CrisisCrunch

By Amanda Lahan, The PBN Company, Washington, DC

The Customs Union between Russia, Belarus and Kazakhstan has been officially established. The leaders of the three countries signed a formal agreement creating a unified customs union at a November 27 meeting of the Eurasian Economic Community (EurAsEC) in Minsk. A unified system of external tariffs will be put in place by January 1, 2010, while the unified Customs Code, still in the draft stage, will take effect on July 1, 2010.

Approximately 92% of the new tariffs are identical to Russia’s existing tariff system, meaning that Russia won’t have to change much. Considering that Russia has a larger number of tariffs than either Belarus or Kazakhstan, these two countries will have to increase their duties on some goods or put brand new duties into place. Kazakhstan alone will have to raise tariffs on more than 5,000 goods. Once the tariffs are in place, any increase or decrease will have to be negotiated by the governments of all three countries, making any changes a complicated process.

Other tariffs are yet to be determined. Russia currently has much higher import duties on cars - especially used cars - than Belarus or Kazakhstan, and is concerned that lowering these duties will result in a flood of imported used cars from these two countries, especially Belarus. While Russia has export duties on oil in place, Kazakhstan does not. Both of these thorny issues are not expected to be resolved any time soon.

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By Martina Bozadzhieva, The PBN Company, Washington, DC

On September 10th President Medvedev surprised both Russian and international observers with an unexpectedly honest and critical article about Russia’s strategic challenges. Medvedev decried Russia’s “primitive raw materials economy, chronic corruption,” “inefficient economy…weak democracy,” and “negative demographic trends,” causing a flurry of comment and speculation. The fact that the article appeared in Gazeta.ru, an online news source often critical of the Russian government, only made it more unusual.

The initial reaction was one of skepticism, especially among Russians who were asking why he published such a scathing commentary now. Having been president of the country for a year and a half, critics charge that Medvedev hasn’t done anything to solve the problems he identified. A common criticism by both journalists and readers who posted comments on the Gazeta website was that Medvedev’s ambitious agenda for turning Russia into a high-tech, knowledge-based economy was impossible without true political liberalization. Very few seemed to buy Medvedev’s argument that “the more intelligent, smarter and efficient our economy is…[the more] our political system and society as a whole will also be freer, fairer and more humane.”

Many observers considered the article’s message to be yet another example of Medvedev’s tendency to speak eloquently about democracy and liberalism without doing enough to turn his words into reality. Others , however, have started to see “Go, Russia!” as a part of a larger attempt by Medvedev to separate himself politically from Prime Minister Putin. Medvedev’s statement before the Valdai forum that he might run for a second term has been interpreted as a part of an emerging pattern.

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By Amanda Lahan, Account Manager, The PBN Company, Washington DC

After a summer of uncertainty, Russia’s World Trade Organization (WTO) accession process seems to be back on track - but the Russian government seems also be looking to get the best of both worlds. While it is voicing support for a timely accession to the WTO, it still supports the creation of a Customs Union with Belarus and Kazakhstan and simultaneous WTO entry for all three countries, despite the fact that Kazakhstan and Belarus are far behind Russia in terms of their accession negotiations.

In mid-September Prime Minister Putin again voiced his support for the three countries joining the WTO as a group, while at the same time asking the US to drop restrictions on trade with Russia.  Several days later, First Deputy Prime Minister Igor Shuvalov stated that Russia aimed to finish its WTO negotiations in 2010, and that WTO negotiations for Kazakhstan and Belarus should be conducted simultaneously. However, he also cautioned that the leaders of the three countries could change their plans if Kazakhstan and Belarus slowed Russia’s accession process. Shuvalov then reiterated his support for the countries’ accession as a group at a meeting of Customs Union members in Almaty on September 25th.

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Last week Russia’s Cabinet approved the draft 2010 budget. Prime Minister Putin promised to cut spending by government departments while also stressing social provisions, including “maternity capital.” Galina Khatiashvili, Intern, The PBN Company, Moscow, examines how the scheme to boost Russia’s population is being received.

When Russian parents have a second child, they are eligible for what is know as “maternity capital” - a benefit currently worth 312,162.50 rubles, or just under $10,000. Prime Minister Putin recently said that an estimated 300,000 families will receive 102 billion rubles next year as part of the scheme. But although it looks good at face value, its actual usefulness is limited, making it difficult for families to take advantage of the income boost.

Maternity capital can be claimed for three different purposes: to improve living conditions, to pay for education and to supplement a mother’s pension. To draw the benefit, families must justify the purpose through a complex and lengthy administrative process designed to help prevent fraud. And it can only be claimed as a credit to pay, for example, a building contractor, rather than be withdrawn as cash to use directly.

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By Yuliya Sobko, Head of Financial Communications and Investor Relations, The PBN Company, Kyiv

From the outside things have seemed particularly grim in Ukraine of late, with a combination of pre-election politicking and energy issues dominating international headlines. But in the midst of the severe economic slump Ukrainians are strikingly optimistic – about economic recovery (we hope we see production bottoming out in August) and the ability to cope with any policy mistakes that may come our way.

Ukrainians are stubborn survivors and optimists, and the government is more optimistic than ever. Ukraine’s Economy Minister Bohdan Danylyshyn, upbeat about the country’s future economic prospects, recently said that Ukraine has the resources to prevent the country from defaulting on its debts. “We have got the crisis under control and, little by little, Ukraine is overcoming it,” he offered as reassurance.

The draft State Budget, submitted to parliament on September 17, is also infected with bullish forecasts. The government expects GDP to grow by 3.7% in 2010, with inflation at 9.7% (compared to 1.5% GDP growth and 13.4% inflation forecasted by the World Bank). Based on these projections, the UAH 1.27 billion budget foresees a 19% increase in revenue and a 21% rise in expenditures compared to the 2009 budget (and the 2009 budget was based on rather upbeat forecasts as well). The budget deficit is predicted to increase by 49.9% in 2010 to UAH 46.7 billion, while UAH 4.5 billion is needed to cover credits and UAH 11.7 billion for credit arrangements. The fly in the ointment for the government? The fractious political situation makes it unlikely that the budget will be passed before the January elections.

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The economic crisis has done little to dampen the enthusiasm of Kazakhs for lavish weddings. Yekaterina Syrtsova, Associate Account Manager, The PBN Company, Almaty, marvels at the glitz and wonders how it all adds up.

If you have ever visited Almaty, chances are you have been stuck in traffic amid two or three honking wedding corteges. This summer it has often felt like one happy couple’s celebration is everyone else’s traffic jam.

Wedding-induced bottlenecks have been prevalent this year, and looking at the splendor of the wedding corteges lined up in front of the Almaty Central Civil Registry Office every weekend, one might think that the crisis had actually passed Almaty by.

This year, the typical traffic-snaring Almaty wedding has not only featured Hummers and while limos. It is a two-day celebration with over 100 guests and complete with western designer clothing, a hired tamada (toastmaster), musicians, dancers, fireworks and even white doves liberated at the ceremony. All adding up to a minimum $8,000 price tag.

What is significant is that these newlyweds are not just the nouveaux riches with cash to burn. Relatively average income couples and their families are taking out massive loans to foot the bill. The Kazakh banks may be surviving on state support, shoring up their balance sheets and refusing mortgages, but it seems that bank managers are still saying ‘I do’ in granting wedding loans.

By Bruce Wilson, Senior Consultant, The PBN Company, Almaty

Karim Masimov, Kazakhstan’s Prime Minister, has floated the idea of requiring foreign businesses that operate in Kazakhstan to keep a share of their funds in domestic banks. The need to help Kazakh banks is understandable, but would the proposal have a detrimental impact on the economy?

Kazakhstan’s banking sector still has serious problems, despite significant emergency investments by the government. Many banks, burdened by enormous foreign debts, are also mired in corruption scandals, and the damage to their reputations has further dampened economic activity throughout the country. Foreign investors, so the theory goes, are the ideal candidates to step in and help to bolster the banks’ balance sheets.

Foreign businesses have a vested interest in Kazakhstan’s economic health in general and the viability of the financial sector in particular. However, the merits of Masimov’s idea must be off-set against the additional damage that may be done to Kazakhstan’s international reputation. The proposal will be seen abroad as an additional challenge to investing in Kazakhstan - a constraint adding to the existing costs and risks of doing business in the country. If foreign businesses reduce their investments as a result the plan will backfire, further hampering Kazakhstan’s ability to attract capital and technical know-how. Ultimately, it may reduce the competitiveness of Kazakh products in the global market, raise prices for local Kazakh consumers and hinder rather than expedite Kazakhstan’s economic recovery.

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By Yekaterina Syrtsova, Associate Account Manager, The PBN Company, Almaty

Kazakh and western retail companies are pushing ahead with expansion plans despite the crisis.

Earlier this month Metro Cash & Carry, the German retailer, laid the foundation stone for its first supermarket in Astana and announced plans to build 10-15 stores in Kazakhstan. Arzan, a big local market player, unveiled two shopping centers in Almaty last year, and Magnum Cash & Carry followed suit, promising to establish supermarkets across the country. In a further sign that the sector is undergoing a shakeup, at the start of 2009, the chain SM-market bought supermarket chain Gross.

According to research published in newspaper Panorama, the annual turnover of the Kazakh retail sector is $2.5 billion for food sales and $8 billion for other goods. This is leading economists to speculate about a possible ‘hand off’ within the economy, whereby consumer spending takes over from oil and metals as drivers of growth, or at least as a counterweight to recession.

Consumers may be able to play this sort of role in shaping Kazakhstan’s economy, but key issues must first be addressed. Logistics is a major problem, particularly the lack of distribution platforms and storage facilities, as Stephen Kreeger, Country Director for Metro Cash & Carry Kazakhstan, told Kapital. Andrey Revin, Finance and Business Development Director of Eurasia RED, a big local developer, also cites the lack of both quality selling space and local franchisers selling international brands.

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by Jonti Small, Senior Account Manager, The PBN Company

“A year after Russia fought a war with its former-Soviet neighbor Georgia…” begins the Wall Street Journal’s report on the fractious relations between the two countries. Why does this description sound off-key?

Putting aside questions regarding who fought with whom, it is the short phase ‘former-Soviet neighbor’ that makes a clanging sound. The more often one reads this clunky piece of journalistic shorthand, the more discordant it is. Hyphens are invaluable in heading off ambiguity, particularly in adjectival phrases – “a man-eating shark” is different to “a man eating shark” – but the WSJ’s phrase is so peculiar that it actually creates ambiguity.

Geographically Russia and Georgia are neighbors. And Georgia can be accurately, if unhelpfully, labelled a “former-Soviet country”. What I quibble with is the elision – the definition of Georgia as Russia’s “former-Soviet neighbor”. Georgia was part of the Soviet Union, and not its neighbor. (Except from 1917 to 1921 when Georgia technically was a neighbor to the Soviet Union, but this distant period is not what the WSJ is alluding to.) Newspapers aim to provide facts and context in as brief and accurate way as possible. In this case, the phrase is concise but the context is muddied and the accuracy lost, which is unhelpful in an article that meditates on which country was the aggressor in a recent war.

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By Myron Wasylyk, Senior Vice President & Managing Director, The PBN Company, Kyiv

US Vice President Joe Biden’s visit to Ukraine this week accomplished three very important objectives not only for the US-Ukrainian bilateral relationship, but also for communicating Washington’s security policy views to Central and East Europeans.

First, Biden affirmed for official Kyiv the continuity of US-Ukrainian relations and their strategic importance to both sides on a wide range of issues. This ended speculation in both capitals about the status and nature of the bilateral relationship and affirmed that an independent, democratic and prosperous Ukraine remains a strategic priority for America.

During meetings with Ukraine’s political and business leaders, Biden specifically affirmed Washington’s support for the 1994 Budapest Memorandum, which gave Kyiv security assurances from the United States, United Kingdom and Russia in exchange for Ukraine’s getting rid of its nuclear weapons arsenal, one of the world’s largest at the time. The term of the memorandum expires this year and the Ukrainians were keen to receive a signal of support from Washington.

In another important step for Kyiv, the Charter on Strategic Partnership signed by Presidents George Bush and Victor Yushchenko was renewed. Biden announced a bilateral commission would be established to focus on economics, trade, energy, security and rule of law with an inaugural meeting of the commission scheduled for this autumn in Washington, DC Biden also affirmed US support for Ukraine’s Euro-Atlantic integration without mentioning NATO by name.

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