MARKET EKONOMY.

Throughout history, every society has faced the fundamental economic problem of deciding what to produce, and for whom, in a world of limited resources. In the 20th century, two competing economic systems have provided very different answers: command economies directed by a centralized government, and market economies based on private enterprise. Today, in the last decade of the 20th century, it is clear that, for people throughout the world, the central, command economy model has failed to sustain economic growth, to achieve a measure of prosperity, or even to provide economic security for its citizens. Yet for many, the fundamental principles and mechanisms of the alternative, a market economy, remain unfamiliar or misunderstood despite its demonstrable successes in diverse societies from Western Europe to North America and Asia. In part, this is because the market economy is not an ideology, but a set of time-tested practices and institutions about how individuals and societies can live and prosper economically. Market economies are, by their very nature, decentralized, flexible, practical and changeable. The central fact about market economies is that there is no center. Indeed, one of the founding metaphors for the private marketplace is that of the "invisible hand." Market economies may be practical, but they also rest upon the fundamental principle of individual freedom: freedom as a consumer to choose among competing products and services; freedom as a producer to start or expand a business and share its risks and rewards; freedom as a worker to choose a job or career, join a labor union or change employers. It is this assertion of freedom, of risk and opportunity, which joins together modern market economies and political democracy. Market economies are not without their inequities and abuses many of them are serious but it is also undeniable that modern private enterprise and entrepreneurial spirit, coupled with political democracy, offers the best prospect
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for preserving freedom and providing the widest avenues for economic growth and prosperity for all.

CONSUMERS IN A MARKET ECONOMY

Consumers in both market and command economies make many of the same kinds of decisions: they buy food, clothing, housing, transportation and entertainment up to the limits of their budgets, and wish they could afford to buy more. But consumers play a much more important role in the overall working of a market economy than they do in a command economy. In fact, market economies are sometimes described as systems of consumer sovereignty, because the day-today spending decisions by consumers determine, to a very large extent, what goods and services are produced in the economy. How does that happen?

Buying Oranges. Suppose a family Robert, Maria and their two children go shopping to buy food for a family dinner. They may originally be planning to buy a chicken, tomatoes and oranges; but their plans will be strongly influenced by the market prices of those goods. They may discover, for example, that the price of oranges has increased. There are several things that might cause those higher prices, such as freezing weather in areas where oranges are grown, which destroys a large part of the crop. The effect of the freeze is to leave the same number of consumers trying to buy a smaller number of oranges. At the old, lower, price, therefore, sellers would soon run out of oranges until the next harvest. Instead, by raising the price, all consumers are encouraged to cut back on the number of oranges they buy, and producers are encouraged to grow more oranges as fast as they can. There is another possibility: suppliers could choose to import a larger number of oranges from other countries. International trade, when it is permitted to
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operate with relatively few barriers or import taxes (called tariffs), can give consumers wider choice and allow producers to offer more competitive prices for a wide range of products, from oranges to automobiles. On the other hand, the orange crop might be spared freezing weather, but instead consumers decide to start buying more oranges and fewer apples. In other words, instead of the orange supply shrinking, demand increases. This too will drive up the price of oranges for a time, at least until growers have time to bring more oranges to market. Whatever the reason for the higher price, Robert and Maria will probably respond in a predictable way once they discover that the price is higher than they anticipated. They may well decide to buy fewer oranges than they had planned, or to buy apples or some other fruit instead. Because many other consumers make the same choices, oranges won't disappear from store shelves entirely. But they will be more expensive, so only the people who are willing and able to pay more for them will continue to buy them. Shortly, as more people start buying apples and other fruits as substitutes for oranges, the prices of those fruits will rise as well. But the response of consumers is only one side, the demand side, of the equation that determines the price of oranges. What happens on the other side, the supply side? A price increase for oranges sends out a signal to all fruit growers people are paying more for fruit which tells the growers it will pay to use more resources to grow fruit now than they did in the past. It will also pay the fruit growers to look for new locations for orchards where fruit isn't as likely to be damaged by bad weather. They may also pay biologists to look for new varieties of fruit that are more resistant to cold weather, insects and various plant diseases. Over time, all of these actions will increase the production of fruit, and bring prices back down. But this whole process depends first and foremost on the basic decision by consumers to spend some part of their income on oranges and other fruits.

If consumers stop buying, or if they decide to spend less on a product for whatever reason prices will drop. If they buy more, increasing demand, the price will rise. Keep in mind that this interaction of supply, demand and price takes place at every level of the economy, not just with consumer goods sold to the public. Consumption refers to intermediate goods as well to the inputs that companies must purchase to provide their goods and services. The cost of these intermediate, or investment goods, will ripple throughout a market economy, changing the supply-and-demand equations at every level.

Prices and Consumer Incomes

The other economic factor that consumers must consider carefully in making their purchases of goods and services is their own level of income. Most people earn their income from the work they perform, whether as physicians, carpenters, teachers, plumbers, assembly line workers, or clerks in retail stores. Some people also receive income by renting or selling land and other natural resources they own, as profit from a business or entrepreneurial venture, or from interest paid on their savings accounts or other investments. We later describe how the prices for those kinds of payments are determined; but the important points here are that: 1) in a market economy, the basic resources used to make the goods and services that satisfy consumer demands are owned by private consumers and households; and 2) the payments, or incomes, that households receive for these productive resources rise and fall and that fluctuation has a direct influence on the amount consumers are willing to spend for the goods and services they want, and, in turn, on the output levels of the firms which sell those products. Consider, for example, a worker who has just retired, and as a result earns only about 60 percent of what she did while she was working. She will cut back on her purchases of many goods and services especially those that were related to
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her job, such as transportation to and from work, and work clothes but may increase spending on a few other kinds of products, such as books and recreational goods that require more leisure time to use, perhaps including travel to see new places and old friends. If, as in many countries today, there are rapidly growing numbers of people reaching retirement age, those changing spending patterns will affect the overall market prices and output levels for these products, and for many others which retirees tend to use more than most people, such as health care services. In response, some businesses will decide to make more products and services geared toward the particular interests and concerns of retirees as long as it is profitable for firms to produce them. To summarize: whether consumers are young or old; male or female; rich, poor, or middle class; every dollar, peso, pound, franc, rupee, mark or yen they spend is a signal a kind of economic vote telling producers what goods and services they want to see produced. Consumer spending represents the basic source of demand for products sold in the marketplace, which is half of what determines the market prices for goods and services. The other half is based on decisions businesses make about what to produce and how to produce it.

BUSINESS IN A MARKET ECONOMY

As we have seen, a firm's success in a market economy depends on satisfying customers by producing the products they want, and selling those goods and services at prices that meet the competition they face from other businesses. Doing that requires firms to develop careful answers to one of the most important questions every economic system faces: how can a society produce goods and services most efficiently? In a market economy, that means getting the greatest value of output from the inputs producers use.
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Production of bicycles.

Let's take the case of a firm that is considering the manufacture and sale of bicycles. Before launching such a venture, any entrepreneur or company has to consider a host of factors. First, what is the potential size and nature of consumer demand for a new brand of bicycle? Is there a single, large market for standard model bicycles? Or is the bicycle market divided in many smaller markets, or niches, for specialized bicycles for children, customized racing bikes or bicycles built for two? A new trend, such as the sudden popularity of so-called mountain bikes that can handle wilderness trails, might also attract new manufacturers who see an opportunity to make a profit. On the other hand, prospective suppliers may simply feel that they have developed innovative manufacturing techniques for a standard bicycle, or possess significantly lower labor costs, so that the company can undersell their rivals in the marketplace and still make a profit. Not only are there many kinds of bikes to make, but there are many ways to make these bicycles from using a highly automated assembly line to stamp out thousands of identical parts and put the bikes together, to using more labor and much less machinery to design and make customized bikes. Once again, the firm making these decisions in a market economy has to consider several different prices that may rise or fall in response to the behavior of people who buy and sell those products. For example, the prices the firm has to pay for its inputs will obviously play a major role in determining how much steel, aluminum, labor, machinery and other materials the firm will use in making its bicycles. If the price of steel rises and the price of aluminum falls, many bicycle firms will look for ways to use more aluminum and less steel. Similarly, if wages for workers rise sharply, firms will have a strong incentive to look for ways to use more machinery, or capital, and less labor. A firm might decide to buy more fork lifts, for example, using fewer workers to move its inventory around the company's warehouses. Or it might use more machines to make routine and repetitive welds on its bikes, and thus hire
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fewer workers to do welding jobs. (As a consequence, the number of workers in factories producing the welding machinery used by the bicycle manufacturers would increase.) Any such venture carries a large element of risk: a new bicycle design may fail to attract customers, or manufacturing costs may be unexpectedly high, pricing the company's bikes out of the market. Companies alone bear this risk of failure and reap the economic rewards of success if they have planned correctly and their bicycle venture succeeds. This balancing of risk and rewards by individuals and private companies points to an essential role of government in any market economy: protecting private property rights and enforcing a law of contracts. Property rights must be well-defined legally, and business owners and investors must be treated the same by the law and commercial regulations whether they are citizens of the country or foreign nationals. Only if property rights are free from the threat of expropriation by government, or exploitation by political interests, will individuals and companies be willing to risk their money by investing in new or expanded businesses. Moreover, they must be assured that the state's legal system will settle disputes over contract terms in a fair and consistent manner. In short, entrepreneurs, whether domestic or foreign, must be willing to face economic uncertainty in their ventures but should not have to face political or legal uncertainty about the legitimacy of their enterprise.

1.1 Balancing inflation and the rouble The move by Russias central bank to lift the refinancing rate at its last meeting brought economic focus back to inflation, with crude and commodity prices, the rouble, and the economic recovery all factors to be balanced in the response. Inflation took off in January, with the surge in crude prices and commodities generally leading to fears it could go higher. Vladimir Tikhomirov, Chief economist at Otkritie says the full inflationary impact of the recent surge in oil prices has yet to be felt. The current surge in oil prices will gradually worsen Russian inflation, in fact oil prices is not so far a major issue for the inflation process. When we see increase in oil prices it leads to hikes in fuel prices and the chain is further obvious for Russia meaning that inevitably food prices start rising. Taking into consideration that food products account for 38% of consumer basket it became apparent that consumer sentiments will deteriorate. Apart from oil prices, dwindling of harvest and continuous increase of tariffs amalgamate into a serious blast of inflation. Veles Capital analyst, Ivan Manaenko, believes that after the rebound in food prices during 2010 it has been the recent surge in crude prices, reflecting social instability in the Middle East, which has forced the central bank to act. The Central Banks reactions to soaring oil prices we have seen already in February when the Central Bank has changed its tactic from smooth well signaled rate increases to a more aggressive stance. Assuming speculative oil price maximums and government policy commitment to limiting price increases the inflationary impact will be limited. I think, that the Central Bank may raise rates by 0.25-0.5 pp in the first half 2011. UniCredit Chief Economist, Vladimir Osakovsky believes the Central Bank will be pushed into stronger action, tipping a 1% increase in the refinancing rate during the first half of 2011, on the back of food price hikes.
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Moreover, food prices continued to post robust gains, partly supported by strong seasonality in fruits and vegetables, but most other non-seasonal items also posted robust price growth. Therefore, we continue to believe that inflationary pressures are likely to remain strong in the coming months, as the impact of the administrative correction in fuel prices is set to fade in the near future. Otrkities Tikhomirov sees inflationary pressure subsiding during 2011, but only if oil prices stabilize and food price inflation, internationally and domestically, doesnt break out more than it has.He says that the rebound in Russian inflation created an environment where the Central bank was forced to act. In essence, the Central Banks announcement and actions on the refinancing rate and continued increases reflect politics and pressure, because rates have remained unchanged since July 2010 when the inflation rate was 5.5%.But now it grew to 9.5% which can not be ignored. My forecast will be for inflation at 10.5%11% for 1H 2011 and than we can see a moderation of the rate easing to 9% at the end of 2011. However, that will happen only if: Russia and the rest of the world has a good harvest, oil prices stabilize and the rouble continues to strengthen.

2.1 Cherkizovo starts construction of Lipetsk mega poultry plant

Russian meat and poultry producer, Cherkizovo Group, has started construction of a $685 million state of the art poultry plant at Elets,in the Lipetsk region. The plant will become the corner stone of an agro industrial cluster in the region and help promote Russian food self-sufficiency.By developing a modern new integrated plant Cherkizovo is looking to introduce new efficiency standards and lay the basis of a competitive food production platform into the future. The project will see construction of a 160 million eggs per year hatchery, housing capacity for 10 million broilers, and with a 24000 thousand birds an hour processing facility, and 500 thousand tonnes frozen storage capacity.Additionally the facility will include a capacity to produce 90 tonnes of feed an hour, a 300 thousand tonnes grain storage capacity and oilseed processing capacity. The plant is expected to become operational in three years, and become fully operational at the end of 2015, providing 4000 jobs.It follows an agreement between the regional government, the Russian Ministry of agriculture, and the Cherkizovo Group, signed in May 2009 Sergey Mikhailov, CEO of Cherkizovo Group said the unrivalled facilities will strengthen the groups leading industry position and increase consumer confidence in the safety of Russian poultry products. This project confirms Cherkizovo Group as the leader in Russian agriculture and food production. This large-scale investment project will mark a transformational stage in our development. The new site will increase our production capacity to an entirely different level and allow Cherkizovo to draw competitive advantages from the proximity to our other existing production sites. Moreover, the strategic location of this innovative project will provide direct access for our quality products to the lucrative markets of Moscow and Central Russia. This is a unique project for Russia and we are very pleased to take up
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another opportunity to contribute meaningfully to the programme of security of food supply and to the overall development of the national economy BKS analyst, Vladislav Metnev, says the massive investment project will underpin Cherkizovos position on the Russian market for years to come. It is a bespoke large scale project for Russia. The ammount of investments almost 3 times high annual company investments. The modernization will drive companys market share from the current 9% to 16-17% over the next 3 years assuming 10% year on year market growth. Undoubtedly, the company will cement its leader position in the Russian poultry industry. Metnev added that the scale of the plant, in addition to providing for a significantly enhanced competitive position for Cherkizovo on the domestic market, with greater price competition, will enable exports. Russia is importing a part of all poultry products from abroad, however the implementation of this solution will certainly open new export opportunities for Russian poultry products. We expect the Russian poultry export will reach 50-70 thousand tonnes per year. Matnev also noted that despite highly attractive gross margins in the poultry sector at about 30%, could prompt more investment, a lack of large scale producers capable of handling the costs involved is likely to limit it.

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3.1 2010 excise hikes and grain prices leave beer drinkers looking for change

The Russian brewing industry is pointing to an excise tax increase which prompted a demand slowdown to explain a production drop during 2010. The rate of excise duty on beer was increased by 200% to reach 9 roubles per litre, replacing heavy alcohol at the top of the excise range. That came on top of rising costs as Russias barley crop was decimated by the drought. According to Baltica the 2010 increase in excise tax corresponded with a 4% decline in beer market volumes. Alexei Kedrin, Director of Corporate Communications and Information, OJSC Baltika says the volume of sales fell as soon as news on tax increase leaked on the market. Sales volumes across the company's products, including sales of non-beer categories, and sales abroad, decreased by 12% in 2010 compared with 2009. Sales volumes of beer in Russia decreased by 13% and were due to stockpiling by distributors in the 4th quarter of 2009 in anticipation of rising excise taxes. At the same time, distributors sales in retail outlets fell by 4% compared to 2009. According to the Russian Brewers' Union, the yield of barley in Russia in 2010 amounted to only 8.4 million tones, 54% less than in 2009 with the harvest downturn extending for 2 years. To avoid crop shortages, Russian companies substantially increased imports of malting barley and malt in the second half of 2010. Traditionally, barley cultures are imported mainly from Finland and Germany. However, Germany faced similar problems with bad harvest which resulted in a substantial increase in commodity prices in late 2010. Vladimir Efremov, director of sales Ochakovo says despite disappointing production results Ochakovo has a significant advantage to protect against further production declines in the form of its own secure crops. The production of Ochakovo beer decreased by 8.2% in 2010 on the back of excise tax increase from 3 roubles up to 9 roubles per liter. However, we are independent from country volume of harvest as we produce and cultivate our own
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corps of barley and have independent resource base so the price for the Ochakovo products will change only within the general rate of inflation in the country. Moreover, in 2011 we plan to increase production by 3-5%. Kedrin from Baltika also pointed to crop failure as a factor in trimmed Full Year 2010 profits. The production cost decreased significantly in 2010 compared with 2009 as prices for barley have reached their lowest level in the last four years. Adverse weather conditions in summer 2010 led to bad harvest and skyrocketing prices on barley at the end of 2010 which affected company profits and added 25% to a retail price of product Efremov notes that despite the impact of the tax excise demand rebound in coming years. Changing the rate of excise duty is the most significant factor that has influenced the production and consumption of beer in 2010, but according to our forecasts, the demand will recover gradually, as consumption of beer in Russia lags 30-40% behind the European average. Whereas the beer production slumped Baltikas Alexei Kedrin noted vodka and wine production grew by 3.7% and 14.5% respectively in 2010. He says this means weaker alcohol products are being replaced by stronger alcohol. While the global trend focused on substitution of strong spirits with low alcohol beverages the local tax increase of 200% on beer is incomparable with only 10% increase on strong spirits this is a step in the opposite direction. We assume that as a result of triple increase of the excise tax on beer and as a consequence, a significant increase in retail prices for beer consumers may switch to more affordable spirits. Efremov agrees that the consumer patterns might be affected due to robust law enforcement. Decreasing beer industry production inevitably leads to growth in the vodka market. Vodka producers are the major initiators of the reform and put pressure on government officials to push an anti-alcohol campaign, resulting in controversy and ineffective outcome. The portfolio of our company has several licensed brands Kaltenberg, Altstein, these brands remain a positive trend in
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consumption, despite the overall decline in production, meaning price is not a dominating factor for premium brands. Therefore, in 2011 we are planning to offer several new licensed brands of beer for consumers. But it should be noted that the average consumer has become thrifty. Those who switched to spirits were driven by comparatively low retail price of vodka. Kedrin agrees that apart from price hikes, the economic slowdown impact consumer sentiment. Until the second half of 2010 the turn around tendency has been observed with more consumers switching to cheaper brands of beer and packaging increasing importance of modern trade channel. Nevertheless, the statistics for the second half of 2010 indicates a gradual return of consumers to more premium products and usual standards of consumption.

Kedrin says Russian brewers had no other chance to retain production levels, except to push marketing expenditures. The company managed to moderate the impact of substantial increase in excise tax on sales through the implementation of pricing strategy of gradual price increases during the year, as well as due to the recovery of the market in the second half of 2010. The company's financial results reflect lower sales volumes. Nevertheless, despite the overall decline, marketing expenditures were increased and the company managed to maintain profitability.

Efremov said consumer focus helped company to save customer loyalty avoiding quality reduction. First, we optimized the internal business processes and logistics, in addition, to maintain prices at a certain psychological level, we launched a new packaging of 1 litre and 2 litre bottles. Thus, our customer can choose the optimal amount of products at attractive prices. The only thing on which we never reduce expenses is the quality of raw materials and production technology.

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4.1 East-West to bridge the digital divide

A new web based news service is looking to open up understanding of Russias IT sector with founders saying it is a key part of attracting further investment into Russian innovation. The news service, called East-West Digital News, is looking to plug what it sees as the english language based gap in information about Russias IT and telecoms sectors with up to the minute news on developments. Co-founder Adrien Henni says that although there is often plenty of information available in Russian there is often very little available in English, the language of global business. In contrast with the abundance of such information available in Russian, no regular or sufficient source of information covering these industries existed in English. Henni adds that this leads to a situation where the Russian IT industry, home to global players such as Kaspersky Labs, Dr Webb , DST and Mail.ru, who are well known globally, is not well understood, with news of developments slow to catch on.Henni, who has a journalism and investment banking backround, adds that for smaller and less well known players the lack of accessible information can mean a lack of cash. Partners, colleagues and I myself personally witnessed how numerous foreign players were restrained from developing their business in Russia or have postponed business initiatives due to lack of reliable information. The digital news site provides coverage of Russian Internet, telecom, digital TV, satellite, and software markets, including developments, in depth studies and industry events, as well as links with recruitment agencies and consulting firms.It also has a partnership with the Higher School of Economics, which Alexey Novoseltsev, HSEs Director for innovation and enterprise says will help innovation.

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"This project will be a powerful information and communication tool for innovative players seeking to develop internationally. We feel that by supporting East-West Digital News, our university is contributing to the infrastructure of Russia's innovation agenda."

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5.1 The West Must Not Turn Its Back on Russia

Russia's ties with the West have been experiencing growing tension of late. The Yukos affair, the conduct of the parliamentary and presidential elections, increasingly Soviet-like national television and other developments have contributed to what U.S. Ambassador Alexander Vershbow and others have diplomatically alluded to as a "values gap." Debates about Russia and its place in international institutions have become more heated. Similarly, Russia's stances toward the United States, NATO and the European Union have also become more contentious. Unfortunately many of these discussions are replete with dubious interpretations of revisionist history and patently unconstructive approaches from both sides. This has been especially true concerning the future of Russia's role in the G-8 as well as its ties with the newly expanded NATO. Bipartisan legislation in the U.S. House of Representatives, House Resolution 336, introduced by Democrat Tom Lantos and Republican Christopher Cox, calls for throwing Russia out of the G-8 if it does not make significant progress on a number of issues, including: the rule of law, including protection from selective prosecution and protection from arbitrary state-directed violence; a court system free of political influence and manipulation; a free and independent media; a political system open to participation by all citizens and that protects freedom of expression and association; and the protection of universally recognized human rights. This resolution follows similar legislation introduced into the Senate by Democrat Joe Lieberman and Republican John McCain in the fall, after the arrest of former Yukos CEO Mikhail Khodorkovsky. There is no question that all of the above points are laudable issues. I and many of my colleagues in and out of government have expressed concern about them over the years and increasingly in the last six months. There is also no
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question that Russia is deficient on these points in comparison with other G-8 member states. But there are no formal membership criteria for the G-8. Informally, the criteria are that member countries be developed market democracies with large and influential economies. When Russia was invited to become a formal member of the G-8 in 1997, it did not meet any of the above criteria. Even today it really meets only one of those criteria since it was recognized as a market economy by the United States and the European Union in 2002. Even now, into its sixth year of economic growth, Russia is not one of the 10 largest economies in the world. And while Russia was hardly a perfect democracy in 1997, it would be difficult to posit the argument that positive progress has occurred on this front. So if Russia didn't come close to meeting the loose membership criteria, why was it let in? Well, it was pretty simple. We wanted things from the Yeltsin administration, and membership in this prestigious international club was one of the things we could offer in return. In 1994, when the West wanted to ensure that the Russian military departed Estonia on time, we used the carrot of joining the political discussions of the G-7. In his memoir of Clinton administration Russia policy, former Deputy Secretary of State Strobe Talbott quoted then-U.S. President Bill Clinton as saying, "It's a pretty simple deal. We get 'em into the G-7, and they get out of the Baltics. If they're part of the big boys club, they've got less reason to beat up on the little guys." The same logic applied in 1997, when proposing formally turning the G-7 into the G-8 the following year was to compensate thenPresident Boris Yeltsin for the decision to expand NATO. Sure, it sounds condescending -- throwing "ole Boris" a bone, as it were -- but that is the way U.S.-Russia relations were in the 1990s, with Russian power and influence at near all-time lows. Yeltsin understood the logic perfectly well, and he wrote in his memoir "Midnight Diaries" that he viewed his tough stance on NATO expansion as the main reason for the invitation to join the G-8. In 1999, during the negotiations to bring the Kosovo war to an end and to bring in Russian peacekeepers, then-Prime
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Minister Sergei Stepashin acknowledged that the pressure of the Cologne G-8 meeting scheduled for late June pressed the Russians to reach a deal earlier. The invitation to Russia in 2002 for full participation in political and economic discussions, as well as to host the 2006 meeting of the G-8, acknowledged Russian support in Afghanistan post-Sept. 11, 2001, and President Vladimir Putin's decision to accept the next round of NATO expansion quietly. As this brief history suggests, Russia's inclusion into the G-8 has had little to do with its democratic or economic credentials. Now we can argue, and many have, that relaxing membership criteria for Russia to join the G-8, the Council or Europe or a number of other international institutions was and is a mistake. But in the case of the G-8, it is not even that the membership criteria were relaxed, but rather that Russia was let in for really quite different reasons. It seems just a tad self-righteous and hypocritical to come back now and argue that Russia should be excluded for reasons that were not really part of its membership criteria. But it provides a convenient excuse for some congressional grandstanding during an election year. Similarly, the recent entry of seven new states, including the Baltic states, into NATO has triggered many well-worn and neuralgic arguments from Russian government officials and political elites about the potential threat that NATO presents. However, it is simply not credible that four old Belgian jets patrolling Baltic airspace present any kind of real threat to Russia. Nor does the possible creation of smaller "lily pad" bases in new member states like Romania and Bulgaria present any threat to Russia. Russia has a very different kind of relationship with NATO today than during the Cold War, so the movement of bases closer to Russia's borders does not simply equate to an increased threat environment for Moscow, as traditional military planning might suggest. None of this is to suggest that Russia, the United States and Europe don't have real differences to address, or that existing institutions have fully adapted to rapidly changing conditions. On European security, resolving our differences over the Conventional Forces in Europe Treaty, including the importance of its
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ratification by the Baltic states, and for Russia to fulfill its Istanbul commitments to close bases in Moldova and Georgia, are and will be challenging. Let's not also forget, however, that Russia and NATO military forces are working increasingly closely to achieve joint operability. Putin and Defense Minister Sergei Ivanov last week articulated the importance of moving a positive agenda with NATO forward. And while democracy in Russia has taken steps backward, throwing Russia out of the G-8 is not the solution, either. Part of the rationale for admitting Russia into the G-8 and other institutions is that through interaction with powerful market democracies in a format of equal partnership, Russia would over time be socialized to different standards of conduct. Just as it would be premature to pronounce the demise of NATO (as many Russians would like), so it would be premature and not in the interests of the West now to close the books on the long-term prospects for Russia's integration with the West.

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6.1 Returning to market

With Russian companies resuming equity placements in 2010 and a number lined up to go to market in 2011, Business RT spoke with Tom Blackwell from M:Communications Russia about the factors they consider and the difference between success and failure. RT: Global markets are shivering over debt issues and rating cuts. Is it not risky for Russian companies to list in such market conditions? TB: I think certainly there is a lot of nervousness around the world, and some of that reaches into Russia.Is it risky?I think you have to look at some of these things case by case, and I think what youve seen is that, as youve said there has still been $2 billion raised so far this year.There are still companies that meet the criteria and are able to get their stories away and others have struggled and partly that is influenced by the market conditions and partly thats influenced by more company specific aspects. RT: Which sectors of the Russian economy are of the most interest for foreign investors and why? TB: Well I think that if you look at how the Russian IPO market has evolved over the last few years, you have had a lot of diversification whereas previously in the early days it was more the natural resource stories that dominated the capital markets, and you moved out into the consumer area, the retail consumer goods and what have you. At this stage you have a lot of the sectors which are quite well represented, so there has been proven appetite and demand for more or less any sector of the economy that meets a certain investor criteria. If you look at the deals which are in the pipeline at the moment and coming up over the next year, you have anything from toilet paper, to shoes, to coal, to manufacturing, maybe even
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helicopters. Youve got a big range, and I think within that its a matter of whether the companies can present the right kind of story. RT: Are Russian IPOs a good opportunity for a foreign investor and why? What's your advice? TB: I think there has been a lot of skepticism generally.People have looked at the performance of Russian IPOs and Russian companies that have listed and where they are trading today versus where they were at the listing date.And I think its true that if you look at where everyone, by and large, is trading, its not quite as impressive as you would have hoped at the times when buying into these deals.But I think that you have to add a bit of perspective into that when you are looking at the performance of Russian IPOs over the last several years.The IPO market has really only existed for about five or six years, by and large, and within that timeframe you have had some fairly major things happening in the global economy, including the worst crisis in, sort of, living memory.And that obviously, Russian stocks, like many others were hit fairly substantially, and many now are recovering and getting back into pre-crisis levels.But you have to factor that in then you look at the performance of Russian IPOs specifically. RT: What's behind the failures of mobile phone retailer Euroset and Severstal's unit Nord Gold earlier this year? Are they asking for too much? TB: Well I think, were they asking too much? Thats one of the

questions.Valuation and price is always going to be one of the key questions investors look at.But if you look at the concerns and considerations of investors today, they are fundamentally no different than they were five or six years ago.There has always been fairly key themes that investors have looked at.One is obviously the price and that we discussed, but they also want to see a reasonable split between primary and secondary not just a case of a shareholder selling out completely, that some of the money is going into the company, they dont mind seeing some of the money going to paying down debt, but to see it an entire debt driven story, and so on.But they have always been the criteria from the beginning and they remain so today.And perhaps there is even more scrutiny around those
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core areas.So if you look at the deals which didnt happen, you would probably be able to see why those deals didnt get away, why they didnt get the demand, based on those criteria I mentioned.

7.1 Rostelecom consolidates to lead to local telecoms shakeup

From April, 1 Sibirtelecom, Southern Telecommunications, Northwest Telecom, Volgatelecom, Uralsvyazinform, CenterTelecom, Dalsvyaz and

Dagsvyazinform are officially merged into Rostelecom. The consolidation process has seen ordinary and preferred shares in the eight companies converted into ordinary Rostelecom shares along with bonds. Alexander Provotorov, president Rostelecom , hailed the consolidation saying that it paves the way for a new global fixed line player. "The biggest telecommunications company in Russia has been created, which could become the unconditional leader in several segments of the domestic market." Georgy Voronkov, analyst telecoms at InvestCafe believes the merger is likely to generate synergies with staff numbers likely to be trimmed as function duplications between the former companies are eliminated. But he believes that customers are barely likely to notice. I dont think customers will noticed any changes in service provision. Pricing can vary only within the price wars with competitors; it is a concern for long-distance service in Moscow where Rostelecom is losing its market share. In order to increase customer loyalty Rostelecom may intend to reduce prices on long-distance calls. With the consolidation underway Rostelecom president Alexander Provotorov says a placement of shares in London is moving onto the radar, although he didnt indicate a specific timeframe and said the company is not in need of equity funding currently.
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"It'll probably be the LSE, however, the company does not need additional funds and we don't plan to raise additional funds on the exchange in the near future" Provotorov added that mobile players are looking attractive as merger partners, dovetailing with the new Rostelecom strategy. "Some of them are already ready for merging as they are leaders in their markets, and others are not quite ready. The whole process will take some time," Svyazinvest general director, Vadim Semyonov, says Rostelecom might take on Sky Link, with Svyazinvest looking for a supportive partner for Sky Link expansion. Svyazinvest as the main shareholder of Sky Link is considering various options for its development. We hope in this matter, Rostelecom will help us." Voronkov Georgy, analyst telecoms InvestCafe, says the move will help company to succeed in an alternative business niche. Analysts believe the consolidation will make it easier for the company to attract loans and investment. The establishment of the merged Rostelecom will see an increase in the share free float which will be added to the MSCI Russia and MSCI EM May 31. Georgy Voronkov also believes that Rostelecom will expand its broadband operations, with the broadband market rapidly becoming a core market.

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8.1 Russia and Europe to push on roaming call charges

Russia and European Commission have agreed to work on a partnership agreement allowing Russia to become a member the European roaming model, after a meeting between the Russian Ministry of communications and members of the European commission in Brussels. Igor Shchegolev Russian Minister of communications hailed the move saying that the proposed model will improve communications from abroad. We have expressed willingness to join the European model and extend it to Russia. This means that Russian citizens will pay for services according to European tariffs According to the Ministry of Communication experts from both parties will work out the most feasible scheme of cooperation, with the Minister looking for an expedited outcome. The road map can be presented by April and talks on the project should be finished not earlier than in 2012. The Russian side is ready to accelerate talks. Prime Minister Putin stressed the importance of the issue for Russian citizens with Minister for Communications, Igor Shchegolev, prior to Euro commission meeting. We have raised these issues in bilateral negotiations with mobile operators and we continue to push them, but the issue should be addressed to the European Union because the European Union has a single roaming rate, there are two special rules of the European Union, which is compulsory for all participating countries Viktor Markov Senior Analyst Zerich Capital Management believes this bilateral agreement could see costs fall for many Russian roaming customers.
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It is a good sign for Russian citizens and a strong regulatory move to support customers and control tariffs of mobile operators. The price of roaming was earlier addressed by the regulatory body following unjustified overstatement of tariffs. The operators were overpricing roaming tariffs according to their own calculations unproved by the general rules. On the other side foreign operators impose high prices on connection service. Currently, the roaming tariff includes Local operator tariff cost plus foreign operator tariff and additional costs for connection service. If Russian operators will apply the European roaming model the tariff will exclude the connectivity cost and operators will be able to change and influence the tariffs only according to the European charter which states that the cost of out warded calls should not exceed 49 cents per minute and 24 cents per minute for incoming calls. According to Top Three Russian mobile operators statistic data 20 to 30% of revenues comes from roaming services. Markov says that the implementation of the new scheme for roaming service will not affect operators revenues.

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9.1 Prices and Consumer Incomes

The other economic factor that consumers must consider carefully in making their purchases of goods and services is their own level of income. Most people earn their income from the work they perform, whether as physicians, carpenters, teachers, plumbers, assembly line workers, or clerks in retail stores. Some people also receive income by renting or selling land and other natural resources they own, as profit from a business or entrepreneurial venture, or from interest paid on their savings accounts or other investments. We later describe how the prices for those kinds of payments are determined; but the important points here are that: 1) in a market economy, the basic resources used to make the goods and services that satisfy consumer demands are owned by private consumers and households; and 2) the payments, or incomes, that households receive for these productive resources rise and fall and that fluctuation has a direct influence on the amount consumers are willing to spend for the goods and services they want, and, in turn, on the output levels of the firms which sell those products. Consider, for example, a worker who has just retired, and as a result earns only about 60 percent of what she did while she was working. She will cut back on her purchases of many goods and services especially those that were related to her job, such as transportation to and from work, and work clothes but may increase spending on a few other kinds of products, such as books and recreational goods that require more leisure time to use, perhaps including travel to see new places and old friends.
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If, as in many countries today, there are rapidly growing numbers of people reaching retirement age, those changing spending patterns will affect the overall market prices and output levels for these products, and for many others which retirees tend to use more than most people, such as health care services. In response, some businesses will decide to make more products and services geared toward the particular interests and concerns of retirees as long as it is profitable for firms to produce them. To summarize: whether consumers are young or old; male or female; rich, poor, or middle class; every dollar, peso, pound, franc, rupee, mark or yen they spend is a signal a kind of economic vote telling producers what goods and services they want to see produced. Consumer spending represents the basic source of demand for products sold in the marketplace, which is half of what determines the market prices for goods and services. The other half is based on decisions businesses make about what to produce and how to produce it.

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10.1 Russian billionaires back in town

The number of Russian billionaires has returned to beyond pre crisis levels according to the annual survey by Finans magazine. The annual survey undertaken by the magazine shows that Russia currently has 114 billionaires, more than the 101 it had in 2007, but with the net worth of the richest 10 Russians still down at $182 billion, compared with $221 billion in 2007. Retaining number one position is NLMK Chief, Vladimir Lisin with a net worth according to Finans magazines list of the Richest Russians compiled at the end of 2010, of $28.3 billion.His net worth has been buoyed by the rebound in the Russian stock market since the start of 2010, with seemingly insatiable Chinese demand for steel also helping global steel prices, and his wallet. Mikhail Prokhorov, owner of the New Jersey Nets, Chairman of Polyus Gold, and president of Onexim came in at second position with a net worth estimated at $22.7 billion, largely through having sold his stake in Norilsk Nickel at the height of the 2007-2008 boom, and purchased a half stake in Renaissance Capital, with the performance of gold also helping his Polyus Gold operations over the last 18 months. Another beneficiary of the rebound in global demand and prices for metals is Russias third richest magnate, Alisher Usmanov, who Finans magazine estimates is worth $19.9 billion.The co owner of Mettaloinvest also has significant media, telecoms and internet interests, and is a major shareholder in Londons Arsenal Football Club.

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Metals also underpin the wealth of Oleg Deripaska, General Director and majority shareholder in Rusal, the worlds largest Aluminium producer, with an estimated net wealth of $19 billion. Roman Abramovich, owner of the Chelsea football Club, and majority shareholder in Millhouse, rounds out the top 5 Russian billionaires with a net wealth estimated at $17.1 billion.A major shareholder in steelmaker and miner, Evraz, he also has gold interests through Highland Gold. Rounding out the top ten, according to Finans Magazine, were more metals and energy magnates, Alexei Mordashev ($17.05 billion), Suleiman Kerimov ($16.9 billion), Mikhail Fridman ($16 billion), Vladimir Potanin ($14.3 billion) and Vagit Alekperov ($10.9 billion).

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The West Must Not Turn Its Back on Russia By Andrew C. Kuchins Russia's ties with the West have been experiencing growing tension of late. The Yukos affair, the conduct of the parliamentary and presidential elections, increasingly Soviet-like national television and other developments have contributed to what U.S. Ambassador Alexander Vershbow and others have diplomatically alluded to as a "values gap." Debates about Russia and its place in international institutions have become more heated. Similarly, Russia's stances toward the United States, NATO and the European Union have also become more contentious. Unfortunately many of these discussions are replete with dubious interpretations of revisionist history and patently unconstructive approaches from both sides. This has been especially true concerning the future of Russia's role in the G-8 as well as its ties with the newly expanded NATO. Bipartisan legislation in the U.S. House of Representatives, House Resolution 336, introduced by Democrat Tom Lantos and Republican Christopher Cox, calls for throwing Russia out of the G-8 if it does not make significant progress on a number of issues, including: the rule of law, including protection from selective prosecution and protection from arbitrary state-directed violence; a court system free of political influence and manipulation; a free and independent media; a political system open to participation by all citizens and that protects freedom of expression and association; and the protection of universally recognized human rights. This resolution follows similar legislation introduced into the Senate by
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Democrat Joe Lieberman and Republican John McCain in the fall, after the arrest of former Yukos CEO Mikhail Khodorkovsky. There is no question that all of the above points are laudable issues. I and many of my colleagues in and out of government have expressed concern about them over the years and increasingly in the last six months. There is also no question that Russia is deficient on these points in comparison with other G-8 member states. But there are no formal membership criteria for the G-8. Informally, the criteria are that member countries be developed market democracies with large and influential economies. When Russia was invited to become a formal member of the G-8 in 1997, it did not meet any of the above criteria. Even today it really meets only one of those criteria since it was recognized as a market economy by the United States and the European Union in 2002. Even now, into its sixth year of economic growth, Russia is not one of the 10 largest economies in the world. And while Russia was hardly a perfect democracy in 1997, it would be difficult to posit the argument that positive progress has occurred on this front. So if Russia didn't come close to meeting the loose membership criteria, why was it let in? Well, it was pretty simple. We wanted things from the Yeltsin administration, and membership in this prestigious international club was one of the things we could offer in return. In 1994, when the West wanted to ensure that the Russian military departed Estonia on time, we used the carrot of joining the political discussions of the G-7. In his memoir of Clinton administration Russia policy, former Deputy Secretary of State Strobe Talbott quoted then-U.S. President Bill Clinton as saying, "It's a pretty simple deal. We get 'em into the G7, and they get out of the Baltics. If they're part of the big boys club, they've got less reason to beat up on the little guys." The same logic applied in 1997, when proposing formally turning the G-7 into the G-8 the following year was to compensate then-President Boris Yeltsin for the decision to expand NATO. Sure, it sounds condescending -- throwing "ole Boris" a bone, as it were -- but that is the way U.S.-Russia relations were in the 1990s, with Russian power and influence at
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near all-time lows. Yeltsin understood the logic perfectly well, and he wrote in his memoir "Midnight Diaries" that he viewed his tough stance on NATO expansion as the main reason for the invitation to join the G-8. In 1999, during the negotiations to bring the Kosovo war to an end and to bring in Russian peacekeepers, then-Prime Minister Sergei Stepashin acknowledged that the pressure of the Cologne G-8 meeting scheduled for late June pressed the Russians to reach a deal earlier. The invitation to Russia in 2002 for full participation in political and economic discussions, as well as to host the 2006 meeting of the G-8, acknowledged Russian support in Afghanistan post-Sept. 11, 2001, and President Vladimir Putin's decision to accept the next round of NATO expansion quietly. As this brief history suggests, Russia's inclusion into the G-8 has had little to do with its democratic or economic credentials. Now we can argue, and many have, that relaxing membership criteria for Russia to join the G-8, the Council or Europe or a number of other international institutions was and is a mistake. But in the case of the G-8, it is not even that the membership criteria were relaxed, but rather that Russia was let in for really quite different reasons. It seems just a tad self-righteous and hypocritical to come back now and argue that Russia should be excluded for reasons that were not really part of its membership criteria. But it provides a convenient excuse for some congressional grandstanding during an election year. Similarly, the recent entry of seven new states, including the Baltic states, into NATO has triggered many well-worn and neuralgic arguments from Russian government officials and political elites about the potential threat that NATO presents. However, it is simply not credible that four old Belgian jets patrolling Baltic airspace present any kind of real threat to Russia. Nor does the possible creation of smaller "lily pad" bases in new member states like Romania and Bulgaria present any threat to Russia. Russia has a very different kind of relationship with NATO today than during the Cold War, so the movement of
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bases closer to Russia's borders does not simply equate to an increased threat environment for Moscow, as traditional military planning might suggest. None of this is to suggest that Russia, the United States and Europe don't have real differences to address, or that existing institutions have fully adapted to rapidly changing conditions. On European security, resolving our differences over the Conventional Forces in Europe Treaty, including the importance of its ratification by the Baltic states, and for Russia to fulfill its Istanbul commitments to close bases in Moldova and Georgia, are and will be challenging. Let's not also forget, however, that Russia and NATO military forces are working increasingly closely to achieve joint operability. Putin and Defense Minister Sergei Ivanov last week articulated the importance of moving a positive agenda with NATO forward. And while democracy in Russia has taken steps backward, throwing Russia out of the G-8 is not the solution, either. Part of the rationale for admitting Russia into the G-8 and other institutions is that through interaction with powerful market democracies in a format of equal partnership, Russia would over time be socialized to different standards of conduct. Just as it would be premature to pronounce the demise of NATO (as many Russians would like), so it would be premature and not in the interests of the West now to close the books on the longterm prospects for Russia's integration with the West.

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Cooperating on Iran As the Bush administration wrestles with changes in the U.S.-Russia relationship, the issue of Iran's nuclear proliferation has re-emerged as the most important source of tension between the two states. This past weekend, the U.S. State Department imposed sanctions against two Russian firms based on "credible information" that they were selling equipment that could assist Iran in its quest for weapons of mass destruction. The bogeyman of Russians providing Iran with "the bomb" remains alive and well in Washington. Indeed, at a hearing convened by the House International Relations Committee on March 18, the question of Russian support for Iran's nuclear program was repeatedly raised by members of Congress and cited as a major stumbling block for the development of partnership between the two countries. Successive U.S. administrations have viewed Russia as Iran's foremost nuclear supplier and thus believe that getting Moscow to cease all cooperation with Iran -- even in areas permitted under the Non-Proliferation Treaty -- is the principle counter-proliferation measure. However, given Iran's rapid pace toward self-sufficiency, cutting off Russian assistance will no longer have a material impact on Iran's nuclear path. Iran can cross the nuclear threshold without receiving a single addition piece of Russianmanufactured dual-use technology. Over the past few years, a series of revelations have revealed that the Islamic
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Republic is increasingly employing its civilian nuclear research program to gather sufficient knowledge and expertise to achieve a nuclear weapons capacity. The first shock came in August 2002, when U.S. intelligence reported that Iran had built extensive facilities for enrichment of uranium in Natanz. The Natanz installation currently contains 160 centrifuges needed for this purpose, with another 1000 under construction. The plan is to have 5000 operational centrifuges within three years. In addition, it appeared that Tehran was completing another facility at Arak for heavy water production. The most recent IAEA inspection team has ominously found many traces of concentrated fuel suggesting that Iran has largely completed an indigenous fuel cycle. Given the sophisticated nature of Iran's program, traditional tools of counter-proliferation such as pressuring Russia and other countries not to engage in trade with Iran and instituting a more rigorous export control policy are unlikely to succeed. Given that neither IAEA's more intrusive inspections nor pressure on Iran's suppliers is likely to obstruct Tehran's path, Washington has to devise a new strategy of pressure where Russia is an active participant. Tehran will only abandon its WMD program if it is made clear that violation of clearly demarcated red-lines -- including the testing and deployment of nuclear weapons -- would lead to Iran's total economic and diplomatic isolation. The Islamic Republic remains vulnerable to multilateral economic pressure, particularly from its more reliable commercial partners such as the EU and Russia. Indeed, it was only after the European states suspended their trade discussions with Iran that the mullahs agreed to sign the additional protocols. And this is a threat that the regime cannot ignore. Increasingly pressed to provide economic opportunities to a more and more restive (and young) population, Tehran needs trade and investment for survival much more than nuclear arms. As long as U.S. economic sanctions remain in place, Iran's Moscow connection is a

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vital lifeline and so gives Russia a good deal of influence. If the United States is serious about preventing an Iranian nuclear breakthrough, Russia has to be a major part of the solution. A U.S. policy of continuously decrying Russian conduct and imposing sanctions and penalties is guaranteed to lead to Kremlin intransigence, at a time when cooperation is needed. Moreover, the sanctions have no practical impact. The companies sanctioned are not seeking any investment from U.S. sources nor have any prospects for business deals with American firms. The only tangible result is an irritated Russian Foreign Ministry. Meanwhile, the Iranian government hopes to exploit dissension between the United States and its key partners in Europe and Asia to deflect attention away from its WMD programs. Shifting the focus away from Russia's business deals onto Iran's treaty obligations is an appropriate first step. The onus should not be placed on Russian companies to prove beyond a shadow of a doubt that technology they legally sell to Iran is being used for nefarious purposes. Russia cannot be expected to accept U.S. calls for isolating Iran, especially when nothing substantive is being offered in return. Both Moscow and Washington, however, want a non-nuclear Iran. So rather than pressing the Kremlin to abandon all ties between Russia and Iran, the Bush administration would be best served by enlisting Russian help to monitor the situation in Iran, and, if necessary, to serve as an intermediary between Washington and Tehran. Russian-American cooperation has helped to defuse the tensions on the Korean peninsula. There is no reason this model could not work in the Persian Gulf as well.

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By Stan Crock

"Analyzating" Bush's Grey Matter

The President's tendency to mangle words and syntax may be due to an undiagnosed language and hearing disability, say some experts Ever wonder why President Bush says "nuculer" when he means "nuclear" or "subliminate" when he means "subliminal?" Or why he mixes up perseverance and preservation? Why does he mangle the English language often enough for Slate Editor Jacob Weisberg to produce three books of Bushisms such as "I know how hard it is for you to put food on your family." Are you still puzzled that Bush: Was a "C" student and class clown, yet became President? Doles out odd nicknames with abandon? Has held only 12 Presidential news conferences, the lowest frequency for a President since Richard Nixon's scandal-plagued second term? Chose to go one-on-one with Meet the Press's Tim Russert, one of the roughest interviewers in the business during one of the toughest times in his Presidency? Stunned former Treasury Secretary Paul O'Neill by barely responding in their first hour-long briefing at the White House? Doesn't "do nuance," as the President himself puts it? "SUBTLE DISORDER." To some learning-disability experts, the signs are clear: Bush might want to pay them a visit. These experts haven't tested the President, so they caution that they can't be certain of the diagnosis. Yet, ample signs indicate that something unusual is going on in the left side of his brain, where language and hearing are processed. The possibility is high that there's some dysfunction in the way he hears words, the
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way he processes what he hears, or the way he retrieves words when he tries to speak. When someone uses the wrong word or malapropisms and has difficulty with grammatical sentences, experts on learning disabilities "typically suspect at least a subtle language disorder," says William Stixrud, a clinical neuropsychologist in Silver Spring, Md. Some voters infer from Bush's syntax and behavior that he isn't the sharpest saw in the tool box. Yet, learning and processing disorders aren't indicators of native intelligence. If anything, a learning disability would better explain how Bush has accomplished so much, with his critics underestimating him every step of the way. ALL IN THE FAMILY? Those with learning disabilities can become stellar achievers precisely because they develop compensating mechanisms to overcome their syndromes -- often using their own intuition and smarts. The SchwabLearning.org Web site, which bills itself as a guide for parents of learningimpaired kids, lists more than 50 luminaries with disabilities, including athletes Bruce Jenner and Magic Johnson, actors Henry Winkler and Whoopi Goldberg, and business executives Richard Branson and Charles Schwab. Such disorders often are genetic, and the Bush family has a history of them -Bush's brother, Neil, has been diagnosed with dyslexia. Bush's other brother, Marvin, has a son in a Washington school for children with learning disabilities. Perhaps as a result, the President's mother and First Lady Laura Bush have both been big advocates of improving reading skills. Journalists have tried in the past to explain Bush's peculiar speech and processing patterns. In May, 2000, Dana Milbank of the Washington Post suggested that Bush's speech patterns reflect the patois in Midland, Tex., which Eastern elites disdain. Maybe it was something he learned or inherited from his dad, for whom uttering a complete, syntactically correct sentence often was a challenge. Another possibility Milbank cited, which was suggested by a Bush aide: The President's agile brain works faster than his mouth. Milbank also quoted an expert who opined that the symptoms resemble apraxia, an inability to position the lips, jaw, and tongue properly when speaking. In a Bush profile in the October, 2000, Vanity Fair, Gail Sheehy postulated that Bush, like his brother, has dyslexia, which is commonly seen as a reading disability. DIGGING DEEPER. Weisberg says in the introduction to his first volume of Bushisms that he doesn't buy these theories. He notes, as Milbank did, that apraxia usually produces shortened words, while Bush sometimes elongates them, as when he says "analyzation" instead of analysis. And if Bush had dyslexia, he wouldn't be able to read a TelePrompTer so well, Weisberg postulates. But with sufficient practice, someone with the disorder could read a speech adequately, says Kathy
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Hosty, a Washington, D.C., speech-language pathologist. Bush has denied in the past that he has dyslexia. Asked for this column if the President has a language disorder, White House spokeswoman Claire Buchan dismissed the idea, without flatly denying it. She told BusinessWeek Online Bush's medical records have been scrutinized for 15 years. "The American people know more about the President's health than just about anyone's," she added. I started to look for a more satisfactory explanation for Bush's demeanor for several reasons. Frankly, I've long been mystified by the way Bush expresses himself off-the-cuff. Secondly, the President's way of expressing himself clearly throws foreigners, especially diplomats, for a loop. They're appalled, since they view his mastery of language as critical to persuading others of the correctness of America's course in world affairs. A third reason is that a friend of mine has a son who doctors suspect has something called central auditory processing disorder (CAPD). My friend says whenever she sees the President, she sees her son's traits. "OTHER KINDS OF INTELLIGENCE." That led me to do some Web research and talk to some experts on the subject to see what they think. I'm no doctor. I'm a journalist. But it turns out there's an intriguing consensus afoot, and I'm here to report it. According to an article on the Internet by Judith W. Paton, a San Mateo (Calif.) audiologist, CAPD is a physical hearing impairment that doesn't show up as hearing loss but rather affects hearing beyond the ear. In effect, the auditory nerves don't handle the raw data from the ear properly. It's usually found with a cluster of other symptoms. Among the tell-tale signs she cites: Confusion of similar sounding words, terse communications, better hearing when watching the speaker, and trouble hearing when it's noisy. This syndrome, like dyslexia, probably wouldn't have been diagnosed when Bush was growing up. It could explain why, undiagnosed, he was a lackluster student, Paton said in an interview. "A lot of his IQ points were in political intelligence and other kinds of intelligence," she notes. A CLOWN'S MASK. CAPD isn't recognized as a formal diagnosis yet, partly because not enough research has been done on it. "It's a pattern of deficits that has been described by a large body of clinicians, but it hasn't undergone the rigors of scientific verification," says Fresno (Calif.) neuropsychologist Howard Glidden. Some experts also consider it a vague, umbrella term for a lot of traits. What all the experts seem to agree on is that Bush exhibits "phonological" problems, that is, he has trouble breaking apart and putting together the discrete sounds that make up words. That could explain why the President tortures the
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language so often. And his clowning around could have been a way to compensate. Such a syndrome also could explain other characteristics. The nicknames -- he dubbed ex-Treasury Secretary O'Neill "Pablo", for example -- could be a device to help with name retrieval. The infrequency of news conferences could reflect the difficulty someone with CAPD would have in a press-conference setting. While it would be possible to bone up for a quieter one-on-one grilling by Tim Russert, the noise and distractions of a news conference would make the kind of focus Bush may need very difficult. "A news conference would be his worst nightmare," says Hosty. "You can't control the barrage of different communications styles." ONE OF THE GUYS. Bush's penchant for talking about good and evil and for saying countries are either with us or against us in the war on terrorism may also reflect a learning disorder. His professed distaste for nuance could stem from an inability to process the complex sides of an issue. "To analyze that, you have to analyze the language," says Bonnie Rattner, a speech and language pathologist in San Mateo, Calif. One solution: Hire good people to fill the gaps. A business executive with great vision and creativity may not be organized, so the exec would have to employ someone with good executive functions, notes Robert L. Mapou, a Silver Spring (Md.) Ph.D. in clinical psychology who specializes in the neuropsychology of adult learning disabilities. Yes, all of these examples of Bush's behavior have alternate explanations. A lack of focus during a privileged upbringing could explain the President's grades in college. The nicknames could be an attempt to control relationships or be one of the guys. The infrequent press conferences could result from the Administration's penchant for secretiveness and general disdain for the media. COHERENT APPROACH. Likewise, Bush's black-and-white approach can be seen as moral clarity stemming from his religious beliefs or the candor supporters argue is needed relief from diplomatic niceties in perilous times. All these separate explanations are plausible - but taken together, they present quite a coincidence. The language-disorder explanation would cover them all. And if it's right, it should give pause to late-night comedians Jay Leno, David Letterman, and Jon Stewart. The President's twisting of the English language may be a phenomenon that's far more complicated than comic.

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Reviving the Lubyanka Method

By Yevgenia Albats People do change their views. However, when they change those views 180 degrees from being in harsh opposition to the regime to calling on others to be loyal to the sovereign, i.e. President Vladimir Putin, as Mikhail Khodorkovsky did in his open letter earlier this week, and when they perform such a volte-face not from the comfort of their office but from a prison cell (in anticipation of being sentenced to years in a labor camp, where tuberculosis etc. are rife), such a recovery of sight comes across as a little bit suspicious, doesn't it? It sounds more like a plea or an entreaty to be pardoned, as opposed to the free expression of the views of a successful businessman, one-time political dissident and one of Russia's most powerful personalities -- as Khodorkovsky used to be. It matters little whether the letter was written by Khodorkovsky himself, as his lawyer claims, or whether there were co-authors. We now know that those people who used to write Khodorkovsky's speeches were not involved in the endeavor. We also know that everything which came out of his prison cell in Matrosskaya Tishina first went through severe scrutiny and often did not reach its intended destination, while at the same time several drafts of the letter were circulated back and forth for some time, and one was even leaked to a web site. However, the Justice Ministry, under whose jurisdiction prisons are, publicly acknowledged that the letter's publication in a Moscow newspaper came as a surprise, and it is going to conduct an investigation as to how it happened. Oh, really? Maybe we should help Justice Ministry officials and provide them with the address, or are they capable of finding it themselves? What really matters in this whole saga, however, is the method used to bring closure to this dead-end case which has been damaging Putin's reputation as a modern, enlightened leader for quite a while now; and the real goal behind
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selecting public self-condemnation as that method. There can be no doubt that Khodorkovsky's trial will not now produce any scandal and that the president's once fierce opponent will get a lighter or suspended sentence. The closure may even coincide with or occur before the G-8 summit that will be held in the United States in late June, making it easier for President George W. Bush to once again look into Putin's eyes, see his soul and endorse the Russian president's vision of democracy at home. For scholars of Soviet politics, the method used is not a new one. It was successfully developed by Josef Stalin during the show trials of the 1930s and, with the help of The New York Times reporter Walter Duranty, it was accepted as valid by Western public opinion. However, it was turned into an art form by the KGB's Fifth Directorate (for ideological counterintelligence) in the 1970s, when several famous Soviet political dissidents acknowledged their activities against the regime as being wrongful and caused by misleading Western propaganda. It was standard practice for these "most sincere confessions" to be accompanied by betrayal and/or condemnation of former comrades-in-arms, just as Khodorkovsky accuses Yegor Gaidar, Anatoly Chubais (who was one of the few to raise his voice in Khodorkovsky's defense at the time of his arrest) and other liberals of all sins imaginable (including his own), and calls on readers not to be blinded by approaches used in the West but instead to look for Russia-specific ones. The outcome of such confessions in the 1970s is well-known: Some got freedom right away, others spent years in exile rather than spending time in labor camps (as happened with Kremlin spin doctor Gleb Pavlovsky). Back then confessions came at the time of dtente, when the Soviet Union, along with some 34 democracies around the world, signed the Helsinki Bill of Rights. Public selfcondemnation by those formerly opposed to the repressive regime suited the Kremlin's purposes both domestically and internationally. Domestically the message was: "Watch out, the Lubyanka can break even the strongest, so don't even dare to speak out against the regime." The very same message is broadcast loud and clear by Khodorkovsky's letter. Internationally it served an important purpose as well: It allowed leaders of Western democracies to accept their Soviet counterparts as equals and to turn a blind eye to Soviet repressions. The same is true now, in view of the upcoming G8 meeting: An issue raised by top U.S. diplomats in talks since Khodorkovsky's arrest has happily been diluted. Other G-8 leaders can get a breather and avoid feeling morally corrupted and cynical, when they once again acknowledge Putin as an enlightened democratic leader -- as one of them. Long live the Lubyanka method -- at our expense ... Yevgenia Albats hosts a prime-time political talk show on Ekho Moskvy on
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Sundays. She contributed this comment to The Moscow Times.

MinFin Electioneering
y Mikhail Delyagin Official federal budget data cast light on the use of a qualitatively new "political technology" in President Vladimir Putin's Russia: The "shock" financing of politically and socially sensitive budget items in the run-up to elections.
B

In the mid-1990s, when wage and pension arrears were pretty much universal, the clearing of arrears just a few days before an election tended to be a winner for the authorities. Such measures, however, undertaken at the regional level, were largely inconspicuous at federal level. And when the economic situation normalized, such methods could no longer be employed. But 17 days before December's State Duma elections, the Finance Ministry suddenly began financing expenditures "early," disbursing at the end of November money that according to the budget plan should have been disbursed in December. The most likely explanation for such unprecedented actions was that elections were taking place on Dec. 7, and funds disbursed from the budget even bang on Dec. 1 might not have reached voters' pockets in time to influence their voting behavior. Spending on education exceeded the plan for November by 6.5 percent; on ecology by 7 percent; on transport and communications by 10 percent; on healthcare by 13 percent; on government administration by 15 percent; on law enforcement and security by 16 percent; on "mobilization preparations" by 35 percent; on culture and the arts by 36 percent; on the destruction of weaponry by 40 percent; on the mass media by more than a factor of 1.5; on science by 57 percent; and on space by 85 percent. The total "early" disbursement for these budget items exceeded 10 billion rubles -of which 4 billion went to the law enforcement agencies and FSB.
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At the same time, the general policy of containing inflation by "freezing" money on budget accounts was continued, inter alia by not fully disbursing allotted budget funds. Overall, despite the forced pace of payment on the most sensitive items, as usual budget funds were not fully disbursed to the tune of 24 billion rubles. Thus, taking into account the early disbursement of funds for sensitive items, politically non-sensitive budget items were underfunded to the tune of 34 billion rubles in November. For the more important presidential election, however, the authorities temporarily forgot about battling inflation. In February 2004, federal budget spending grew by more than two-thirds compared to January, from 163 to 273 billion rubles, although revenues remained virtually unchanged. The only reason for this "explosion" was to "massage" the spirits and the pockets of those who receive budget funds just before the presidential election. It was Boris Yeltsin that people voted for "with their hearts" in 1996; courtesy of the Finance Ministry, people also voted with their pocketbooks for Putin. As a result, while in January the budget had a surplus of 55 billion rubles, in February it had a similar-sized deficit. "Shock" disbursement was carried out by specially accumulating funds on budget accounts: In January these funds were increased by 50 billion rubles, exceeding 300 billion rubles in total; in February, they fell by 75 billion rubles. Also indicative are changes in budget recipient account balances. In Russia, it is not enough to receive funds from the budget -- the Finance Ministry also has to sanction their disbursement. Apart from the desire of bureaucrats to "show who's boss," the Finance Ministry's tight-fistedness can be explained by the desire to contain inflation through "freezing" funds, including those on budget recipients' accounts. That is why budget recipient account balances tend to grow in the course of the year. In January 2004, balances increased by 48 billion rubles. You might expect that in February, with a sharp increase in spending, there would be "congestion" on budget recipients' accounts for purely technical reasons. However, in fact, only an insignificant sum (less than 2 billion rubles) got stuck. This underlines the Finance Ministry's desire to ensure that just before elections, unlike the rest of the time, budget funds reached budget recipients in a timely fashion. Probably in order to disguise these tricks, the Finance Ministry stopped publishing monthly data on budget payments by item, instead publishing only quarterly reports. But even they make it quite clear what is going on. Total federal budget expenditures for January-February 2004 were 65 percent of the quarterly projected levels, while those items that were disbursed early had blatant electoral importance. Disbursement of funds for government administration amounted to 75 percent of
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the quarterly plan, while for the analogous period of the previous year it was only 60 percent. Funding in February grew by a factor of 1.6 compared to January 2004. Top priority went to the "power agencies." Funding was 77 percent of the quarterly plan, compared to 61 percent in January-February 2003. Moreover, in February 2004 spending increased by a factor of 1.8 compared to January (and defense spending doubled). Assistance to the regions in January and February was funded at 72 percent of the projected level (64 percent was the figure for that period in 2003); February spending exceeded January by 55 percent. On the eve of the elections, even industry which is normally passed over, received additional funds. Thus, the conclusion is that the real priorities in the run-up to the presidential election -- in contrast to the parliamentary elections -- were bureaucrats, siloviki and the regional and industrial elites. The narrowing of priorities and the character of those priorities reflects the decline of democracy in the March presidential election, even compared to the tragic December parliamentary elections. Mikhail Delyagin, chairman of the presidium of the Institute of Globalization Studies, contributed this comment to The Moscow Times.

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