On the Spot Guidance

Earlier this month, Putin showed up in Pikalyovo to quell a workers' protest and put Deripaska in his place. Then, he appeared at an art exhibit telling renown painter Ilya Glazunov a unsolicited critique: "The sword is a bit too short, it looks like a pocket knife in his hands ... It looks like it's only good for slicing sausage." Naturally, the artist promised to fix it.

No surprise then that a local trip to an X5 supermarket in Moscow yesterday, Vladimir Vladimirovich gave another round of "on the spot guidance" to Yuri Kobaladze, the MD of corporate relations for X5:

P: "Why do your sausages cost 240 rubles? Is that normal?
K: "But these are high quality sausages. Look, these ones are just 49 rubles."
P: "Too expensive."
K: "No..."
P: "I can show you your mark-up ... Look at this kind of sausage, your mark-up is 52%!"

Then they moved to the meat counter...

P: "This is twice as much. Is this normal? It's very high."
K: "Tomorrow we will cut the price."

At this rate, VVP may begin to overfulfill the international quota on micromanagment.

€$€$€$€$€$

Customs Union, Gazprom in Trouble

The big story this week was the decision of Russia, Kazakhstan and Belarus to unilaterally withdraw from the WTO and form a Customs Union (read analysis here).

Curiously, this big policy initiative -- years in the making -- was thrown into doubt when Russia slapped a milk ban on Belarus. This also comes at a time when Moscow has created a commission to shape its PR image. President Medvedev played the usual bratstvo card: "Talking about these latest events, we were a bit taken aback, of course, by the way our Belarusian friends and partners reacted to what was happening. The situation is really quite simple, after all. What we need is civilized trade, even between such close and brotherly countries as Russia and Belarus."

The other big story was Gazprom's self revelation that it is in big trouble. Gazprom's revenue is expected to shrink to $40 billion from last year's $73 billion, while production is dropping and demand in Europe is shrinking. Investments will reach 400 billion rubles -- half of last year's amount. Not to depress spirits, a mountain in the Urals will be named Mt. Gazprom.

Therefore it is not surprising, that as soon as the Belarusian milk ban was lifted, Minsk got a nasty bill of $230 million for debts incurred over January-April. Fears of yet another gas crisis with Ukraine are dominating talks in Brussels.

Izvestia on the Potomac

I didn't want to hold my breath too long about reports of U.S. intervention in Iran, but here you have it. Izvestia reports:

"Can this revolution a "colored" one to be put on a par with the Serbian, Georgian, Ukrainian, and Kyrgyz? On formal grounds it seems that yes, the reason for people's performances in each of these cases was the outcome of the election, accusations of fraud. But in fact, this is not the case. Iran is too specific a country. There are other factors in this present revolution. Causes of the Iranian Revolt are their own and purely internal. And the infamous "hand of the West" is not visible.

Even the leaders of the CIA have to admit that they have very little leverage on the impact of the situation in Iran. There are no surrogates. Don't think that the Iranian Yushchenko and Saakashvili is the opposition leader, former Prime Minister Mir-Hossein Mousavi. He was once a colleague of Ayatollah Khomeini (another friend of America!). And now his supporters are on a demonstration by shouting "Allah akbar." In general, if one refers to the Iranian revolution's "color," it can be only one color -- Islamic green."

While Izveztia says that the West and CIA hold little leverage in Tehran, the op-ed pages of the Washington Post say that Obama "subtly encouraged" ferment in Iran. Nonetheless, before exhaling, I discovered a straw internet poll in the Russian daily revealing that 46% believe that the situation in Iran is "an 'orange revolution' planned in the West'."



Phew. I thought the world went all topsy-turvy.

Nonetheless, we have the usual arguments trying to debunk the "orange revolution" with the shoots of a "green" one. Unfortunately, many of these commentaries espouse the typical view from Washington and/or the Kremlin that the U.S. had a "hand" in the orange revolution, without doubting the actual effectiveness of technical assistance versus more major factors (i.e. the Constitutional Court annulled the vote on 12/3/04). Iran is not Ukraine -- except in the minds of those who wish to prop up the ideologically-driven, and arrogant, argument that the U.S. must have a hand in everything:

"Over the last couple of decades, the U.S. has actually gotten good at nudging along regime change through elections. In Serbia, Ukraine and Georgia, U.S. advisers harnessed popular rage at the theft of an election and provided a variety of technical assistance to help engineer revolutions."

Considering the impending media blackout in Iran, for now I am comfortable with Izvestia's simplistic analysis that Iran is "too specific" to be compared to Ukraine.

Milk Wars, Breakaway Republics and Loans

Interfax reports that as of in the first four months of 2009, the foreign state debt of Belarus had increased by 33.8% to $4.976 billion. In Belarusian rubles, foreign state debt soared 70.6% to BYR 13.96 trillion.

Last week, Russia offered an additional $500 tranche of loans. Lukashenka scoffed at the deal, which was contingent on the fact it would be dispersed in Russian rubles as opposed to dollars. "It's not working out with Russia. We don't need to beg. We don't need to whine and cry. We need to look for happiness in another part of the planet," said Lukashenka to his PM.

Suddenly on 3 June, Belarus asked for a whopping $9 billion loan. "We could get confronted with the Belarusian government's insolvency as early as in late 2009, or next year," said Deputy Prime Minister and Finance Minister Kudrin in response. This sum was too much for MinFin RF to handle.

"If those who want to help Belarus and want a balanced and stable economy are equated to opponents, then I don't know what Belarus wants," said Kudrin on the difficult loan negotiations. But it is certainly clear what Moscow wants from Belarus. Moscow Times today reported that the original $500 million loan was contingent on Belarus' support for South Ossetian and Abkhazian independence.

Stepping up pressure, Russia slapped a ban on 500 types of Belarusian milk products in response on 6 June. Rospotrebnadzor head Gennady "Swine Flu" Onishchenko said that Russia would be ready for talks on the resumption of imports but "only with those officials who represent manufacturers and are 'competent' enough to solve the problem (Moscow Times, 9 June).

This begs the question -- if Russia offered a loan of, say $300 million in rubles, would 300 types of Belarusian milk products have been blocked? In an even more arbitrary move, Rospotrebnadzor blocked an additional 800 dairy products today.

This non-tariff measure will cost Belarus $1 billion comes at a time when Economy Minister Nabiullina and US Trade Representitive Ron Kirk last week optimistically talked about Russia's languid WTO accession process finally drawing to a close. The milk wars, not to mention the meat wars, indicate that the process could drag out even longer than next year.

Even more bizarre, Putin announced today that Russia would join the WTO, not as an individual member but as a part of a joint customs block with Belarus and Kazakhstan.

Business as Usual

[Update: Video of Putin sans necktie in a Members Only jacket dressing down Deripaska].

Putin traveled to Pikalyovo, where workers of the BasEl-owned cement plant blocked a motorway this week in protest over layoffs and unpaid salaries, to rap Deripaska on the knuckles.

"Why was everyone running around like cockroaches before my arrival? Why was no one capable of taking decisions?" Putin said as Deripaska stared blankly. "Has Oleg Vladimirovich [Deripaska] signed? I do not see your signature. Come here and sign it," Putin said, throwing a pen dismissively onto the table (Reuters, June 4).

While the situation looks dire in Pikalyovo and other monogorody, the price of oil continues to climb, rising $1 today:

"The oil price is going up, everything seems to be in order, so why change?" Sergei M. Guriev, dean of the New Economic School in Moscow and a board member of the state-owned Sberbank, said by telephone. "If oil prices go back to where there is no budget deficit, then it will be business as usual (NYT, June 4).

In Pikalyovo, $1.3 million in wage arrears need to be paid out. According to Merrill Lynch's chief economist, for each $1 increase in the price of oil (like in today's trading), the budget earns about $1.7 billion a year.

Far-Flung Euro-Junket to Khabarovsk

Yesterday, Eurocrats arrived in Khabarovsk — nine time zones away from Brussels — for the biannual EU-Russia Summit. The FT hilariously noted that "jet lag topped the agenda," adding that even "President Dmitry Medvedev has recently taken to video conferencing with the far eastern region's bureaucrats as a saner alternative to flying there. 'You lose two whole days when you go out to the far east'..."

"Vaclav Klaus, Czech president - the Czechs hold the revolving EU presidency - had a look at the list of prospective sites before Mr Klaus picked Khabarovsk, because 'he hadn't been there before and wanted to see it', according to a diplomat, who asked not to be named."

Not surprisingly, nothing got accomplished — the usual with most EU-Russia powwows. Both sides failed to agree on concrete measures to prevent another cutoff of gas supplies to Europe. Medvedev also reaffirmed opposition to signing the Energy Charter and once again suggested a Moscow-proposed energy security pact. Meanwhile, Barroso said such proposals could only supplement, but not replace, the Energy Charter. While the EU pressed Russia to ensure reliable gas supplies, Medvedev singularly blamed Ukraine for the two-week gas cutoff in January and warned further disruptions due to Ukraine's insolvency. Kyiv plans to inject 12-19 bcm of Russian gas supplies worth $3-4.8 billion into its underground storage. Medvedev proposed that the EU help Kyiv obtain a syndicated loan to finance the supplies.

I propose that EU-Russia Summits should be like the Olympics or the World Cup — held every four years so that both sides can actually come up with some concrete proposals and try to implement them when the time comes. Or maybe the next EU-Russia Summit can be held in the Falkland Islands (a UK territory), which is only 7 hours from Moscow.

South Stream Signed, but Where's the Gas?

Gazprom has officially signed agreements to realize South Stream with Bulgarian Energy Holding, Greece's DESFA and Serbijagas. According to Kremlin spokesman Dmitry Peskov, Eni and Gazprom will not sign a long waited agreement, but a memorandum of cooperation to map out future steps. Apparently, Eni is not as happy as its Bulgarian, Greek and Serbian counterparts. It wants to market gas from the pipeline in the countries the pipeline will pass through. However, Gazprom only offers the right to bring gas into Italy and a role in managing the pipeline.

According to a Gazprom official, South Stream will be implemented regardless of the situation of Nabucco. He added that "all the activity around the Southern Corridor / Nabucco is often initiated by politicians overseas because it is a political rather than an economic project. It has no influence on the realization of South Stream because from the very beginning companies, rather than politicians thought it is a reasonable commercial project."

Alfa Bank reports that on May 10, Gazprom's production was 0.975 bcm/day, its lowest level since 1983. Domestic demand in December-April was down 8-12% year-on-year, while exports to Europe were down by 21% year-on-year during the first five days in May (USRBC Daily Update, May 13).

Ultimately, the pipeline will have capacity of 30 bcm. Considering the Gazprom is producing gas at Andropov era levels, it is hard to see the commercial viability of this €10+ billion project.

Arctic Heats Up

On May 13, President Medvedev reconfirmed the Strategy of National Security through 2020. The document stresses the implementation of the strategy as "a mobilizing factor for the development of the national economy, improving people's quality of life, political stability in society, strengthening the national defense of national security and the rule of law, improving the competitiveness and the international prestige of the Russian Federation."

Apart from giving a nod to the importance of alternative energy, the document noted that Russia must counter the threats of the depletion of world reserves of mineral, water and biological resources through the "introduction of environmentally sound production, the search of promising energy sources, formation and implementation of state programs to build strategic reserves of mineral resources."

The Times and Guardian picked up on some of the more militaristic points, i.e. "The presence and potential escalation of armed conflicts near Russia’s national borders, pending border agreements between Russia and several neighboring nations, are the major threats to Russia’s interests and border security" and "in a competition for resources, it can't be ruled out that military force could be used for resolving emerging problems."

Noting the "incredible nervousness" and "panic reaction" of these UK press accounts, RIA Novosti commentator Andrei Fedyashin noted:

"As a strategic vision it is not only a statement of national interests and threats to them, but also a warning to many world capitals, where Arctic resources for long looked upon with excitement. The conclusion was made clear -- Moscow will be ready to defend its interests in the Arctic. The type of pranks such as last year's placing of a [Russian] flag at the bottom of the Arctic Ocean are over. Now everything is serious."

Signing the strategy release by Medvedev on May 13 was no coincidence -- it marked just one day before the deadline to clarify its application to the UN Commission on the Limits of the Continental Shelf on territorial claims to the Arctic shelf, submitted by Russia in 2001. This means that those who did not submit such applications (i.e. NATO countries Canada, U.S., Norway, Greenland/Denmark) will not be able to claim its share of the shelf, which is believed to hold vast amounts of hydrocarbons. The UN process, filled out by 48 other countries, refers to territorial claims around the world.

The UN Convention on the Law of the Sea of 1982 governs all parties as well as settlement of all possible territorial issues. The United States has signed, but not ratified, this "maritime constitution," due to a conflict with interest with Canada over rights of passage through the Arctic Sea. As a signatory to the Convention since 1997, Russia claims rights to the continental shelf 350 miles from the territorial waters, and is attempting to claim even more if it proves that its continental shelf beyond the limits of its economic zone.

While NATO allies U.S. and Canada bicker about what is international waters and what isn't, Russia is already making a case to prove that the underwater Lomonosov Ridge is a continuation of the Siberian continental plate, and Russia has all rights to it and any potential energy resources. In addition, it is in Russia's best interest to allow global warming to unlock potential hydrocarbon resources in the region.

Rogozin Strikes Back

Dmitry Rogozin, Russia's Ambassador to NATO, has always pushed the boundaries of diplomatic language. Last year, he threatened to point nukes at Ukraine if it joined NATO -- but this one tops them all (to date):

"If Saakashvili gets diarrhea, it must also be the hand or foot of Moscow ... We’re tired of replying to such provocative stupidity, such drivel put out by the Nazi leader of Georgia," said Rogozin (Bloomberg, 5 May).

The liberal use of Godwin's Law is rife on blogs, but should it be tolerated in modern diplomacy?

After closing, then reopening, and now closing relations again NATO should take the advice of Ronald Asmus and simply stop feeding the trolls:

"[The NATO-Russia Council] has never become what we wanted: a channel for consultation and real cooperation ... [Russia] treats the NATO-Russia Council as yet another platform for its anti-Western strategy. Russian NATO Ambassador Dimitry Rogozin behaves like an old-style propagandist seeking to sow dissension in the ranks of allies. We have lots of channels to talk to Moscow. Let's shut this one down until Moscow gets serious about doing business and not spreading anti-NATO propaganda” (WSJ, 18 August 2008).

Swine Flu: Russia’s WTO Accession May Be First Casualty

"With $476 million in exports last year, Russia is the fifth-largest market for US pork. Yet as the sudden outbreak of swine influenza spreads, the health of Russia’s accession to the World Trade Organization could also take a turn for the worse ... " (read on at PBN CrisisCrunch).

[El Gripe Puerco has even spawned the Cumbia de la Influenza in Mexico.]

On April 27, Russia’s Federal Agency for Veterinary and Phytosanitary Supervision (Rosselkhoznadzor) banned all meat imports - including poultry and beef - from the US states of California, Texas, Kansas, New York and Ohio, and non-thermally treated pork imports from eight other states.

The US Centers for Disease Control and Prevention continue to reiterate to an increasingly unnerved public that pork is safe to eat. “You cannot get swine influenza from eating pork or pork products,” stated US Trade Representative Ron Kirk and Agriculture Secretary Tom Vilsack in an e-mailed statement on April 28. The UN Food and Agriculture Organization is even lobbying for a name change to disassociate pork production with the human-human virus.

Rosselkhoznadzor quickly rebuffed US assurances, claiming that eating and handling raw pork meat can transmit swine flu, adding that in denying this US meat exporters are only trying to protect their interests.

Over the past year, Russia has failed to “relist” 34 US pork processing, production and storage facilities - effectively rendering around half of all US pork production ineligible for export to Russia. On April 8, the National Pork Producers Council (NPPC) called on the Obama administration to decelerate Russia’s WTO accession until it began to “play by the rules and stop its blatant actions to restrict US pork.”

Until this week, Russia has not been able to identify any health or sanitary reasons for blocking US meat imports - the requirement for justifying the block as per its 2006 bilateral WTO obligations. The ineptly named swine flu now presents a reason for Russia to approve US meat facilities on a plant-by-plant basis - actions inconsistent with the WTO’s Sanitary and Phytosanitary (SPS) Agreement requiring WTO signatories to recognize equally standards in other countries.

While the US NPPC calls Russia’s ban “protectionism, plain and simple,” the implications of Russia’s meat ban go far beyond the interests of the US pork lobby. In a trade row dubbed the “Meat Wars,” Poland threatened to block Russia’s entry to the WTO based on Russia’s 2005 embargo on Polish imports of agricultural products. Warsaw went even further, blocking talks on a new Partnership and Cooperation Agreement between Russia and the EU. While both sides accused each other of politicizing the situation, the “Meat Wars” provided plenty of excuse for mutual mistrust on a host of outstanding issues.

Pressing the “reset button” on US-Russian relations in early April on the sidelines of the G-20 Summit, both President Medvedev and President Obama cited Russia’s entry into the WTO as a top priority. Speaking in Washington on April 24, Russia’s Minister of Finance Alexei Kudrin emphasized that WTO entry would spur his country’s diversification efforts and help shake off the economic crisis.

Representative Kirk, however, warned that Russia’s meat ban “may result in serious trade disruptions without cause.” If the “Meat Wars” waged in the past repeat themselves, US support for Russia’s WTO entry will falter once again, with wider implications for overall relations.

But for now, anyway, it seems that Virginia ham is strictly off the menu in Voronezh.

So easy, a chimp could do it!

A female chimpanzee named Lucy, a resident of Warsaw Zoo, has been approached to create an investment portfolio for Puls Biznesu daily. The idea is to discover whether trying one’s luck is not the best bet at a time of shaky markets, rapidly changing recommendations and ambiguous advice coming from analysts. Puls Biznesu intends to follow Lucy’s moves over one month to see how she is doing against the blue chip WIG20 index. So far, a week into the experiment, the chimp appears to be losing. Her portfolio shrank by 0.3%. In the same time WIG20 climbed 1.2%.

Track her portfolio here.

Quote of the Week: Dimocracy in Action

Quote of the Week from President Dmitry Medvedev to Novaya Gazeta's Dmitry Muratov:

"А знаете, почему я дал интервью именно «Новой газете»? Вы никогда никому ничего не лизали."

"You know why I gave the interview to Novaya Gazeta? You never have sucked up to anybody."

Feeling the Squeeze

On 1 April Gazprom officially admitted that it expected a sharp $28 billion (45%) revenue decrease from gas exports to Europe for this year compared to last. The average price of gas in Europe will be around $260 per tcm compared to $400 in 2008. As of 1 April, Gazprom limited the volume of gas accepted from independent companies and Central Asian exporters by 40 bcm. Further, Gazprom's purchase of a $4.3 billion 20% stake of Gazpromneft from Eni only adds to its indebtedness, now exceeding past $50 billion. While it's no secret that the monopoly's falling production indicators have been deteriorating for quite some time, the economic crisis has forced Gazprom to suspend its most expensive and least profitable projects, including Yamal and Shtokman. Even if the top priority of Gazprom, Nord Stream, gets built there may not be any gas to fill it.

Not surprisingly, Ukraine is once again feeling the squeeze. RIA Novosti reports that Gazprom has reportedly demanded that Ukraine pay a fine of about $530 million for its failure to import the contracted volume of gas in March. Ukraine had contracted to buy 2 bcm, but bought only 0.9 bcm. Under the contract, the supplier has the right to demand reparations totaling 150% of the value of the shortfall during the October-March period, and 300% during the rest of the year.

This announcement backtracks from Putin's benevolence a month ago. On March 12, Putin announced "We are waiving this fine, based on realities-they can't pay. They are now on the verge of bankruptcy, and you perfectly understand that you cannot finish off your partners."

While there is speculation in Russia that Putin has apparently changed his mind after the deal between Ukraine and the European Union to provide up to $5 billion to modernize Ukraine's gas pipeline system, Gazprom's looming crisis could be the real reason.

Operation Yatsenyuk

Now that early presidential and Rada elections (October 2009) are a reasonable possibility, Ukraine will once again plunge into business-as-usual nasty electoral politics of oranges, checked-mark hearts and blues. A glimmer of hope shines for many in Ukraine who are fed up -- Arseny Yatsenyuk. In a few months, he will meet the age requirement to be president. At the tender age of 34, he has already served as speaker of parliament, foreign minister and economy minister. Not only does he speak derzhavna mova, he speaks fluent English.

His views smack of matter-of-fact realpolitik, the mode du jure in the west that has yet to catch on in the orange vs. blue world of ultra-competitive politics in Ukraine. Speaking at a press conference in Simferopol, Yatsenyuk is quoted in yesterday's Korrespondent.net:

"The issue is part of Ukraine's membership in NATO is not on the agenda. We have no offers to become members of NATO ... Ukraine is not ready to join NATO, moreover, NATO is not ready to accept Ukraine."

"Where is the Ukrainianization? Who are we Ukrainianizing? Switch on the TV -- Russian language. Pick up a book its in Russian."

Despite his reasonable views, Project Yatsenyuk will have a difficult time getting past the perception of that his candidacy will be Yushchenko's very own Operation Successor. After the FT's ridiculous headline on Monday "Fresh Face Wins Reputation of Kiev's Obama," Yatsenyuk will be dismissed as another pro-American "stooge" or as some commentators on Korrespondent put it, "just another project of Pindostan."

Or maybe it's "Change we can believe in"?

Live from Chisinau

This stream is available through Stirile Pro TV.

As of 19.00, people seem to be milling about in front of some government building.

Moldova Erupts

Looks like people power has returned to the CIS ... this time to Moldova. What's the cause?

Bush? George Soros? CIA?

Bush is retired. CIA is preoccupied. Soros made only $1.1 billion last year.

So it must be the economic crisis?

Naturally, but Moldova's economy is unlike its neighbors, with up to one-third of GDP from remittances.

Or maybe, just like in Ukraine of 2004, people are simply tired of their sovok-led government.

NYT reports: "Demonstrators gathered in the center of Chisinau, shouting “We want Europe,” “We are Romanians” and “Down with Communism,” according to the Interfax news service.

Putin's Pooch Pilfers Pastries

Reuters: Prime Minister Vladimir Putin's pet dog gobbled up snacks prepared for United Russia bosses on Wednesday. While Putin discussed ways to help the local food industry, his black Labrador Koni snuck into a room at his residence and tucked into the delicacies. "Koni ate everything," said one of Putin's astounded bodyguards. Putin's spokesman said Koni, who has the run of Putin's home, had eaten pastries, cookies and jellied desserts.

I can imagine the United Russia toadies saying "That's OK Vladimir Vladimirovich, we weren't hungry anyway..."

But if Medvedev were there, I imagine them saying "Diiiiima! Dammit, You've really done it this time! Go to the Dunkin' Donuts and get some more, bystro."

Shaking Hands, Pressing the Reset Button

As world leaders representing the G-20 gather in London today to hammer out a global response to the economic crisis, US President Barack Obama met Russian counterpart Dmitry Medvedev face-to-face for the first time. While two declarations were signed — one on strategic weapons and another on general bilateral relations — major breakthroughs will be saved for the next presidential meeting, which both leaders agreed would take place in July. In the meantime, both countries will strive to further reduce weapons stockpiles through a new Strategic Arms Reduction Treaty, set to expire in December ... (read on at PBN CrisisCrunch).

Igor Sechin, Quote Machine

Igor Sechin, Russia's shadow energy minister, gave a rare interview with the WSJ. Some choice quotes:

On Russia's resource dependence: "In effect, this happened because Western countries, most of all the U.S., tried to break their link to OPEC. Now they tell us, 'you have Dutch disease, you're a resource economy.' But you yourselves asked us to be that way. We provided supplies for you. Now you're telling us, 'that was your mistake.' In general, one should be calm about the presence of resources in Russia. For us, it's a God-given good that should be used effectively. There's nothing terrible in this. No one can tell that we should sit on these resources. Somebody is always wanting to take them away."

On Russian geography: "It's good that we have resources, but we have a difficult climate, I remind you. Somebody else might have less resources but the sun shines and the bananas fall from the trees. They can just roll from side to side in the shade under the palms and wait for them to ripen. So there's no need to envy anyone."

On Russia's oil companies: "It's well known that OPEC members generally have national oil companies…Our entire oil industry is privatized, these are private companies."

The Road to Hell

H1 2009 has been a big one for the Czech Republic. Amidst yet another Russian-Ukrainian gas conflict, Sarkozy reluctantly passed the torch of the EU presidency to Czech PM . After a flap with a tongue-in-cheek Brussels-funded art installation, the Czechs were proud to bring their energy security agenda to the fore.

Then the plot thickened. First, parliament decided to temporarily halt the U.S.-led plan to install components of a missile defense shield, a project its enthusiastically backed only months ago. After this month's quantitative easing from the U.S. Federal Reserve, Czech Prime Minister Mirek Topolánek voiced what was on other Eurocrats' minds but were too afraid to say -- that U.S. monetary policies are the "way to hell" that would "undermine the stability of the global financial market." Meanwhile, Topolánek's own government finally collapsed under the weight of a weak coalition. And all of this happened a fortnight before Obama's EU debut.

According to one New York Times blog:

It turns out that the heavy metal band AC/DC played a show in Prague last week which was attended by Mirek Topolanek, the country’s prime minister. Mr. Topolanek, who is now just a caretaker prime minister, after losing a vote of confidence this week — one unrelated to his flights of rhetorical fancy — told a Czech newspaper that he was influenced by one of the group’s most famous songs, “Highway to Hell,” when he veered off script this week during his speech before the European Parliament and criticized Washington’s stimulus spending.

The Czech leader, who was filmed on YouTube punching a paparrazzi, was suddenly on the front page of the FT (not to be confused with this Czech intergovernmental smackdown).

Prague has not only turned against the MD shield, but it is criticizing U.S. capitalism as its own fortunes have changed. A European leader, from the contenent's "east" no doubt, was plotting a collision course with Washington.

Is the Czech Republic, seen as a staunchly pro-U.S. member of "New Europe," starting to act like "Old Europe"? The answer of course is yes, but Washington has simply failed to notice.

A Day of Tokens But Not a Token Appointment

On Monday, women were fêted with flowers as Russia celebrated International Women’s Day. On March 12, Yelena Skrynnik became the third female to join President Dmitry Medvedev’s cabinet, filling the post of Minister of Agriculture. With the economic climate negatively impacting Russia’s regions, Medvedev’s has chosen a proven manager to steer the agricultural sector through a difficult financial period... read on at PBN CrisisCrunch

Gag Gift Diplomacy, Pop Music Flops and the Rise of the Yevraz

The Washington Times today finally asks, "What was State thinking?!" about their cripplingly embarrassing negligence to accurately translate "restart" for the gag-button that Clinton presented to Lavrov in Geneva on Friday. The article didn't mention the more important question of whether the U.S. has finally resorted to using gag gifts in our diplomacy with the other most-powerful nuclear state on the planet (what's next -- rubber "turkeys" with Erdoğan?). The "reset button" in question isn't even a button, but a rubber twist knob -- but I digress. Now that this incident proved to the Russians that the Clinton team needs to brush up on their Russian language skills, Lavrov is busy calculating in Moscow whether State is filled with a bunch of amateurs (not a single native Russian speaker to consult?)

***

Speaking of silliness, some Eurovision fans are attempting to generate some culture wars after the Georgia imbroglio and the Ukraine NATO MAP. Georgia's awful entry "I Don't Wanna Put In" was banned for its awkward, unfunny political wink-wink nudge-nudge stab at the Russian prime minister. Meanwhile, Russia's candidate Anastasia Prikhodko is (gasp) actually a Ukrainian. According to Russia Profile, LDPR faction leader Igor Lebedev weighed in to the drama, claiming that Prikhodko’s candidacy "damages national prestige" because the singer is not, apparently, Russian enough. He went on to note that "it is not even that she is a citizen of another state, although by itself this causes resentment among our voters, but the fact is that she is known for her extreme right-wing nationalist views." LDPR founder "Mad" Vlad Zhirinovsky, who is also known for his right-wing nationalist views, didn't qualify for Eurovision. The most shocking part of the miniscandal unfolding is the fact that an LDPR party member finally admitted that Ukraine is, in fact, a foreign country.

***

The Moscow Times today reports on a story that has made headway since Kazakhstan felt the first blow of the global financial crisis and the precipitous decline in the price of oil -- dismantling the U.S. dollar as the global currency and the creation of the yevraz, a Kazazkhstan-led (of course) initiative to establish a common non-circulating Eurasian currency.

Talk of the ruble as a strong global reserve currency seems like ages ago. The rhetoric has now shifted toward even more lofty goals. Nazarbaev's plans seem to suggest that reviving the dead-in-the-water Eurasian Economic Space, convincing the Russians to abandon the ruble and establishing a Eurasian common currency would be more realistic than reducing Kazakhstan's dependence on dollar-indexed natural resources. The problem is that none of the above looks reasonable.

Dire Straits

Today at CSIS I had the chance to attend a presentation given by World Bank economist Zeljko Bogetic who gave a thorough overview of the economic situation in Russia. Some main points:

- The crisis is bigger than global governments can handle.
- Methodologies cannot accurately predict the economic situation, and over the course of several months they have been constantly shelved and revised.
- The Russian government announced GDP growth of -2.2% but this is a very conservative estimate. Anders Aslund, who gave his thoughts, predicts that the best global growth scenario will be a shrink of 10%, but a fall of 20% is most likely.
- The collapse of commodities prices is the key factor in the global crisis and Russia in particular. But given the scope of the crisis, oil and gas and metals industries will take a long time to recover ... if they manage to do so. Bogetic's concern is that illiquidity on the global market will force the metals (and perhaps the oil and gas) industries to shut down completely. An even bigger question mark is the survival of Gazprom's managerial status quo as Russia makes decisions to manage the crisis.
- This month we learned that Q408 GDP growth was -12.7% in Japan, -20% in Taiwan & S. Korea, and yesterday -6.2% in the U.S. Russia has not yet even begun to mark this kind of contraction, but will in the near future.
- By January 2009, Russian banks were overleveraged by 127% on average, which is actually lower than in other countries such as Ukraine. Future deleveraging holds great implications for bank consolidation, and this is something to watch.
- While the currency reserves and stabilization fund will help Russia ride the crisis through until 2010, the social impacts are extremely important. With rising unemployment, not only will poverty rates in the regions will increase, but nominal poverty levels will increase in Moscow and St. Petersburg, considered "rich" regions.
- A big question from American companies continues to be whether Russia will reverse its course and begin opening up to foreign investment as a result of the crisis. The World Bank economist believes that the circumstances are very different from 1998, and that Russia will pursue protectionism and competitiveness will erode. Unfortunately, Russia will have to work even harder to attract foreign investment in these difficult circumstances.
- Despite the $200 billion lost to support the ruble, Russia has opened up a more flexible monetary policy. There has been a higher capital injection thanks to reserves; however, the ruble is volatile against the dollar and euro in an environment when all global currencies are volatile. This means that protectionism will rise.
- Will the crisis result in reform? The past has shown that this has happened, but this current crisis is unprecedented. For example, the crisis has halved the number of Russian billionaires in the past year. Will the oligarchs be replaced by a stronger more effective state, or will there be a rise of "Chekist-barons?" (In my opinion, this is the most difficult question to answer).
- Infrastructure will be strained throughout the course of the crisis. This includes everything from coal mining safety to roads to leaky oil and gas pipelines.
- Financing of SMEs will be a major challenge.

Given this laundry list of problems, I was struck by his analysis that the crisis has been comprised of three phases:

I) RTS fall, banking crisis (Sept.-Oct.);
II) Real economy contracts (Nov.-present);
II) Regions take the hit and unemployment and poverty rises (Jan.-present);
IV) Impact of the above three on continued deterioration of the economy and financial sector (near future).

The third phase is only in its beginning. This has significant political implications about the "social contract" of the Putin era -- the tradeoff between economic growth and democratic freedom. The government will have to maintain current, if not increased levels, of social spending. Although today Putin warned that economic protests would not be tolerated, rising ethnic nationalism, radicalism mixed with Central Asian and Chinese immigration will be a dangerous cocktail for Russia of the late 2000s-2010s.

Obviously, policy toward the "near abroad" is also contingent on these factors. At this stage it is difficult to see whether Russia will continue to assert itself in the region, or head for the trenches and manage the crisis. It certainly seems that South Stream, a strong ruble and the Sochi Games are distant projects of the Glory Days.

Ouch.

Doom and gloom finally reached East Europe according to the FT.
In an earlier post this summer when I was living in Warsaw and the złoty was inching at 2:1, I lamented the "bad luck of getting paid in dollars." Last week, the Polish currency peaked at 3.90 to the greenback. So much for the "pickle index."

We Livin in a Crisis

A simple Google Reader search of the word through all of the blogs and papers I follow resulted in the obvious: "Results: thousands for crisis."

It is remarkable how as a global society we quickly tap into collective consciousness. Today is not unlike October 2001 -- many around here are gripped with fear, zombie-like. Even the yuppies in DC are feeling the pinch (alas, with much room for Schadenfreude).

Flip through a Greek-English dictionary. The word "crisis," comes from the Greek κρίσις, derived from κρίνω – 1. separating, putting apart; hence a picking out, choosing. 2. a deciding, determining, a judgment, sentence. 3. trial

A soundtrack documenting times past:
Pablo Gad - Crisis
Uncle Tupelo - No Depression
Bob Dylan - Hard Times in New York Town
Skip James - Hard Time Killin' Floor Blues
The Smiths - Panic

Which soundtrack represents the now? Only in hindsight we'll know.

Metamorphosis

Dude, Where's My Tenge?

Last year if one said that Kazakhstan was the "Iceland of Central Asia" it would have been a compliment.

"Kazakhstan looks like a small version of Iceland with its banks borrowing from abroad. A currency crisis becomes a banking crisis, it becomes a housing crisis, a sovereign-debt crisis, it becomes a corporate crisis because each one of these agents in these economies has a large amount of foreign liabilities," said one economist (Bloomberg, 4 February).

Crippled by the sinking price of oil and metals, the Central Bank of Kazakhstan announced this week it would devalue the tenge, a really cheery-looking currency, by 18% in one fell swoop. The move follows the reinstatement of Grigorii Marchenko, a figure of liberal economic reform in independent Kazakhstan, as Central Bank Governor last month.

Since the onslaught of the financial crisis, reserves have dwindled $3.5 billion to prop up the tenge. $19 billion in foreign debt is due this year. Bank profits have plunged by 93% and the Kazakh government is buying 78% of BTA Bank, the biggest lender. Short of cash itself, the government may turn around and sell this portion to Russia's Sberbank.

It will get worse. Analysts expect the exchange rate to sink to 180 tenge per dollar and an IMF rescue plan may be in the works.

Debacle in Davos

Since the last meeting of the World Economic Forum in Davos, Switzerland an estimated $25 trillion of wealth has been wiped from the global economy as a result of the worldwide financial crisis. Usually touted as a high-end lovefest of the international elite, this year's summit showed itself as increasingly irrelevant.

Lots of blame was passed around in the cocoon of the luxurious canton. During a champagne and canapes reception at the Hotel Europe Piano Bar, JPMorgan Chase CEO Jamie Dimon "expressed frustration at those who seek to pin all the blame on bankers" while blaming "all the American banks and all the things they did" (Bloomberg, 30 Jan). Morgan Stanley Asia CEO and perennial pessimist Stephen Roach warned that joblessness could hit 10% in 2009 -- speaking at the exclusive resort behind the backdrop of the Swiss Alps (watch video). The audience cheered in one debate when Nassim Nicholas Taleb said it was time to punish bankers by forcing them to hand back bonuses (FT, 30 Jan). At this year's soiree no bankers were present this year to fulfill the key task of entertaining the elite. In the vacuum, Putin's vodka party was the hot ticket while Barclays and Standard Chartered hosted "rival dinners." All of this reassures us about the grim predicament of the world economy.

Meanwhile, Turkey's Prime Minister Tayyıp Erdoğan scored domestic points by storming out of a panel after he was brusquely cutoff from rebuking Israeli President Shimon Peres for atrocities committed in Gaza. The American moderator interrupted him because it was "time for dinner." No doubt, more champagne and canapes.

There was one noticeable incident of sheer paranoia. After mentioning his favorable impression of the Russian IT sector's scientific talent and Putin's success at bringing computers into classroom, Michael Dell asked Vladimir Putin a seemingly harmless and open-ended question: "How can we as an IT sector help you broaden the economy as you move out of the crisis and take advantage of that great scientific talent that you have?" Around 1:02 into the video Putin cringes and retorts with: "The thing is that we don't need help. We aren't invalids and we don't liken ourselves to people with limited capacity [i.e. handicapped]. One should help pensioners. One should help developing countries ... and shouldn't just help by giving money." He then goes into a five minute monologue about the successes of bringing computers into Russian classrooms, exactly what Dell already prefaced in his question.

Putin's gruff response is not a surprise and a mediocre interpreter didn't help (watch the video in Russian). While Dell may naively hope to cash in quickly on Russia's financial crisis, Putin has refused for months to admit that one even exists. While the WSJ and Forbes jumped on the barb and bloggers called it a "smackdown," the Russian press focused on the mistranslation and blamed the Western press for its usual bias (comments on YouTube noted that Dell's "offer to help came across as a backhanded compliment").

Despite being lost in translation, the Putin-Dell exchange illustrates the fact that Russia and the West are speaking at two completely different wavelengths, if not from two completely different planets. Earlier in the week, Putin was "teaching them how to make cabbage soup" by advocating international control of U.S. monetary policy and calling for "the emergence of several reserve currencies" to diversify from the greenback. There was no mention of diversifying Russia's economy away from dollar-indexed energy exports.

These episodes at Davos are symptomatic of the larger disease spreading around the world. Certainly, a glitzy affair mixed with doom and gloom further deflate what's left of our confidence in the Masters of the Universe on Wall Street and the upper crust of global politics. "Nobody wants to be photographed gallivanting around the Swiss ski resort with the rest of the discredited international elite -- while their minions wait for the next round of layoffs in their cubicles," says one commenter.

While many bankers and CEOs shied away, many insisted on wining and dining, including Viktor Yushchenko and Morgan Tsvangirai. At least representatives from Iceland and Hungary had the sense to stay at home. For certain, WEF organizers will not count Erdoğan to sign up next year. By then the whole affair might be even more irrelevant.

Off to a Bad Start

Excerpt from the State Department's first daily press briefing under the new administration, Friday, 23 January:

MR. WOOD: Good afternoon, everyone. Welcome to the briefing. If you like, I’d run down – I’ll run down some of the Secretary’s calls that she’s had over the last couple of days. Okay, let me start. Well, first we’ll start in the Middle East. She’s spoken with Israeli Prime Minister Olmert, Israeli Foreign Minister Livni, Israeli Defense Minister Barak, Egyptian Foreign Minister Aboul Gheit, the Jordanian King Abdullah, Palestinian Authority President Abu Mazen, Palestinian Authority Prime Minister Fayyad, and Saudi Foreign Minister Saud al-Faysal.
We’ll go over to Europe. She’s spoken with UK Foreign Secretary Miliband, French Foreign Minister Kouchner, German Foreign Minister Steinmeier, Czech Foreign Minister Schwarzenberg – Czechoslovakia holds the EU presidency, as I think most of you know.

QUESTION: Except that, I’m sorry, Czechoslovakia hasn’t existed for a while.

MR. WOOD: Did I say – excuse me, the Czech Republic. It’s just one of those things.

QUESTION: First day jitters, eh?

MR. WOOD: No, no, no. (Laughter.) You know, that is – that would be a good little story.

Gas War IV Ends

On 20 January, Russian gas flows via Ukraine resumed. Kyiv and Moscow signed a ten-year deal for direct supplies and transit of Russian gas, which includes formulas for the calculation of prices and transit tariffs. Although a long-term transit agreement was inked, statements on both sides indicate no consensus for transit tariffs for 2010. Most likely, another dispute over the transit tariffs will emerge. As with previous 'agreements' in years' past, the fine print of the deal remains murky as the gas trade itself. While it is too early to gauge the results, here is a breakdown of other major developments:

According to PM Yulia Tymoshenko, Ukraine will pay an average $228.80 per tcm in 2009, or $49 more than 2008 prices. This breaks down to $360 per tcm for Q1 2009, $270 for Q2, $219 for Q3 and $162 for Q4.Ukraine will buy 40 billion bcm -- 15 bcm less than last year. Naftohaz will buy the 11 bcm of RUE gas stored in Ukraine at a rate of $167 per tcm and "technical gas" for transit will be purchased at the price of US$153.90. Ukraine still will not be allowed to export gas. Ukraine still has 16 billion bcm gas reserves already purchased at the 2008 rate of $179.50.

RosUkrEnergo has been removed from the system of gas supplies to Ukraine. This is a major victory for Tymoshenko, who fulfilled a 2007 election promise to nix the intermediary. After years of supporting the 50% Gazprom-owned company, the Kremlin finally gave the blessing to remove the shady company from the bilateral gas trade. However, the company won't be dismantled. Kyiv Post reports that RUE head Dmytro Firtash "holds options on the acquisition of 'some regional gas suppliers.'" Gazpromzbyt Ukraina, another Gazprom spinoff company, has been authorized to sell gas on the Ukrainian market, although it is not clear if its market share in Ukraine refers only to the segment of gas supplies to industrial customers. The debt arrears between Naftohaz and Gazprom are not clear. The state-owned Naftohaz is not required to pay the full bill in advance, and problems will arise once it falls behind the payment deadline. All of this unresolved business between the companies at stake means more conflict in the future.

Ukraine still has a trump card for future negotiations -- higher transit tariffs, which will remain unchanged this year at $1.7 per tcm per 100 km. By keeping this arrangement, both Russia and Ukraine have allowed room for future conflict and failed to take a step to move towards market-based rates of transit.

Ukraine will pay around $10 more per tcm than average European prices. According to Tetyana Vysotska, Ukraine will survive the price hike, but economic growth will be stunted. This view seems to dominate because Ukraine doesn't have the luxury to plan for the medium term given the financial crisis. In my view, Ukraine will emerge from the crisis even further behind the EU at present levels because politicians in Kyiv have spent more political capital on securing 'cheap' gas prices since the 2006 'gas war' rather than unveiling a serious and sustainable program of energy conservation and modernization. If the EU gets serious about its 3x20 program to modernize energy infrastructure and diversify its energy mix, Ukraine will lose even more in the long run by focusing on getting a 'fair' price for 2009.

There is a natural temptation to assess the 'winners' and 'losers' of the Russian-Ukrainian Gas War IV, which emerged from a commercial crisis to a political game. Roman Kupchinsky at EDM not only states that the war should have never taken place, but Russia had three political objectives: to wage a disinformation campaign to convince the EU (especially Germany) that Ukraine is an unreliable transit state; to convince the EU to go ahead with Nord Stream and South Stream; and to create political instability in the Party of Regions constituencies of eastern and southern Ukraine. In any event, Gazprom lost between $1.5 billion as a result of the dispute, only reinforcing the assumption that the company acts in a political rather than a commercial manner.

Given the (peaceful) transition of power in the United States, Washington played a minuscule role in this crisis, only giving a lukewarm reproach to Russia for its "unacceptable" behavior. Therefore, it seemed quite odd for Gazprom CEO Aleksandr Medvedev to blame outside forces (read the USA) of playing a 'handmaiden' role in the conflict: "We believed yesterday that the door for Russian gas was open but again it's been blocked by the Ukrainians [...] It looks like ... they are dancing to the music which is being orchestrated not in Kiev but outside the country" (Guardian, 14 January 2009).

With the Ukrainians at fault and the Americans out of the picture, the response from Berlin will hold the ultimate key to determining the overall impact of Gas War IV. Putin’s visit to Germany on 16 and 17 January was an element to influence the EU position in a country that did not feel the bitter winter cold without gas experienced in Serbia, Bulgaria and Slovakia. Surprisingly, the offer to create a EU-Ukraine-Russia consortium for gas transit, an idea kicked around in 2002, was resuscitated. Chancellor Merkel didn't give Russia the support it wanted on this issue and others -- she maintained the position that both sides of the conflict were responsible.

While this was interpreted as tacit support for support for Ukraine by Putin, Russia's actions in the Gas War IV will have a profound impact on the energy discourse in Germany, especially with nuclear power and renewables. Despite the close ties between Foreign Minister Steinmeier and Putin, Gazprom may have overplayed its hand in Germany.

On 12 January, Der Spiegel asked rhetorically: "But hadn't the heads of companies in the German energy sector, like the CEO of chemical giant BASF, repeatedly insisted that Gazprom, though not always easy to handle, was a 'consistently reliable partner?' Hadn't German Foreign Minister Frank-Walter Steinmeier lobbied on behalf of the strategic partnership with the Russians, especially in the interest of 'energy security?' And didn't his old boss, former Chancellor Gerhard Schröder, who now sits on the board of Gazprom-owned Nordstream, allegedly say only last week in St. Petersburg that Russian policy is characterized by the fact that 'European gas consumers are not forced to suffer because of disagreements between trading partners?'