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Russia Report: July 21, 2006

July 21, 2006, Volume 6, Number 13
ST. PETERSBURG, July 17, 2006 (RFE/RL) -- In the end, it may be the weather that proves one of Vladimir Putin's greatest disappointments during his country's hosting of the G8 summit.

Cloud-chasing airplanes were deployed to guarantee a sunny St. Petersburg summit. But intermittent rain showers occasionally dampened the showcase event, even forcing the cancellation of a late-afternoon tea planned yesterday for the G8 leaders.

But even the rain did not detract from what some observers say was a triumphant first summit for the G8's youngest -- and arguably most ambitious -- member.

Putin, speaking at the first of the press briefings marking the conclusion of this year's summit, noted with evident satisfaction that the St. Petersburg gathering had shown Russia to be a strong and vital member of the G8.

"We are satisfied that our partners received with understanding Russia's ideas and proposals for the summit," Putin said. "It is also obvious that Russia's growing economic potential allows it to play a more significant role in global development, and we are ready to participate actively in implementing all of the proposed initiatives."

The summit was unexpectedly overshadowed by escalating violence in the Middle East, where Israel has mounted a powerful military offensive against Lebanon following the capture of two Israeli soldiers by Lebanese Hizballah militants.

Some observers feared that the Lebanese crisis and concern over North Korea's recent missile tests would hijack the summit.

Both proved to be headline issues. But the leaders gathered in St. Petersburg also released joint statements on all of the items on Putin's G8 agenda, including health, education, and energy security.

John Kirton is the director of the G8 Research Group, an independent Toronto University body tasked with monitoring the Group of Eight. Speaking to RFE/RL in St. Petersburg, he praised the summit as a success.

"It [Russia] has pulled it off in fine fashion, by some measures we know already -- by delivering at the summit more commitments, more codified collective decisions than any other summit before, since the start over 32 years [ago]," Kirton said. "So if people judge this summit by its ability to make clear, collective, codified commitments, St. Petersburg is the best summit ever."

For oil- and gas-rich Russia, energy security was by far the most important item on the Kremlin's formal G8 agenda.

There, Russia won a decisive victory in rejecting European calls for it to ratify the Energy Charter Treaty.

That agreement would require Russia to provide open access to its energy resources and transport infrastructure.

Russia agreed to a vaguely worded G8 statement supporting the "principles" of the Energy Charter. But without ratification, control of Russia's gas-export pipelines remains fully in the hands of the country's Gazprom monopoly.

European leaders fear this will leave them and their energy needs vulnerable to the whims of the Russian government.

But Putin today defended the situation, saying Russia was behaving no differently than those European countries that the Kremlin has accused of blocking Russian investment.

"The Energy Charter implies mutual access to production infrastructure of energy resources and to transportation infrastructure," Putin said. "Naturally, we can allow our partners access to both. But our question is, what will they give us access to? Where is their production or transportation infrastructure?"

Russia was dealt one major setback, in failing to clear the main hurdle to its long-sought entry into the World Trade Organization.

The United States has not signed a bilateral treaty with Russia that would allow the country's bid to be passed on to the bloc's 149 members for approval. A deal expected on July 15 fell through.

Putin, who has showed confident assurance as this year's G8 host, appeared undaunted by the delay.

Instead, he has aimed sharply worded commentary at some of his fellow G8 leaders, including U.S. President George W. Bush and British Prime Minister Tony Blair.

Bush and Blair, by contrast, have appeared deferential, backing away from past criticism of what they termed Russia's antidemocratic trends.

Troublesome issues such as Russian intervention in so-called "frozen conflicts" in Georgia and Transdniester have been largely absent from the G8 discussions.

Putin has even used the Lebanon conflict to advance his own political argument.

Some G8 leaders have called for Syria and Iran to be recognized as complicit in the Hizballah actions against Israel.

In response, Putin asked why Russia can't mention "other countries that harbor people who are quite obviously terrorists" -- an apparent reference to Britain, which has refused to extradite Akhmed Zakayev, the London-based foreign minister of Chechnya's separatist government. (Claire Bigg)

Cherie Blair, the wife of British Prime Minister Tony Blair, risked raising the ire of the Kremlin on July 17 by offering to help Russian human rights activists challenge new legislation in the European Court of Human Rights. They say the law on nongovernmental organizations will severely restrict their activities. Cherie Blair, a leading human rights lawyer who had accompanied her husband to the G8 summit in St. Petersburg, told a meeting of some of the Russian government's harshest critics that she had come to hear their experiences.

PRAGUE, July 18, 2006 (RFE/RL) -- It was billed as a private gathering, but in truth Cherie Blair's meeting with human rights activists in St. Petersburg was a calculated snub to the Kremlin.

Aleksandr Petrov, the director of Human Rights Watch in Moscow, and one of the organizers of the meeting, said it had been planned well in advance.

"The meeting was arranged at our initiative and was begun through talks involving our representatives in Washington and London and Mrs. Blair some time ago -- about 1 1/2 to two months ago," Petrov said. "She expressed a desire to take part in an informal meeting with representatives of Russian NGOs while she was in St. Petersburg for the summit."

What better reminder to President Vladimir Putin of Western concern over the erosion of human rights than for the wife of the British prime minister, a famous human rights lawyer in her own right, to address such a gathering?

There has been no official comment from Britain on the content of Cherie Blair's meeting. But the prime minister's office made clear on July 17 that her attendance at the NGO meeting had official blessing.

The Kremlin has yet to respond to the development. But it was the second time in a week that Britain had risked incurring Russia's wrath on the issue of human rights.

On July 11, the British ambassador to Russia, Anthony Brenton, defied the Kremlin to address a conference of human rights activists in Moscow.

There is growing concern in the West about what is perceived by many as the rollback of democracy in Russia. U.S. President George Bush also met representatives of Russian civil society during his visit, although detractors suggested he had deliberately avoided meeting the harshest of the Kremlin's critics.

That is not an accusation that could be leveled at Cherie Blair.

According to Petrov, she told activists from some 12 prominent nongovernmental organizations that she had come to learn more about their plight and to celebrate the work they carried out.

"In the introductory part of her speech, she expressed support for civil society in Russia and mentioned also the current situation in connection with the introduction of the new law -- although, as she said, she was not familiar with the text of the law, but was familiar with the many expressions of concern about how the law will operate and the problems it will create for nongovernmental organizations," Petrov said.

Foreign and Russian nongovernmental organizations say they have come under much closer official scrutiny since the introduction of the new law, which, they say, is designed to paralyze them in a mesh of bureaucratic red tape. President Putin has accused some NGOs as acting as cover for foreign intelligence agencies.

According to Petrov, Cherie Blair said she wanted to familiarize herself with the text of the legislation and that, if necessary, she was prepared to help activists pursue cases in the European Court of Human Rights. (Robert Parsons)

PRAGUE, July 19, 2006 (RFE/RL) -- The controversial initial public offering (IPO) of Russia's Rosneft oil company on London's Stock Exchange was launched today after a last-ditch attempt to derail the flotation failed.

The beleaguered Russian oil company Yukos contested the IPO, saying it amounted to the sale of stolen property because Rosneft acquired Yukos's main oil-production arm in a disputed auction. But that argument was shot down by a British court.

Early trading today gave credence to the argument by many observers that the Yukos controversy would not prevent Rosneft from finding investors willing to take advantage of the rare opportunity to buy into Russia's booming oil trade.

Opening at $7.55 today, shares of Rosneft on the London exchanges quickly rose nearly 3 percent in early trading (to $7.58 by midday in Central Europe). By midday in London, the price had dropped to the original issue value, but remained stable.

Simon Wardell, a senior oil analyst at Global Insight's London office, said many investors are eager to participate in a relatively rare opportunity to invest in Russia's energy sector.

"You're going to see a lot of interest from international companies in terms of gaining access to these sorts of opportunities when they arise," Wardell said. "And they are so infrequent and limited now that, I think, the success of the Rosneft IPO is one that is probably not in isolation."

The IPO -- the largest in Russian history, and among the top five ever in the world -- has attracted the attention of several high-profile investors. Rosneft hopes to raise $10.4 billion through the flotation, the first phase of which was launched on the Moscow exchange on July 17. Rosneft's total value is estimated at $79.8 billion.

China announced today that it purchased a $500 million stake in Rosneft on the Moscow exchange -- and wanted even more. The China National Petroleum Corporation said in a statement that it had sought to purchase a $3 billion stake, but was allocated only one-sixth of that amount.

And analyst Wardell says that the allocation of shares to such companies as European oil major British Petroleum and Malaysia's state oil company Petronas is a show of confidence in Russia's oil sector.

"The listing that is going ahead -- especially the fact that it's been subscribed by a lot of major oil companies such as BP and so on -- shows that there's still obviously huge interest in the Russian oil sector," Wardell said. "An interest in accessing or gaining rights to any company which has strong oil and gas reserves at its disposal."

Singapore's Temasek Holdings has reportedly decided against acquiring a stake, saying it believes the shares are overvalued.

Critics of the IPO include U.S. lawmakers and financier George Soros, who recently told "Financial Times" that the flotation raises "serious ethical and energy security issues."

The IPO has faced challenges by the beleaguered Russian oil company Yukos, whose main production arm, Yuganskneftegaz, was auctioned off by the Russian state two years ago to settle a tax bill. Rosneft took control of Yuganskneftegaz as a result, instantly making it one of Russia's largest energy producers.

Yukos had hoped to block today's IPO by arguing in court that the Yuganskneftegaz acquisition was illegal and constituted the sale of stolen property. But Britain's High Court struck down the argument on July 18.

Yukos has vowed to continue to challenge the sale.

Arms manufacturers from Russia and elsewhere in the CIS assembled in Nizhny Tagil this week to tout their products at one of Russia's largest arms expositions. Russia's share of the global arms industry remains a sliver of what it was during the Soviet era, but it has posted gains in recent years. Russian arms manufacturers are hoping to build on that success by expanding sales in Latin America and the Middle East, and Russia's efforts to re-equip its own military could further boost the industry. What does the future hold for Russia's arms industry, and are its expansion efforts based on politics -- or just business?

PRAGUE, July 14, 2006 (RFE/RL) -- Hundreds of Russian armaments manufacturers convened at this week's exhibition, which ends on July 15, to hawk the latest Russian military technology. Officials took advantage of the event to predict a bright future for the domestic industry.

And by many measures, they have reason for optimism.

In a stagnant market, the world's second leading arms exporter posted a significant gain in 2004, with $6.1 billion in agreements -- accounting for 16.5 percent of the market -- compared to $4.3 billion in sales in 2003. Russia maintained that level in 2005 -- again exceeding expectations and exporting about $6 billion worth of military equipment to more than 60 countries.

Russia's state-owned arms export agency Rosoboroneksport, announced in Nizhny Tagil on July 11 that it has orders in hand worth about $17 billion. Deals for naval equipment headed the list, but orders through 2010 for Russian air-defense systems accounted for a major share ($3.5 billion). Rosoboroneksport Deputy Director Ivan Goncharenko also predicted a major turnaround for the much-maligned military-aviation sector, saying aviation equipment will be Russia's top seller in 2007.

Movement is afoot on the domestic front as well. Defense Minister Sergei Ivanov recently said Russia will spend 237 billion rubles ($8.8 billion) this year to upgrade its military equipment -- and that figure is to rise to 300 billion rubles in 2007. In addition, the country is mulling a proposed program that would increase defense procurement by 20-25 percent a year.

But some say serious flaws remain in Russia's arms industry, claiming it depends too much on Soviet-era designs and that the failure of the industry to adapt to economic realities threatens to torpedo the entire endeavor.

Detractors include Defense Minister Ivanov, who last year expressed fears that by 2011 the Russian arms industry would be incapable of re-equipping its own military.

In an attempt to address such fears, Russia has embarked on a large-scale effort to consolidate its defense enterprises -- an exercise in "state capitalism" that at the same time harkens back to the Soviet Union's oversight of a massive defense industry.

Aleksandr Goltz, a defense expert for the Moscow-based "Daily Journal" ("Yezhednevnia zhurnal"), says this effort is steering the industry in the wrong direction.

"All these plants, all these enterprises, will again, as in Soviet times, be put under strong bureaucratic control," Goltz says. "And as [a] result, the level of bribes, the level of corruption, will rise and it's obvious that it will make this process much more complicated, not easier."

The direction of Russia's arms-sales policies has attracted controversy in the United States.

A fly-by at the Russian Arms Exhibition in Nizhny TagilIn April, Russia inked a deal for the sale of 100,000 Kalashnikov assault rifles and 15 military helicopters to Venezuela, which says it needs the weapons to defend itself in case of a U.S. invasion.

The Latin American country is also seeking to purchase 24 Sukhoi fighter jets -- a deal that Washington has asked Russia to reconsider out of fears that it could upset the balance of power in the region.

Missile sales to Iran have also raised the ire of Western countries, particularly the United States, and sales to Sudan and Syria have been criticized.

Russia maintains that such sales break no international regulations, and that if it doesn't sell to these countries, somebody else will.

So, are Russia's efforts to expand its arms sales based on politics, or business?

Both, says analyst Goltz.

"Such countries as Iran, or Venezuela, or Syria have no other sources of military equipment," Goltz says. "It's profitable, but at the same time it is politics because Russia positions itself as the supplier of these -- as the people in Washington say now "problematic regimes."

But given the position Russia is in, it may have no choice. Goltz says he is skeptical of the Russian arms industry's chances of survival. And other analysts have noted that -- given the intense competition in the industry and the United States' dominance as the world's largest arms exporter -- Russia is in no position to turn away business. (Michael Scollon)