German Gref, the head of Sberbank, Russia's biggest lender, became a shareholder in the firm for the first time after buying a 0.000004 percent stake worth $2,500, the bank said on Monday.

The state-controlled bank, which has a market cap of $51.2 billion, has been hit hard by the global economic downturn, but aims to return to pre-crisis profitability with an expected net of at least 100 billion rubles this year.

Gref bought 1,079 ordinary shares worth 76,000 roubles ($2,493), according to Reuters calculations.

Shares in Sberbank had gained 0.5 percent at 1359 GMT, in line with the broad market index but still 24.1 percent below their 52-week high.

Sberbank's management has been pushing a stock option programme for several years but so far has had no success in persuading the central bank, which holds a controlling stake, to go ahead with the programme.

German Gref, a former economy minister, took the helm at the bank in autumn 2007, promising to change a clumsy Soviet-era behemoth into a modern financial services firm capable of competing against global rivals.

In another development the bank opted against selling dollar bonds for the first time in two years because debt markets are too unstable, Deputy Chief Executive Officer Anton Karamzin told Bloomberg Businessweek in an interview published Monday.

“The market now is far too volatile and dislocated to ensure comfortable levels for us,” Karamzin said in an interview on the 22nd floor of the state-run company’s Moscow headquarters last week.

Karamzin, 40, said the decision to delay selling foreign currency debt was made even after foreign investors showed a “healthy appetite” for Sberbank debt during meetings in Europe. “We have excessive liquidity and can wait until the right moment on the market,” he said.

Europe’s sovereign debt crisis has led to credit downgrades for Greece, Spain and Portugal and discouraged lending, pushing interbank interest rates to a 10-month high on May 27. The yield on Sberbank’s 6.468 percent, $500 million bonds due July 2013 jumped to 5.487 percent on May 25 from 4.103 percent on April 29, the day the lender hired banks to organize meetings with potential bond investors. The yield has since retreated to 4.789 percent.

Sberbank, whose market value exceeds Credit Suisse Group AG’s, will consider selling $1 billion of “five-year senior unsecured” notes to establish a benchmark “if the price is right,” Karamzin said.

Inflation Vs. Loan Growth

Sberbank’s loans-to-assets ratio is less than 75 percent, compared with 85 percent 18 months ago, which “wasn’t particularly comfortable for us,” said Karamzin, who left Morgan Stanley in 2008 to work for CEO and former Economy Minister German Gref. “The current ratio reflects the situation in the market, where the whole system in Russia and globally has significant short-term liquidity overhang.”

The lender has “excessive capital” even after it repaid in May 200 billion rubles ($6.5 billion) of the 500 billion rubles it received in a subordinated loan from the Central Bank at the end of 2008.

‘Very Fine Line’

“Hopefully, within the next month or two,” the government will decide whether to cut the rate on subordinated loans outstanding, Karamzin said. “If the price is not changed, it would be quite expensive for us to keep it.”

“The demand for loans in the real sector is still weak,” Karamzin said, adding that “great caution needs to be exercised” when considering interest-rate cuts. The central bank is “walking a very fine line” between stoking lending and spurring inflation, he said.

Annual consumer-price growth slowed to 6 percent last month, the lowest level in 12 years. Gross domestic product may expand 4 percent this year, up from an earlier forecast of 3.1 percent, according to the Economy Ministry.

‘Our Word: Caution’

“We lend to every industry and every sector and every segment, so we are more closely linked to the macro than any other bank in this country,” Karamzin said. “Whilst there are some clearly visible green shoots, our word is that of caution,” he said. Sberbank sees this year’s growth at 3.8 percent, a forecast which may be revised, he said.

The 169-year-old lender is focusing on attracting more clients among small and medium-sized businesses and setting “aggressive targets” for its brokerage business, which caters to the “broader public’s interest in investment in the securities market,” Karamzin said.

Sberbank, which bought No.3 Belarusian lender BPS Bank in December for $281 million, is looking abroad for other opportunities, particularly in Turkey, eastern Europe and former Soviet republics.

“It would be nice to be able to pick up a platform that covers all” of Eastern Europe. Karamzin said. “If the right opportunity arises, we are prepared to move relatively quickly, to not drag our feet.”

51% stake in retailer

Also on Monday Sberbank took over a 51 percent stake in private food retailer Vester as part of a debt forgiveness deal, Vester said on Monday.

Vester is the third retailer in which the state-controlled lender has acquired control in exchange for a debt writeoff as some small and medium-sized chains still struggle to refinance debts.

Russian retailers have yet to see a sustainable recovery after consumer demand was battered last year by the economic turmoil. Small companies, stripped of access to cheap credit, have found it hard to survive.

Vester, which operates 51 hypermarkets and supermarkets in Russia, Kazakhstan and Belarus, will get two Sberbank representatives on its board, co-owner Oleg Bolichev told Reuters.

Under the deal signed on May 27 with Sberbank's investment unit, Sberbank Capital, Vester has the right to buy back its business in 2013.

Last year, Sberbank received property of Siberian retailer Alpi -- and later sold it to developers -- and a controlling stake in Mosmart as part of a debt restructuring deal.

Russia's central bankdecided to lower the key policy rate on Monday and said the achieved level may be retained in the coming months. 

The Bank of Russia cut its refinancing rate by 25 basis points to 7.75%, citing low inflationary pressures ahead. The latest is the fourteenth cut in a series that started since April 2009. "In this case, it is estimated that the risk of significant increase in inflation in the coming months remain low," the bank said. 

On April 30, the bank has lowered the policy rate by 25 basis points to 8%. Official data on the macroeconomic indicators of Russia points to the gradual recovery of the economy.

At this juncture, accelerated growth in investment, real wages and retail trade turnover indicates formation of positive trends in domestic demand. The labor market also recorded favorable changes, the bank observed. 

However, Bank of Russia cautioned against prevailing risks of volatility of perceived recovery of credit activity and growth, mostly associated with the uncertainty of the future external economic environment.

The country's annual inflation rate was at 6% in April, while the monthly inflation rate stood at 0.3%.

The Russian economy expanded 2.9% annually in the first three months of this year after contracting 3.8% in the fourth quarter of 2009. The latest expansion is the first since 2008. Gross domestic product fell 7.9% in 2009. 

(RTT News)

by Gordon Hahn

As I have been writing for over two years, Russian President Dmitry Medvedev and Premier Putin are conducting a political and economic liberalization policy in Russia.  Police, penitentiary, legal and judicial reforms along with some minor political reforms are bringing some democratization with this policy. However, many of the authoritarian excesses of the Yeltsin and Putin administrations remain and will persist for some time.

This ‘thaw’ does not mean that non-democratic phenomena disappear immediately. Those who focus on Putin’s past controls and ignore the current tandem’s liberalization, will continue to be off target, just as with the past two years in denying that a thaw had begun.  The fact is Medvedev’s Russia is a mix of ongoing reforms and authoritarian remnants.  It is hybrid government moving towards re-democratization.

Gubernatorial policy is a useful prism through which to examine the reforms and pre-reform remants that coexist simultaneously in Medvedev’s Russia.  He has selected regional governors in new but contradictory ways during his first two years in office.  In the first year, Medvedev moved fairly aggressively to remove regional executives by replacing Putin appointees before their terms expired.  Of the 13 new governors appointed between May ‘08 and April ‘09, 8 were removed before their terms expired.  His second year, May 2009 to April 2010, all 11 new gubernatorial appointees replaced an incumbent after the latter’s term had expired (Dmitry Kamyshev, “Kremlovskii polusrochnik,” Kommersant-Vlast, Nos. 17-18, 10 May 2010). In part this was due to the Medvedev-era reform that gives the regional parliament’s majority party the right to propose candidates and then confirm or reject the candidate approved by the president. Thus, Medvedev was less aggressive, but the system for appointing governors became more routinized in his second year.  It became potentially more liberal––if regional elections become more free and fair.

On the other hand, while Medvedev was less aggressive in removing governors, his new appointees are increasingly from the regions over which they will rule.  This contrasts Putin’s policy, where many governors were from outside the local regions. Only one native was appointed in Medvedev’s first year, but 5 of the 11 new appointees in his second year were natives (Dmitry Kamyshev, “Kremlovskii polusrochnik,” Kommersant-Vlast, Nos. 17-18, 10 May 2010).

Some of Medvedev’s earliest appointees had a liberal bent, although they were outsiders.  The best known was the appointment of a democratic opposition leader, Nikita Belykh, to the governorship of Kirov Oblast.  Belykh had been a frequent detainee at pro-democracy demonstrations and was co-chairman of the opposition coalition ‘Other Russia’ along with bitter Putin critique Garry Kasparov. Belykh brought with him other democratic leaders into the Kirov administration. He appointed another leading democratic leader, Maria Gaidar, the daughter of the controversial Yeltsin-era liberal, Yegor Gaidar.  Ms Gaidar is viewed as a potential leader in any Russian ‘birch revolution.’ Belykh, 33-years old and independently wealthy, auctioned off his predecessor's official luxury car and now donates his salary to orphanages.  Upon assuming office, he immediately crushed regional bureaucratic resistance and corruption by bringing into the region, two major Russian supermarket chains, which had been kept out from the region under Belykh’s predecessor (See, for example, Matthias Schepp, “Medvedev's Man in Kirov: The Russian Dissident Who Became a Governor,” Der Spiegel, 3 March 2010).

The creation of an eighth federal district in January 2010 has been Medvedev’s most aggressive foray into regional policymaking.  The Southern Federal District was split in half to form a new North Caucasus Federal District (NCFD) consisting of the region’s titularly Muslim republics.  Instead of appointing a representative of the siloviki (power ministries or organs of coercion) to the post of NCFD presidential envoy, Medvedev appointed a relatively liberal businessman and governor from Siberia’s Krasnoyarsk Territory.  At the same time, Medvedev promised 900 rbl million of assistance to Ingushetia to provide new work places in the republic that has seen the highest number of terrorist attacks (over 300) of any Russian region during the past three years.  The new governor, Khloponin, immediately met resistance from Chechen President Ramzan Kadyrov, who has carved out an autonomous refuge in the heart of the jihad-plagued North Caucasus.

Kadyrov’s autonomous Chechen fiefdom – not to mention the so-called Caucasus Emirate’s ongoing terrorist jihadism – is one of the greatest of regional challenges to Medvedev’s efforts to implement real reform.  For real change to set it, President Medvedev must move against the most odious of Russia’s three regional governors.  Top on the list are Chechnya President Ramzan Kadyrov, Bashkortostan president Murtaza Rakhimov, and Moscow Oblast Governor Boris Gromov.

Regarding Kadyrov, abductions of citizens continue though on a lesser scale than previously, and his security forces often burn down the homes of families whose members have defected to the jihadists.  Moreover, there simply have been too many murders of journalists, human rights activists, and allies turned enemies, whose activity was tied to Chechnya and Kadyrov to be coincidence.  At least some of these murders likely were committed by Kadyrov’s closest associates on either his acquiescence or orders.

The trepidations of Kadyrov and his allied clans in parliament are in part driven by these developments in combination with the ‘thaw’ in domestic and foreign policy under the tandem.  Surely on Kadyrov’s instructions, the Chechen parliament adopted a resolution criticizing Medvedev’s NCFD envoy Khloponin for making his first trip to North Ossetia rather than Chechnya.  This raised fears that Khloponin would devote insufficient attention to Chechnya’s economic development.  This compounded fears sparked by rumors that Khloponin was going to appoint to the NCFD staff competitors of Kadyrov like Beslan Gantemirov.  (Chechenskie parlamentarii predosteregayut polpreda Khloponina ot ‘neudachnykh resehenii’ pri podbore kadrov,” Kavkaz uzel, 1 April 2010, 15:25).  The Medvedev thaw, which includes a new emphasis on the Western vector in Russian foreign policy, are inciting fear of a reconsideration by the Kremlin of Kadyrov’s costs and benefits.

At some point, as Kadyrov suspects, both the domestic thaw and external rapprochement will bump up against the unsavory nature of the Kadyrov regime.  To be sure, Moscow has been forced to some extent to get into bed with unsavory characters in the North Caucasus in order to manage the traditionally violent region with its traditions of blood revenge, martial culture, politicized Islam and, more recently, terrorist jihadism.  However, there are limits to how much and how long Moscow should tolerate even in the name of Russia’s territorial integrity and political stability.  Indeed, Kadyrov’s unpredictability could some day come back to bite the Kremlin.

While on a level signficiantly below that of Kadyrov’s harsh regime, Rakhimov and Gromov are also leading violators of political, civil and human rights and have held their posts for over two decades and one decade, respectively. Rakhimov, will be replaced shortly as result of age when his term expires. Since the late Soviet era, he has run perhaps Russia’s most authoritarian regional government outside the North Caucasus.  His government is rife with corruption, and he runs some of the most unfree and unfair elections in all Russia, in addition to discriminating against ethnic Russians and Tatars.  He, like Kadyrov, has been tolerated by the Kremlin because he has blocked the potential rise of Bashkir separatism.

Closer to the Kremlin is former general Boris Gromov, the governor of Moscow Oblast which surrounds the city of Moscow.  Gromov, is running a harsh state oligarchy that runs roughshod over popular interests and those who seek to champion them.  Numerous journalists have been beaten; one recently within an inch of his life who was left with brain damage and crippled for life for investigating officials close to Gromov.  The latter are involved in real estate corruption and environmental negligence towards a large but potentially lucrative swathe of ancient Russian forest in Khimki, a suburb not far from the capitol and its land-hungry elite.  See (On Gromov’s repression of journalists and activists see Clifford J. Levy, “In Russia, Journalists Face Blatant Attacks,” New York Times, May 18, 2010).

When Medvedev is able to replace these three regional leaders, the battle for reform likely will have been won, and Russia can take greater strides towards full liberalization.  However, the institutionalization needed for democratization requires free and fair regional elections so that local parliaments can carry out their role in appointment of regional governors, and thus be on a more equal footing with the president.  This will allow more rapid turnover of regional governors; one driven by the population’s interest in better governance, not corrupt governors’ interests in power.

By Gordon M. Hahn

The Washington Post conducted another of its mini-offensives against Russia on May 25th and 26th.  It consisted of three oped pieces criticizing or proposing ways to counter Russia. One wonders when the last time the Post published three articles in a two-day period targeting the global jihadists, China, Saudi Arabia or other true resistors of democracy?  In relation to Russia such mini-offensives occur several times per year. The Washington Post, New York Times, and Wall Street Journal never accept oped pieces focused on cooperation with Russia.

This readiness to register only the negative side of Russia has caused the Post and other U.S. mainstream media to miss the two-year domestic and foreign political thaw under the Medvedev-Putin tandem, the decade of rise of jihadism in the North Caucasus, underestimate Russia’s ability to weather the global financial crisis, and overestimate the Russians’ discontent toward Russia’s leadership.  In other words, the Post and the U.S. mainstream media failed to perform the media’s only function: to accurately inform the public.  Instead, they have chosen to advocate, propagandize, exaggerate, and agitate.

One of the three recent Post articles was written by imprisoned Russian oligarch, Mikhail Khodorkovskii.  Yes, Khodorkovskii was singled out, among other oligarchs, by then President Vladimir Putin and that the prosecutors’ brief in the new trial stands on shaky ground, suggesting perhaps trumped up charges.  But it is worth remembering that Khodorkovskii say openly he would “buy” the Russian Duma, did plan to sell a major share of his huge oil company to Exxon-Mobile, and did commit tax evasion.   He is at least allowed to write letters and articles from prison, suggesting his treatment is not all bad.  Can we cite any similar missives from among the tens of thousands of political prisoners in the communist gulags of China and North Korea and the torture chambers called prisons in Saudi Arabia and other Islamic countries we consider friends?

The second in the trilogy criticizes the Obama Administration’s Russia ‘reset’ policy in particular Russia’s role in watering down the tightened sanctions being moved against Iran (Robert Kagan, “The Russia "Reset" Fraud,” Washington Post, 25 May 2010).  To be sure, a much tougher set of sanctions than the one that apparently will be adopted is desparately needed.  But China was more adamant than was Russia against harsh sanctions.  Indeed, the author himself writes: “(T)he (Obama) administration was forced to cave to some Russian and Chinese demands. The Post reported: ‘The Obama administration failed to win approval for key proposals it had sought, including restrictions on Iran's lucrative oil trade, a comprehensive ban on financial dealings with the Guard Corps and a U.S.-backed proposal to halt new investment in the Iranian energy sector.’” So where is the Post’s article on China’s negative role here?  China has more of an economic imperative to drive its obstinance against tough sanctions.  We know for sure that it is China, not Russia, that has more to lose from an embargo against cooperation with the Iranian oil industry.  China already consumes much Iranian oil and would suffer badly if Teheran’s exports were cut.  Russia needs trade with Iran more than China does, and, unlike Beijing, Moscow has a slew of legitimate complaints against the West’s post-Soviet policy that drove it towards a cynical hyper-realism that has considered Russia’s interests alone in dealing with the West until more recent policy changes.  It is China that has a massive trade balance with and massive investments from the U.S. floating its economy and no NATO breathing down its neck.

Kagan is particularly upset about the absence of any clause in the sanctions resolution prohibiting Russia from executing its contract to sell of S-300 air defense missiles to Teheran, which would make any attempt to destroy Iran’s nuclear production by air assault unlikely to succeed.  Kagan surely knows that the S-300 contract has remained unfulfilled for several years.  Perhaps Moscow promised behind-the-scenes not to make the sale until the nuclear issue with Iran is resolved one way or the other.  Kagan also writes about a wave of fear across Eastern and Central Europe that Washington will not protect the region from the bear’s clutches.  However, in reality the russophobic candidate in Poland’s current presidential election, Jaroslaw Kaczynski, is losing in the polls to Bronislaw Komorowski, the candidate who has warned against russophobia.  Further, the usually anti-Russia Polish Foreign Minister Radek Sikorski (husband of the Post’s lead Russia commentator Anne Appleabaum) proposed that Russia join the "group of friends" of the European Union's Eastern Partnership created for cooperating with former Soviet republics.

The third article (Kurt Volker, “Sochi Olympics offer a lever on Russia and rights,” Washingotn Post, 25 May 2010) divines a policy towards the 2014 Olympic Games to held in Sochi, Russia––which is not far from Abkhazia, one of the former Georgian breakway republics-turned unrecognized quasi-independent states which Russia recognized after the 2008 Georgian-Ossetian/Russian war.  The policy is based on the Western lack of understanding that Georgia did more than Moscow to create independence of these breakaway regions, through its repressive, authoritarian, and imperial policies from 1990-2008.

Volker proposes avoiding the choice between boycotting the Sochi Games and complicity with Georgia’s coercive breakup of Georgia’s territorial integrity.  This can be done, he argues, by using the Games as leverage for resolving several long-standing sovereignty disputes in the Caucasus, bringing the region "into the 21st century," and "consigning to history Moscow's zero-sum, divide-and-rule approach to the Caucasus.”  Specifically four steps are proposed.  First, NATO and the EU should adopt a “formal non-recognition policy” towards Georgia’s breakaway republics of Abkhazia and South Ossetia.  This would run counter to NATO's and the EU's rather formal recognition of Kosova’s independence.  This was also brought about through the use of force by the Kosovo Liberation Army and then NATO force.  The recognition of the Kosovo's independence, moreover, violated UN Resolution 1244 which recognized the territorial integrity of Yugoslavia and provided the UN troops' mandate in Kosovo.  Thus, this continued pursuit of a double standard will ruffle feathers in Moscow.  The charge that Moscow takes a 'sero-sum approach' in relation to Russia's versus Western influence in the Caucasus is the result of a misperception of Moscow's reasons for resisting the Western presence.  That reason is the militarized nature of the West's presence created by NATO expansion.

Most worrisome is the Caucasus Emirate (CE) jihadi terrorist active near Sochi in Russia’s North Caucasus.  The CE claims all of the North Caucasus as its territory, regards Sochi and all of Krasnodar Krai (Territory) as part of its ‘Nogai Steppe Velayat’ (Arabic for Province), and regards the Transcaucasus/South Caucasus as “occupied Muslim lands.”  The CE was likely behind the car bomb explosion in the capitol of Krasnodar’s neighboring Stavropol on May 26th that killed six and wounded some forty mostly civilian victims.  CE and other jihadi activity have also been evident in Azerbaijan, and Azeri and Turkish fighters are found among the CE mujahedin.

Georgia’s recent decision to agree to visa free travel with Iran, and Russia’s decision to support sanctions against Iran can only compromise security in the region and for the Sochi Games.  Indeed, Iranian President Akhmadinejad issues vailed threat against Moscow on May 26th.  Washington, Brussels, and Moscow should move immediately to organize security cooperation among themselves, Azerbaijan, Armenia, Georgia, Abkhazia, South Ossetia, and Nagorno-Karabakh against the Caucasus-wide jihadi threat.

By Gordon Hahn

Over two years ago I reported for ROPV on the upcoming domestic thaw in Russian politics and predicted first a gradual liberalization and then perhaps a gradual democratization of Russia’s political system under the duumvirate of President Dmitry Medvedev and Prime Minister Vladimir Putin.  The U.S. mainstream media could have seen this coming if not for the intense bias against Russia it harbors as a result of a confluence of liberal political correctness and conservative Russophobia.  It is now clear that a similarly ‘surprising’ thaw has occurred in Russian foreign policy.  Although Russia’s hyper-realism, which promotes its economic interests above all other considerations, may limit rapproachement with the West at some point, this is a good first step that heads Moscow in the right direction.

When the Soviet Union’s last leader Mikhail Gorbachev began his reform of Soviet foreign policy, he called for “new political thinking” on both sides of the Atlantic.  It is clear that Russian foreign policy is undergoing a similar form of new political thinking.  A new leaked foreign policy doctrine draft marked a foreign policy course consistent with Medvedev’s thaw in Russian domestic politics.  It seeks to put an end to the cool relations between Moscow and the West and develop closer ties with the West in order to facilitate Russia’s economic and technological modernization.  A high-ranking Russian Foreign Ministry official confirmed to Russian Newsweek that the Kremlin has approved a new period of “detente” with the West, in particular the U.S. (Konstantin Gaaze and Mikhail Zygar: "Let the Sun Shine Again", Russkiy Newsweek, 10-16 May 2010, www.runewsweek.ru.)  At the same time, the policy will maintain the multidirectional or multi-vectoral geostrategic orientation of recent Russian foreign policy doctrine, which serves the same economic purpose.

Just as under Gorbachev, the cornerstone of the shift in Russian foreign policy is rapprochement with Washington. It is also clear that Washington encouraged and met Moscow’s change of course halfway (perhaps more than halfway) with its effort to ‘reset’ American foreign policy and several recent concessions reviewed below.

The most obvious but perhaps not most outstanding example of the new political thinking on both sides is the new START Treaty.  Less obvious are the U.S. decision to restructure its plans for a anti-missile defense system to counter the growing Iranian and Korean nuclear threats, especially the willingness of the White House and the Pentagon to consider involving Russian in a joint project to build a global AMD system.  More recently, Russian Deputy Prime Minister Sergei Ivanov visited Washington and met with all the key makers of U.S. foreign policy except for the president and the vice president.  Discussions covered cooperation on most of the top international issues in U.S.-Russian relations today – Iran, AMD, WTO, technology trade, and investment.

Despite Teheran’s gambit under the agreement with Brazil and Turkey to send spent fuel for reprocessing announced last week and pressure from Ankara, Moscow maintained its support for a tougher sanctions regime on Iran, including an embargo on sales of heavy weaponry such as tanks and fighter jets.  Apparently in return for Moscow’s vote, Washington conceded two weeks ago to resubmit to Congress the 123 Agreement that would allow civilian nuclear cooperation with Russia and lifted sanctions on Russia companies Rosoboronexport, the Tula Instrument Design Bureau, the Moscow Aviation Institute, and the Mendeleev Chemical-Technological University suspected of circumventing previous sanctions on Iran.  Moscow also managed to keep any sanctions on air defense systems out of the agreement in support of its long-unfulfilled contract to deliver S-300 anti-aircraft missiles to Iran.  The Obama Administration should not have made so many compromises until it received a guarantee Moscow would not sell S-300s to Iran until there is responsible regime in Teheran or at least gained concessions on Moscow’s part for the tougher sanctions.  Similarly, it appears that the Obama Administration failed to win restrictions on Iran's oil trade, a ban on financial relations with the Revolutionary Guard, and a boycott on any new investment in Iran’s energy sector.  If Russia was a party that refused to back these more robust sanctions and all of the concessions mentioned above were made to secure Russia’s cooperation on Iran, then it seems Washington’s concessions were excessively generous.

Thus, rapprochement has bought real, if potentially dangerous dividends for Russia.  I say dangerous because Iran may rule the day it traded economic benefits against sanctions on Iran’s nuclear plans.  Iran is dangerously close to the Caucasus where the jihadi terrorist organization, the self-declared ‘Caucasus Emirate’ (CE), has been responsible for over one thousand terrorist attacks since November 2007 in the North Caucasus and elsewhere in Russia, including the March 29th Moscow subway suicide bombings that killed 40 and wounded nearly one hundred.  Recently, its websites have been particularly enamored with a 2003 fatwa that justified the use of weapons of mass destruction against ‘infidels.’  Although it is generally assumed that the Shiite regime in Teheran would be reluctant to assists the Caucasus’s Sunni jihadists, reports that Iran is assisting the transit of Al Qa`iada elements across its territory suggest that the Shiites when necessary could assist Sunnis.  One causus for such a move by Teheran (or elements therein like the revolutionary Guards) in the Caucasus could be a decision by Moscow to support full sanctions.  But if that decision comes after Iran’s Islamist rogue regime has weaponized nuclear fuel, a new threat will appear on Russia’s horizon.  Already today Iran could supply jihadists with enough radiological materials for dirty bombs.

A U.S.-Russian breakthrough of sorts occurred in the area of defense industry cooperation.  Moscow proposed joint development of the Russian heavy military transport aircraft, the Antonov-24 or An-124, and was met with a positive reaction from Washington.  This would have been sufficient compensation – without all the other goodies – for Russia’s agreement to slightly strengthen the sanctions regime on Iran and is a welcome step in an area of cooperation that was rendered long overdue by the U.S.’s mistaken policy to embark on NATO expansion.  That policy essentially seized export markets from Russia’s defense industry for some 15 years, delayed Russia’s emergence from its communism-induced great depression of the early 1990s, discredited the idea of Russia’s comprehensive westernization in the eyes of most Russians, and led to the U.S-Russia ‘cool war’ of the last decade or so.  Moscow’s degraded military-industrial complex now requires foreign investments and Russian purchases of military equipment from foreign states.  Moscow’s recently announced desire to purchase fighter jets from France was the first sign of a new policy aimed at achieving closer ties with the West’s defense industry, in order to facilitate technology transfers and Western investments.

U.S.-Russian cooperation in the war against jihadism is also strengthening.  The most obvious examples of rapprochement here are: (1) Moscow’s agreement to allow not only air but also ground transport of U.S. supplies, including military equipment, across Russian territory; (2) stepped up Russian traning of Afghanistan anti-narcotics capabilities; increased supply of Russian arms to Kabul; and (3) growing Russian investment and development assistance in Afghanistan.  Less obvious but significant is a concession of sorts by the U.S. State Department. On April 29th it delayed its annual April 30th publication of its official list of international organizations in order to consider inclusion of the CE on the list.  Since the CE declared jihad on the U.S. (as well as Great Britain, Israel, and any country fighting Muslims anywhere across the globe), it is in U.S. interests to acknowledge this threat and facilitate cooperation with Russia against it.  Nevertheless, this marks a divergence from the policy that seemed to reject or at least ignore the North Caucasus jihadists’ and formerly the Chechen separatists’ ties to international jihadi terrorist like Al Qa`ida, which are well documented.

Very important is Moscow’s rapproachment with NATO-member and perennially hostile Poland.  That rapprochement was underway before the crash of the Polish government plane that killed President Krascnyski and other top Polish government officials.  The Russian government had approved the release of all documents related to the 1944 massacre of 14,000 Polish officers and soldiers by the Soviet NKVD, and Premier Vladimir Putin took part in a ceremony honoring the victims of Katyn in respectful and moving fashion.  Following the crash Putin displayed great sympathy and warmth to grief stricken Polish elite, and President Dmitry Medvedev gave an emotional speech expressing his condolences and then attended the funeral in Warsaw a week later.  By all accounts, the Russians’ behavior had a profound effect on Polish citizens and officials alike and has laid the groundwork for a nearly miraculous transformation of Polish perceptions of Russia and Russians.

President Medvedev made a landmark visit to Turkey on Monday where he secured a number of agreements on oil, gas, and nuclear enery cooperation.  It seems that Medvedev may have played a role in the resolution of a gas-pricing dispute between Turkey and Azerbaijan that was blocking development of the Nabucco pipeline the West is backing as a way to reduce Europe’s dependence on Russian supply.  Unfortunately, Russia’s zeal to boost its economy through broad-based foreign policy ties also led to an agreement to sell more arms to troublemaker Syria, which President Medvedev visited upon leaving Turkey.  Syria has supplied arms bought from Moscow to Hamas and Hezbollah in recent years; a practice that has justifiably irked Israel.

Overall, however, Moscow’s improving ties to NATO members France, Poland, and Turkey fits with an overall improvement in relations with NATO spoiled by the August 2008 Georgia-Russian war.

Improving fortunes for Moscow in the post-Soviet space are also reducing tensions in the region between Moscow, and the one hand, and some former Soviet republics and the U.S., on the other hand.  Thus, Moscow improved its relations with Viktor Yanukovich’s Ukraine without stepping on Kiev’s sovereignty in the bargain.  Moscow and Kiev agreed to exchange Russia’s continued lease of the Sevastopol naval base for its Black Sea Fleet in return for natural gas supplies to Ukraine, and the Kremlin proposed creating a consortium that would merge GazProm and Ukraine’s NaftoGaz and pipelines.  Kyrgyzstan’s anti-Tulip revolution and continuing instability is likely to make Bishkek more dependent on Moscow; yet the Kremlin and Washngton seemed to see eye to eye on the causes and necessary response to the April 7 revolt, and each helped the incoming government of Roza Oyunbaeva.  Moscow has been seeking ways to re-establish ties to Georgia while avoiding relations with President Mikheil Saakasvili. Air travel between the two countries was reopened by Moscow, and the Kremlin has been courting leading Georgian opposition figures, while apparently restraining the Ossetians from provocations.  Putin recently spoke favorably of once intensely anti-Russian opposition leader and former Georgian parliament speaker Nino Burjanadze, who attended Moscow’s May 9th Victory Day parade and joined Putin laying a wreath at a monument to those killed in the war.

Russia’s new style and policies reflect the domestic thaw initiated by the Medvedev-Putin tandem in 2008 and offers some hope for a permanent Russia-West rapprochement.  Key obstacles to such a rapprochement remain, however, including Iran, NATO expansion, and the West’s, especially the U.S.’, role in post-Soviet Eurasia.

Russian state authorities have finally liberalized the migration legislation. The Association of European Businesses in Russia (AEB) was at the forefront of these changes; working continuously on issues related to the work of expatriates in the Russian Federation. Therefore, it is with great pleasure that the AEB announces that the most of the burning issues in the sphere of migration legislation have been at the very least addressed in the recent amendments.

The Federal Law amending the Law on the legal status of a foreigner in the Russian Federation and Budgetary and Tax Codes has brought a lot changes to the existing system of working conditions of foreigners in the RF. The AEB would like to draw attention to the most significant changes that most likely will affect the vast majority of foreign employees in Russia.

1) Work permits and permissions to employ foreign workers – based on the new system, highly qualified foreign workers shall be exempt from the quota application procedure. The new system would just require an employer to submit an application to the respective state body for such highly qualified workers. Such an application must be considered within 14 days. High qualification shall be determined based on the salary threshold (starting from 2 mln. RUR per year) and documents proving it (diploma, reference letters, etc.). It should be especially noted that the 2 mln. RUR should be received from Russian sources only.

2) The duration of the work permits is extended to 3 years for the highly qualified workers, in accordance with the period of the labor agreement’s duration.

3) The registration procedure has been substantially simplified. An employer no longer has to notify the migration service every time its foreign worker leaves the city he is working in.

4) The list of professions (positions) that are exempt from the quota system will not be subject to change.

5) Highly qualified workers will have the right to obtain residence permits for themselves and their family members for the period of labor agreement’s duration.

6) Work visas for the highly qualified worker will be issued for 1 year, with a possibility of an extension of up to 3 years.

The AEB has actively participated in the preparation of these amendments by providing the necessary expertise and information. The AEB continues to interact with the Ministry of Economic Development, the Federal Migration Service and all other relevant bodies on issues pertaining to migration.

The AEB organized a meeting with the Head of the investment policy and public private partnerships department of the Ministry of Economic Development, Mr. Sergey Belyakov, who provided members  with information that helped better understand these modifications and invited the AEB to assist in the preparation a number of bylaws that should accompany the above mentioned amendments.

In line with the AEB active involvement in the ongoing modification of the Russian legislation on migration, the AEB also held a meeting where Ms. Ekaterina Egorova, Deputy Head of the Federal Migration Service (FMS), was a guest of honour. She briefed the audience on the main aspects of the Law concerning highly qualified specialists, the bylaws and other legal acts related to the law, which are being prepared by the Federal Migration Service, at the moment.

The adopted Federal Law is available at www.aebrus.ru in the “Site news” section.

X5 Retail Group N.V., Russia's largest retailer in terms of sales, today announced its IFRS results for the first quarter ended 31 March 2010, reviewed by auditors.

Q1 2010 Highlights
• Net sales increased 20% year-on-year in RUR terms to RUR 76,003 mln or 36% in USD terms to USD 2,543 mln;
• Gross profit totaled USD 594 mln, for a gross margin of 23.4%;
• SG&A expenses before ESOP as percent of sales decreased by 60 bp year-on-year to 19.1%. Total SG&A increased by 50 bp year-on-year to 20.1% driven by ESOP cost of USD 25 mln;
• EBITDA amounted to USD 179 mln reflecting ESOP cost of USD 25 mln for an EBITDA margin of 7.0%. Net of ESOP, EBITDA margin amounted to 8.0%;
• X5 reported a net profit of USD 79 mln;
• The Company used available cash to reduce total debt by USD 133 mln;
• Due to significantly lower food inflation to date and in the official forecast rate for the year, X5 provides a more conservative 2010 revenue growth outlook in the low-20 percent range in nominal RUR terms. Actual top-line performance will depend on inflationary trends and the timing of a recovery in consumer spending.

X5 Retail Group CEO Lev Khasis commented:
“X5 achieved strong top-line growth against a backdrop of weak consumer spending and drastically lower food inflation. Discounters delivered industry-leading performance. We have introduced a streamlined operational structure for supermarkets and hypermarkets and are adding more affordable choices and loyalty program upgrades for our customers to drive higher basket and benefit from future economic recovery. Integration of Paterson resulted in temporary closings and inventory clearance sales during Q1. All acquired stores have been
converted as of May, setting the stage for improved performance. We expect consumer spending to begin to show improvement towards the end of the year. This, in combination with new store openings and post-integration contribution from Paterson, should enable X5 to deliver top-line growth in the low-20% range in a significantlylower than projected inflationary environment."

X5 Retail Group CFO Evgeny Kornilov added:
“Consistent execution of our “Close to the Customer” policy resulted in solid LFL sales growth of 7% compared to Q1 2009, the strongest quarter last year prior to the onset of trading down trends. We drove a 60 basis point improvement in X5’s key performance indicator for cost control, SG&A before ESOP as a percent of sales. We used our strong cash position this quarter to continue selective expansion of new stores while reducing total debt by net USD 133 million and further limiting currency exposure. For the rest of 2010 we expect reduced levels of gross margin investment and improving EBITDA margin, driven by continuing efficiency improvement and cash generation, postintegration upside of converted Paterson stores and higher overall second half 2010 sales growth. We are well-positioned in terms of our upcoming loan refinancing later this year,
with good access to RUR bank facilities more than sufficient for our funding needs.”

Olimpstroi, the state corporation overseeing construction for the Sochi games, has announced an agreement with AST Group, owned by Telman Ismailov, to invest in the main Sodruzhestvo hotel complex and another 150 room sea shore five star hotel.

Mr. Ismailov is the flamboyant Azerbaijani tycoon whose $1.5 billion Mardan Palace hotel in Turkey, was launched just before his Cherkizovsky Market in Moscow was closed after Prime Minister Vladimir Putin complained of smuggling.

AST will invest $800 million into two Sochi hotels, Olimpstroi said Thursday. The price tag is double what Ismailov had been expected to invest in the construction of hotels in the host city of the 2014 Winter Games.

Olimpstroi said Thursday that AST Group had signed an agreement to develop 4,000 rooms and that the two sides were negotiating the hotels' design and concept. 3,850 rooms will be of three- and four-star quality and be part of the 5,500-room Sodruzhestvo hotel complex, which is currently listed in the official program without an investor, Olimpstroi said. Sodruzhestvo, which will cover 24.9 hectares, will be the closest hotel to the main Olympic venues and will be located about 700 meters from the beach, according to Olimpstroi's map.

The International Olympic Committee needs 24,400 hotel rooms ranging from three to five stars for tourists, officials, journalists, athletes and other Olympic guests. In addition, 38,000 rooms are needed for tourists, Olimpstroi said.

Investors have still to be found for two four-star hotels with 1,120 rooms.

Two hotels of the Brussels-based Rezidor Hotel Group are to be opened soon at the ski resort of Krasnaya Polyana, where Olympic Alpine skiing and snowboarding events will take place. The hotels will be built on the territory of Roza Khutor ski centre.

The hotel Radisson Roza Khutor will be 180 rooms. The second hotel, the Park Inn Roza Khutor 200 metres from the Radisson will have 200 rooms.

The big problem facing Sochi is sustainability and use of the facilities after the Games.Sochi has a 3 month summer tourist season and a an equally short winter skiing season.

A delegation of senior Sochi 2014 officials, led by the Deputy Prime Minister of the Russian Federation, Dmitry Kozak, in May visited the Munich Olympic Park for a series of meetings with legacy experts to discuss the opportunities for maximizing the positive legacy from the Sochi 2014 Olympic and Paralympic Winter Games. The Munich Olympic Park is one of the best examples of an Olympic Games leaving a enduring sporting and social legacy.

The high-level delegation - which also included Sochi 2014 President and CEO, Dmitry Chernyshenko, Mayor of Sochi, Anotaly Pakhomov and Deputy Governor of the Krasnodar Region Aleksandre Ivanov (with regional responsibility for Olympic construction) – were eager to see at first-hand a functioning example of a sustainable Olympic Park as part of their preparations for hosting Russia’s first ever Olympic and Paralympic Winter Games. DOSB President and IOC Vice President, Dr. Thomas Bach, joined the delegation for meetings before the two-hour visit to the Munich Olympic Park which included a detailed presentation of the Olympic Park and a tour around the Olympic Stadium, Olympic Hall, Olympic Swimming Hall and Olympic Tower, which have all been in almost daily use since they were built for the 1972 Olympic Games.

Kingfisher Plc, Europe’s largest home-improvement retailer with the B&Q and Castorama brands, will invest “aggressively” in Russia, where the market is set to return to growth in the second half, Chief Executive Officer Ian Cheshire said.

The London-based retailer, which has 13 Castorama stores in Russia, plans to open a smaller outlet in Moscow “within the next 18 months,” Cheshire said in an interview in the Russian capital today. Kingfisher may use small-format stores as a test prior to openings in other European countries, he said.

The latest Castorama to open in Russia was in Perm at the end of March. Castorama Russia is the first international DIY retailer in the city and the store is 11,500 sq m, selling approximately 35,000 product lines. Perm is an attractive market after more than 660,000 sq m of new residential property was developed in 2008/09 according to the company.

“There is clearly an opportunity to open more stores” in Russia and Poland than the four and six per year now targeted respectively for the two countries, the CEO said. “We expect Russia to be one of the highest growth markets in the world” over the next five years, he said.

The Russian home-improvement market may expand between 10 percent and 15 percent this year after being “difficult” over the last 12 months, Cheshire told reporters at a press conference. The retailer spends 30 million pounds ($44 million) to 50 million pounds a year in the country and may invest more “if there are opportunities,” the executive said in the interview.

Kingfisher doesn’t rule out possible purchases in Russia “if there is an opportunity to acquire an interesting site through an acquisition,” the CEO said.

The smaller format being tested will have about 60 percent of the retail space of the chain’s normal outlets, with a full range of products but less stock. If successful, the new format may be used in other countries, particularly in Poland, Peter Hogsted, Kingfisher’s international director, said in July.

The retailer plans to open a distribution center in Poland in the second half, which will allow it “to bring in more group-sourced products” and improve margins, Cheshire said today. “It’s a big three to five year opportunity,” he said.

An explosion killed at least seven people and wounded more than 40 others Wednesday evening in Stavropol, a southern Russian city that had seemed immune from growing violence in the north Caucasus. Moscow officials pointed the blame to what they called criminal gangs.

The blast on Wednesday under a canopy at the Culture and Sport Palace in the North Caucasus city had initially left four people dead, with dozens of others injured.

The explosive device detonated as people were making their way to a concert by a musical ensemble from conflict-torn Chechnya.

The newspaper Rossiyskaya Gazeta cited Russian special envoy for the North Caucasus region, Alexander Chloponin as pointing the blame on bandits working "under the cover of religious extremism."

Stavropol, a centre of the Don Cossaks, hosts many refugees from Chechnya and neighbouring Ingushetia and Daghestan.

Stavropol, with its 300,000 mostly Russian inhabitants, is not considered part of the conflict area in the North Caucasus.

Islamist terrorists have repeatedly threatened to expand their fight for an independent "Caucasus Emirate" to other parts of Russia. In March, 40 people died during a suicide attack in the Moscow metro.

Authorities said a remote or timer-controlled bomb went off outside the concert hall, shortly before the start of a concert by a dance company linked with Kremlin-backed Chechen President Ramzan Kadyrov. Stavropol is the administrative seat of the ethnically Russian Stavropol Territory, which borders the embattled, mainly Muslim republics of Chechen and Dagestan republics.

Reuters reports that the bomb was equivalent to 400 grams of TNT, and disguised as a pack of juice. No one has yet claimed responsibility for the blast, but police found an improvised explosive device, a gun, and ammunition while searching the homes of two suspects.

Investigators opened a criminal case under terrorism laws, the prosecutor general's office said in a statement.

The explosive used in the attack appeared to be homemade, reports Russian video news outlet RT, and was packed with shrapnel. A 12-year-old girl was among those killed.