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

The proposed Customs Union between Russia, Kazakhstan, Belarus - and now possibly Kyrgyzstan - has received extensive coverage, with much attention focused on the impact on Russia’s accession to the World Trade Organization. However, while there are many potential benefits for Russia in terms greater access to Kazakh markets, what is in the Customs Union for Kazakhstan? A lively debated has been prompted about the economic and the political merits of going along with Russia’s proposal.

The Union is an obvious win for Kazakh industries that supply the Russian market, such as metallurgy, coal and chemicals. It will stimulate development of Kazakhstan’s Russian exports in these sectors by eliminating the customs duties they currently pay, making them more competitive. The Union will also simplify on-going issues relating to transit of Kazakhstan’s oil through Russian pipeline systems. For many years transit routes in general - and the expansion of the Caspian Pipeline Consortium in particular - have been a matter of political dispute with Moscow. That situation may now change.

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By Roman Kolosovskiy, Intern, The PBN Company, Moscow

President Obama’s trip to Moscow was billed as a milestone in US-Russia relations - there would be none of the Bush-era soul searching, but rather a chance to find pragmatic, common ground on pressing global issues like nuclear arms and Iran. Meetings were held and hands were shaken, but what is clear now that the dust has settled is that the US president has not aroused the same level of “Obamania” behind him in Moscow as he has elsewhere in the world.

As the Russian Foreign Ministry spokesman Andrei Nesterenko said in a television interview, the summit was “groundbreaking” in that the United States and Russia “managed to stop the degradation of our relations,” which is a subtle, but key distinction from a wholesale “reset.”

Nevertheless, Presidents Obama and Medvedev had a constructive meeting. The leaders seem to have hit it off in a way that bodes well for a positive working relationship, with Medvedev telling Interfax that he “like[s] talking with Barack.” The tone of the conversation was honest and went beyond exchanging pleasantries, which shows that the two leaders, who share a strong legal background, are serious about establishing a constructive bilateral relationship.

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

A Russo-Ukrainian gas dispute has, since 2005, been a recurring winter event that threatens serious repercussions for EU gas supplies. This year, however, the annual disagreement has been worse than ever, rearing its head each month and even dragging on into the summer. This situation has not only caused irrevocable damage to both Ukraine and Russia’s international image, but also has serious economic consequences that have been exacerbated by the recession.

Ukraine, which continues to be fully reliant on Russian gas, has been hard hit by the credit crunch and has severe budgetary problems. A revised supply deal signed in January gave Gazprom more favorable terms, and Ukraine is already in arrears on its gas payments.

In early June, Naftogaz, the Ukrainian gas supply company, said it will struggle to pay future bills and that it needs to raise a whopping $4.2 billion. Given that Russia supplies 25% of EU gas, and 80% of those supplies flow to Europe through Ukraine’s pipeline network, Ukraine was hoping for European funding to meet its obligations. It also put forward an alternative supply proposal in which the European gas companies supplied via Ukraine would pay Russia directly and then ‘store’ their gas in Ukraine, eliminating Naftogaz as the financial middleman. German utility RWE expressed interest in the idea and said it has put proposals on the table. However, Germany’s biggest gas company, E.ON Ruhrgas, has ruled out the idea. European industrial group Eurogas said it was still consulting its members and could not yet gauge their response.

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By Julia Kosygina, Intern, The PBN Company, Washington, DC

In his 1904 article, The Geographical Pivot of History, British geographer Sir Halford Mackinder emphasized the “Eurasian heartland’s” critical role in global politics. More than 100 years later, the battle for Eurasia continues as Kazakhstan prepares to chair the Organization for Security and Cooperation in Europe (OSCE), the world’s largest international security organization. On June 11, 2009 Washington, DC’s Center for Strategic and International Studies (CSIS) and Institute for New Democracies (IND) held a conference entitled Kazakhstan’s OSCE Chairmanship Agenda. The event was the product of a special task force created to promote Kazakhstan’s 2010 OSCE chairmanship. According to a Eurasianet report, the Kazakh government gave $29,000 to CSIS and IND to write several reports and hold conferences in DC and Astana.  This ambitious PR initiative provided some interesting insight on Kazakhstan’s leadership potential.

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

Russia’s accession bid to the World Trade Organization received quite a bit of attention during the St. Petersburg International Economic Forum on June 4-6. EU Trade Commissioner Catherine Ashton and US Trade Representative Ron Kirk met separately with Economic Development Minister Elvira Nabiullina to discuss Russia’s entry into the WTO.  While Ashton was optimistic that the accession process could be completed by the end of this year, Kirk stopped short of putting a date on when Russia would finally join.

These meetings follow on other, mostly positive, signals coming out of Russia regarding its desire and readiness to enter the WTO.  Since President Obama first met with President Medvedev on April 1 and discussed WTO accession, Prime Minister Putin and Foreign Minister Lavrov have expressed support for Russia’s WTO bid.  Minister Nabiullina has stated that she thinks that Russia could become a member of the WTO by early 2010.

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By Trevor Barton, Senior Vice President & Managing Director - Europe, The PBN Company, London

Close your eyes and cast your mind back to the heady days of 2007 when Russian companies made the record books, topping the European IPO league table by raising a total of $29 billion.  That year, Russia’s Sberbank and VTB were the world’s largest flotations of the year, raising $8.8 billion and $8 billion, respectively.

Then came the global credit crisis, and during 2008 the flood turned to a trickle.  In 2009, the ground has been parched, and we have had to content ourselves with the hope that Russian IPOs on international exchanges will start flowing again once market conditions improve.

But will they?  Not, it seems, if the Russian authorities have anything to do with it.

On June 3, Russian business daily Kommersant released details of draft regulations that stand to have a profound impact on the ability of Russian companies to conduct share placements abroad.

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By Julia Kosygina, Intern, The PBN Company, Washington, DC

Since their debut in the late 19th century, matryoshki - the Russian nesting dolls - have come to symbolize the country’s culture.  As fashions and political regimes have changed, the appetite for matryoshki has remained strong both in Russia and abroad.  Recently, however, the matryoshka industry has become yet another victim of Russia’s deepening economic crisis.  According to the Independent, matryoshka sales have fallen by 90% due to an ailing tourism industry and the penny-pinching habits of domestic consumers.

Fearing the extinction of its most popular souvenir and cultural artifact, the Kremlin has decided to bail out the matryoshka and the broader handicraft industry by purchasing more than $30 million dollars worth of nesting dolls and other traditional crafts for state officials to give away as gifts - the Kremlin hopes that giving away matryoshki instead of iPods will stimulate patriotism while reviving a dying industry.

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By Alexander Seltzer, Intern, The PBN Company, London

Despite concerns relating to the global financial downturn, it looks like the Sochi 2014 Olympic Winter Games is one organization that will not be seeking a bailout this year.

Russia’s Deputy Prime Minister Alexander Zhukov announced on June 2 that funds raised by Sochi’s local organizing committee have exceeded government expectations.  Private investors and foreign firms, such as Italian developer Todini Costruzioni Generali, are eager to invest in the Olympic project and have all but replaced the need for government subsidies this year.

“We have decided today that the organizing committee will not receive subsidies from the federal budget in 2009-2010,” Zhukov said in televised comments.

This is purported to save the government $88 million over the next two years, according to Zhukov. More good news followed with Zhukov also reporting that the organizing committee has a $130 million budget surplus, although he said the government would resume state financing of the Olympic project in 2011.

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By Anna Yarmarkova, Associate Account Manager, The PBN Company, Moscow

Muscovites seem to have found a universal explanation for all problems big and small.  Be it the copy machine running out of paper, a store clerk without proper change, a traffic cop pocketing an exorbitant fine or a whole town up in arms over unemployment and water supply problems, the response is a shrug, a sigh and the inevitable phrase: “you understand, there’s a crisis” (”понимаешь, кризис все-таки”).

For the average person on the street this is most obvious when it comes to prices.   I was left bewildered but not amused when negotiating with a taxi driver the other day.  He demanded 500 rubles for a trip that would only have cost 300 rubles last spring.  It’s the “krizis”, he explained - but I still went in search a more reasonably-priced cabby.

So why do prices keep climbing in Russia?   According to a recent Moscow Times report, food prices are growing 10 times faster than in the EU.  Of course, with Russia importing about 30% of its food supply, it’s easy to see how ruble devaluation is playing a role here.  Nonetheless, it seems that Russians are getting whacked twice by the crisis, not only facing wage or job cuts, but also higher prices and higher interest rates.  Perhaps this is what President Medvedev meant when he said in late May that the crisis is developing according to a “moderately negative scenario.”

That may seem to be a bit of an understatement to say the least, but what can I say? Понимаешь, кризис все-таки.

By Oksana Monastyrska, Deputy Managing Director, The PBN Company, Kyiv

Ukraine’s stereotypical national mentality comprises a mix of industriousness, integrity and bravery combined with a certain reverie, romanticism and nonchalance.  While these sorts of generalized national characteristics are always slightly misleading, they do provide an interesting prism through which to look at how the recession is changing Ukrainian consumer values.

Recent research by GfK Ukraine and IFAK Ukraine sheds some light on this topic.  Both surveys show beyond doubt that Ukrainians are feeling the effects of the crisis - according to IFAK, 51% of Ukrainians have experienced a reduction in income, and 45% of respondents say that their living standards have deteriorated.

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By Anna Yarmarkova, Associate Account Manager, The PBN Company, Moscow

As the crisis continues, Russians have started looking at ways of cutting their expenditures.  And with salaries falling and food prices rising, people are increasingly planting vegetables instead of buying them.

Dachas, or Russian country houses, have long been popular among city-dwellers.  The high season starts with the May holidays - generally kicking off with shashliki, Russian kebabs, and a good spring clean.  The summer dacha phenomenon, and the corresponding mass exodus from the country’s cities, is so popular that politicians have even been known to save unpopular decisions for this period when citizens are more focused on planting gardens than reading newspapers.

Dachas were originally encouraged during Soviet times as a way for people to help the state by feeding themselves by planting vegetables like potatoes.  With the fall of the Soviet Union and the corresponding improvement in quality of life, people from big cities started to treat their dachas primarily as places for relaxation rather than as sources of food - those with a hankering for gardening tended to prefer petunias to potatoes.

But as Russians cut holidays abroad and grocery bills, dachas are enjoying a resurgence as a place for spending summer vacations - and planting potatoes.

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

Thirty active Kazakh government blogs have been set up since Prime Minister Karim Masimov started a campaign on January 30 to encourage blogging among ministers, governors and heads of various state agencies. All the blogs follow a Q&A format, but now new questions are being raised as the blogs take on unexpected uses.

By far the most popular government blog to date is the Prime Minister’s. Despite some complaints about the efficiency of official blogs, most questions have been answered and Karimov even posts video responses. There have been obvious positive changes in official blogging, improving the overall quality of the Internet in Kazakhstan.

Interestingly, Kazakhstanis have started to use the official blogs as a way to complain about the dishonesty of their employers. The PM’s blog is full of posts describing what is said to be an “epidemic of companies firing employees and reducing staff”. According to the complaints, firms are not paying social security allowances and are asking that employees take “indefinite salary breaks” or are “forced to leave ‘voluntarily’.”

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By Yulia Sobko, Financial Communications and Investor Relations Manager, The PBN Company, Kyiv

On the eve of Victory Day, the IMF gave the green light to disburse the second tranche of its loan to Ukraine.  The second tranche totals $2.8 billion, bringing the IMF’s total loan to $7.3 billion to date.

Ukraine has had difficulties obtaining this second tranche. The original IMF loan agreement stipulated certain monetary and fiscal conditions to be met in time for the Q2 review for the second tranche, and many of those conditions became contentious domestic political issues.  After some haggling over terms, the IMF has now met Ukraine part way, granting waivers on particularly controversial issues such as budget deficit and exchange rate, currency and import restrictions (which will now have to be removed promptly).

Under the revised terms, Ukraine is allowed a budget deficit of 4% of GDP in 2009, as opposed to the original requirement for a balanced budget, and the IMF has strongly recommended certain key structural reforms, including pension and tax reform.  Ukraine’s National Bank has also committed to implement a flexible exchange rate policy and to discourage dollarization of the economy, which should mitigate the effect of external shocks on the economy and help focus monetary policy on inflation.

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By Adrian Erlinger, Account Manager, The PBN Company, Washington, DC

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.

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.

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

A typical Central Asian “guest worker” in Almaty usually makes half as much as any local would get for doing the same job.  Regardless, opportunities to work in Almaty - even without an official work visa - are often too good to pass up due to the lack of prospects at home.  However, the crisis has now also taken its toll on the job market for guest workers - and there have been unpleasant consequences.

Almaty has always been particularly attractive for guest workers that come from other Central Asian republics, particularly Uzbekistan, Tajikistan and Kyrgyzstan.  According to www.nur.kz, a Kazakh news site, there are three million migrant workers in Kazakhstan as a whole, including seasonal workers.

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By Blake Marshall, Senior Vice President & Managing Director - Government Relations, The PBN Company, Washington DC

Framework Legislation Takes Shape

The Russian government recently introduced two pieces of long-awaited legislation designed to strengthen Russia’s financial markets by curbing abuses of insider information.

On April 17, the State Duma, the lower chamber of the Russian Parliament, adopted on first reading the draft bill “On Counteracting the Abuse of Insider Information and Market Manipulation” with 316 votes in favor (more than two-thirds of the 450 member Duma).  This first reading adoption follows the bill’s submission by the Russian Government at the end of the Duma’s fall session in December 2008.

If this bill ultimately passes through both chambers and is signed, it would become the first law that addresses the issue of insider information in Russia.  In preparation for nearly a decade, an earlier version of the bill was introduced by a group of Duma deputies in 2000, but was then recalled under the pretext of another pending government initiative on the subject.

On March 4, the Government also introduced into the Duma amendments to the Criminal Code that establish a maximum sentence of seven years in prison for the abuse of insider information.  The first reading of these amendments is scheduled for May 2009.

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By Yulia Sobko, Financial Communications and Investor Relations Manager, The PBN Company, Kyiv

As with many of our friends in their thirties, my husband and I almost gave up hope of ever being able to buy a house. Since we got married three years ago we have been waiting for house prices to come down. In the last eight months prices have plummeted spectacularly, falling 20-30%. But while Ukrainians with sufficient savings and those still in work  cheered and started to scope out affordable deals, the majority of these buyers still need mortgages – which the banks are increasingly reluctant to give.

Last week in the UK, the Times reported that prospective British buyers who don’t have a 40% deposit are being excluded from the most competitive mortgage deals. Economists argue that this is  preventing the UK housing market from stabilizing and ultimately recovering.

Ukraine is in a similar predicament. Only one bank, Ukrsotsbank (recently acquired by Unicredit Group), is offering general loans for the purchase of both new and renovated homes (22% interest in UAH, 30% down payment for 25 years). Three other banks – CreditPrombank, Kyivska Rus and Swedbank – are only lending for new housing built by specific developers. This restricts the choice of property but allows for superb loan conditions: 15%-26% interest with a 25%-40% down payment for 25-30 years, discounts of up to 20%, and guarantees that that housing will actually be built (all of the buildings claim to be over 75% ready).

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By Jed Holmes, Senior Policy Analyst, The PBN Company, Moscow

Russian Internet search engine Yandex has seen a surge in the number of searches for “pistols”.

A virtual surge in handgun interest

The news portal BFM.RU* was the first to report on this phenomenon in mid-January. Curious to see whether this trend was holding, I did a little research of my own on Yandex’s search statistics site.

Searches for “pistols” rose from an average of around 150,000 per month from March through September 2008 to approximately 200,000 in October-November 2008 and 280,000 in December 2008-January 2009. In February 2009, the last month for which statistics are currently available, the number of searches leaped to over 450,000.**

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By Tom Blackwell, Senior Vice President and Managing Director, Moscow, The PBN Company

There are always risks involved in speaking to the media, and in times of crisis these risks may appear magnified. But the fact is that it is even riskier to try to shut out the media, as there are great opportunities arising from constructive engagement.

In common with investors and analysts, the media have revised their expectations in light of the ongoing uncertainty and rapid changes in the market. In a sense, journalists are now less demanding of companies – they know not to expect hard numbers or concrete forecasts – but they do have a wealth of material drawn from the global financial situation and are looking for examples and evidence to support their market assessments.

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By Yekaterina Syrtsova, Associate Account Manager, The PBN Company

People in Kazakhstan feel surprisingly optimistic about the country’s economic situation, according to a recent poll by the Post-Crisis World Institute and the Public Opinion Foundation.  Interfax reports that only 16.6% of people believe that life will get harder before the summer, while 35.4% expect that the situation will improve.  The latter figure stands in contrast to Russia and Ukraine, where far fewer people (12.6% in Russia and 6.5% in Ukraine) expect the situation to get better before the summer.

Kazakhs also look favorably on their government’s anti-crisis measures - BusinessNewEurope reports that “66.3% [gave] their government a thumbs up, against 40.7% in Russia and just 13.5% in Ukraine.  Of those that criticized the government for its action (or lack of it) the numbers were 9.2% in Kazakhstan, 21.5% in Russia and a whopping 74.3% in Ukraine.”

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