This September, Russia will play host for the Asia-Pacific Economic Cooperation (APEC) Summit for the first time. At the venue, which will be staged on Russky Island near Vladivostok, 85% of preparation work has been completed and inspected. In the run-up to the September meetings, discussions have already been launched. On January 30, the First APEC Senior Officials’ Meeting began and will run through February 19 in Moscow. Russia’s Deputy Foreign Minister Igor Morgulov.is chairing the first in a series of meetings.

President Medvedev has outlined Russia’s agenda for the APEC Sumitt in his article “Integrate to grow, Innovate to Prosper.” While the major outcomes of APEC 2011 Leaders Declaration were strengthening of regional economy, promoting effective market-driven innovation policy, enhancing enterprises participation in global production chains, trade and investment in environmental goods and services, this year Russia decided to go even further and add focus on food security, reliable supply chains through transport infrastructure investment, fighting terrorism, and military-political stability. According to U.S. Secretary Timothy Geithner, Russia’s agenda for the September summit has gained the support of the US side. China, Thailand, and Indonesia, which will take over APEC rotating chair in 2013, are also largely supportive of Russia’s programs.

At the same time, its major focus Russia puts on regional economic integration with Asia-Pacific countries through investment and trade liberalization. Recent accession to WTO makes regional trade agreements one of the top goals pursued by the government, especially in light of the ascent of the Customs Union and talks to create a Common Economic Space. Such regional blocs could pave the way for a fundamentally new form of APEC integration and help expand the Asia-Pacific markets further in to the whole of the Eurasian continent.

Russia has recently signed into law a ban on bribing foreign officials, a necessary precondition to increase its chances to become an OECD member. While a vast amount of work is to be done to stamp out corruption, it shows that Russia is serious about integrating with the club of rich nations. Russia’s accession to the OECD on Combating Bribery convention will make it possible not only to harmonize international anti-corruption standards, but also its domestic legislation contributing to the creation of a positive dialogue between businesses and governments. Integration will be discussed at a second meeting of the anti-corruption working group and the APEC Business Advisory Council on corruption issues in Kazan in May 2012.

Russia’s APEC chairmanship is not only a chance to put its proposals on the table among leaders in this dynamic region, but also to reinforce Russia’s position as a global leader in international relations. If Russia’s plans for further regional integration succeed, the officials should bear in mind that its participation necessitates a diversity of opinions and national interests, which might cause a larger confrontation in finding common ground and reaching consensus.

On the other hand, the prospects of greater integration in APEC should jumpstart multilateral trade talks and make them more constructive. So far, Russia is technically prepared to offer access to its transport corridors as the shortest route between Asia and Europe. According to the latest IMF predictions, Russia’s GDP is expected to drop to 3.5% in the upcoming year due to the lingering financial crisis in Europe. This might lead to a decreased trade with Europe. However, according to Russian Deputy Economic Development Minister Andrei Klepach, budgetary revenue is expected to rise in 2012 due to further expansion of trade with Asia-Pacific countries, which is likely to offset a spillover of crisis from Europe. Whether it happens or not will depend on the outcome of negotiations between APEC countries.

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2. WTO Update: One Step Closer
3. Ukraine Continues to Resist Customs Union Overtures

Accession to the Customs Union has not been on the agenda of Ukraine until recently, when Russia refused to limit its gas imports. Although President Medvedev has clearly claimed that Ukraine will not join the Customs Union in a special 3+1 format, Azarov is not ruling out the possibility of joining while figuring out the pros and cons first. President Yanukovych also replied that Ukraine would prefer to see how the union works in practice, and how relations would be structured within the customs bloc when its members join the World Trade Organization. Kazakhstan is planning on the accession to the WTO in 2013.

Although Russia is not imposing any deadlines, it has extended lower gas prices for Kazakhstan and Belarus in a move to convince Ukraine to make commitments and join the Customs Union. While selling a stake in the Ukrainian pipeline network to Russia could be a condition for lowering prices, Ukraine’s national interests would be highly jeopardised. Looking for alternative strategies might be seen as a way around this offer. For example, Norway has already offered Ukraine its own gas, but Norway could not guarantee cheap transit. Ukraine has boosted the use of coal at its thermal power plants for heating instead of gas in order to save about 6 billion cubic meters of gas per year. At the same time, Ukrainian gas monopoly Naftohaz has increased imports of gas from Russia while recently struggling to cut it down.

Accommodating membership of the Customs Union with the current government’s stated goal to join a deep and comprehensive Free Trade Agreement with the EU is appearing to be ever more problematic. EBRD economist Alexander Pivovarsky told the Ukrainian service of Voice of America on January 25 that Ukraine’s economy is one of the most exposed to economic recession due to the European crisis among CIS economies. The EBRD has also downgraded Ukraine’s 2012 GDP growth forecast from 3.5% to 2.5%. It is unlikely that the EU is willing to integrate a country that might only worsen its economic crisis anytime soon.

The requirement for membership in the EU also involves difficult reforms at a domestic level, a difficult task since the imprisonment of opposition leader Yulia Tymoshenko. Swedish Foreign Minister Carl Bildt pointed out at the World Economic Forum in Davos on January 27 that Ukraine could not hope to attract investment if the law did not apply, adding that a deal between Ukraine and the EU is “dead in the water.”

One thing is still clear: Ukraine has been and remains a strategic trade partner as well as a major consumer of Russian gas. If the EU gives an absolute no, Moscow’s offers look increasingly attractive. Since Turkey gave its agreement to the Russian government to build the South Stream gas pipeline across the Black Sea, the battle between Russia and the EU has been recently increasing pressure on Ukraine to give Moscow the control over its pipelines, which is also a condition for lowering prices that Russian government has been offering to Ukraine. Some experts point out that selling a stake of Ukraine’s gas transport system or joining the Customs Union is not only an unacceptable scenario, but also it would undermine the popularity of President Viktor Yanukovych and his Party ahead of October parliamentary elections.

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2. The Latest Proxy Gas War
3. “Stupor at the Border”

Nur Otan’s political monopoly was broken by the pro-business party Akzhol and the Communist People’s Party of Kazakhstan (KNPK) joining the parliament for the first time. Akzhol polled 7.5% and the KNPK 7.2%. However, with Nur Otan retaining its parliamentary majority, Kazakhstan’s economic priorities and direction are likely to remain the same.

Despite a small number of demonstrations that urged a boycott of the elections, the party is still viewed by many as the best guarantor of political and economic stability, something that has set Kazakhstan apart from its neighbors.

Today Kazakhstan holds 3% of global oil reserves and is the world’s largest uranium miner. Last year the economy grew by 7.5%. Kazakhstan has attracted more than $120 billion in foreign investment and, currently, as of the end of 2011, remains a leader in a number of foreign investments among the countries of the CIS. Energy exports resulted in around $75 billion in foreign currency assets. By the end of 2011 350 new businesses were opened, and Nur Otan promised to raise overall GDP per capita to $15,000 by 2017, while the International Monetary Fund (IMF) predicts that Kazakhstan will remain Central Asian’s second largest economy and may expand up to 5.6% in the upcoming year. A proposed Business-2020 program suggests further industrial innovation, an employment program, a program for fresh water supply, a program for reconstructing of housing and the public utilities, and a program for development of agriculture.

Looking at the achievements of the previous year, the party is likely to continue the programs and projects it has pursued before.  Nur Otan remains popular due to Kazakhstan’s economic growth; the country was not as negatively affected by the global financial crisis as was Russia. However, according to Valentina, a pensioner from Almaty, “The gap between the rich and the poor is too big. We shouldn’t have splendor and squalor side-by-side”. Food products still account for 45% of every family’s budget.

Multiple investment projects planned by Nur Otan for the near future require productivity to triple. Unless incentives in the form of higher salaries and job creation exist, the economic development plan may fail. A good chunk of population is also still frustrated with the “corrupted” political system. In order to avoid the risk of mass riots and succeed in its programs for economic and social modernization, reforming law enforcement and fighting against corruption should also be party priorities.

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McFaul is known as an outspoken yet diplomatic critic of Russia’s authoritarianism and specialist on democracy and Russian elections. Under the Obama Administration, he was the Special Assistant to the President and Senior Director of Russian and Eurasian Affairs on the National Security Council, and he has become best known in the recent past as the architect of the U.S.-Russia “Reset” strategy.

McFaul’s swearing in came in mid-December after Senator Mark Kirk (R-IL) lifted his hold on the process. Kirk initially blocked McFaul’s nomination over concern that, with McFaul as Ambassador, the White House might share missile defense information with Russia without congressional approval. Kirk lifted his hold, however, after receiving a letter of reassurance from the administration and after new language was added to the defense authorization bill, requiring the administration to inform congress of its plans to share sensitive information with Russia 60 days in advance.

During this process, Russian commentators have had time to speak out concerning McFaul’s nomination as U.S. Ambassador to Russia. Many traditional media accounts have remained neutral on the matter, citing only the facts, and the pro-Kremlin Twitterverse has taken a typically antagonistic stance (primarily via Duma deputies Konstantin Rykov @rykov and Robert Shlegel @Shlegel). Reactions from many pundits, however, have, on the whole, been positive.

According to the Washington Post, the president of the Moscow-based think tank Institute for Strategic Assessments, Alexander Konovalov, sees McFaul as an “ideal choice” thanks to the latter’s deep understanding of Russian politics. A decision to give the post to a Russia specialist, according to Konovalov, demonstrates that Washington “pays serious attention to Russian politics.” In Kommersant, political pundit Igor Zevelev similarly sees the nomination as significant for U.S.-Russia relations, pointing to McFaul’s background as State Department outsider as a welcome change in the embassy. Indeed, McFaul’s various experiences should, according to RIA Novosti analyst Dmitry Babich, allow for “creative solutions” to problems between the nations.

Moscow State Institute of International Relations (MGIMO) pundit Artem Malgin sees McFaul’s appointment as an attempt to reinvigorate the faltering “Reset” strategy and to improve the status of the role of Ambassador to Moscow. However, Moscow Carnegie Center Director Aleksey Malashenko notes that this does not mean making concessions to the Kremlin. While McFaul may be considered the “Father of the Reset,” Malashenko points out that he is also a member of “the Democratic Party and will devote attention to human rights,” which “will be a fairly unpleasant factor for Moscow.”

McFaul’s connections to opposition groups have not gone unnoticed by writer and political scientist Igor Panarin, who, in a column published in Reuters, says that McFaul will not remain on the sidelines but will actively attempt to influence Russia’s upcoming presidential election. Panarin believe that McFaul will use his ties to democracy advocates and opposition leaders to fine-tune the political technologies tested during the Arab Spring in an attempt to prevent a third term for Vladimir Putin.

Indeed, Russian authorities have already criticized McFaul for meeting with opposition figures in his second day on the job. However, while the Ambassador has managed to create ties with Russian human rights activists and opposition leaders in the past, James Collins, a former U.S. Ambassador to Russia, posits that the McFaul’s new mandate will most likely be to continue the “Reset” under the next Russian leadership, not abandon it.

On the other hand, in an article in Russia’s popular online Snob Project, (funded by presidential candidate Mikhail Prokhorov and one of Russia’s most popular blogs according to Yandex.ru), columnist Ksenia Semenova points out that, while McFaul claims “our style is not shake our finger to dictate to and threaten others,” things might not need come to this, for Russia’s protests movements are demonstrating frustration with their government without outside help.

While America might otherwise like to take an active role in promoting collective action and democracy in Russia, right now it might be able to simply sit back and watch it happen on its own. Given McFaul’s expertise in Russian politics, his appointment demonstrates the seriousness with which the United States currently views Russia. The variety of responses from Russia demonstrates that Russians are watching McFaul’s moves closely and anxiously as well during this turbulent time.

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3. The Russian Government Will Take Science and Technology Under Its Wing

Shop till you drop.

As the Internet becomes accessible to more Russians (see recent blog post), barriers for e-commerce —from convincing potential customers of the validity of online purchases to ensuring their delivery of these purchases—are diminishing.

Russian netizens already spend more time on social media than their global counterparts, and Russia represents a large market for online advertising and consumer information gathering. According to the U.S. Commercial Service, the Internet advertising market in Russia has reached over $400 million, with Yandex Direct, Google Adwords and Rambler’s Begun among the key players.

Equally important, a future consumer base is already in place. As Russian Internet users in Russia tend to be young, demand for online spending will see a significant jump in the next several years as this group of early adapters ages into a working population with money to spare. Internet penetration in Russia is increasing most quickly in the regions, providing access to goods and services more widely available in larger cities.

This is not to say barriers to e-commerce are nonexistent. According to Time, due to either a lack of trust in the postal service or in poor delivery services (in areas outside of Moscow and St. Petersburg) 80% of Russians who make purchases on Ozon.ru, Russia’s analogue of Amazon, physically pick up and pay for their purchases at the post office after having ordered them online. Ozon has effectively used these difficulties as an opportunity to innovate, setting up its own private courier service, O-courier, in larger cities that delivers goods at a lower cost than other courier services. This year the company is expanding to cities such as Tver and Vladivostok, as well as Astana and Almaty in Kazakhstan. Slow delivery times on rail-based infrastructure has been the primary hindrance to expanding e-commerce in the regions.

A similar barrier exists in the lack of online payment options. While SMS, credit card, web-money, and cash payment systems are gaining traction, many Internet businesses do not accept online payments. Reports still indicate the lack of retail bank branches and bank cards in regions. While recent reforms have attempted to make credit card use safer, only 11 million of Russia’s 140 million citizens actively use credit cards.

For those with credit or debit card access, online shopping is becoming much easier. Citibank for anticipates a 17% increase in online spending and a 50% decrease in cash withdrawals for December 2011. As Internet penetration expands to Russia’s regions, the desire to make online purchases most likely will follow, and thus the number of people actively using banks accounts for online transactions will increase as well.

With the lower costs of operating on the Internet as opposed to through a storefront, many businesses moved their operations online during the economic crisis. Several large e-commerce startups have appeared in the past two years, including Darberry (Russia’s answer to Groupon that was quickly purchased by the U.S. company), online shoe store Sapato and daily discount service KupiBonus. In 2010 eBay also opened a Russian interface with PayPal services to compete with Russia’s own online auction site Molotok.ru.

While Russia’s official “E-Russia” plan has made little significant progress in stimulating e-commerce since 2001, there are 60 million internet users and Internet penetration stands at 42%. In response, businesses are already moving online and entrepreneurs are seeing opportunities for innovative startups. As Russia moves online, we should not be surprised to see its e-commerce market open up quickly and expansively as well, it would be a wise for veteran Internet retailers to be prepared to meet it.

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While events such as Moldova’s Twitter “revolution” and the Arab Spring have led pundits to ask if the Internet in many developing nations is truly free or only nominally so, key members of Russia’s government have maintained for over a decade that the Russian Internet is indeed free.  According to CNN, in 1999, four days before becoming president, then-Prime Minister Vladimir Putin held a conference with Russia’s leading Internet entrepreneurs and promised to allow Internet freedom and to not resort to “Chinese or Vietnamese models” of censorship. Putin has largely stuck to this belief, and in his annual televised call-in show on December 16, 2011 he reiterated that “restriction of online freedoms is technologically complicated, politically wrong, and is not needed in Russia.” Security Council Secretary Nikolai Patrushev, who headed the Federal Security Service (FSB) during Putin’s first two presidential terms, seconded this sentiment in a recent interview, noting that, “attempts to stop people from communicating are in principle counterproductive and even amoral.”

Left to be relatively free and expand on its own, the Internet in Russia is now increasing in penetration more quickly in Russia than in any country in Europe, and social media usage is growing faster in Russia than in any other country in the world.  Internet penetration is currently around 42 percent (59.7 million users), and while this may not seem like much now, it marks a sixfold increase over 2002, and the number is expected to double in the next few years. On top of that, the whole of the Russian Internet (RuNET) itself is expanding, having added over 84,000 domain names in the last month alone and currently totaling approximately 4.5 million across the .ru and .рф domains.

Confidence in the Internet is increasing as well. According to a 2011 nationwide poll conducted by the Russian Public Opinion Foundation (Fond Obshchestvennykh Mnenii – FOM), the Internet is increasingly becoming a trusted source of information. This is important in a nation where television has historically been by far the most ubiquitous and most trusted medium for information dissemination. According to RIA Novosti, this attitude is change, and Russians are beginning to put less stock in television and more in online media for gathering reliable and speedy information. The state news agency points to the events of the January 24 Domodedevo airport bombing as impetus for such a change, noting that news of the story broke on Twitter a full hour before national media outlets began to cover it, providing information-consumers a glimpse into the shortcomings of traditional media sources.

The percentage of active Internet users (in Russia mostly 18-24 year olds) that use blogs and/or social networking sites is higher than in the U.S., and Russians spend the most time per user on social media sites than any other country in the world. In addition, according to Harvard’s Berkman Center for Internet and Society, those who do use social networking sites are interacting more with their online peers than do their counterparts in other countries, meaning that messages can travel faster and have more impact than we may see in other countries.

Thus, recent events demonstrate, and statistics corroborate, that the Internet is taking on a more important role in Russia, from the increase in general penetration to the dedication of Russia’s netizens to engaging with the medium. While the government’s stated position on Internet freedom may seem paradoxical given recent shutdowns of political websites, the general increase in numbers of users on the medium demonstrates that the Internet in Russia will play an increasingly important role in the country’s future.

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October 24 saw Russia’s last-minute acceptance of the Information Technology Agreement (ITA) in which the country agreed to eliminate tariffs on high-tech goods covered by the ITA.  This was a relief to many U.S. high-tech companies who were concerned that import tariffs would not be eliminated.  In addition, on November 8, the U.S. Trade Representative (USTR) finalized a substantive agreement with Russia regarding sanitary and phytosanitary standards.  Russia and Georgia signed an agreement on November 10 for a third party to monitor trade through the disputed Abkhazia and South Ossetia regions, jumping a final and rather high hurdle to accession.  Finally, on November 11, the Working Party approved the Working Party report in Geneva, as well as the goods and services schedules.  The accession package was then referred to the Ministerial for final approval.

Now that Russia has been formally invited to join the WTO, it has six months to complete its domestic ratification procedures, which in Russia’s case will take the form of a Duma vote, and officially notify the Geneva Secretariat of its acceptance.

Effects on U.S. Russia Trade

The business community nearly unanimously agrees that Congress must graduate Russia from the USSR-era Jackson-Vanik amendment and grant Permanent Normalized Trade Relations (PNTR) status to Russia. While some pundits, such as the former assistant secretary of defense for international security policy Richard Perle, believe President Obama should simply declare, by executive order or even public pronouncement, that Jackson-Vanik does not apply because Russia is both a market economy and allows emigration, Jackson-Vanik will ultimately be debated in Congress, which has expressed reluctance to grant PNTR to Russia, largely for political reasons.

The United States’ top exports to Russia include spacecraft, airplane parts, machinery, chemicals and transportation equipment, and all will benefit from WTO entry.  Russia has the world’s ninth largest market and according to the Peterson Institute, bilateral trade has the potential to triple from the current level.  Because both countries are underperforming in terms of their potential, WTO accession is good for both parties and for business in general.

Intellectual property right enforcement is still a major factor in U.S.-Russia trade relations, and the U.S. Trade Representative has been working to ensure Russia’s enforcement will continue through accession.  A roadmap on enforcement is being developed with the USTR’s IP office to engage the Russian Ministry of Economic Development and the Duma, especially regarding internet service provider liability.

Overall, Russia’s WTO entry will be positive for many sectors and will solve some of Russia’s problematic foreign trade issues.  The prices of foreign goods will decrease, fees on Aeroflot flights over the EU will be eliminated, and import tariffs on a variety of trade goods will disappear.  Russia’s entry into the WTO will benefit both producers and consumers and should help business in the United States and in the East.

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Despite the increase in capital outflows these numbers show, there is a lack of consensus on the causes of capital flight and on the extent to which it is occurring. On October 26, Prime Minister Vladimir Putin announced that capital inflow would reach $100 billion this year, but actual figures suggest Putin’s figure is inflated at least sixfold. Putin’s number includes the funds entering Russia through foreign direct investment, which, as independent economists note, include “participation in share capital, reinvested income and other investments” (such as repaying loans). Thus the percentage of this that can be considered actual new investment is much lower than $100 billion. President Dmitry Medvedev voiced similarly optimistic opinions in a November 19 announcement that the country is becoming increasingly attractive to foreign investors and that more government spending is needed to speed up this process via “promotion of Russia’s economic successes.”

While the President and Prime Minister remain optimistic, the majority of observers concur that capital flight is occurring on a large scale, yet they fail to agree on its causes. Vladimir Tikhonov, chief economist at Otkritie Capital blames general global volatility for investors leaving the domestic stock market as investors search for safe havens. Russia’s low deposit rates and a weak ruble have not made it an attractive enough location for their assets. Tikhonov notes this is true for domestic exporters as well, as they increasingly deposit their currency gains abroad. While Putin demanded an end to this practice in his recent presidential nomination acceptance speech, it is unclear what measures will be put in place to disincentive storing capital abroad.

Other experts point to “political uncertainty,” as a primary cause of capital flight, particularly in light of the firing of Finance Minister Alexei Kudrin and the upcoming elections. Presidential Aide Arkady Dvorkovich is quick to refute this argument, however, claiming that a bad investment climate, not political uncertainty, is causing capital flight. Dvorkovich’s opinion is corroborated by the economy’s failure to improve after the questions of presidential succession and WTO accession had been resolved.

Ultimately, the answer lies somewhere in the middle. Capital flees with uncertainty about the future. This is caused both by Russian domestic problems and general volatility of the world market, and both aspects should be considered. Yet the focus above all should be on what steps Russia is taking to provide final, not quick, fixes to its poor investment climate.

While the question of presidential nomination has been settled, it is too soon to know if United Russia will remain the dominant party or whether all questions of political uncertainty have been resolved given the ruling party’s falling popularity.

In the meantime, Putin seems to have ignored IMF advice to reign in government spending, recently announcing he will not raise the retirement age even though the pension fund deficit will reach $30 billion this year. Without tackling budget issues, taxes will inevitably need to be increased, which will further negatively impact the investment climate. A recently proposed law that looks to offset spending costs by increasing taxes on foreign workers in Russia who make over $16,600/year may foreshadow what is to come as Russia looks to quick fixes for its economic problems.

In Russia’s defense, it is in a budgetary quandary that somewhat explains its vicissitude in shoring up its economy. In order to mitigate the risks of oil-dependency, the country needs to cut expenditures and raise taxes. Paradoxically, this will deter foreign investment unless it is accompanied by concrete steps to improve the country’s attractiveness for investment. Yet the worsening worldwide economic environment is expected to decrease oil prices and further weaken the ruble, which Russia will need to reap the benefits of its export-oriented economy as it integrates into the WTO. At the same time, however, a weak ruble will make Russia less attractive for new foreign investment. With these contrasting goals, Russia’s seeming lack of a plan in the immediate future seems understandable, but this does not mean it should not focus on the less-tangible goals of investment in the coming years.

Overall, a good deal of progress has been made on numerous proposals to shore up investment Dmitry Medvedev made at last year’s St. Petersburg International Economic Forum, and Russia’s large and growing middle class, internet penetration that expects to double in the coming years, and cheap, abundant resources should be to its advantage. Based on recent campaign rhetoric and its dedication to the WTO accession process, the administration is fully aware of what it needs to do to concretely curb capital flight and make Russia a safe and profitable place to invest for the future. All it has left is to do it.

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In a much anticipated move, Kazakhstan has called for an election to remake the lower house of Parliament – The Majilis.  This has been expected since last April’s presidential election when Nursultan Nazarbayev was re-elected with an overwhelming majority of votes.  The Kazakhstan constitution stipulates that parliamentary elections cannot be conducted the same year as a presidential election.  So, January is the first possible opportunity for this parliamentary election.

Publicly, the government cites the need to seat a new parliament ahead of a potential second financial crisis that many expect.  A more provocative reason relates to the eminent Russian Federation parliamentary elections.  Many expect the Russian election to result in some degree of success by “opposition” parties.  In holding its parliamentary elections as quickly as possible, Kazakhstan is seeking to limit the potential spill over from the Russian elections.

The current Majilis consists of just one party, President Nazarbayev’s “Nur Otan” party, as no other party achieved the minimum threshold of 7% of votes to gain seats in the last election.  However, the law now stipulates that at least two parties must be represented.  Experts, including presidential advisor Yermukhamed Yertysbayev, have predicted that the “Ak Zhol” party will be the second party seated.

“Ak Zhol” is led by Azat Peruashev, the former head of “Atameken,” Kazakhstan’s main union of business and entrepreneur associations.  He is a well-respected and influential voice who has championed the need for a second party in the Majilis.  “Ak Zhol” is a pro-government party, rather than an opposition voice.  Their rise to power will not result in a contentious political environment or significant policy alignments in the government.

Still the single party character of the current Majilis has been uninspiring.  The body has been ridiculed in the media for their lack of strength, independence and contribution to Kazakhstan’s government.  The presence of another voice, therefore, should lead to a richer dialogue and more thoughtful lower house.  And it may present better opportunities to advocate for substantive discussion on legislative action.

The Mazhilis consists of seventy-seven deputies. Sixty-seven deputies are elected as representatives of defined districts of approximately equal numbers of voters. Ten deputies are elected from party tickets based on proportional representation nationally. The term of office is five years.

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At the XIII Congress of the Nur Otan party in February 2011, President Nursultan Nazarbayev said: “The People’s IPO provides an opportunity to hundreds of thousands of ordinary people to have shares of the largest companies, as well as a new investment tool to increase savings…” In September of this year, on the President’s instruction, a special program to place the shares of the national companies comprising the National Welfare Fund Samruk Kazyna in the domestic market was approved.

The President highlighted that the first IPO in the framework of the Program should take place at the end of 2011. In the beginning of August, NWF Samruk Kazyna announced that shares of Samruk-Energo,  Kazakh company Electricity Grid Operating KEGOC and KazPost will be offered until the end of 2011. Shares of JSC NC KMG, JSC Kazakhstan Temir Joly, and JSC Kazatomprom will be placed on the stock market in 2012-2013.

Two weeks later Kairat Kelimbetov, Minister of Economic Development and Trade announced the updates on the list of the companies and projected timing of the People’s IPO Program. The first tier companies KEGOC, Kaztransoil and Air Astana are scheduled for Q2-3 2012; however, as Kelimbetov noted, Air Astana is considered as an additional company to the list of the first tier companies.  ”In connection with the current funds structure of Air Astana, the company is under further consideration by the Samruk Kazyna.  The control of the company by the government will be ensured”, the Minister explained. Shares of the second tier companies, KazTransGaz, KazMorTransflot and Samruk Energo will be offered to the public in 2013. Timing for the third tier companies, Kazakhstan Temir Zholy and Kaztemirtrans was not determined. He also said that Kazatomprom and KazMunayGaz could be considered for the People’s IPO after 2015.

On October 26, 2011, at a round table in Almaty, the managing director of NWF Samruk Kazyna, Peter Howes, said that People’s IPO dates in Kazakhstan might shift depending on market conditions. “If there is a huge crisis, it is always possible to put off the IPO,” he added.

He said the IPOs were rescheduled to allow more time for thorough preparation of state-owned companies and lowering their risks.

House said that the state companies’ offering, while the share are low-value stocks, makes sense for the People’s IPO program, as the population acts as a buyer. “In a situation when the Kazakh companies are undervalued, the risk that the shares will drop further is much lower,” he added.

Now that we have more clarity on the People’s IPO, we see that the first round of offerings seem purposely selected as reliable, stable, income-generating businesses—nothing that will generate explosive shareholder value.  More importantly, they are equally unlikely to result in massive shareholder losses. These are not the kind of investments that overseas investors are interested in, but they are appropriate for the targeted new domestic retail investors and local pension funds.  Beyond the first wave, the announced privatizations offer potentially more value-generating businesses.  But by then, already a story will be written about the great success of the “People’s IPO.”  How it that story continues may have numerous turns.

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President Dmitry Medvedev’s $33 billion privatization plan, and the zeal with which the current administration appears to be pushing it, demonstrates Russia’s interest in changing the hold of the state over enterprise. The fiscal need for privatization in Russia is clear after the government depleted funds from the National Wealth and Reserve Funds (the Reserve Fund went from $132.63 bln in November 2008 to $25.6 bln this month). This poses a risk for the economy in the case of falling oil prices, as IMF Chief Christine Lagarde emphasized in a conference this week in Moscow.

The recent auction of Russian Railways’ Freight One, which controls around 23% of the country’s rail stock, provides insight into the privatization program’s progress. On October 28, Vladimir Lisin, the billionaire owner of Russia’s Universal Cargo Logistics Holding (UCL Holding), won the Freight One auction with an uncontested $4.2 billion opening bid. On the one hand, Lisin’s bid for the company fell into the upper ranges of Freight One’s independent valuations (though only slightly above its listing price), fulfilling the first goal of the privatization plan –– to raise capital. As for the second aspect, another state company has been sold, and Lisin’s history of managing a listed company and his expertise in the transportation sector increase the likelihood that this purchase will lead to improvements in the company’s efficiency and will increase future outside investment. Thus, at face value it appears the program is succeeding.

However, the extent of “competition” in the sale is questionable. The auction was open only to “legal entities registered in Russia, non-state corporations that have a strong financial position and experience operating railway rolling stock.” Such restrictions are reasonable when it comes to parting with strategic sectors and do not necessarily indicate lack of fairness or openness to competition. However, despite earlier reports of “fierce competition” (originally between six bidders), the only two bidders in the auction were Lisin and Gunvor’s Gennady Timchenko, both of whom already control a significant portion of Russia’s transportation infrastructure and purportedly have equal influence in the government.

Since the auction was closed to the press, versions of the bidding process differ, but Lisin’s having paid only slightly more than the starting price seems to corroborate the story of an “uncontested” bid. While observers estimated that “jockeying” between the two bidders would raise the sales price by as much as 15%, no jockeying seems to have taken place. Moreover, by numerous accounts, Timchenko was not only supposed to be a formidable second bidder at the auction, but he was widely expected to win. While experts argue the Lisin’s acquisition of Freight One is preferable for the company itself, Timchenko’s surprise defeat after all the hype makes one wonder if he ever planned to bid at all, or if he was told not to.

A main goal of the privatization program is the breakup of networks that hinder competition and inefficiency, as well as the depoliticization of business by turning state assets over to unaffiliated market-driven owners, making companies more transparent and efficient. After this sale, Lisin now controls nearly a quarter of Russia’s freight. In this sense, the sale seems to indicate an expansion of Lisin’s monopolistic power rather than any progress toward a more competitive domestic market.

In addition, the company could likely have been sold for more, and the winner in this sale was Russia’s richest man who already controls a huge portion of Russia’s infrastructure. Had Timchenko acquired the company, his win would not have improved market competition since he already controls much of Russia’s trade infrastructure. Given that the auction was confidential, with the state tightly controlling who could bid, the process itself does not indicate an increasing desire to increase transparency. Thus, the sale itself seems to have fallen short of meeting the broader ideological goals of the privatization plan.

Yet, while the sale of Freight One could have been more transparent, and it could have been open to more investors, the sale went through. Freight One is now at least nominally depoliticized, and this is hopefully one of many small steps Russia is taking toward further privatization. Lisin’s management may in the end prove a boon to Freight One –– the sale may work to help Russia refill its depleted Reserve Funds, and investment may pick up thanks to both of these aspects. It should also be noted that the plan went forth even after the announcement of Putin’s presidential nomination, signaling that privatization will likely continue under Putin. The sell off of Freight One demonstrates that, while the privatization process may not be flawless, Russia appears committed to it.

Possibly related posts:

1. The Second Wave of Privatization
2. The Great Moscow Privatization
3. How Can Kazakhstan Take Advantage of Russian Expansionism?

The politician’s press secretary confirmed the future partnership with Astana, but refused to comment on the  former Prime Minister’s salary level. According to different sources, for one year of work, Blair will earn from £8 to £12 million.

Mr. Blair’s opponents repeatedly have accused him of  “making money” on the relationships that he acquired while working as head of the British government. Since leaving office in 2007, Blair has become an official special envoy to the Middle East, launched the Blair Faith Foundation, and offered consulting services to foreign governments. Blair has been criticized over his role as envoy for the Middle-East Quartet, with his detractors alleging that he has been almost invisible and, in any case, hugely compromised by his role in the Iraq war.

Meanwhile, in Kazakhstan, opinions are divided.  Majilis deputy, Vladimir Nekhoroshev, said on October 23 that the idea to invite Blair  “is a genius solution.”  Nekhoroshev’s colleague, majilisman Iraq Yelekeyev supported his opinion: “Engaging Tony Blair as an adviser on economic issues I support as an expert: one deal – our national experts, and another - when the head of one of the leading governments – the government of Great Britain - gives such advice.”

At the same time, Majilis deputy Sat Tokpakbayev said, “I do not think this is a good solution, and do not support this idea. We have enough of our own staff. It had been practiced 15-20 years ago, and at that time, engagement of foreign experts and advisers was needed. Now it is 2011 – we have a plenty of our specialists. I think we could manage by ourselves.”

Kazakh political scientist Nurlan Erimbetov believes that the former prime minister of Great Britain should be engaged not to give advice on economic issues, but to improve the image of the country. “I believe that the involvement of Tony Blair as a consultant is more of a PR stunt. I do not think that Tony Blair will arrive in Kazakhstan, go into our plants, factories, and grain fields, or fly to the mines. This is a PR move: to have a person who is very popular around the world, enter, so to speak, into noble houses and to present Kazakhstan as prosperous, adequate, and having a future as a country, so it proves reliability to our overseas partners,” he said in an interview to zakon.kz.

Time will reveal whether both sides win or lose from this collaboration. There can be only one winner: partnership with Kazakhstan can damage the former Prime Minister’s reputation or Kazakhstan could spend millions on bad advice.

Possibly related posts:

1. Multivector Relationships
2. Kazakhstan: WIEF and Building Islamic Finance Capacity
3. Marchenko: The IMF’s Underdog Candidate