

Russia's Import of Merchandise

250000

u C3 ■with non-CIS countries a 150000 c B 100000 -with CIS countries S 50000

iry sc sc 3^ c: — r*-, - r in >c OvOvOvSvONO'OOOSCOSO— — — — — — M ri ri n n n

(Excel sheet Chart by Researcher based on data from Federal Bank of Russia) 64

2.14 Russia’s Relations with China. 2.14.1 Revival after the Cold War. Russia and China as nations have shared their relations for centuries since the times of their respective empires, through the revolutions and planned or controlled economies to the present days struggle towards market economy.

Soviet Union and China had their own cold war which fully thawed after Mikhail

Gorbachev visited Beijing in 1989. With new regime in Russian Federation struggling for economic stability and rise of China both as industrial exporter and as a large consumer market especially for energy and technology the relations have received a new impetus like never before.

2.14.2 Main Forces behind Shanghai Cooperation Organization. In 1990s several bilateral agreements, a joint declaration for heightened strategic partnership and demarcation of common borders were issued. In 1996 a Shanghai Five Group comprising

Russia, China, Kazakhstan, Kirghizstan and Tajikistan was fonned, primarily for border resolution and later to include trade, cultural, military and security cooperation. Uzbekistan joined in 2001.

2.14.3 Resolution of Border Dispute. The 4,000 kilometer border including a tenitory leading to a war in 1969 between Russia and China has was resolved in 2004.stabilized.

2.14.4 Strategic Partnership in Defence and Security. Russia and China have had joint military exercises at various levels missile defence, air to air cooperation, naval cooperation and anti-terrorist measures. A joint wargame with 10.1000 troops was conducted in 2005. The Shanghai Cooperation Conference came into being and offers a suitable platform for expanding the cooperation with other nations in geographic proximity. Today China is the biggest buyer of Chinese amis, fuel and there are joint ventures emerging in infrastructural and industrial sectors.

2.14.5 Institutionalized and Governnicnt-to-Covernment Exchanges. There has been a concerted effort for promoting trade and mutual investment in various areas. 65

2.14.6 Growth of Trade in Military Hardware.

2.14.7 Assistance in Nuclear Power Plants. Cooperation between Russia and China in the area of atomic energy must not be limited to the construction of the Tianwan nuclear power plant.

2.14.8 Extension of Electric Supply to China. Unified Energy System (UES), Russia’s power grid operator is plarming for large-scale electricity exports to China on a long term basis upto 2015. In future it may involve building new coal-powered plants with a total capacity of some 11,000 megawatts in the Russian Far East. To operate the project, the UES board plans to create a fully owned subsidiary. Eastern Energy, to become an export-contract holder. In November 2006, UES and the State Grid Corporation of China signed a framework agreement on the basic parameters of Russian electricity exports to

China.

2.14.9 Expansion of Trade and Cooperation in High Tech areas, Aerospace and Transportation.

2.14.10 Traditional Export of Crude Oil. Oil has been traditionally transported through Trans- Siberian and Trans Mongolian Railway. China Petrochemical Corp, Asia's largest oil refiner and parent of Sinopec, has sealed a long-awaited deal to buy crude oil from

Russia and transport it by rail through Mongolia.

2.14.11 More Russian Oil to China through Kazhak Pipeline. With constmction of the oil pipeline Atasu-Alashankou linking central Kazakhstan with north-western China, China expects to import more Russian oil in addition to the Kazakh oil.

2.14.12 Oil and Gas Pipe-Lines. An ambitious project is in progress on Russia's border with China. Russia intends to build two gas pipelines to China: one from Western Siberia

(via Altai) and another from Eastern Siberia. Russia's technical and environmental watchdog Rostekhnadzor has given ecological approval to Transneft for the constmction. Constmction on the second leg of the East Siberia-Pacific Ocean (ESPO) pipeline, managed by state-mn pipeline operator Transneft, in collaboration with Chinese National Petroleum Coiporation (CNPC) could begin in 2015-2017. Russia is planning to pipe 68 billion cubic meters of natural gas to China each year by 2020. Additional 66 pipelines are being build to transfer oil and gas from East Siberia to North East China. That link would carry Russian crude from Skovorodino on a planned line across eastern Siberia south into China's Daqing oil center.

2.14.13 The first leg of the East Siberia-Pacific Ocean (ESPO) pipeline at the cost of 390 billion rubles ($12.5 billion) will come on stream on December 25, 2009. The pipeline is designed to pump up to 1.6 million barrels of crude per day from Siberia to Russia's Far

East and then on to energy-hungry China and the Asia-Pacific region. A 1,100-kilometer

(680-mile) stretch of the pipeline was opened in October 2008 in Russia's Far Eastern republic of Yakutia. The initial route through Buryatia in East Siberia has been replaced with a more northern one going via Yakutia. The pipeline's destination originally planned for Perevoznaya Bay in the Russian Far East will now be Kozmino Bay near the port of

Nakhodka, Russia's easternmost point. The first stage of 2 757 kilometer (1,713-mile) section has a capacity of 30 million tons (220.5 million barrels) of oil per year. It will link

Taishet, in East Siberia's Irkutsk Region, to Skovorodino, in the Amur Region, in Russia's

Far East. The second stretch will run 2,100 kilometers (1,300 miles) from Skovorodino to the Pacific. It will pump 367.5 million barrels of oil annually.'*^

2.14.14 Collaboration in Russian Shakhalin Project. Exxon Neftegas Limited is one of the developers of Sakhalin-1 project off Russia's Pacific coast.

2.14.15 Rosneft and Sinopec, a subsidiary of the China National Petroleum Coiporation

(CNPC) have signed an agreement on strategic cooperation to launch a joint company for geological exploration of the Veninsky bloc , a part of the Sakhalin-3 project as well as the

Udmurtneft and Adaisky blocs in Kazakhstan. Rosneft and Sinopec are supported by

China's State Bank of Development (CSBD) who have pledged to invest up to $130 million in the Sakhalin economy. The CSBD would also provide financial backing to

Sinopec for its Sakhalin-3 project, and the bank also indicated interest in coal, forestry, and agriculture projects. CSBD pledged to open a $500 million credit line to Russia's

Vneshtorgbank for funding Russian-Chinese projects. Separately, both banks and the

Sakhalin regional administration agreed to cooperate on investment promotion and support. The Chinese intend to have quotas for Chinese workers to be employed in

Sakhalin and also indicated interest in coal and forestry supplies from Sakhalin to China. A 67 new entity, the Beijing-registered Zhunhai Corporation, was launched in China to manage China-invested projects in SakhaHn.

2.14.16 Chinese Bridge between Sakhalin and Main land Russia CSBD is also interested in potential interest in major projects, such as building a bridge to ponnect

Sakhalin and Russia's mainland. By encouraging China's interest in gas-rich Sakhalin,

Moscow apparently aims to stimulate sustainable, long-term growth of Chinese natural gas imports. China is interested in gas cooperation with Russia,

2.14.17 A joint Venture Vostok Energy between Russia's state-run oil company Rosneft and China National Petroleum Corporation (CNPC) (51 and 49 per cent shares respectively) is working on development of oil and gas fields in Irkutsk Region to include

West Chonskoye field and Upper Icherskoye field. Rosneft, CNPC, and the State

Development Bank of China also had a $6 billion contract, involving supplies of 50 million tons of crude to China.

2.14.18 Expansion of Rosneft towards the Asia Pacific. Rosneft has expanded its operations to Preobrazhenskoye Oil and Gas field in Irkutsk Region of East Siberia and is poised to become a major player towards feeding the ESPO pipeline and increase its market share in the Asia Pacific countries, primarily China. Rosneft also intends to set up their finishd products retail market in China.

2.14.19 Cooperation with Gazprom. A memorandum of mutual understanding with Russia's Gazprom with China's National Petroleum Corporation (CNPC) on purchases of

Russian gas by China was signed as strategic partnership agreement which widened the scope of cooperation between the two companies. Russian gas monopoly OAO Gazprom would build two pipelines. The first 3,000-kilometer line would carry 30 billion to 40 billion cubic meters a year of gas from fields in western Siberia across China's western border with Russia. First shipments on that line could begin in 2011. A later pipeline would link fields in eastern Siberia and Sakhalin to northeast China. Russian officials said that project could carry gas from ihe Kovykta field near Irkutsk, one that BP PLC's

Russian venture has sought to develop. To ensure supplies for the new lines, Gazprom said it agreed to consider joint exploration and development of gas fields within Russia. 68

2.14.20 Expansion of Russian Trade and Cooperation in Southern and Central China. In the past, Russia did not have extensive trade ties with China's Guangdong province and

Shanghai. But now Russia's annual trade volume with Guangdong has increased.

2.14.21 Chinese Investment in Russian Industry Chinese company Hanwei Energy Service Corporation plans to invest US $10 million in the construction of a fiberglass- reinforced plastic pipe plant in Russia's Tyumen region.

2.14.22 Cooperation in Oil Refining, Petrochemicals and Marketing Projects. Russian energy group Rosneft and China Petroleum & Chemical Corp (Sinopec) are expanding their bilateral ties in oil exploration and extraction on the territory of the Russian

Federation and oil refinery and sales of oil products on Chinese territory. And these operations are likely to be taken on to third countries. China's permission to sell oil products made from oil extracted by Rosneft is key to the Russian company's access to the

Chinese market.

2.14.23 PetroChina. This Chinese Company has started to transport imported Russian crude oil through pipeline to its refineries in northeastern China. This move is expected to boost the efficiency of crude oil delivery from China's northeastern borders to inland refineries.

2. 14.24 Progress is already seen in joint ventures, such as the Baltic Pearl housing project in St. Petersburg, Russia's second-largest city.

2.14.25 Future of Bilateral Trade between Russia and China. The volume of bilateral trade is expected to reach $ 60 billion to $ 80 billion by 2010, and China's total investments in Russia should reach $ 12 billion before 2020. However, economic ties between Russia and China appear firmly based on the energy partnership, which remains dependent on global commodity price volatility.

2.14.26 Russo-Chinese Military Maneuvers. In August 2005, for the first time in 40 years, Russian and Chinese armed forces carried out joint militaiy exercises. China took the lead in proposing the size, participating type of forces and content of the maneuvers.

Allegedly, China also took care of most of the costs of the exercises. 69

2.14.27 Energy Policy. In November 2005 Russia and China agreed to double oil exports to China and to consider constructing an oil pipeline from Russia to China and a gas- transmission project from eastern Siberia to China's Far East China, however, also focuses on Kazakhstan in its need for energy. In December 2005, the Atasu - Alashankou pipeline between the two countries was opened. In due course, this Sino-Kazakh pipeline will be

enlarged from 1,000 to 3,000 kilometers (621 to 1,864 miles) and will eventually provide China with approximately 15 percent of its crude oil needs. By establishing energy ties with Kazakhstan, it is clear that China wants to avoid energy dependency on Russia.

2.14.28 Impact of Global Commodity Prices on Volume of trade. As Russian exports to China remain dependent on international commodity price movements, Russian officials

are wary of a possible global commodity downturn. These numbers make analysts wonder

>.ow bilateral trade turnover could be increased to $60-80 billion by 2010, particularly in

the event of lower global commodity prices. In the meantime, Chinese exports to Russia are not as tied to commodity prices. The share of high-tech goods was up by nearly 60% in

overall Chinese exports to Russia in 2005. Meanwhile, the share of Russian machinery

sales in overall exports to China plunged from 4.8% in 2004 down to 2.2% in 2005.

2.15 Russia’s Relations with India

2.15.1 The Beginning. Afanasy Nikitin, a trader from Tver (near Moscow) set off in 1469 hoping to make his fortune in the lands of fabulous riches that he heard lay across the

seas from Russia. Travelling for two years on horses or on foot across the Caucasus region

and Persia and by boats and through uncharted teiritory across three seas, he reached the

ancient Indian port of Chaul, 50 kilometers south of Mumbai in 1471. He left India in 1974 after living in Vijayanagar and Bahamani kingdoms of South India for three years. Before he could reach back home, he died in Smolensk in 1475. Over five hundred years later, in 2006, a team comprising 14 members led by Prof Hari Vasudevan of Kolkata University and Ms Phalguni Matilal an adventurist from Delhi, using three SUVs sponsored by Indian automobile company Mahindra and Mahindra along with their engineer Sudhir Kashyap, retraced in 35 days the 10,000 km route from Moscow to Mumbai followed by Nikitin.'*'^ 70

2.15.2 During Soviet Era. Former USSR established diplomatic relations with India on 13*^ April 1947 even before India’s independence from the British. Following decades witnessed a steady rise to a peak virtually in all spheres like foreign policy, defence, trade and economy, science and technology, culture and tourism till an abrupt end with collapse of USSR leading to many projects being put on hold and a period of uncertainty and confusion.

2.15.3 Revival with Russian Federation. Ten years were needed for Russia and India to restore political confidence, regain lost ground and evolve a new comprehensive pattern of interaction based on sincere friendship and close spiritual affinity, as the feelings of the people towards each other had remained unchanged. During the Soviet times economic ties between Russia and India were governed by bilateral agreements at state level, by state regulation on the basis of state credit. Nowadays the interaction needs to be based on a different foundation determined primarily by market economy mechanisms and driven by direct business-to-business contacts.

2.15.4 Rupee-Ruble Trade Regime. In November 2007 the long-awaited Letters of Exchange on utilization of debt Rupee funds for investment purposes were finally signed providing a strong boost to bilateral trade and economic exchanges on a level playing field to advantage of Russia. (More details in Chapter 4 Section 4,15).

2.15.5 Renewed Foreign Policy towards India. Russia intends to strengthen its traditional partnership with India, including in the international affairs, and to aid overcome problems persisting in South Asia and strengthen stability in the region.^"

2.15.6 Declaration of Strategic Partnership. Russia and India in view of their national interests and common approaclies to global issues declared a strategic partnership during the visit of President Vladimir Putin to India in October 2000. This has been followed by intense political dialogues between various ministries and agencies, diverse business-to- business contacts and dynamic interaction in the sphere of science and technology.

2.15.7 Cooperation in Nuclear Energy and Technology. Marking the 60‘'' year of their diplomatic relations in 2007, Russia and India through summits between President Putin and Prime Minister Manmohan Singh adopted 11 documents including a Memorandum of

Intent on developing cooperation in the constnjction of additional nuclear power plant units at the Kudankulam Site as well as the construction of Russian design nuclear power 71 plants at new sites in India. Kudankulam nuclear power plant is expected to satisfy the needs of the Indian industry in ftill. The plant is being built from Russian blueprints and with Russian equipment, as part of a strategic partnership between Russia and India

2.15.8 Technical and Military Cooperation in form of Joint Ventures. One of the most significant manifestations of Russian-Indian strategic partnership is highly intensive military and technical cooperation between the two countries based on the long-term

Programme of Military and Technical Cooperation till the year of 2010. Russia enjoys the status of major exporter of armament and military equipment to the Indian market.

Significantly, the current trend in Russian-Indian military and technical cooperation is a transition from the "cash and carry" mode to equal joint participation in long-term R&D projects, which envisage transfer of Russian technologies to the Indian Side and joint production of military equipment. A number of such projects are already underway; for example

2.15.8.1 Joint Development of the BrahMos Cruise Missile. The BrahMos cruise missile project has been moving forward steadily. It has a special place in the

history of Russian-Indian military-technical cooperation. The BrahMos serves in

effect as a pilot project for the joint development of a new weapons system by

Russia and India; the administrative, legal and financial framework developed for

this project will likely be applied for the creation of a fifth-generation fighter and a

multi-role transport aircraft. The research and development (R&D) for the

BrahMos was completed and large-scale production of missile systems for the

Indian Navy has begun. With the deployment of land-based systems and the

creation of air and sea-launch \ ersions, the total number of orders could reach up to

1000 units. Notably, the success of the BrahMos project facilitates the promotion of

other Russian air and naval (surface and undersea) platfonns. However, the field

trials of the Anny version were not successful and the Chief of Indian Army Staff

has postponed the date of induction of this missile in the Indian Army.

2.15.8.2 Sukhoi. A contract for joint production of 40 Numbers SU - 30 MKl aircrafts between Hindustan Aeronauticals Limited and Rosoboronexport is under

negotiation pending price resolution. The most important accomplishment in 72

Russo-Indian relations during 2007 was the signature of the long-awaited intergovernmental agreement on the joint development of a fifth-generation fighter

and the multi-role transport aircraft. After two years the Indian Air Force finally chose Sukhoi’s T-50 over M iG’s light fighter, which carried a greater technological risk.

2.15.8.3 Joint Development of Multi Purpose Transport Aircraft (MTA) and Fifth Generation Multifunctional Fighter. During the Moscow Summit in November 2007 Russia and India signed two important Agreements - on developing a multi-purpose transport aircraft and a multi-functional 5th generation fighter aircraft confirming their willingness to carry forward defense cooperation on the above mentioned pattern. The venture is considering joint production to meet the requirement not only of Russia and India but also of the market. The Russian Airforce’s requirement has been finalized. Intellectual

Property Rights clauses pertaining to both the MTA and FGTA have been

finalized. It needs to be ensured that the issue should not become an instrument of

financial pressure or assertion of technological superiority by one partner over another. India’s participation in development of the advanced tactical frontline

fighter (PAK-FA), formalized in an intergovernmental agreement, gives the project greater financial sustainability because it is set to receive priority

financing as an international project. In combination with the ongoing

development of the Su-30MK1 project, India’s participation in the PAK-FA

indicates that India's heavy fighter development will be oriented towards

Russian-origin equipment for the next few decades. O f course, such a strong pro-

Russian decision on the heavy fighter leaves room for doubt as to India's

intentions with respect to the medium and light fighters; that is, the 126 multi-role

aircrafts. One might also expect the stagnating mid-range transport aircraft

(MTA) project to pick up speed once an intergovermnental agreement is signed.

2.15.8.4 M IG 29 Upgrade Project. It has been agreed that some aircrafts will be upgraded in Russia and others in Nashik. A depot will be created in Nashik with

spares for MiG29 including for the upgradations for the Indian Air Force and the

Indian Navy. A US $ 850 million contract was concluded in December 2006, after 73

two years of intensive negotiations. Major companies involved are MBCB

Mezhdunarodnii Salon Vooruzenia I Voennoi Tekhniki and IRKUT Corporation,

Russia’s leading Company manufacturing civil aviation and military aircrafts.

Orders worth US $ 4.6 billion were placed in 2007. The unfortunate update in

March 2009 is that Russia has grounded its MIG 29 fleet due to design failures and

an Indian Navy team meant to collect MIG 29s from Russia returned empty

handed.

2.15.8.5 IL 76/78 Upgrade. Rosoboronexport and Illushin Aircraft Corporation

are working with the Indian Air Force.

2.15.8.6 Medium Lift Helicopters (MLH). The finalization of the purchase of 80 Mi-17 helicopters is expected in the near future. India has already purchased 40

such machines from Russia a few years ago. A new contract for double the original

number testifies to Russia’s complete dominance on the Indian market for military-

transport helicopters as well as the highly competitive stance of these machines in

general.

2.15.8.7 A swap of 18 x SU 30 K procured in 1997-99 with SU-30MK1 was signed in May 2007.

2.15.8.8 Frigates for Indian Navy. Three Follow on Frigates under are under constmction in Yantar Shipyard, Kaliningrad. Delivery of first ship is due in

2011.

2.15,9 Problem Areas in Delivery of INS Vikramaditya (Formerly Admiral Gorshkov). The critical status of the contract for the modernization and refitting of the Admiral Gorshkov aircraft carrier represents the major negative news for the year. Bsides e slippage of the delivery date from 2008 to 2010, at the earliest, Russia has also admitted its inability to meet contractual obligations on the terms agreed in 2004. This is mainly due to the shaip fall in the value of the dollar and the rise in operating costs within Russia's defence industry. Moreover, it’s likely that the price originally negotiated was lower than what

Sevmash Shipyard could have reasonably agreed to even at that time. If so, this would be the second time that Rosoboronexport has signed a contract on terms that are virtually impossible for the industry to meet. The first such contract, for delivery of 38 I1-76MD and lA

I1-78MK military-transport aircraft and refuelling tankers to China, had to be uhimately cancelled. As for the Gorshkov, the Russian party has reportedly asked for an extra 380 million USD for completion of the project. However, the Indians also displayed a certain tolerance of the delays in both projects; in any case, they did not impose penalties on the

Russian producers. The DG of concerned shipyard was replaced. High level internal

assessment is taking place.^'

2.15.10 Difficulties in Other Contracts. An attempt to change the financial terms of the

contract would be unprecedented for Russo-Indian defence cooperation. If such a demand

was indeed made, it suggests that the steep fall in the value of the dollar, the currency in

which most, if not all, Russian arms trade contracts are denominated, is having a serious

impact on the ability of the Russian defence industrial complex to fulfill export contracts,

especially the long-term contracts signed in 2003-2004. The second public crisis involves

claims made by the Indian Navy against the quality of the modernization of the 11-3BSD anti-ship aircraft, outfitted with the Sea Dragon targeting system. Complaints about quality and performance are not unusual and are not unique to Russo-Indian relations as, for

example, the technical problems that plagued the Polish F-16s indicate. However, in this

case, the categorical lone adopted by the India suggests that India is genuinely disillusioned with the effectiveness of the Sea Dragon system, developed by the Leninets holding company. Moreover, as distinct from the Gorshkov, where the Indian Navy has no substitute, the market for anti-ship defence equipment is highly competitive, and a

customer can choose from a variety of offerings.

2.15.11 India’s Options. There are at least two reasons why problems with the

modernization of the 11-38 could have especially negative consequences for Russia. First,

the issues with the Sea Dragon open the door for American offerings to India like the

Lockheed Martin P-3 Orion and the Boeing PSA Poseidon patrol aircraft. However, in

spite of the recent warming in military and military-technical relations between India and

the U.S., concrete examples of American sales on the Indian market remain scarce.

Therefore, it would be vexing if a Russian failure had the consequences of promoting U.S.

sales. Second, the problems of the 11-38 modernization project would toipedo an analogous

deal to modernize the Indian Tu-142ME anti-ship aircraft, which in itself is a much more

interesting platform than the 11-38. 75

2.15.12. Positive Signals for better Indo-Russian Relations. Notwithstanding the aforementioned difficulties, there are positive developments, which indicate that a number of successful Russo-Indian projects initiated in the 1990s have stimulated further cooperation that should allow Russia to maintain its status as one of India’s main military- technical partners well into the future. For example, two new, though previously anticipated, contracts for the delivery of a total of 58 Su-30MKI fighters were consummated in 2007. The first of these agreements is for the delivery of 18 aircraft in exchange for the same number of Su-30K, while the second agreement for the delivery of

40 fighters goes beyond the framework agreements reached in 1996, 1998, and 2000 for the deployment of 190 Su-30MKI to India. Additionally, New Delhi has also signed a contract for the delivery of 347 of T-90S main battle tanks valued at 1,237 million USD.

2.15.13 The development of Russian-Indian military-technical relations in 2007 was thus somewhat contradictory. Russia’s defence-industrial complex has not only defended, but strengthened its positions on the market for heavy fighters, military-transport aircraft and helicopters, and main battle tanks. At the same time, traditional problems like meeting deadlines, production quality, and the ability to meet Indian demands have become more pronounced. The inability of the Russian industry to stay on budget due to cuixency fluctuations and delays in securing materials and parts is a new and wonisome development. These problems give advantage to Russia’s competitors on the Indian market. They could also lead to a relati\ ely new phenomenon, such as direct competition between the American and Russian producers and exporters of arms and military equipment.^"

2.15.14 Space Cooperation and GLOSNASS and Second Indian in Space. Even though India has had extensive cooperation in space technology, its participation in Glonass in a new breakthrough. It involves launching by India of a Russian made Glonass M satellite, joint development of a new Glonass-K satellite and India's access to glonass Radio

Frequency Systems. After interfaces between NPO PM (Energia) and ISRO. launch using

GSLV has been under intensive planning and preparation.

2.15.15 Joint Ventures between Hydrocarbon Companies of Russia and India. Russian companies would expect opportunities either in upstream, midstream or downstream 76 sectors bilaterally or in third countries commensurate with opportunities being sought in the upstream sector in Russia. ONGC and Rosneft have set up a joint study group, which was announced in Jan 07 to identify possible joint ventures for cooperation. Also a joint working group between ONGC and Gazprom to identify specific projects in Russia, India

and third countries for mutual cooperation is under way. Political support is there, but it is

now on the commercial entities to come up with a viable projects.

2.15.16 Sakhalin III. MOU on Hydrocarbon Energy between Oil and Natural Gas

Commision Videsh Limited (OVL), Rosneft and Gazprom may result into concrete

projects. Sakhalin III has three exploration blocks with estimated reserves of four billion

barrels of oil and 26.7 trillion cubic feet (tcf) of natural gas. Amendments to Russian law

on mineral resources determining the country’s strategic resources in which majority

shareholding will be with Russian Companies and foreign companies will be precluded

from taking controlling stakes during development. Third country companies will be able

to participate with the Russian companies such as Rosneft and Zarubezneft for oil and

Gazprom for gas in areas like Kirinskii, Vostochno-Odoptu and Aiyashkii.

2.15.17 Sakhalin IV. Sakhalin IV has two exploration sites the Pogranichny block and the

Okruzhnoye field with estimated reserve of 880 million baiTels of oil and 19 tfc of gas.

Geological studies of the reserves are being carried out by the joint venture of Rosneft

(51%) and BP (49%). Any participation of other companies in the development phase may

become possible once its status becomes clear after amendment of Russian law.

2.15.18 Cooperation in Diamond Industry. Direct Purchase of Russian roughs by Indian

diamond companies through privileged sightings, now at small scale can result in

improved trade and employment in both countries.

2.15.19 Cooperation between Russian and Indian Banks. During a press conference

alter a convention between Russian and Indian banking organizations at New Delhi in

October 2008, the ussian and Indian sides expressed satisfaction and reiterated their

commitment to mutually beneficial, long-term and fmitful bilateral cooperation. Bank of

Russia, Sberbank, Bank VTB, Vnesheconombank, Bank of Moscow, Zenit Bank.

Promsvyazbank, Chelindbank, European Trust Bank, Association of Russian Banks,

Association of Regional Banks of Russia and Russian Insurance Centre had participated. 77

Indian public bank sector was represented by the State Bank of India, Canara Bank, UCO

Bank, Punjab National Bank, Bank of Baroda, State Bank of Hyderabad and others, with

HDFC Bank Ltd., ICICI Bank Ltd., Karnataka Bank Ltd. Speeches by representatives of banks touched upon such issues as prospects of Russian-Indian bilateral and international

banking cooperation, mortgage crediting, anti-money laundering, etc.^^

2.15.20 Efforts made for Promotion of Trade between Russia and India. Indo Russian

Inter Governmental Commission on Military Technical Cooperation have been meeting at periodic intervals. The commercial chambers are setting up Infonnation sharing centres for

the benefit of interested businessmen.

2.15.21 Role of Russian Consulates. The Trade Representation is part of the

Diplomatic Mission of the Russian Federation in India and acts under political guidance

of the Ambassador of the Russian Federation in India. General direction of the activity

of the Trade Representation is carried out by the Ministry of Economic Development of

the Russian Federation. According to the Statute the main tasks and functions of the

Trade Representation are primarily as follows:

2.15.21.1. Ensuring of implementation of the foreign economic policy of the

Russian Federation, promotion of expansion and diversitication of Russian export

of goods and services.

2.15.21.2. Prex cntion of complications in trade and economic relations between

Russia and India, and if any, assistance in their settlement.

2.15.21.3. Dissemination in India of information about Russian cconomy and

investment climate in the Russian Federation.

2.15.21.4. Assistance to interested participants of foreign trade acli\ it> in getting

orders lor supply of goods and services and in promotion of ihc Russian

investment projects abroad.^"*

2.15.22 Cultural Inti'ractions. A very significant development of hosting the Year of

Russia in India in 2008 and the Year of India in Russia in 2009 has provided a much needed stimulus for promoting the relations between the two countries. While Russian- 78

Indian strategic partnership is increasingly gaining momentum embracing an even wider range of spheres, the promotion of cuhural and people-to-people contacts remains as high as ever on the bilateral agenda. These have given exciting chances to take a fascinating glimpse into the life of present-day Russia, its culture, history, customs and traditions.

2.15.23 Partner Relationships between States. At present, partner relations have been established between the cities and regions of the two countries, for instance, the Astrakhan

Region and Gujarat State, the Republic of Tatarstan and Andhra Pradesh State, the Samara

Region and Kamataka State, Kazan and Hyderabad, St. Petersburg and Mumbai. It is expected that other regions will be on this list in the near fiiture.

2.15.24 The Foundation of Indo- ussian Chambers of Commerce. The foundation of Indo-Russian Chamber of Commerce is expected to add new dimension to bilateral

information exchanges in commercially lucrative areas like power generation, upstream

and downstream oil and gas, mining and metallurgy, transport, infrastructure, information technology and electronics, civil aviation, biotechnology, automobile industry, space

exploration and the list can be unlimited.

2.15.25 The Future. There is common understanding in Russia and India that the potential which exists in the sphere of trade is far from being fiilly tapped and there is still considerable disparity between the active political dialogue and military and technical cooperation on the one hand and weak trade and economic linkages on the other.

Numerous endeavors and initiatives of the leadership of the two nations are nowadays

aimed at promptly rectifying this situation.

2.15.26 Higher Political Will. The negotiations between fonner Russian President and now Prime Minister Vladimir Putin and Indian Prime Minister Manmohan Singh have

confirmed there is political will to attain the trade turnover of 10 billion US Dollars by

2010 which is perfectly practicable taking into account the potential of both countries. A

lot will depend on how political will of the leaders will transform into concrete steps of the

business communities. Commercial benefit has today become a major stimulus for the

increase of trade turnover. O f course, a particular entrepreneur does not view the task of

reaching a 10 billion dollar turnover as the most important. For him it is vital to make sure

a deal yields profit. The states should in their turn assist business contacts. 79

2.15.27 Potential Areas of Cooperation between Russia and India. Given the geographical distance between India and Russia, India cannot hope to take China’s place in terms of volume of bilateral trade. However, India and Russia can boost greater cooperation in diverse fields through joint ventures, collaborations and joint development initiatives. A major area of synergy between India and Russia is in the energy sector.

Russia’s importance as a supplier of energy feeds into India’s own rising demand for multiple sources of energy to ftiel its growing economy. The following ongoing or new projects can lead to fruitful and commercially viable joint venture;-

2.15.27.1 Biotechnology/ Biomedicine. Joint centre for hydrate studies at the National Institute of Ocean Technology in Chennai and biomedical technology

centre in Kerala.

2.15.27.2 High-tech and scientific cooperation. A joint centre for transfer of technologies, advanced computing research in Moscow, biotechnology in

Allahabad powder metallurgy in Hyderabad

2.15.27.3 Russia’s Kamaz, Lada and Gaz. These companies have shown interest in sourcing automotive components from India through .IVs and technology tie-ups.

2.15.27.4 Feasible Indian Investments in Russia. The Orenburg Region mostly exports metallurgical equipment manufactured by the engineering concern

ORMETO-YUMZ, asbestos from Orenburg Minerals company, rolled sheet steel

from Urals Steel company, and defence industry products from the Strela

Production Association to the Republic of India. India mostly exports medical

preparations, tea, coffee and consumer goods to the Orenburg Region. However,

Indian investment in the regional economy still accounts for just 0.35% of the

grand total. One wholesale trade company with Indian capital, Pervaya Pomoshch (First Aid) Ltd, is registered in the region. The Orenburg Region and the Republic

of India continue to expand their cultural contacts. In May 2002. the regional

government and the Embassy of the Republic of India in the Russian Federation

signed a cooperation memorandum during the Days of India in the Orenburg

Region. The relevant agreement was also signed between the Orenburg Region's

Chamber of Commerce and Industry and the India Business Alliance. 80

2.15.27.6 India can invest in aviation, pharmaceuticals, IT and software, gems and jewellery, oil and gas in Russia. Internet usage in Russia has grown from 4 million

in 2000 to about 22 million at the end of 2005. The growth has been slow and there

is immense potential in this area for India to invest in Russia - in areas of e-

education popularizing e-govemance in Russia, fixed-line telephone network,

computerization of post offices and schools and so on.

2.15.27.7 Indian Investment in Tobacco Processing in Russia. A demand for an early finalization and signing of a draft inter-govemmental agreement regarding

higher off take of Indian tobacco by Russia through the purchase of cigarettes /

tobacco or procuring of cigarettes from a joint venture proposed to be set up in

Russia by any Indian company which would procure tobacco from India.

2.15.27.8 Joint Venture in Popular Brands of Tea. Request to accord protection to "Darjeeling tea" as a geographical indication and to recognize "Assam", "Nilgiri"

and "Indian tea logo" as labels/well known original brands and requested

facilitating setting up of joint ventures between Indian tea companies and Russian

business houses in order to augment the export of quality tea from India.

2.15.27.9 Cooperation in Direct Trade in Diamonds. The Protocol for cooperation in diamonds was signed during the visit of President Putin to India in

October 2004. India has asked Russia to expedite the decision agreed by both sides

for inclusion of MMTC in the list of regular participants for auction and tenders for

selling of rough diamonds by Alrosa (Russian diamond mining company) as also to

explore the action taken by the Russian side for setting up a joint venture by Alrosa

with MMTC for manufacturing jewellery in India. India has also requested Russia

to expedite the release of payment due to the Indian exporters and de-link this issue

from the overall settlement of state credit. The issue of early conclusion of

simplified visa procedure agreement to enhance trade and economic cooperation

needs resolution.

2.15.27.10 Indian Investment in Explorative Hydrocarbon Industry. India must look towards trying to help Russia build its oil and gas infrastructure. 81

2.15.27.11 Indian Human Resources for Russian Industry. India can offer its highly skilled and mobile population in crucial industries and sectors of Russia’s

economy.

2.15.28 Strong Russian Diplomatic Initiatives. Vyacheslav I Trubnikov, Ambassador from Russian Federation to India emphasized in a convention, “..no one can deny the reality of emerging new centres of influence and the need to combine efforts in resolving the problems that confront the world and threaten to throw it out-of-balance. A strong democratic and powerful India meets the fundamental national interests of Russia. ... we have substantially intensified our contacts in the format of «troika» Russia-India-China and «quartet» Brazil- Russia-India-China”®®

2.15.29 Corporate Efforts for Better Awareness. One of the fundamental obstacles that 1;'^ on the way of widening economic cooperation is lack of awareness and facilitation in establishing contacts, especially between small and medium enterprises. The Branches of Indian Chamber of Commerce is trying to bridge this gap.

2.15.30 Russian Investment in Sistema Shyam. Russia is planning to buy 20 per cent stakes in Sistema Shyam Teleservices which is owned 73% by Russian Sistema Group controlled by Billionaire Vladimir Yevtushenkov, as a part of New Delhi's outstanding Soviet era loan debt to Moscow.

57 2.16 Global Competitiveness Ranking of Russia

2.16.1 World Economic Forum (WEF) has been ranking various countries according to the Global Competitiveness Index (GCI) worked out on 12 factors like institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size and business sophistication and innovation. They have ranked Russia in 5V' place among 134 countries included in their 2008-2009 report. This is a marked improvement from the 58* place (out of 131) recorded in 2()()7-2008 and 59"' (out of 122) in 2()()6-2007.

2.16.2 Strengths. Russia's main strengths have been identified with its large market size and improving macroeconomic stability partly due to oil revenues. 82

2.16.3 Weaknesses. Russia’s weaknesses hampering its competitiveness and sustained development are:-

2.16.3.1 Lack of government efficiency (116'’’ place).

2.16.3.2 Lack of independent judiciary (109* place).

2.16.3.3 Government’s favoritism in its dealings with.private sector and lack of

corporate ethics (112^’’ place).

2.16.3.4 Inefficient goods and financial markets (99* and 112* places

respectively).

2.17 Chapter Summary

2.17.1 Historical Russian Struggle for access to Commercially Active Sea Ports. To start with, Russia, a land of agriculturist people was a landlocked territory. With expansion of territory it wanted access to the ports for trading. Establishment of St Petersburg on a captured territory was the first step in this direction. During the peak of its power the

Soviet Russia was a force to reckon with. Now it is struggling again for its markets outside

Europe and China and a commercially active harbor. Its port at Kaliningrad is an exclave connected to main land only through sea route to St Petersburg.

2.17.2 Vast unexplored/underdeveloped Geographical Territory. The vast territory with rich mineral and forest resources is underdeveloped from industrial and agricultural point of view compelling it to depend upon imports from neighboring countries. It is looking for collaborating coi-porations for exploration of its oil, gas and mineral resources as well as for setting up factories on remote areas not so developed, some of them used during Soviet era as places for exile of dissidents.

2.17.3 Depleting Population Deprived of Spiritual Stimulus. Russia’s population is on the decline. Over half a century of communist indoctrination and lack of religious pursuits has deprived the people of a basic necessity of life, like the Faith. This is now gradually being built up with Orthodox Churches and Islamic teaching facilities. Barring the extremist struggles in Chechnya, Russia is a multi-ethnic and multi-religious country. 83

2.17.4 Severe Shock during Transition from Controlled Economy towards Free Market. The controlled economy of the Soviet era left Russia in a poor state of economy. The uncontrolled privatization made few powerfiil people rich with state property.

Ineffective regulatory institutions caused flight of money to overseas banks, high inflation and steep drop in the value of the ruble.

2.17.5 Opening of Russian Market to Non CIS states. Russia has opened its market to Non CIS states while maintain good and growing trade within CIS states.

2.17.6 Slow Recovery of Economy due to rising oil prices and increased consumerism. The higher oil prices have been providing a windfall of economic success for Russia, with its foreign exchange reserves rising rapidly. The spendings by emerging middle class and novo-rich have been on the increase. However with the current drop in oil prices and global economic turn down, Russia is again reeling under another economic hardship. \ 2.17.7 Slow Movement towards Democracy and Poor State of Governance. The attempt to bring a socio-economic change through ‘shock-therapy’ did not allow building up of efficient financial institutions. To provide stability in the goveming body the old trusted leaders, mostly from defence or secret services have been installed. Democratic values are yet to set in.

2.17.8 Improved Relations with China due to Complex Relations with USA and European Union who have geopolitically an aggressive posture. Russia is seen by the west as trying to restore its Soviet era glory. However there is a need to appreciate that with disintegration of Soviet Union Russia's defence potential has considerably reduced.

The hostile attitude of some erstwhile soviet republics has compelled Russia to find alternative in Organizations like The Shanghai Cooperation Organization and closer ties with China.

2.17.9 Seeking better Relations with India. Russia has enjoyed good relations with India during the cold war period. The trade relations after disintegration of Soviet Union were attenuated for some time, but they were quickly restored by mutual dialogue over a number of issues like Rupee mble trade and mutual cooperation in science, technology and sale of military hardware including going for joint venture. 84

2.17.10 Global Competitiveness Ranking, Strengths and Weaknesses. The World Economic Forum in its 2008-09 ranking has placed Russia at 51^‘ place out of 134 countries. Russia has a large market and strong macro-economic potential in its natural resources. However, it suffers from poor political and corporate governance, favoritism

and inefficient goods and financial markets.

Chapter Notes: 1. Churchill, Sir Winston, as quoted by Freeze, Gregory L, Russia a History, Oxford University Press, 1997. 2. http://www.russiaprofile.org. Home page. 3. Ostrovsky, Arkady; A Special Report on Russia, The Economist, November 29*'’- December 5*, 2008. 4. Langer, William L. (Coolidge Professor of History, Harvard University, Ed); A Survey of European Civilization, Complete, Third Edition, 1962, Page 23. 5. Ibid, page 87. 6. Ibid page 283. 7. Ibid Page 536. 8. Ibid Page 542. 9. Ibid page 639. 10. Ibid page 715. 11. Ibid page 733. 12. Freeze, Gregory L„ Russia a Story, page 442. 13. Desai, Padma, Conversations on Russia, Oxford University Press, Indian Edition 2007, Pages 160. 14. hltp:/''vvww.gks.ru'wps/poi1al/!ut/p'.cmd/cs/.ce/7_0_A/.s/7_0_3QA/_th/J_0_9D/ s.7 0_ A/7_0_2BD' me/7 0 2BC-7 0 A/ s.7_0_A7_0_3QA. 15. Arkhangelsky, Alexander, "The Impossible That Is Real", Special Interview to RIA Novosti, January 27, 2009. http://russiaprofile.org/page.php?pageid=Politics&articleid= aI233074016. 16. Farisov Farit, Interview by Dmitry Babich, Russia's Islamic Backbone, Russia Profile. Febnaary 9, 2009, http://www.russiapronie.org/page.php?pageid=Politics&aiticleid =a 1234195 574 17. Country Data; From the Economist Intelligence Unit, Dec 16th 2008. http://ww\v.economist.com/countries/Russia/profile.cfm?folder=Profile Economic Data. 18. http://news.bbc.co.Uk/2/hi/europe/country_profiles/l 102275.stm. 19. Afanasiev. Yury . "The end of Russia?". The Open Democracy, 21 - 01 - 2009 http://wvvw.opendemocracy.net/article/russia-theme/the-end-of-russia. 20. Human Rights Report 2007. 21. http://wvvw.russiaprofile.org/page.php?pageid=Politics&articleid=a 1230576433. 22 CIA World Fact book, Russian Federation. 23. http://wvvw.fco.gov.uk/en/about-the-fco/country-profiles/europe/russia?profile=all. 24. http://www.fas.org/nuke/guide/russia/doctrine/econcept.htm. 25. Ibid. 26. Ibid. 85

27. Medvedev, Dmitry Anatolyevich, during a Press interview, http://www. russiaprofile.org/ page.php?pageid= CDI+Russia+Profile+List&articleid=al230325135. 28. http://www.fas.org/nuke/guide/russia/doctrine/econcept.htm. 29. Desai, Padma, Conversations on Russia, Pages 156-7. 30. Pukhov Ruslan quoting Russian Defense Minister Anatoly Serdyukov, October 14, 2008, CAST Research. 31. Makienko, Konstantin; Russo-Indian Military-Technical Cooperation: New Challenges and New Opportunities. 32. Langer, William L. (Coolidge Professor of History, Harvard University, Ed); A Survey of European Civilization, Complete, Third Edition, 1962, Page 413. 33 The Economist, February 21st - 27th, 2009. 34 Aiyar, Swaminathan Anklesaria, “If US is bad its rivals are worse”,Times of India, 15 March 2009. 35 http://www.cia.org 36. http://www.fco.gov.uk/en/about-the-fco/country- profiles/europe/russia?profile=all. 37 New Theme; On Russian-Indian Affairs, Volume VII, No 5 Sept-Oct 2006. 38. Anders Aslund; Crisis Puts Putinoniics to the Test. Moscow Times, Dcccmbcr 24, 2008. http://www.russiaprofile.org/page.php?pageid=CDI+Russia+Profile+List&articleid= al230325135. 39. http://www.economist.com/countries/Russia/profile.cfm?folder=Profile%2D Economic%20Data. 40 Cramer, Andrew; Moscow; Kreminology; Last Days of Russian Oligarchs? Government is likely to gain control of private coiporations; DNA, Pune; 9* March 2009. 41. http://www.gks.rU/wps/portal/Iut/p/.cmd/cs/.ce/7_0_A/.s/7_0_3QA/_th/J_0_9D/_s. 7_0_A/7_0_2BD/_me/7_0_2BC-7_0_A/_s.7_0_A/7_0_3QA 42. Guillet, Jerome, Comment: Ukraine-Russia: Some Background And Contexthttp://www. njssiaprofile.org/page.php?pageid=Business+New+Europe&articleid= a 123 1767797 . Paris, January 12, 2009.

43. http://www.gks.ru/wps/portal/!ut/p/.cmd/cs/.ce/7_0_A/.s/7_0_30A/_th/J_0_9D/_s. '7_0_A/7_0_2BD/jTie/7_0_2BC-7_0_A/_s.7_0_A/7_0_3OA.

44. Ibid. 45. Ibid. 46. Ibid. 47. Ibid. 48. "Russia to launch 1st leg of ESPO pipeline on Dec. 25, 2009". RIA Novosti; 13 Jan 2009, http://www.yakutiatoday.com/news/business_espo.shtml. 49. Indian Express, http://www.indianexpress.com/news/Tracking-a- Russian92s- footsteps-10,000-km-from-Moscow-to-Mumbai,-500-years-later/16480/ and http://www.tclegraphindia.com/1061118/asp/atleisure/story_701621 l.asp, 12 Nov 2006. 50. The Foreign Policy Concept O f The Russian Federation. http://www.fas.org/nuke/guide/russia/doctrine/econcept.htm. 51. Makienko, Konstantin; Russo-lndian Military-Technical Cooperation: New' Challenges and New Opportunities. 52. Sibal, Kanwal, Fonner Indian Ambassador to Russia 53 "Days of Russian Banks in India", http://www.rusembassy.in/eng/?page=news/6. 86

54 http://www.rustrade.in/pages/AboutUs.htm. 55. Trubnikov, Vyacheslav I., “Russia and India - Partners in Progress”, February 8, 2008, The Foreign Pohcy Concept O f The Russian Federation. http://www.fas.org/nuke/guide/russia/doctrine/econcept.htm, /www.rusembassy.in/ eng/?page=news/6. 56 AFP, Moscow quoted under “Russia may buy stake in Sistema Shyam”, Times of India, Pune 19^’’ March 2009. 57. The Global Competitiveness Report 2008-2009, World Economic Forum.