30 January 2007

Guess the Date of this Headline

I first started doing business in Russia in 1994, I had more hair, less belly and a chin then, I can't exactly remember when the first news story appeared touting a rail link between Sheremeytevo and Moscow but it was definitely BC (before the Crisis.)  And it's back again.  I am not sure if the wolf really is coming this time or it is just a red herring designed to make us think that Sheremeytevo might at some point stop feeling like the Black Hole of Calcutta (with apologies to Calcutta.) Or any other not entirely appropriate analogy.

As I am willing to pay large sums of cash to airlines which fly out of Domodedovo in preference to sitting for hours on Leningradski Prospect, and then standing for hours* for one, or more of; entering the airport security, customs, checking-in, passport control, a toilet which is not closed for cleaning (at least 40 minutes in every hour) I don't actually care.  It was just a warm feeling of deja vu.

Rail Line Planned to Sheremetyevo:
Russian Railways will spend 2 billion rubles ($75 million) in 2007 to build a branch line to Sheremetyevo Airport.

*  Note that I did not expect to queue.  In the days when I flew in and out of Sheremeytevo regularly I used to bring my own line with me.


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26 January 2007

The Not So New Paper on the Block

I was reminded today that Business New Europe (BNE) is now up and running.  It's the brain child of Ben Aris who writes more commonsense than the average journalist (damning with faint praise).  It's a better round up of business related news than most of the news agencies.  Being a new kid on the block you can read the website, get your news via email or have it delivered to your favourite feed-reader via RSS.

Go support Ben.

Updated to replace the "t" in now with the more traditional "w."

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25 January 2007

You Know You've Been in Russia Too Long..........

Someone, somewhere linked to 42 "you know when you've been in Russia too long when."  Here are some additions:

When you believe that you can get "the flu" from an air conditioner

Q: Russians tend to believe that illnesses can be caused by air currents, whether the source is an air conditioner, a draft or even a breeze on a warm day. Foreigners tend to disagree. Who is right?

Dr. Natalia Udaltsova, Centro Medico Italiano:
"Drafts and cold air currents have the same effect on people as cold drinks -- everything depends on the strength of each person's immune system. Overcooling and drastic changes in temperature can result in a cold or fever for people with a weakened immune system.
"Also, an air conditioner in a confined office space creates the effect of fresh air without any disinfectant functions. In other words, it is just driving the existing bacteria and microbes around in circles."

Dr. Irina Perrin, European Medical Center:
"Foreigners are correct in their belief. Everything depends on the patient's immune system."

Dr. Svetlana Zorina, Ne Bolit Medical Center:
"Cold air currents, including those from air conditioners, can cause muscle fever or myositis, especially if you enter a conditioned room after intense physical exercise or after being outdoors in hot weather."
When, on returning from whence you came, you leap in to a car and promptly drive around the queue to the traffic lights and push in at the front, thus creating an impromptu additional lane

More to come - undoubtedly.

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23 January 2007

2007: The Year of the Russian Language

The First Post a strange English, as opposed to British, online newspaper, the purpose of which I have yet to fathom, has a piece on Putin's Kanutian desire to restore the Russian language:

The Year of the Russian Language

The problem is apparently that the near abroad prefer their own language and English to Russian and Russian (strange that), and native Russians (whoever they may be - but that's a different topic altogether) have a nasty habit of eating sala, drinking vodka, not having enough sex, too many abortions, dying early and generally being fewer at the end of the year than at the beginning.  Not so much a dying language, as a population suffering from a collective heart attack.

If I can give VVP one hint to help the adoption of Russian, and I am not going to get in to the Latinisation of Cyrillic here, it would be the simplification of verbs of motion.  I frequently physically fly back and forth to London but grammatically I go, don't come back or come back on a different route having confirmed that I was indeed about to board and return on a BA flight.  As you can imagine this causes some concerns with drivers who are trying to arrange when to meet returning flights and with domestic help concerned that you may be about to walk out of Moscow forever.  At least it has been some time since I caused concern that I had walked back from wherever I had been. 

So VVP please help us poor non-sala eating Russian speakers out by allowing us to simply go and come back; an upgrade at Sheremeytevo wouldn't be amiss whilst you are at it.

Thanks


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21 January 2007

Turkmen Gas - Not Being Transported by Balloons

MSM was concerned when the Turkmenbashi finally shuffled that there would be another tussle between Russia and the US for control of Turkmenistan's gas.  Whilst that balance-of-power struggle may/is still be going on behind the scenes, Turkmenistan's gas is still routinely transiting Russia on its way to Ukraine for one blindingly obvious reason; it has nowhere else to go - hence the title of the post.  Gas transportation relies on fixed infrastructure (pipelines).  Marginally less important, Turkmenbashi's successor is Kremlin-friendly, or not unfriendly.  It could have been nasty if the US had managed to install a friendly puppet; I am not quite sure how Russia would have squared its need for Turkmenistan's gas with its need to ensure that it keeps flowing north and nowhere else.

This is a reality born of fixed infrastructure and European energy demand.  As much as Turkmenistan may want to have alternate routes to sell its gas; east to China, south through Afghanistan and Pakistan (clearly one of the world's more stable regions) or south west across the Caspian and over Central Asia's San Andreas fault, the only pipelines that work today (and even then at 60% of design capacity) pass through Kazakhstan and enter southern Russia.  So as much as Cheney et al would like to ensure that Russia cannot control Turkmenistan's gas there is no other option today, and the only one even vaguely likely in the future will be a Kazakh pipe going to China.  Which really does not help the US efforts at world domination at all.

Turkmenistan's gas is officially sold to Ukraine (each molecule is tagged as it crosses the border in to Russia to make sure that it ends up in Ukraine); more importantly it forms a significant part of Russia's gas supply balance.  Broadly speaking there are three demands on Russia's gas in reverse order of profitability for GAZP; Russia, the near abroad (ex-FSU) and Europe.  Re-ordering the list in terms of GAZP's obligations would result in Europe and Russia sharing first place and the FSU coming in a very distant third.  Except, as we have come to learn, the export pipelines, before Schroeder's pipeline,  still have to pass through Ukraine and Belarus who have a nasty habit of taking what they need before allowing the balance to make it to Europe.  Thus, if history were to repeat itself, if Turkmenistan's gas does not come north there will not be enough gas for Ukraine, which will probably means there is not enough gas for Europe.  Meanwhile, Russia will still have access to enough gas to fire its electricity generators, steel and aluminum plants creating an ever more economically powerful Russia.

The above graph, which is built on UBS data with some personal tinkering, shows expected gas supply from Russia, Central Asia and Independents (Novatek, LUKoil, TNK-BP etc) in BCM p.a.  There is a large and increasing requirement for Turkmenistan, Kazakhstan and Independents to equalize the demand / supply equation.  Hence the change to domestic Russian pricing at the end of last year.  For each of the three supply components a worryingly large chunk of 2010-2015 supply falls in to "yet-to-be-discovered" or incredibly technical mega-projects whose real and official start dates may be as much as 5 years apart.

Hyper-expensive pipelines across opium-growing Afghanistan or linking with the gas version of the Baku-Ceyhan pipeline are never going to happen.  For which Europe should be very pleased.

Here is the link which started me thinking; RIA Novosti - Opinion & analysis - Fight for Turkmen gas called off:

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19 January 2007

Golubovich - The Prisoner's Dilemma

Alexei Golubovich, from the days of the battles of Volgotanker, provides a perfect demonstration of the Prisoner's Dilemma.  With a twist.  In this game MBK, Golubovich's previous boss, is the prisoner.  Mr. G wants to see his mum, the Prosecutor's office wants to see Mr. G. 

Solution; sell the prisoner down the river - no dilemma.

YUKOS Ex-Executive Back in Russia to Testify against Khodorkovsky

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Gazprom: World’s Greatest Energy Company?

From Kurt Wulff via Seeking Alpha.  Wulff is an independent US-based oil and gas analyst with a real focus on economics.  His price btu comparisons are worth a thought.

Gazprom: World’s Greatest Energy Company?:

Kurt Wulff (McDep Associates) submits: Buy-recommended Gazprom (OGZPY.PK)’s sales of natural gas are as large as Saudi Arabia’s sales of crude oil in heating equivalent, and superior in environmental quality. Yet Gazprom’s selling price at about $2.50 a million btu is only about one-fourth of Saudi Arabia’s at some $60 a barrel, or $10 a million btu.

In view of that price chasm one can hardly fault Russian President Putin for attempting to secure market value for a precious resource. Yet, Russia, unlike Saudi Arabia, offers ordinary investors, as well as anyone who objects to a nearer-to-market price for clean energy, the opportunity to participate in the producer profit by owning shares of what may become the “World’s Greatest Energy Company.”

Meanwhile, results for the second quarter of 2006, reported according to international financial standards on December 21, confirm a modest one-third increase in natural gas price over the previous year. With continued progress there would be justification for upward revisions in estimated net present value, currently at $56 a share, that amount to a modest multiple of current cash flow from a low natural gas price.
Energy a Political Tool?

How can consumers justify paying Gazprom, the world’s largest natural gas producer, $2.50 a million btu for clean fuel while paying Saudi Arabia, the world’s largest oil producer, $10 a million btu for medium dirty fuel? Because the gap between realized price and market price for Russian natural gas is so wide that we have little sympathy with the argument that energy is being used as a political tool.

Instead, President Putin’s great contribution to his countrymen may be to recognize the value of Russia’s energy resources and to take actions to realize that value for Russians rather than to give it away cheap. We believe that consumers are also better off in the long run if energy sells at a market price that takes into account environmental characteristics.

The choice we make when we recommend Gazprom is driven by resource value and concentration on the cleanest fuel. Political risk is there, but it needs to be put in a balanced perspective.

The World’s Greatest Energy Company designation applies to Gazprom today only in the size of its clean fuel resources. The company is not there yet on a commodity market price basis, in operating efficiency, in transparency of financial results or in stock market value. The future price of freely traded Gazprom stock may be the most credible measure of the success of Russia in managing its clean energy asset for home and global benefit. In view of the great potential, investors can be patient.

Sakhalin II Project Agreement Reached

At the same time Gazprom announced second quarter earnings, buy-recommended Royal Dutch Shell (RDS.A) announced that it and its partners had reached agreement to sell a half interest in the Far Eastern oil and liquefied natural gas project, Sakhalin II, to Gazprom for $7.5 billion. The deal resolves a dispute with the Russian government over a doubling of the estimated cost of the project to $20 billion. It looks like the price covers a half share of the costs incurred so far and we presume Gazprom will pay its share of costs not yet incurred.

We don’t like seeing that Shell has to give up half of its upside. Yet the effect is not a lot different than when Norway some thirty years ago raised its incremental tax rate on oil to near 80% and required that the state oil company be a partner in new deals. The net result of today’s Sakhalin announcement for investors is the transfer of some possible future reward from publicly held Shell to half publicly held Gazprom.
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Weather, in the wrong place at the wrong time

As promised posting is slow.  I am going to fire off a couple of quick posts a sort of personal break from the pain of editing a 140 page document.

As we await Hurricane Cyril over the weekend I thought that it would be instructive to post this comparative temperature map from The Oil Drum.


December 2006 was 8 degrees warmer than December 2005, and I have no recollection of December 2005 being particularly cold - that came mid-January.

What is worse, as we await a new moon, it is dark, dark, dark in Moscow, without the usual covering of snow which helps to lift the gloom.

As this unseasonal weather repeats itself all over western Europe it will be intresting to see what Gazprom's year-on-year sales to western Europe will be both during the winter when it is not cold and then during the summer when it very definitely will be air-conditioning warm again.

The comparative weather picture came from The Goddard Institute for Space Studies.

Coming Out Negative in the Balance

Lord Skidelsky, wrote a somewhat balanced view in the Moscow Times (hurry the link will die tonight) on the Russia / Belarus spat earlier this year.  Copydude has been all over this both politically and musically (follow the link).  Skidelsky, somewhat more reasonably, than the blogosphere takes MSM to task for rolling out the same old list of misdemeanours without bothering to dig in to the background of the story.

The FT under Neil Buckley's leadership in Moscow has become a useless source for Russia insight and The Economist, with the honourable exception of Gideon Lichfield has maintained Edward Lucas' policy of being on the wrong side of the story so often as to be a great counter-indicator of reality, as Konstantin has catalogued. 

Intelligent comment is very difficult to find.  I am told that Le Monde is a good source, but my French is not up to it.

Coming Out Negative in the Balance:

"Let me return to the question of why Russia gets such bad press. First, many of the actions of the Russian state can and should be criticized -- as much by Russians as by those in the West. The country has no understanding of the meaning of the rule of law. It uses legal devices to obtain political objectives. This makes it look shifty and vindictive. Secondly, journalists are often just lazy. It is much easier to compile lists of misdemeanors and assert trends than to dig into the circumstances of particular cases."

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18 January 2007

EBRD and Gazprom

I am struggling to see why the EBRD should be financing Shell / Sakhalin II Consortium at all.  I think that would fall in to the crowding out regular lender category. 

EBRD's mandate is to help finance Russia's emerging economy, which implicitly means being a prudent lender or investor to businesses where there are no established means to finance them.  A Shell-led consortium does not meet those conditions.  If it cannot find projects to fund within its mandate then I would suggest that it return capital to its investors - otherwise known as governments, and they to their tax payers.

EBRD financing not critical for Sakhalin II - Gazprom:
MOSCOW, January 17 (RIA Novosti) - A senior Gazprom [RTS: GAZP] official said Wednesday that financing from the European Bank for Reconstruction and Development was not critical for the current phase of the Sakhalin II hydrocarbon project off Russia's Pacific coast.

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16 January 2007

If It Walks Like A Duck

looks like a duck, quacks like a duck

and its Gazprom - then its not a monopoly.

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15 January 2007

100 fishermen on drifting ice in giant Russian water reservoir

I have something of a fascination for the many ways which Russians have found to place themselves in mortal danger.  Those of us who are fortunate enough to live here get to watch, and indeed participate in, the entertainment that is potential suicide by motor transport.  No shopping trip, even to the more expensive supermarkets, highlight at least to those of us brought up according to the western dietary traditions (fat bad, fibre good) of Russians daily flirtations with a reduced life expectancy.

And then there is this bizarre and miserable weather.  It is apparently +2 outside as I write and it is definitely grey and miserable.

Which brings us in a rather round about way to an early occurrence of potential death by fishing and definitely one of my favourites;  100 fishermen on drifting ice in giant Russian water reservoir.  And that's before taking in to account that well over 90% of those fishing were also consuming vodka in non-small doses.  Usually you have to wait until March/April for this story, but as it seems that we are going to be winterless this year, after being summerless last year, the fishermen afloat stories came early this year.


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06 January 2007

With many thanks to Snowsquare who has captured the slightly bizarre zebra crossing advert. My apartment is in the pereuloki between Stary Arbat and Prechistenka which means that I frequently cross both on car and foot the two of the only zebra crossings which are sometimes obeyed. I know what the traffic law says, but it is disobeyed so completely as to make it no longer a law, until the GAI are underperforming their quotas of de-cashification of Moscow drivers. Suffice it to say that neither drivers nor pedestrians have road sense; as a Brit I clearly remember the Green Cross Code lessons at school. No one crossing a zebra crossing in Moscow does.




The Oil Drum | Using NATO to fight peak gas

An exceedingly good article on US/UK Gas Wars by Jerome a Paris in TOD. We have differences of opinion not least of which relate to Gazprom's ability to meet its own supply forecasts in the medium-term. Vladimir Milov has some good graphs showing Jonathan Stern's forecasts of decline of Russia's major gas fields. Attached is Vladimir's own graph which looks exactly like mine, except his is a picture and mine is an excel graph. Jerome is correct that there is plenty of gas in Russia but his demand forecasts are a little out of date. Notwithstanding his point is that the US/UK are trying to demonize Russia from a fallacious base. It's worth the read.


2006 Becomes 2007 - Some Ruminations

You may have noticed that I have been away.  Well I am back now (as if you care) and looking forward to an interesting 2007.  Here's your Ruminator's take on 2007 with half an eye on what happened in 2006.

The three big themes of 2006 will continue in to 2007;

  • The Presidential election (sic)
  • Energy security, or Russia flexes its energy muscle; and
  • Continued domestic growth.

In reverse order, or in order of which they are more likely to be correct.

Russia Is Growing
Occasionally you will actually get to read a story about continuing Russian domestic growth, usually tucked into in the business section of a newspaper, when another multi-national in the consumer industry announces that its growth in profits and revenues has been driven by the Russian (CIS) economy, or indeed when another Russian IPO hits London.  There will also be news of more banking and financial industry deals as Russia slowly develops its domestic financial sector. 

If there is to be bad news, which you will be able to read on the front page, inflation will continue to be a worry for Messrs Kudrin and Gref.  As the remainder of the Russian government will adopt its customary Kanutian approach to generally accepted economics, Gref's and Kudrin's focus will be especially important.  Inflation should be contained, at least headline inflation, until Putin's appointee is safely ensconced on his, or her (yes there is a female option) throne.  Which would be known in Rugby as a hospital pass.  Currency inflation (or dollar deflation) may put a bit of a damper on some domestic industry but with revenues growing at least as sharply as costs, 2007 may be the year which real management begins to make an impact. With energy prices  now definitely set to rise 2007 should also be the year that Russian industry starts to wean itself of cheap energy.  Notwithstanding, growth will continue to be the rising tide that covers many sins.  The Regions will join the party and the feel-good factor will still feel good. With many more people enjoying a full stomach, and those already full demanding higher quality goods and better services the chance of agitation for anything other than the status quo will be nil.  Which is as it should be.  Stability to an investor is like a fix for a junkie.

Amongst other things this will be good news for Russia's broadband sector which by the end of 2007 will begin to look like a poster child for new media, in Moscow at least.  This will principally be good news for the Ruminator's bank account.

Oil and gas, energy security or the new playground of the new Cold War
This is an analytical minefield.  Last year started with Ukraine blaming Russia for Ukraine's stealing of Europe's gas and ended with the death of the Turkmenbashi and the Belarus sandpit squabble.  In between, the oil price breached $80/bbl and retreated to $60/bbl and Rosneft IPO-ed on LSE.  The net result was mostly noticed in Moscow's restaurants and, of course in London's, real estate prices and the board rooms of Shell, BP, ExxonMobil, Total etc., and unfortunately etc.  Somewhere along the way the G8 summit in St. Petersburg (home of the 5th Directorate Thugs) epitomized much of what will remain wrong with relationships between the US and UK, France and Germany and new Europe, on many sides and Russia, on the other.  Thinking back without a crib sheet, the Bush / Blair conversation stands out as revealing the paucity of much of the UK/US foreign policy; Putin's barbs as the confidence that Russia had re-found through its supposed strength in oil and gas.  Supposed, because as Claude Mandil at the IEA had been pointing out all year, Russia has failed to invest in its gas industry properly for sometime and would struggle to meet just about anyone's forecast demand scenarios.  As the year progressed having failed to prove the case that Russia was an unreliable supplier the heat was turned on Russia for failing to produce enough gas to keep Europe warm in our increasing old age.  With Vladimir Milov able to broadcast his complaints from just about any platform Russia itself sought to address the demand supply issue, and partially succeeded - balancing a number of legitimate concerns (demand stimulation and inflation) and one illegitimate one (maintaining VVP's good Tsar halo).  And then the Turkmenbashi finally shuffled Brezhnev-like.  When you are relying on Turkmenistan to produce an unrealistic amount of gas to fill the under-investment gap losing the guarantee of supply highlights the paucity of Russia's gas policy.

So what for 2007.  Firstly the rhetoric cannot continue at this elevated level for long.  A number of concurrent events should see the bluster cool and the temperatures head in the other direction; firstly Germany takes over the Presidency of the G8 and the EU.  Whilst Merkel is no friend of Putin's neither is she a Cold War warrior or in need of a bogeyman to divert attention from her other foreign policy misadventures.  In the US it looks as though Bush will be tied up trying to create his legacy (?) through some sort of solution in Iraq (already doomed to failure.) In the UK all attention will focus on Brown's ascension as Prime Minister some time in May (or June, July, August etc), although the UK's genuinely independent courts might yet scupper any Berezovsky extradition deal.  Which will cause Russia's two shrillest critics (Poland is so shrill that only the dogs and Edward Lucas are listening) to leave Russia alone.  For the first half of the year the failure of winter to be winter (its +3 in Moscow as I write this) should see oil prices drop towards $45/bbl, albeit that a huge number of knowledgeable commentators (T. Boone Pickens amongst them) would fundamentally disagree.  Europe and the US worry about the El Nino fueled increase in temperatures, but global warming is no where near as scary if you can afford to pay for the petrol to worry about it in your 4x4.  It won't be the heating season that drives up prices but the air conditioning season which will start early and finish later than usual.  As an aside its time to worry about coral bleaching again.

The last forecast is tied up with the Presidential election and should be included below.  But as it is all about oil and gas it will stay here.  2006 in Russia was mostly about positioning in advance of the 2008 Presidential appointment.  In the oil & gas sector that meant personal financial positioning using national oil and gas policy as the driving force for all sorts of nasty shit.  After the Rosneft IPO one clan was deemed to have fed at the trough enough and was told to get its house in order.  Gazprom  finished the year by eating at Shell's trough.  I would be surprised if there is much more troughing to come.  As always, SurgutNG acquisition stories will circulate but unless a deal is done by at the very latest end of June 2007 the Ruminator will confidently forecast no more deal doing until after the election/appointment.  There is a huge amount of work to be done in both Gazprom and Rosneft to fulfill their roles as national champions.  With oil prices definitely on the way down, gas prices should move in lock-step, albeit in less liquid markets, the challenge in 2007 will be larger than either company will be able to manage.  Gazprom, in particular will have a challenging 2007 as it seeks to bring the next generation of super-fields in to production without much help from those with the expertise to do it either inside the company or internationally.  After firing Ryzanov late last year Gazprom now contains no one who knows anything about gas E&P.  If you want an early prediction for 2015 here its is; Shtockman will not be producing - feed that in to your gas supply models and go long fur coats - providing we still have a winter then.

The Presidential Election
We will know who will be elected President in 2008 either just before or just after the 2007 July/August break.  Feeling optimistic I will plump for just before and will undoubtedly be wrong.  As a result no big deals will be done after March 8th until we know what, how, who and why (actually we will never know why.)  The Ruminator has no desire to stick his head above the parapet to make too many forecasts as to who.  Putin will not stand again (this time around),  Medvedev and Ivanov are the front runners, Kozak would be a nice to have, Matvienko might squeeze her way in to the mix -  the conspiracy theorists certainly think so.  The quasi-anarchy that characterised the end of 2006 (Kozlov, Politkovskaya, Litvinenko amongst others) has either ended or will end shortly.  Sometime around the May holidays we will bemoan the lack of excitement in Russian poliitics - and thank goodness for that.  Depending on how much intra-Kremlin wrangling was resolved over the holiday period there will be a domestic driven rally in 2007 which will announce, much like white smoke from the Vatican, that Putin's successor has been nominated and  the market insider like the stability that should flow as a result.

In the meantime nothing will be done that might upset the narod.  Inflation will be kept down (at the expense of local business if needs be), the shelves will be stocked with an ever increasing range of high quality goods and Russian made food which will remain mostly flavourless and inedible.  Of all my predictions for 2007 none is more likely to be true.

Extreme nationalism, otherwise known as racism will continue to make Russia a less than welcoming place to anyone whose natural pigmentation was a result of anywhere south of Moscow.  Moscow needs immigration to counteract Russian's unhealthy desire to eat Russian food (male life expectancy is a massive 58 years - up from 54 in 1998) and drink vodka.  Nationalism has now taken hold and will be a very difficult virus to kill-off.  Not sure who will build the buildings.

So there is my big picture for 2007.  Along the way there will undoubtedly be some more bureaucratic madness, more Khordokhovsky trials and Berezovsky extradition attempts, more Russian floozies caught in cars in Monaco when they should be in bed with the mumps.  Your Ruminator will be busy, very busy.  In the first quarter work will keep him from blogging, in the second half of the year it will be personal life that will prevent me from blogging the bizarre and Russia's business environment.

Enjoy it, it will be another year to make money in Russia.


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30 January 2007

Guess the Date of this Headline

I first started doing business in Russia in 1994, I had more hair, less belly and a chin then, I can't exactly remember when the first news story appeared touting a rail link between Sheremeytevo and Moscow but it was definitely BC (before the Crisis.)  And it's back again.  I am not sure if the wolf really is coming this time or it is just a red herring designed to make us think that Sheremeytevo might at some point stop feeling like the Black Hole of Calcutta (with apologies to Calcutta.) Or any other not entirely appropriate analogy.

As I am willing to pay large sums of cash to airlines which fly out of Domodedovo in preference to sitting for hours on Leningradski Prospect, and then standing for hours* for one, or more of; entering the airport security, customs, checking-in, passport control, a toilet which is not closed for cleaning (at least 40 minutes in every hour) I don't actually care.  It was just a warm feeling of deja vu.

Rail Line Planned to Sheremetyevo:
Russian Railways will spend 2 billion rubles ($75 million) in 2007 to build a branch line to Sheremetyevo Airport.

*  Note that I did not expect to queue.  In the days when I flew in and out of Sheremeytevo regularly I used to bring my own line with me.


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26 January 2007

The Not So New Paper on the Block

I was reminded today that Business New Europe (BNE) is now up and running.  It's the brain child of Ben Aris who writes more commonsense than the average journalist (damning with faint praise).  It's a better round up of business related news than most of the news agencies.  Being a new kid on the block you can read the website, get your news via email or have it delivered to your favourite feed-reader via RSS.

Go support Ben.

Updated to replace the "t" in now with the more traditional "w."

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25 January 2007

You Know You've Been in Russia Too Long..........

Someone, somewhere linked to 42 "you know when you've been in Russia too long when."  Here are some additions:

When you believe that you can get "the flu" from an air conditioner

Q: Russians tend to believe that illnesses can be caused by air currents, whether the source is an air conditioner, a draft or even a breeze on a warm day. Foreigners tend to disagree. Who is right?

Dr. Natalia Udaltsova, Centro Medico Italiano:
"Drafts and cold air currents have the same effect on people as cold drinks -- everything depends on the strength of each person's immune system. Overcooling and drastic changes in temperature can result in a cold or fever for people with a weakened immune system.
"Also, an air conditioner in a confined office space creates the effect of fresh air without any disinfectant functions. In other words, it is just driving the existing bacteria and microbes around in circles."

Dr. Irina Perrin, European Medical Center:
"Foreigners are correct in their belief. Everything depends on the patient's immune system."

Dr. Svetlana Zorina, Ne Bolit Medical Center:
"Cold air currents, including those from air conditioners, can cause muscle fever or myositis, especially if you enter a conditioned room after intense physical exercise or after being outdoors in hot weather."
When, on returning from whence you came, you leap in to a car and promptly drive around the queue to the traffic lights and push in at the front, thus creating an impromptu additional lane

More to come - undoubtedly.

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23 January 2007

2007: The Year of the Russian Language

The First Post a strange English, as opposed to British, online newspaper, the purpose of which I have yet to fathom, has a piece on Putin's Kanutian desire to restore the Russian language:

The Year of the Russian Language

The problem is apparently that the near abroad prefer their own language and English to Russian and Russian (strange that), and native Russians (whoever they may be - but that's a different topic altogether) have a nasty habit of eating sala, drinking vodka, not having enough sex, too many abortions, dying early and generally being fewer at the end of the year than at the beginning.  Not so much a dying language, as a population suffering from a collective heart attack.

If I can give VVP one hint to help the adoption of Russian, and I am not going to get in to the Latinisation of Cyrillic here, it would be the simplification of verbs of motion.  I frequently physically fly back and forth to London but grammatically I go, don't come back or come back on a different route having confirmed that I was indeed about to board and return on a BA flight.  As you can imagine this causes some concerns with drivers who are trying to arrange when to meet returning flights and with domestic help concerned that you may be about to walk out of Moscow forever.  At least it has been some time since I caused concern that I had walked back from wherever I had been. 

So VVP please help us poor non-sala eating Russian speakers out by allowing us to simply go and come back; an upgrade at Sheremeytevo wouldn't be amiss whilst you are at it.

Thanks


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21 January 2007

Turkmen Gas - Not Being Transported by Balloons

MSM was concerned when the Turkmenbashi finally shuffled that there would be another tussle between Russia and the US for control of Turkmenistan's gas.  Whilst that balance-of-power struggle may/is still be going on behind the scenes, Turkmenistan's gas is still routinely transiting Russia on its way to Ukraine for one blindingly obvious reason; it has nowhere else to go - hence the title of the post.  Gas transportation relies on fixed infrastructure (pipelines).  Marginally less important, Turkmenbashi's successor is Kremlin-friendly, or not unfriendly.  It could have been nasty if the US had managed to install a friendly puppet; I am not quite sure how Russia would have squared its need for Turkmenistan's gas with its need to ensure that it keeps flowing north and nowhere else.

This is a reality born of fixed infrastructure and European energy demand.  As much as Turkmenistan may want to have alternate routes to sell its gas; east to China, south through Afghanistan and Pakistan (clearly one of the world's more stable regions) or south west across the Caspian and over Central Asia's San Andreas fault, the only pipelines that work today (and even then at 60% of design capacity) pass through Kazakhstan and enter southern Russia.  So as much as Cheney et al would like to ensure that Russia cannot control Turkmenistan's gas there is no other option today, and the only one even vaguely likely in the future will be a Kazakh pipe going to China.  Which really does not help the US efforts at world domination at all.

Turkmenistan's gas is officially sold to Ukraine (each molecule is tagged as it crosses the border in to Russia to make sure that it ends up in Ukraine); more importantly it forms a significant part of Russia's gas supply balance.  Broadly speaking there are three demands on Russia's gas in reverse order of profitability for GAZP; Russia, the near abroad (ex-FSU) and Europe.  Re-ordering the list in terms of GAZP's obligations would result in Europe and Russia sharing first place and the FSU coming in a very distant third.  Except, as we have come to learn, the export pipelines, before Schroeder's pipeline,  still have to pass through Ukraine and Belarus who have a nasty habit of taking what they need before allowing the balance to make it to Europe.  Thus, if history were to repeat itself, if Turkmenistan's gas does not come north there will not be enough gas for Ukraine, which will probably means there is not enough gas for Europe.  Meanwhile, Russia will still have access to enough gas to fire its electricity generators, steel and aluminum plants creating an ever more economically powerful Russia.

The above graph, which is built on UBS data with some personal tinkering, shows expected gas supply from Russia, Central Asia and Independents (Novatek, LUKoil, TNK-BP etc) in BCM p.a.  There is a large and increasing requirement for Turkmenistan, Kazakhstan and Independents to equalize the demand / supply equation.  Hence the change to domestic Russian pricing at the end of last year.  For each of the three supply components a worryingly large chunk of 2010-2015 supply falls in to "yet-to-be-discovered" or incredibly technical mega-projects whose real and official start dates may be as much as 5 years apart.

Hyper-expensive pipelines across opium-growing Afghanistan or linking with the gas version of the Baku-Ceyhan pipeline are never going to happen.  For which Europe should be very pleased.

Here is the link which started me thinking; RIA Novosti - Opinion & analysis - Fight for Turkmen gas called off:

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19 January 2007

Golubovich - The Prisoner's Dilemma

Alexei Golubovich, from the days of the battles of Volgotanker, provides a perfect demonstration of the Prisoner's Dilemma.  With a twist.  In this game MBK, Golubovich's previous boss, is the prisoner.  Mr. G wants to see his mum, the Prosecutor's office wants to see Mr. G. 

Solution; sell the prisoner down the river - no dilemma.

YUKOS Ex-Executive Back in Russia to Testify against Khodorkovsky

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Gazprom: World’s Greatest Energy Company?

From Kurt Wulff via Seeking Alpha.  Wulff is an independent US-based oil and gas analyst with a real focus on economics.  His price btu comparisons are worth a thought.

Gazprom: World’s Greatest Energy Company?:

Kurt Wulff (McDep Associates) submits: Buy-recommended Gazprom (OGZPY.PK)’s sales of natural gas are as large as Saudi Arabia’s sales of crude oil in heating equivalent, and superior in environmental quality. Yet Gazprom’s selling price at about $2.50 a million btu is only about one-fourth of Saudi Arabia’s at some $60 a barrel, or $10 a million btu.

In view of that price chasm one can hardly fault Russian President Putin for attempting to secure market value for a precious resource. Yet, Russia, unlike Saudi Arabia, offers ordinary investors, as well as anyone who objects to a nearer-to-market price for clean energy, the opportunity to participate in the producer profit by owning shares of what may become the “World’s Greatest Energy Company.”

Meanwhile, results for the second quarter of 2006, reported according to international financial standards on December 21, confirm a modest one-third increase in natural gas price over the previous year. With continued progress there would be justification for upward revisions in estimated net present value, currently at $56 a share, that amount to a modest multiple of current cash flow from a low natural gas price.

Energy a Political Tool?

How can consumers justify paying Gazprom, the world’s largest natural gas producer, $2.50 a million btu for clean fuel while paying Saudi Arabia, the world’s largest oil producer, $10 a million btu for medium dirty fuel? Because the gap between realized price and market price for Russian natural gas is so wide that we have little sympathy with the argument that energy is being used as a political tool.

Instead, President Putin’s great contribution to his countrymen may be to recognize the value of Russia’s energy resources and to take actions to realize that value for Russians rather than to give it away cheap. We believe that consumers are also better off in the long run if energy sells at a market price that takes into account environmental characteristics.

The choice we make when we recommend Gazprom is driven by resource value and concentration on the cleanest fuel. Political risk is there, but it needs to be put in a balanced perspective.

The World’s Greatest Energy Company designation applies to Gazprom today only in the size of its clean fuel resources. The company is not there yet on a commodity market price basis, in operating efficiency, in transparency of financial results or in stock market value. The future price of freely traded Gazprom stock may be the most credible measure of the success of Russia in managing its clean energy asset for home and global benefit. In view of the great potential, investors can be patient.

Sakhalin II Project Agreement Reached

At the same time Gazprom announced second quarter earnings, buy-recommended Royal Dutch Shell (RDS.A) announced that it and its partners had reached agreement to sell a half interest in the Far Eastern oil and liquefied natural gas project, Sakhalin II, to Gazprom for $7.5 billion. The deal resolves a dispute with the Russian government over a doubling of the estimated cost of the project to $20 billion. It looks like the price covers a half share of the costs incurred so far and we presume Gazprom will pay its share of costs not yet incurred.

We don’t like seeing that Shell has to give up half of its upside. Yet the effect is not a lot different than when Norway some thirty years ago raised its incremental tax rate on oil to near 80% and required that the state oil company be a partner in new deals. The net result of today’s Sakhalin announcement for investors is the transfer of some possible future reward from publicly held Shell to half publicly held Gazprom.
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Weather, in the wrong place at the wrong time

As promised posting is slow.  I am going to fire off a couple of quick posts a sort of personal break from the pain of editing a 140 page document.

As we await Hurricane Cyril over the weekend I thought that it would be instructive to post this comparative temperature map from The Oil Drum.


December 2006 was 8 degrees warmer than December 2005, and I have no recollection of December 2005 being particularly cold - that came mid-January.

What is worse, as we await a new moon, it is dark, dark, dark in Moscow, without the usual covering of snow which helps to lift the gloom.

As this unseasonal weather repeats itself all over western Europe it will be intresting to see what Gazprom's year-on-year sales to western Europe will be both during the winter when it is not cold and then during the summer when it very definitely will be air-conditioning warm again.

The comparative weather picture came from The Goddard Institute for Space Studies.

Coming Out Negative in the Balance

Lord Skidelsky, wrote a somewhat balanced view in the Moscow Times (hurry the link will die tonight) on the Russia / Belarus spat earlier this year.  Copydude has been all over this both politically and musically (follow the link).  Skidelsky, somewhat more reasonably, than the blogosphere takes MSM to task for rolling out the same old list of misdemeanours without bothering to dig in to the background of the story.

The FT under Neil Buckley's leadership in Moscow has become a useless source for Russia insight and The Economist, with the honourable exception of Gideon Lichfield has maintained Edward Lucas' policy of being on the wrong side of the story so often as to be a great counter-indicator of reality, as Konstantin has catalogued. 

Intelligent comment is very difficult to find.  I am told that Le Monde is a good source, but my French is not up to it.

Coming Out Negative in the Balance:

"Let me return to the question of why Russia gets such bad press. First, many of the actions of the Russian state can and should be criticized -- as much by Russians as by those in the West. The country has no understanding of the meaning of the rule of law. It uses legal devices to obtain political objectives. This makes it look shifty and vindictive. Secondly, journalists are often just lazy. It is much easier to compile lists of misdemeanors and assert trends than to dig into the circumstances of particular cases."

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18 January 2007

EBRD and Gazprom

I am struggling to see why the EBRD should be financing Shell / Sakhalin II Consortium at all.  I think that would fall in to the crowding out regular lender category. 

EBRD's mandate is to help finance Russia's emerging economy, which implicitly means being a prudent lender or investor to businesses where there are no established means to finance them.  A Shell-led consortium does not meet those conditions.  If it cannot find projects to fund within its mandate then I would suggest that it return capital to its investors - otherwise known as governments, and they to their tax payers.

EBRD financing not critical for Sakhalin II - Gazprom:
MOSCOW, January 17 (RIA Novosti) - A senior Gazprom [RTS: GAZP] official said Wednesday that financing from the European Bank for Reconstruction and Development was not critical for the current phase of the Sakhalin II hydrocarbon project off Russia's Pacific coast.

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16 January 2007

If It Walks Like A Duck

looks like a duck, quacks like a duck

and its Gazprom - then its not a monopoly.

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15 January 2007

100 fishermen on drifting ice in giant Russian water reservoir

I have something of a fascination for the many ways which Russians have found to place themselves in mortal danger.  Those of us who are fortunate enough to live here get to watch, and indeed participate in, the entertainment that is potential suicide by motor transport.  No shopping trip, even to the more expensive supermarkets, highlight at least to those of us brought up according to the western dietary traditions (fat bad, fibre good) of Russians daily flirtations with a reduced life expectancy.

And then there is this bizarre and miserable weather.  It is apparently +2 outside as I write and it is definitely grey and miserable.

Which brings us in a rather round about way to an early occurrence of potential death by fishing and definitely one of my favourites;  100 fishermen on drifting ice in giant Russian water reservoir.  And that's before taking in to account that well over 90% of those fishing were also consuming vodka in non-small doses.  Usually you have to wait until March/April for this story, but as it seems that we are going to be winterless this year, after being summerless last year, the fishermen afloat stories came early this year.


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06 January 2007

With many thanks to Snowsquare who has captured the slightly bizarre zebra crossing advert. My apartment is in the pereuloki between Stary Arbat and Prechistenka which means that I frequently cross both on car and foot the two of the only zebra crossings which are sometimes obeyed. I know what the traffic law says, but it is disobeyed so completely as to make it no longer a law, until the GAI are underperforming their quotas of de-cashification of Moscow drivers. Suffice it to say that neither drivers nor pedestrians have road sense; as a Brit I clearly remember the Green Cross Code lessons at school. No one crossing a zebra crossing in Moscow does.




The Oil Drum | Using NATO to fight peak gas

An exceedingly good article on US/UK Gas Wars by Jerome a Paris in TOD. We have differences of opinion not least of which relate to Gazprom's ability to meet its own supply forecasts in the medium-term. Vladimir Milov has some good graphs showing Jonathan Stern's forecasts of decline of Russia's major gas fields. Attached is Vladimir's own graph which looks exactly like mine, except his is a picture and mine is an excel graph. Jerome is correct that there is plenty of gas in Russia but his demand forecasts are a little out of date. Notwithstanding his point is that the US/UK are trying to demonize Russia from a fallacious base. It's worth the read.


2006 Becomes 2007 - Some Ruminations

You may have noticed that I have been away.  Well I am back now (as if you care) and looking forward to an interesting 2007.  Here's your Ruminator's take on 2007 with half an eye on what happened in 2006.

The three big themes of 2006 will continue in to 2007;

  • The Presidential election (sic)
  • Energy security, or Russia flexes its energy muscle; and
  • Continued domestic growth.

In reverse order, or in order of which they are more likely to be correct.

Russia Is Growing
Occasionally you will actually get to read a story about continuing Russian domestic growth, usually tucked into in the business section of a newspaper, when another multi-national in the consumer industry announces that its growth in profits and revenues has been driven by the Russian (CIS) economy, or indeed when another Russian IPO hits London.  There will also be news of more banking and financial industry deals as Russia slowly develops its domestic financial sector. 

If there is to be bad news, which you will be able to read on the front page, inflation will continue to be a worry for Messrs Kudrin and Gref.  As the remainder of the Russian government will adopt its customary Kanutian approach to generally accepted economics, Gref's and Kudrin's focus will be especially important.  Inflation should be contained, at least headline inflation, until Putin's appointee is safely ensconced on his, or her (yes there is a female option) throne.  Which would be known in Rugby as a hospital pass.  Currency inflation (or dollar deflation) may put a bit of a damper on some domestic industry but with revenues growing at least as sharply as costs, 2007 may be the year which real management begins to make an impact. With energy prices  now definitely set to rise 2007 should also be the year that Russian industry starts to wean itself of cheap energy.  Notwithstanding, growth will continue to be the rising tide that covers many sins.  The Regions will join the party and the feel-good factor will still feel good. With many more people enjoying a full stomach, and those already full demanding higher quality goods and better services the chance of agitation for anything other than the status quo will be nil.  Which is as it should be.  Stability to an investor is like a fix for a junkie.

Amongst other things this will be good news for Russia's broadband sector which by the end of 2007 will begin to look like a poster child for new media, in Moscow at least.  This will principally be good news for the Ruminator's bank account.

Oil and gas, energy security or the new playground of the new Cold War
This is an analytical minefield.  Last year started with Ukraine blaming Russia for Ukraine's stealing of Europe's gas and ended with the death of the Turkmenbashi and the Belarus sandpit squabble.  In between, the oil price breached $80/bbl and retreated to $60/bbl and Rosneft IPO-ed on LSE.  The net result was mostly noticed in Moscow's restaurants and, of course in London's, real estate prices and the board rooms of Shell, BP, ExxonMobil, Total etc., and unfortunately etc.  Somewhere along the way the G8 summit in St. Petersburg (home of the 5th Directorate Thugs) epitomized much of what will remain wrong with relationships between the US and UK, France and Germany and new Europe, on many sides and Russia, on the other.  Thinking back without a crib sheet, the Bush / Blair conversation stands out as revealing the paucity of much of the UK/US foreign policy; Putin's barbs as the confidence that Russia had re-found through its supposed strength in oil and gas.  Supposed, because as Claude Mandil at the IEA had been pointing out all year, Russia has failed to invest in its gas industry properly for sometime and would struggle to meet just about anyone's forecast demand scenarios.  As the year progressed having failed to prove the case that Russia was an unreliable supplier the heat was turned on Russia for failing to produce enough gas to keep Europe warm in our increasing old age.  With Vladimir Milov able to broadcast his complaints from just about any platform Russia itself sought to address the demand supply issue, and partially succeeded - balancing a number of legitimate concerns (demand stimulation and inflation) and one illegitimate one (maintaining VVP's good Tsar halo).  And then the Turkmenbashi finally shuffled Brezhnev-like.  When you are relying on Turkmenistan to produce an unrealistic amount of gas to fill the under-investment gap losing the guarantee of supply highlights the paucity of Russia's gas policy.

So what for 2007.  Firstly the rhetoric cannot continue at this elevated level for long.  A number of concurrent events should see the bluster cool and the temperatures head in the other direction; firstly Germany takes over the Presidency of the G8 and the EU.  Whilst Merkel is no friend of Putin's neither is she a Cold War warrior or in need of a bogeyman to divert attention from her other foreign policy misadventures.  In the US it looks as though Bush will be tied up trying to create his legacy (?) through some sort of solution in Iraq (already doomed to failure.) In the UK all attention will focus on Brown's ascension as Prime Minister some time in May (or June, July, August etc), although the UK's genuinely independent courts might yet scupper any Berezovsky extradition deal.  Which will cause Russia's two shrillest critics (Poland is so shrill that only the dogs and Edward Lucas are listening) to leave Russia alone.  For the first half of the year the failure of winter to be winter (its +3 in Moscow as I write this) should see oil prices drop towards $45/bbl, albeit that a huge number of knowledgeable commentators (T. Boone Pickens amongst them) would fundamentally disagree.  Europe and the US worry about the El Nino fueled increase in temperatures, but global warming is no where near as scary if you can afford to pay for the petrol to worry about it in your 4x4.  It won't be the heating season that drives up prices but the air conditioning season which will start early and finish later than usual.  As an aside its time to worry about coral bleaching again.

The last forecast is tied up with the Presidential election and should be included below.  But as it is all about oil and gas it will stay here.  2006 in Russia was mostly about positioning in advance of the 2008 Presidential appointment.  In the oil & gas sector that meant personal financial positioning using national oil and gas policy as the driving force for all sorts of nasty shit.  After the Rosneft IPO one clan was deemed to have fed at the trough enough and was told to get its house in order.  Gazprom  finished the year by eating at Shell's trough.  I would be surprised if there is much more troughing to come.  As always, SurgutNG acquisition stories will circulate but unless a deal is done by at the very latest end of June 2007 the Ruminator will confidently forecast no more deal doing until after the election/appointment.  There is a huge amount of work to be done in both Gazprom and Rosneft to fulfill their roles as national champions.  With oil prices definitely on the way down, gas prices should move in lock-step, albeit in less liquid markets, the challenge in 2007 will be larger than either company will be able to manage.  Gazprom, in particular will have a challenging 2007 as it seeks to bring the next generation of super-fields in to production without much help from those with the expertise to do it either inside the company or internationally.  After firing Ryzanov late last year Gazprom now contains no one who knows anything about gas E&P.  If you want an early prediction for 2015 here its is; Shtockman will not be producing - feed that in to your gas supply models and go long fur coats - providing we still have a winter then.

The Presidential Election
We will know who will be elected President in 2008 either just before or just after the 2007 July/August break.  Feeling optimistic I will plump for just before and will undoubtedly be wrong.  As a result no big deals will be done after March 8th until we know what, how, who and why (actually we will never know why.)  The Ruminator has no desire to stick his head above the parapet to make too many forecasts as to who.  Putin will not stand again (this time around),  Medvedev and Ivanov are the front runners, Kozak would be a nice to have, Matvienko might squeeze her way in to the mix -  the conspiracy theorists certainly think so.  The quasi-anarchy that characterised the end of 2006 (Kozlov, Politkovskaya, Litvinenko amongst others) has either ended or will end shortly.  Sometime around the May holidays we will bemoan the lack of excitement in Russian poliitics - and thank goodness for that.  Depending on how much intra-Kremlin wrangling was resolved over the holiday period there will be a domestic driven rally in 2007 which will announce, much like white smoke from the Vatican, that Putin's successor has been nominated and  the market insider like the stability that should flow as a result.

In the meantime nothing will be done that might upset the narod.  Inflation will be kept down (at the expense of local business if needs be), the shelves will be stocked with an ever increasing range of high quality goods and Russian made food which will remain mostly flavourless and inedible.  Of all my predictions for 2007 none is more likely to be true.

Extreme nationalism, otherwise known as racism will continue to make Russia a less than welcoming place to anyone whose natural pigmentation was a result of anywhere south of Moscow.  Moscow needs immigration to counteract Russian's unhealthy desire to eat Russian food (male life expectancy is a massive 58 years - up from 54 in 1998) and drink vodka.  Nationalism has now taken hold and will be a very difficult virus to kill-off.  Not sure who will build the buildings.

So there is my big picture for 2007.  Along the way there will undoubtedly be some more bureaucratic madness, more Khordokhovsky trials and Berezovsky extradition attempts, more Russian floozies caught in cars in Monaco when they should be in bed with the mumps.  Your Ruminator will be busy, very busy.  In the first quarter work will keep him from blogging, in the second half of the year it will be personal life that will prevent me from blogging the bizarre and Russia's business environment.

Enjoy it, it will be another year to make money in Russia.


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