COMMENT: Focus of Kremlin will be on international agenda this week

By bne IntelliNews October 9, 2007

Chris Weafer of UralSib Bank -

In the first week of October, the main headlines concerned the domestic agenda. President Vladimir Putin raised the possibility of a dual power structure within the next government, while more openly endorsing Prime Minister Viktor Zubkov as his likely preferred successor. The newly appointed PM wasted little time in stamping his authority on the cabinet as senior government personnel changes continue amidst rumours of more to come. The more active phase of the Duma election has kicked off and opinion polls suggest that a maximum of four parties will make it into the lower house. Putin's name on the United Russia ticket might even reduce that to three and even two is not impossible.

In the second week of October, the focus will be on the international agenda. French President Nicolas Sarkozy will be in Moscow for two days and issues such as the EU-Russia energy and trade relationship plus Kosovo will likely top the agenda. What type of relationship Russia has with the EU will have a direct bearing on the business models for the larger state-controlled companies and other major enterprises that plan to grow by expanding internationally. A summit of CIS countries was held this past weekend and the Kremlin is clearly pushing to consolidate its central powerful role within the organisation. Turkmenistan, though, appears not to be playing ball.

Putin's surprise announcement

Putin surprised the country October 1 when he said at the United Russia congress that a role as prime minister after March was "not unreasonable." Of course, that has major implications for power sharing and the structure of government and has provoked a lively debate amongst political pundits as to the various scenarios and their implications. The main point of course is that it emphasises the fact that Putin very definitely intends staying at the centre of political power in the country for many years to come. It is only a question of the mechanism. For investors that is the critical factor at least for the next 12 to 18 months (after that other issues and risks may become apparent) and the prospect of both a seamless transition and continued political stability was at least partially responsible for the RTS ending last week at a new record high.

President Putin, when responding to the question of whether he would accept the role of prime minister, said that he would only do so if a) United Russia won the Duma election (see below) and b) the next president was "decent, capable and a modern person with whom I can work". This is almost the same phrase that Putin used when he described Zubkov on the day he announced that he was appointing him prime minister.

One of the assumptions we make when considering Zubkov to be a strong contender to be named by the president as his successor is that the prime minister will by end-December be a more popular figure and will have achieved some "victories." The Kremlin is obviously and actively working on the popular image angle. During September, Zubkov has achieved more TV airtime (over 34 hours of exposure on the main TV channels) than both Sergei Ivanov and Dmitry Medvedev combined and that despite only appearing for the first time on September 12. The amount of TV time allowed to any politician on the state controlled channels is always a good measure of "who's in favour." It is still too early to view any of the late September opinion polls as a good measure of the popularity of the main candidates, but 39% of people polled by the Levada Center in a survey carried out between September 14-18 said that they believed Zubkov will be the next president.

Senior personnel changes

On Saturday, the government announced that ex-prime minister Mikhail Fradkov will become the head of Russia's foreign intelligence service (SVR). He will replace Sergei Lebedev who will assume the role of Executive Secretary of the CIS as Moscow moves to consolidate its influence within that organisation. Earlier in the week, the prime minister accepted the resignation of Sergei Oganesyan from his job as head of the Federal Energy Agency. Media reports said that Oganesyan has been on vacation since May.

There are rumours and media speculation that former Economy Minister German Gref will take over as CEO of Sberbank. So far unconfirmed. This is partly because nobody ever leaves government, they simply get re-assigned, and partly because it is expected that there will be changes across the full breadth of government, including at the top of state companies, as the Kremlin prepares for both political and economic transition.

The new PM also spelled out what exact areas of responsibility each of his deputies has. First Deputy Sergei Ivanov will coordinate the activities of bodies involved in the development of Industry, Transport, Communications and Science. He will also be responsible for monitoring the development programmes in defence, nuclear industry and the space industries. He will supervise the state programmes in arms development and defence modernization. In addition, he will also be in charge of national security and law enforcement.

First Deputy Dmiry Medvedev will coordinate activities in priority national projects in Education, Health, Social Security, Housing and Agriculture.

Deputy Alexander Zhukov will take charge of social and economic development of Russia's regions and coordinating state support from the Investment Fund. He will also take some role in construction projects in housing, public utilities and sports (including the Sochi 2014 project).

Deputy Alexei Kudrin is also finance minister. He will be in charge of social and economic development, pensions, tax and monetary policy. He is responsible for the management of the state's finances and debt, drafting the budget, anti-trust policy, competitiveness, state tariffs and audit processes.

Deputy Sergei Naryshkin is responsible for foreign trade, international relations, economic integration, administrative reforms, culture and tourism plus "energy issues."

Duma campaign gears up

The Central Election Commission has received party lists from the fourteen political parties eligible to contest the December 2 elections. United Russia has submitted a maximum 600 candidates but instead of the three federal list names they have only one - Vladimir Putin. That means that Putin's name will appear beside that of United Russia on all national ballot papers. The most recent opinion poll carried out by VTsIOM is that United Russia should take around 60% of the vote, the Communists around 15%, A Just Russia about 10% and the LDPR close to the 7% minimum cut-off. All of the opinion polls show that these are the only four parties that have any chance of getting seats in the nest Duma.

A Just Russia's fate is unclear. The inclusion of Putin's name on the federal list for United Russia has left A Just Russia party in something of a limbo. This is the party, headed by the Federation Council speaker, that was formed with state support in order to create a more credible two-party system. It was expected that it would benefit from Kremlin support and would both share some of United Russia's votes and also take some from the Communists. Now its role is unclear. Political analysts are now speculating that A Just Russia will be supported in an effort to take seats from LDPR and certainly the recent polls have shown a definite swing from LDPR to A Just Russia.

Whatever the mix of seats after the election, it is a completely safe bet that the Kremlin loyal party will command at least a majority of the seats and probably a 75% share. For investors that is the important point rather than the actual mix, as it will ensure the Kremlin is able to pass legislation as speedily as it was able to during the life of this current Duma.

Sakhozy's visit

President Sakhozy arrives in Moscow on Tuesday, October 9 for a two-day official visit and the agenda is expected to include Kosovo, Russia's energy and trade relationship with the EU, and of course the participation of French companies in the planned escalation of state spending programmes from next year. Sakhozy was quite critical of Russia in the early days of his presidency last spring, but that seems to have changed after the G8 meeting in June. Since then it is noticeable that the relationship is friendlier. Not yet as friendly as that which Putin had with former German Chancellor Schroder, but definitely improving. Of the four major countries in the EU, the best chance for a Russian "ally" is currently with France.

The "troika" group of countries (Russia, EU and the US) nominated by the UN to review the options for Kosovo's future status have to report to the Security Council by December 10. The government in Pristina has said that it will declare unilateral independence after the deadline if the UN does not endorse the plan for EU-supervised autonomy that the UN appointed inspector has proposed. Serbia has said it will oppose that and Russia may have to side with them just as the EU would have to side with Kosovo. This is an issue that could very quickly get out of hand and cause a serious rift between Moscow and both the EU and the US. That would delay any deal on trade, WTO entry and a new energy deal with the EU. It would be damaging for the investment case for Russian equities and provoke a response similar to that seen in April-May when a worsening of international relations caused the RTS to drop sharply against other emerging markets. A major row over Kosovo would be just as unwelcome in Brussels as in Moscow, so we can expect governments in the major EU countries to work with the Kremlin to ensure that the issue stays on hold until (hopefully) both Serbia and Kosovo can work out a mutually acceptable deal.

The issues of trying to work out a new energy relationship and a new trade/investment deal will also be near the top of the agenda. Europe currently gets about 25% of its gas requirements from Russia. Europe's appetite for gas is growing and will grow substantially over the next five to 10 years even if alternative energy sources are agreed and funded (unlikely given the environmental issues surrounding nuclear and coal powered plants). Although the EU has pushed the plan to secure energy from Caspian countries, that is not going to provide any significant new source of gas, ie. even if the pipeline routes can be agreed. And that is a long way from being resolved also. The EU wants Russia to agree to fast track development of new projects such as Shtokman and to sideline the South Stream pipeline in favour of the Nabucco pipeline. Total already has a blocking minority position in Shtokman and the state-controlled Gaz de France may enter the Nabucco project. These are likely to be amongst the issues that Sakhozy will be pushing for Putin's support.

Moscow has its own wish list. Putin has made it very clear that while Russia is willing to push projects like Shtokman with the involvement of EU companies such as Total, it will not give the final green light until it gets a new investment deal that will allow the country's largest companies make investments in the EU. It also wants a new trade deal (the existing 10-year deal ends this year) that will prevent trade disputes when Russia plans to export more manufactured products in the future. Putin very pointedly linked these two issues last year when in response to EU criticism of VTB's EADS deal last year he cancelled the Shtokman deal. Since then it has been revived with Total's inclusion, but its status is currently little more than a dangling carrot. The Kremlin will also be pushing for a softening of the so called "Gazprom Clause" in the proposed EU legislation that will limit foreign company participation in the EU energy sector. Part of Gazprom's planned development is to increase its presence in downstream distribution in Europe and the current EU legislation will hinder that.

CIS role a priority

In early October, a meeting of the heads of state of the 12 CIS countries (Ukraine was represented by a representative of the president) took place in Dushanbe. The purpose was to sign a deal intended to substantially raise the level of interaction and cooperation between the countries. Two of 12 did not sign and Azerbaijan expressed "reservations" about part of the deal. Of the two that did not sign, Georgia was not expected to, but Turkmenistan's refusal will be of greater concern to the Kremlin. Turkmenistan President Berdymukhamedov is being heavily courted by China and the EU to focus future energy developments and exports towards them. Turkmenistan is also the major supplier of gas to Ukraine and is openly unhappy at the low price it gets for its gas. The appointment of Sergei Lebedev (ex-head of Russia's foreign intelligence service) to be the executive secretary of the CIS is part of Moscow's efforts to retain its leading role in the organisation.

Meanwhile, Russia, Belarus and Kazakhstan have agreed to a common customs union by 2011. This is an important step in the very slow process of replicating an EU style structure with the CIS. Of course such a final step is still a very long way off, but expect to see greater investment cooperation between Russia and the CIS countries in the coming years as Moscow advances its long term goal.

Chris Weafer is Head of Strategy at UralSib Bank in Moscow

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