59%

15%

15%

13%

10%

Sollers

Bank St Petersburg

MRSK Holding

Rostelecom

Transneft Pref

1700

1500

1300

1600

1400

11 aug 11 oct1 oct1 sept 15 sept15 aug

MICEX-RTS

IN THIS ISSUE

As a slew of companies dust off plans for listings, investors will be keeping an eye out for the next big sale, from No. 2 mo-bile operator Megafon, to gauge the appetite for Russian risk.

The roadshow for Megafon’s London listing hit a slight hic-cup earlier this month after one of the banks involved in the sale, Goldman Sachs, pulled out over corporate gov-ernance concerns. The U.S. bank cited recent comments by Megafon’s majority share-holder, Alisher Usmanov, to Reuters that he intended to consolidate his assets into a single holding.

Moscow-based analysts are con-fi dent, however, that the resilient consumer growth story underpin-ning the Megafon listing, currently underwritten by Morgan Stanley, Sberbank CIB, Citi, Credit Suisse and VTB, Russia’s second-biggest bank, means the IPO pipeline is still very much on track.

“Megafon could be more attrac-tive than its rivals MTS and Vim-pelcom, as it leads in the promis-ing mobile data segment and has the most clear geographic focus” of the Russian mobile fi rms, said Kon-stantin Chernyshev, a telecoms an-alyst at Moscow-based Uralsib. “Megafon’s solid cash fl ows should also make it a strong dividend play, which have proven to be popular stocks amongst investors this year.”

The attempted fl otation will be closely watched to see if there is enough demand to get more Rus-sian company names listed inter-nationally. Megafon aims to list in London and raise up to $3 billion

Markets Mobile firm Megafon gets Russia’s IPO pipeline rolling again

Russian IPOs are back on the menu

after Russia’s biggest bank,

Sberbank, broke a four-year lean

spell with a secondary public

offering in September that raised

$5.3 billion.

BEN ARISSPECIAL TO RUSSIAN BUSINESS INSIGHT

When Mark Zuckerberg came to Moscow, he posed for goofy photos with Russia’s tech-savvy prime min-ister, Dmitry Medvedev, and posted smiley Facebook updates from Red Square.

But his mission was deadly seri-ous: to try to dent Facebook’s local rival VKontakte’s four-to-one lead in the Russian market, and possibly to lure away Russia’s brightest and best software developers.

Russia’s burgeoning Internet mar-ket – fueled by 50.8 million users at latest count – has quickly become a key target for international players, as online revenues are now rising at an impressive 30% a year. Russia’s overall retail turnover is growing at

online retail, with nearly $10 billion worth of goods bought online, ex-cluding travel deals, and online pay-ment systems and terminals, which garnered $5.4 billion last year.

Also growing fast are the revenues for contextual and banner ads, and marketing on social media websites.

“In 2007 online advertising was worth $420 million, but by 2011 that had grown to almost $1.4 billion - up 287%,” says Svetlana Korobova, marketing director at I-media.

With traditional bricks and mor-tar retail still a work in progress – particularly in the far fl ung regions that stretch over 11 time zones – Rus-sia is ideally suited to e-commerce.

“The potential for e-commerce in Russia is huge,” says Komil Ruzayev, CEO of KupiKupon, a discounting website. “We can go straight to on-line retail as the main point of sale in retail and avoid the cost of build-ing stores in such a vast country.”

Russia’s own Internet billionaires are eager to keep their Western ri-vals at bay, with users of local social networking site VKontakte and search engine Yandex outstripping Facebook and Google by four or fi ve to one, respectively.

E-Commerce Global players are eager to grab a bigger slice of Russia’s soaring online revenues

Russia’s Internet revenues, driven

by burgeoning e-commerce and

online payments systems, are

rising by 30% a year.

Facebook Targets Russia As Internet Rivalry Heats Up

ALINA MAKSIMATKINASPECIAL TO RUSSIAN BUSINESS INSIGHT

Alisher Usmanov, co-owner of Megafon (Russia’s 2nd largest cell phone

provider) has an estimated fortune of $18.1 billion, according to Forbes.

CONTINUED ON PAGE 3

PAGE 2

PAGE 8

SEE THE SPECIAL REPORT ON PAGES 4-5

POLITICS & BUSINESS

FEATURE

The Bear Looks EastShifting Trade to Asia

Grain Exports SufferRussian Drought Raises Bread Prices on American Storeshelves

Two Hours in Moscow Where to Stop and Shop

from the sale of a 20 percent stake.Usmanov, who made his fi rst for-

tune in metals and mining, is well-known in Russia for his canny abil-ity to think outside the box when it comes to investment opportuni-ties. He became Russia’s richest man in 2011 after making well-timed in-vestments in Internet stocks such as Facebook, and in April 2012 com-pleted the purchase of a majority stake in Megafon.

In his Reuters interview, Usmanov attributed his success to investing

smartly: “Buy low, but not at the bottom, and sell high but not at the top, to leave some profi t to others.”

Buying into Sberbank, a top Rus-sian blue chip, was a no-brainer for many investors with exposure to emerging markets, but Megafon may only appeal to investors specifi cal-ly interested in the Russian invest-ment story and the risks that go with it.

In a sign that investors’ appetite for Russian companies is there, MD Medical Group (MDMG), a leading

Russia private health clinics spe-cializing in reproductive services and maternity care, went to mar-ket in London, raising $311 million as it priced its offering at $12 per global depositary receipt.

Russian stocks have not been pop-ular over the last four years, and trade at a signifi cant discount to their emerging market peers. IPOs have been few and far between. There were only three listings in 2009 in the aftermath of the glob-al meltdown, but things picked up in 2010 with 12 IPOs, including alu-minum producer RusAl in Hong Kong and e-mail service Mail.ru in London.

Hopes were higher in 2011 with some $30 billion worth of IPOs planned. However, as fears of a sec-ond global recession mounted, only 10 companies actually made it to market. Search engine Yandex led the way, raising $1.3 billion on the NASDAQ, followed by mid-sized

ONLY AT RBTH.RU

Gazprom Plans Two New Pipelines to Europe

Great Traditions:Reviving the Film Industry

PAGE 6

MONEY & MARKETS

New Wave of PrivatizationsTrains, Planes and Nanotech

RBTH.RU/18997

RBTH.RU/18763

7.2% annually, but within that fi g-ure e-commerce is now growing at two or three times that pace, having seriously taken off in 2010.

In 2011, Russia saw a total of $17.8 billion in Internet-related sales, ex-

penditures and payments, according to a new report by the Russian As-sociation of Electronic Communica-tions and Moscow’s Higher School of Economics.

By far the largest revenues are in

Facebook’s billionaire CEO, Mark Zuckerberg, discussed a proposal from

Prime Minister Dmitry Medvedev to set up a research center in Russia.

This supplement is produced and published by Rossiyskaya Gazeta (Russia) and did not involve the news or editorial departments of The Wall Street Journal

Saturday, October 20, 2012

A product by RUSSIA BEYOND THE HEADLINES

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'The Russia story is like the tortoise

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Distributed with The Wall Street Journal

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11 aug 15 aug 1 oct 11 oct1 sept 15 sept

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Ruble/DollarTOP LIQUID STOCKS(MICEX-RTS, Aug. 11-Oct. 11, 2012)

Sberbank Investment

Research data

Appetite Grows for IPOs'Buy low, but not at the bottom, and

sell high but not at the top, to leave

some profi t to others' ALISHER USMANOV (IN AN INTERVIEW TO REUTERS)

Russian companies

made initial public

offerings in 2011.

subscribers used

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June 2012.

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OPINION

Russia’s Oil: Luck or Curse?

Experts Debate What to Do with Petrodollars

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WWW.RBTH.RUPolitics & Business

NEWS IN BRIEF

• Russia’s nascent protest leaders are now

better known, but increasingly disliked accord-ing to a recent poll by VTsIOM. Half of Russians now recognise anti-corruption campaigner Alexei Navalny, up from 29% in February. However, Na-valny’s disapproval rating rose from 31% to 43%.

• Over 80% of Russians support a draft law

introducing harsher penalties for blasphemy and desecrating religious sites, pollster VTsIOM said. A Moscow court freed Yekaterina Samutse-vich, one of three members of punk band Pussy Riot, after it was ruled that she did not fully take part in a protest in a city cathedral earlier this year.

• Russia’s Federal Security Service has draft-

ed a new treason bill that was approved in the first reading by the Duma. The treason bill broad-ens the definition and is seen by human rights groups as part of the continuing crackdown on foreign-funded organizations in Russia.

• Russia’s liberal cabinet scored a partial vic-

tory over the conservative ‘Siloviki” faction. On October 5, PM Medvedev ordered state holding Rosneftgaz to hand over all of its cash in dividends, a move which would scupper CEO Igor Sechin’s bid to buy stakes in several power companies. Ar-bitrated by President Putin, a compromise has been reached, with Rosneftgaz agreeing to part with RUB50.2bn ($1.6bn), or 38% of its cashpile, signif-icantly above the 25% that the other state owned companies have agreed.

• Former Finance Minister Alexei Kudrin says

Russia is on the brink of stagnation. He believes the country has limited time to brace for an im-pending global slump. He also added that “un-precedented” policy actions in the U.S. might delay a debt crisis by “maybe a year”.

• President Vladimir Putin celebrated his 60th

birthday this month to much acclaim from friends and colleagues. Pollsters report that the president’s popularity has recovered to 64%, and that one in five Russian women want to marry him.

• Russian investigators bring hooliganism

charges against billionaire Alexander Lebedev in a case that could see him face up to five years behind bars. Lebedev punched property develop-er Sergei Polonsky during the recording of a tele-vision program for the state-run television chan-nel NTV earlier this year.

• America’s NGO support arm, USAID, pulls

out of Russia after spending over $2.7 billion on promoting democracy and other helpful things over 20 years. The Russian foreign ministry said the agency had been trying to undermine Russia’s sovereignty.

• Gazprom gives in a little to EU pressure say-ing it plans to change the ownership structure of its European assets in order to comply with the Third Energy Package. Two holding companies will be set up to hold the assets – GMT Holding for gas trading assets and Gazprom Storages & Transport to manage the infrastructure, transport and gas storage assets.

• Russia scores better than any of its BRIC

peers in the global Economic Freedom index compiled by the Fraser Institute, coming in at 95 against Brazil (105), China (107), and India (111). And Russia was named as one of the five worst copyright abusers in the world by a U.S. congres-sional panel. The surprise was that Italy and Swit-zerland both joined it on the list.

• Russia is likely to contest EU energy rules

at the WTO in what would be its first trade dis-pute since it joined the global body this year.

• Iraq signed off on a $4 billion arms deal

with Russia during a visit to Moscow by Prime Minister Nuri al-Maliki. Russia will deliver attack helicopters and mobile air-defense systems to Iraq in a controversial deal that comes on top of arms sales to Syria.

• Russia writes off 90% of North Korea’s debt. The remainder will be exchanged for rights to in-vest in education, healthcare and energy projects.

• Russia’s pension reform is back at the top

of the agenda after a pension reform roadmap was submitted to the President this week. The state needs to make this work as transfers to top up pension payments already cost the government 10% of the budget.

Another food crisis is upon us: the U.N.’s Food and Agriculture Orga-nization expects the worldwide grain harvest to fall 52 million tons short of target this year.

As part of that trend, Russia will harvest 70 million to 75 million tons of grain this year, down from 94 million, according to the country’s Agriculture Ministry. Projections by the U.S. Department of Agri-culture and the International Grains Council, which also keep tabs on Russia, one of the world’s biggest grain exporters, are in the same ballpark.

The United States, an even larg-er supplier not only of wheat but also corn, has this year been suf-fering from its worst drought since 1988. The USDA expects a 12% drop in the U.S. corn crop to about 13 billion bushels.

Just a few years ago, grain was so abundant that farmers did not know what to do with it.

Most grain growers not only from Russian but also American bread-basket regions have seen drought destroy their crops. Left without the two key global suppliers of grain, the markets responded with price hikes that almost matched record highs set in 2008.

Climate change has been forc-ing everybody to work in unusual weather conditions.

Several times in the last few years, farmers’ fi elds in European Russia did not see the fi rst snow-fall until close to Christmas, even though it usually comes in the fi rst half of November.

It was only in 2009, that farmers in Russia’s Altai Territory, Siberia’s breadbasket, threatened to burn

their fi elds because of low prices. Before that, German farmers used grain as fuel to heat their homes because it was cheaper than oil.

Back then, a ton of Class 3 wheat sold for about $125, which did not even cover production costs. Pric-es are now double that. Class 4 wheat (inferior in quality to Class 3) sold for more than $270 in early September, just short of the 2008 record.

In the U.S., prices for No. 1 Hard Red Winter wheat soared from $270 per bushel in May to $340 in early September.

Even these steep price increases, however, have not helped farmers much. Crop failures mean grain is more expensive but also that there is less of it to sell, said Pavel Skurikhin, chairman of Sakho, Si-beria’s biggest agricultural hold-ing company. On the contrary, shrinking crops have raised pro-duction costs signifi cantly.

“It’s clear, even now, that the crop will be much smaller than we had hoped for,” Skurikhin said. “At least we are not selling grain at a loss, as we have done on many occa-sions.”

Russia’s lean years started with the food crisis of 2008 and are con-tinuing into their fi fth consecutive season. Agricultural producers are mired in debt. Many of them have multiple mortgages.

It is not only the weather that is hurting the sector, either. Insuffi-cient working capital, a direct re-sult of the crisis, has forced many to cut the amount of productive land.

The Altai Territory is among the hardest hit. According to the Na-tional Union of Grain Producers, Siberia will harvest around 10 mil-lion tons of grain this year, 4.6 mil-lion less than last season. Even with last year’s balance transfers and reserves, Siberia will, at best, bare-

Russia’s Climate Change Hits U.S. Consumers

Q & A

Targeting growth in Asian grain markets

Why is Russia interested in exporting

grain to Asia?

The eight largest APEC countries by population import 100 million tons of

grain a year - more than Russia pro-duces. We can’t miss this opportuni-ty to [export] and attract technology from neighboring countries.What are the barriers currently

preventing this?

The port infrastructure isn’t there. Al-so, the single-line Trans-Siberian Rail-way can’t handle that volume of car-go, as grain moves from European Russia to Asia but, inefficiently, only empty wagons go in the other direc-tion. Which Asian markets would be

the first to import Russian grain?

The ones with the biggest popula-tions: China, Japan, South Korea, Vietnam, Thailand and the Philip-pines.

said during the summit. The EU currently accounts for

about half of Russia’s foreign trade, about $320 billion. Trade with APEC countries is less than half but it has increased to 23% of Rus-sia’s total from 15% in 2006, ac-cording to customs data from Bloomberg.

“Within 10 years, we want our trade volume with APEC states to be greater than our trade volume with the EU,” said First Deputy Prime Minister Igor Shuvalov.

Even while emphasizing that this rebalancing will not come at the expense of relations with the EU, Russian leaders have announced a raft of trade agreements with Asian countries in recent months.

There are several economic in-tegration projects underway with the Eurasian Economic Space that includes Belarus and Kazakhstan, free trade pacts are in the works with New Zealand and Vietnam and a series of investment projects.

Japan plans to build a $7 billion liquefied natural gas plant near Vladivostok, which will feed an $6 billion export terminal nearby. A

similar plant built by American and Japanese fi rms in 2009 transformed nearby Sakhalin Island into one of the few regional contributors to the federal budget. Japanese carmak-

After centuries of focusing its trade policies on Europe, Russia is quick-ly shifting its attention to Asia.

Fresh from hosting the Asia-Pa-cifi c Economic Cooperation sum-mit in Vladivostok in September, Russia is strengthening its links with Asia-Pacific neighbors through trade deals and initiatives.

The gathering of APEC political and business leaders in Vladivo-stok, the largest city in Russia’s Far East, was something of a coming out party. The federal government spent $20 billion sprucing up Vladi-ovstok, which is geographically closer to Beijing and Tokyo than Moscow or St. Petersburg, and fo-cused much of the summit’s agen-da on trade issues with Asia.

“We want to create a powerhouse of regional development and be-come the link connecting Europe and Asia,” President Vladimir Putin

Trade A planned re-orientation in exports toward APEC spells many opportunities, and challenges

Agriculture Russia’s weak harvest and lower grain exports are raising American store prices

While hosting the APEC summit in

Vladivostok, Russia highlighted its

newfound focus and expectations

for greater trade with Asia.

American shoppers will be hit hard

if Russia’s grain harvest falls 20

million tons short this year, as the

Agriculture Ministry predicts.

er Mazda has launched its first plant in Russia. South Korea’s Hyundai also has a plant nearby.

Global consultancy PwC predicts Russia’s exports to APEC will more than double to $206 billion by 2021. “Russia takes on more risks by not integrating with Asia than by doing so,” said Shuvalov.

One of the most promising sourc-es of increased trade with Asia may also be a signifi cant hurdle. Much of Russian and European overland trade with Asia moves across the Trans-Siberian Railway, which could complement the Northern Sea Route. The railway is operat-ing at full capacity but requires billions to upgrade the single rail line and build logistics facilities along the way to step up capacity. Upgrading this rail link would bring Russia signifi cant economi-cal, and possibly political, benefi ts.

“The amount of trade between Europe and Asia exceeds $1 tril-lion and every percent of the cargo that is transported via Russian ter-ritory will bring our economy no less than $1 billion,” said Ziyavu-din Magomedov, board chairman at Summa Group, a logisitics con-glomerate. For now, less than 1% of that is transported via Russia.

At the same time, Russia would like to increase traffic of cargo at Russian ports from 540 million tons annually to 900 million by 2020. About half of this increase would come from Pacifi c ports.

Summa Group could emerge as a key benefi ciary of rising trade links with Asia. The company has already invested in a raft of infra-structure projects in the region and negotiated a deal to buy 55.8% of the Far East Shipping Company.

Asia also represents a huge ex-port market for Russian energy re-sources and agricultural products.

The eight largest APEC coun-tries by population import more than 100 million tons of grain an-nually, more than Russia’s entire production. APEC countries ac-count for some 37% of all grain imports worldwide, but Russia’s share of that is practically zero. In energy, tellingly, Asia will become the world’s largest natural gas mar-ket by 2015, according to PwC.

Either way, according to Shu-valov, “Russia’s future rapid eco-nomic growth rests on two legs – Europe and Asia.”

Russia Looks Eastward

The longest cable-stayed bridge in the world opened in Vladivostok ahead of the APEC summit.

ARTEM ZAGORODNOVRUSSIAN BUSINESS INSIGHT

ILYA DASHKOVSKYSPECIAL TO RUSSIAN BUSINESS INSIGHT

VYACHESLAV NIKONOV

MEMBER OF PARLIAMENT, BUDGET

AND TAX COMMITTEE

ly be self-sufficient. Russia’s south-ern regions are facing similar cir-cumstances.

And what happens in Russia af-fects farmers worldwide.

“The general global situation af-fects prices. Even if [Russia and America] are not linked through supplies, major exporters’ problems affect everybody,” said Vladimir Petrichenko, general director of ProZerno, a consultancy.

Russia’s drought may account for a 25% hike in U.S. wheat prices, said Dmitry Rylko, general direc-tor of the Institute of Agricultural Market Studies. Conversely, the U.S. drought may have caused a 50% rise in prices in Russia.

The situation is not nearly as bad as it was during the 2008 food cri-sis. The United Nations’ Food and Agriculture Organization estimates that global grain reserves now stand at 522 million tons - 100 mil-lion tons more than in the 2007–08 marketing year. But the balance is delicate.

“With demand and supply more or less balanced, the market is hy-persensitive to any bad news. De-mand is growing slowly but pro-duction is lagging behind. That’s why tension can be felt on the mar-kets. Hence the rapid price growth,” said Boubaker Ben Belhassen, prin-cipal officer of the FAO’s Trade and Markets Division.Mikhail Orlov, president of the Am-bika Group, a Russian agri-food company, said the grain in the mar-ketplace is barely enough to cover supply, which makes traders hy-persensitive to a bad harvest.

“Memories of the Russian em-bargo on grain exports in 2008, after which U.S. wheat prices shot up from $200 to $300 per ton, are very much alive. That’s why trad-ers are scrambling to get their hands on any available supplies and scooping up reserves,” he said.

When Russian officials confi rmed in August that they would not im-pose an export embargo, prices sta-bilized.

That’s as well, Orlov said, as price hikes in Middle East countries such as Egypt, which tends to buy from Russia at the last moment, could cause political turmoil.

02

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300 millionis the number of people in APEC coun-tries who live within a 2-hour flight of Vladivostok.

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NEWS IN BRIEF

• Tech giant Mail.ru Group listed 12 million

global depository receipts. At a price of $34 each, the company raised $408 million. The receipts were offered to a large circle of qualified investors through an accelerated bookbuild offering.

• Billionaire Oleg Deripaska’s Ural truck plant

has cut production by 30% since last year. The plant is located in Russia’s Ural mountains and, as part of Deripaska’s Basel Group, produces trucks under the GAZ brandname. The cuts will lead to an estimated 500 layoffs.

• Russian steel and coking coal producer

Mechel may sell up to 25% of its mining busi-

ness to a strategic partner to pay off debt.

• Russia’s State-owned Sberbank has signed

a $1 billion loan deal with Belarusian potash

producer Belaruskali. Some $800 million will be used to refinance the company’s long-term hard-currency debts. Sberbank says it may invest into the company.

• Russian farmers got more help last month

after the Duma approved an extension to the

zero income tax regime for agricultural pro-

ducers for an unlimited period of time. The income tax rate was previously set to go up to 18% start-ing in 2016 and to 20% starting in 2020, but has been nixed after Russia joined the WTO.

• Shoppers in Moscow ranked 41 in terms of

global purchasing power out of about 180 coun-tries in a survey published by Swiss bank UBS. Zurich is at the top of the list followed by Sydney and Luxembourg.

• Russia’s Energy Ministry wants to auction

off the world’s three largest unalloted oil fields

by year’s end. The three fields are called Shpil-man, Imilorskaya and Lodochnaya. Bids for the three fields will begin at $1.05 billion (32.8 billion rubles). Experts predict total investments could ultimately amount to over $9.6 billion (300 bil-lion rubles).

• Russia’s economy continues to slow with corporate bank lending down 0.6% in September month-on-month and retail lending slowing to 2.5% growth the same month. The World Bank slashed its growth forecast from 3.9% to 3.5%.

• Russians are getting wealthier as inflation

slows and wages rise. Citibank and RBC’s Mass Affluent Wealth Index rose 2.75% in August after a very negative second quarter.

• Russia’s manufacturing PMI for September

advanced to 52.4 (from 51.0 in August) despite a general economic slowdown. Economists fore-cast lower growth for the second half of the year however, with wages rising faster than productiv-ity gains.

• The Russian government is introducing tax

breaks on hard-to-recover oil. The new taxation regime would allow an additional 40m tons per year of production in the best-case scenario and increase annual federal budgetary revenues by $2 billion.

• The government is considering merging the

Central Bank and Federal Financial Markets Ser-

vice into a single mega-regulator. Experts warn the move could reduce competition in the bank-ing sector.

• Deputy Prime Minister Arkady Dvorkovich

says a 3% stake in pipeline monopoly Trans-

neft could be privatized in the near term. Mean-while, shipping company Sovkomflot also said that it could IPO in Moscow and New York, without giving a timeframe.

• President Vladimir Putin supports a TNK-

BP sale to state-owned Rosneft, according to

Rosneft President Igor Sechin. Some of the proc-ceds would then be used to buy Rosneft shares in an apparent alliance between the global oil ma-jors.

• Russia will set up an aerospace “superhold-

ing” company to develop hypersonic weapon

technology, Deputy Prime Minister Dmitry Rogozin said. Russia’s defense industry supplier Rosobo-ronexport said it plans to export at least $11 billion worth of arms this year and has already exported $6.5 billion worth in January-March. Russia’s Mili-tary Industrial Commission added it may consider allowing privately owned military companies in Russia to promote the business internationally.

Purchasing Power Consumer and service industries are taking over as the fastest-growing sectors

Contrary to popular misconcep-tions, Russia is much more of a con-sumer story for investors than an oil and gas play - as the services and consumer goods sectors are now outstripping energy as the main drivers of growth.

That’s the message coming from Russia’s top fi nancial analysts, who see the consolidation of energy as-sets by the state being offset by greater investment opportunities elsewhere.

Chris Weafer, chief strategist at Sberbank Investment Research, says the changing roles are clear: “The Russia story now is like the tortoise and the hare - a static en-ergy sector, but very fast-growing consumer and service industries.”

Steady growth in disposable in-come and investment capital, to-gether with more government sup-port and the advantages of WTO membership, will provide greater non-energy growth, Weafer says.

Russia became the biggest market in continental Europe for milk and children’s toys in 2011, worth a col-lective $22.7 billion in sales. Next year it’s on course to become the biggest market in Europe for clothes, footwear, accessories and advertising worth a collective of $76.8 billion in sales.

Russia’s consumer market has reached critical mass and, thanks to steadily rising incomes, is poised to become the biggest consumer market for a wide range of prod-ucts sometime between now and 2018 when it will simply become the biggest consumer market full stop.

“Rising wealth levels over the last decade have turned Russia into a middle-class country for argu-ably the fi rst time in its history,” says Citigroup’s chief Russian strat-egist, Kingsmill Bond.

Russian incomes have risen an astonishing 16-fold over the last decade, from an average monthly income of about $50 under Boris Yeltsin to just under $800 under President Vladimir Putin. This fi g-ure puts the country into the mid-dle income bracket, according to the last U.N. Development Agency

report. If George W. Bush had de-livered the same sort of increase during his eight years as president then U.S. average per capita in-come would have increased from $35,082 in 2000 to $561,312 by the start of this year.

“In 2004 the government made the principle decision to hike taxes on energy and slash them on ev-erything else. Today Russians enjoy some of the lowest income and cor-porate taxes in Europe,” says Cle-mens Grafe, managing director of new market economics for Gold-man Sachs in Moscow. Focusing on the price of oil is a red herring, Grafe says.

The state is using its oil and gas windfall to subsidize the real econ-omy, which has fueled a decade-long shopping spree.

Already the 11th largest consum-er market in the world, according to Euromonitor International and in the top two or three for most sectors in Europe, Russia contin-

Russia’s oil-fueled consumer

splurge has led it to become

Europe’s largest consumer market

in everything from cars to diapers.

BEN ARISSPECIAL TO RUSSIAN BUSINESS INSIGHT

As Megafon Plans $3 Billion Listing, Appetite Grows for Russian IPOs

commercial bank Nomos, which netted $718 million in London. This year had been even slower, with only one successful IPO be-fore Sberbank’s listing: RusPetro, an oil explorer with assets in west-ern Siberia, raised $250 million in London in January.

Companies are hoping that Rus-sia has turned the corner following

Sberbank’s placement; within weeks MD Medical Group (MDMG) and leading commercial bank Proms-vyazbank (PSB) announced plans to raise some $1.5 billion between them in London by year’s end.

Promsvyazbank specializes in corporate banking for mid-sized Russian companies, trade fi nance and factoring. After the 2008 cri-sis, the bank also got into retail banking and last year had the coun-

try’s fastest-growing consumer lending business. PSB hopes to raise just under $1 billion from the sale of a 25% stake.

“We reached our current posi-tion in corporate banking before the crisis and were already in the top 10 in terms of deposits and loans,” PSB president Artem Kon-standyan said in an interview. “The IPO money will be used to shore up the bank’s capital and give it

Megafon is currently Russia’s second largest mobile operator.

some more fi repower to continue our growth.”

Following the announcement of MDMG’s London placement, the company said its market capital-ization would be about $900 mil-lion after the IPO, with its free fl oat expected to be at around 35 per-cent.

Dr. Mark Kurtser, chairman of MDMG’s board and the driving force behind the group, said in a statement after the listing that the company was “delighted with the positive response to our IPO, which highlights strong investor appetite for industry-leading businesses in growing markets.

“Supported by the London list-ing, we are well placed to capital-ise on opportunities to develop our network of healthcare centres and selectively enhance our service of-fering in Moscow and other eco-nomically attractive regions of Rus-sia.”

MDMG operates 11 clinics and hospitals in Russia, including the country’s largest private hospital, and one in Ukraine. The company caters to growing middle-class de-mands for modern treatment, more comfort and service during child-birth.

Ahead of the listing, Kurtser said that he expected the group to grow by 35%-45% a year.

ues to climb the rankings. GDP will expand by about 3.5% to 4% this year, according to the World Bank.

The fl ood of petrodollars primed the pump and ironically the state’s big presence in the economy pro-vides a very effective “trickle down” mechanism.

Russia’s per capita income is the fastest growing of any major emerg-ing market in the world over the last few years. It reached about $21,350 last year (on a purchasing power parity basis) according to the World Bank, well ahead of Bra-zil ($11,720), China ($8,440) and India ($3,650).

With very little debt, the lion’s share of Russians’ income is dis-posable. And since the advent of consumer credit in 2001 shoppers can multiply the power of their in-come many times over by borrow-ing. Consumer loans have been run-ning high this year and are up 43%, a level the Central Bank says may even overheat the economy.

Europe’s Biggest Market in...

Sector Year it Becomes the Largest in Europe Estimated Size ($ billions)

Vodka 9th century 18

Cell phones 2004 30

Children’s goods 2011 11.3

Clothes, footwear, accessories 2013 (est.) 72.3

Beer 2014 (est.) 30.3

Cars 2018 (est.) 80.3

E-commerce 2018 (est.) 103.2

Retail real estate 2020 (est.) 9SOURCE: BNE

Shoppers in Moscow were ranked 41st globally in terms of purchasing

power based on a survey by UBS.

Forget Oil,

Russia’s a

Consumer

Play Now

CONTINUED FROM PAGE 1

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04 RUSSIAN BUSINESS INSIGHTSECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA

WWW.RBTH.RUSpecial Report

IT Startups How Russia’s most promising tech companies are changing the world

Search Engines Russian behemoth avoids “one size fits all” approach amid expansion in emerging markets

For Russians like Georgy Pa-chikov who grew up in Soviet times, fixing broken-down ma-chines was often a test of ingenu-ity and improvization - not to men-tion sheer determination. Back in 1989, when the whole country was literally grinding to a halt, he had a broken washing machine. As competent repairmen were then thin on the ground, Pachikov chose to fi x it himself.

Working with a friend, he took it apart and reassembled it with success. The machine worked fi ne but there were fi ve spare parts still on the fl oor.

“We had no idea what to do with them. The instructions were in French with no translation. Despite being trained engineers, we were at a loss,” Pachikov recalls. It was then that he had the idea of cre-ating animated three-dimensional repair manuals with detailed il-lustrations of all stages of the pro-cess, translated into several lan-guages. That same year, he founded a company called Paral-lelGraphics. By 2010, Parallel Graphics’ turnover hit $5 million and it employed more than 800 staff.

Pachikov is by no means the only successful Russian software entre-preneur. His brother, Stepan Pa-chikov, developed Evernote, a pop-ular note taking and archiving service in use around the world.

Exporting algorithms

Software development and Russia may be natural partners. “If we get an urge to solve a problem, we’ll get it done, come hell or high water,” says Artem Lyuftin of Moscow-based Mobile Research Group. Rus-sian companies are now world fa-mous as developers of complex software solutions employing so-phisticated algorithms. No fi eld il-lustrates this more clearly than an-ti-virus software. Russia’s Dr. Web and Kaspersky Lab are world lead-ers in the fi eld.

The latter was founded in 1997 by Eugene Kaspersky, a graduate of the KGB Institute of Cryptog-raphy. Kaspersky Lab produced revenues of over $600 million in 2011 and it employs more than 2,500 people.

A different breed of algorithm is offered by ABBYY, a Russian company that developed the inim-itable optical character recogni-tion software FineReader. The fi rst version of FineReader was released in late 1993. Today, the program supports about 190 languages and the company’s annual proceeds are estimated at over $100 million.

Among the less well-known but no less noteworthy companies are

CBOSS (automation systems for the telecommunications industry), Paragon Software (hard disk tools), PROMT (translation), DocsVision (document workfl ow software), and Spirit Dsp (software for voice, video and other data), all offering prod-ucts and services in global use.

One market where Russian IT fi rms have enjoyed particular suc-cess is computer games. It was Rus-sian Alexei Pajitnov who fi rst de-veloped Tetris, one of the most popular computer games ever. The fi fth installment of the popular “He-roes of Might and Magic” was de-veloped by Russia’s Nival Interac-tive with French copyright owner Ubisoft. It sold more than 2 mil-lion licensed hard copies world-wide.

Another Russian game develop-er, ZepoLab, also tasted success with “Cut The Rope” in 2010. The concept was simple: feed a green creature by cutting ropes that hold sugar candy. If successful, the candy fl ies right into the creature’s jaws. The falling candies follow the laws of physics. The app became ex-tremely popular with smartphone and tablet users, with the game being downloaded more than 100 million times and earning more than $85 million. It is now the world’s second most popular game for mobile devices after Finnish de-veloper Rovio’s “Angry Birds.”

The strength of Russian firms comes down to their ability to cre-ate imaginative algorithms.

“Solving complex tasks, in-depth

analysis of large data volumes, de-signing algorithms — these areareas of the IT market where Rus-sia can compete internationally,”says Alexander Galitsky, founderof the fund Almaz Capital Part-ners.

“This is because the country pro-vides world-class education in thefi eld of mathematics and physics,which can be used to solve the mostcomplex software developmentproblems. Programmers in Indiaand South Korea are also prettynifty, but if you’ve got a task noone is willing to tackle, or youdon’t yet have a clear concept ofthe fi nished article, then ‘Welcometo Russia!’” says Alexander Vovku-la, technical director of ParallelGraphics.

Homegrown Software Tackles Global Problems

Arkady Volozh celebrated Yandex’s 2011 NASDAQ

IPO in New York City.

While Russia’s annual software

exports currently total a meager $4

billion, a number of global giants -

including Apple - increasingly rely

on them for their cutting-edge

innovation.

After a successful initial public

offering on NASDAQ, Russia’s

leading search engine expands

internationally from a saturated

domestic market.

ALEXANDER MALAKHOVSPECIAL TO RUSSIAN BUSINESS INSIGHT

ALINA UKOLOVASPECIAL TO RUSSIAN BUSINESS INSIGHT

Russian Software That Already Runs Your Life

Yandex Invades Google Territory

is the current volume of Russian software exports abroad; this is a paltry sum compared with other tech giants.

$4 billion

of Kaspersky Labs’ $600 million revenue in 2011 came from outside Russia; the company has offic-es all over the world.

80%

IN FIGURES

Natalia

AntonovaRIA NOVOSTI

I never thought that there would come a day when I would unabashedly cheer on Mark Zuckerberg. After all, even among hardcore Facebook users such as myself, it is much more fashionable to

poke fun at the guy, gently or otherwise.Yet Zuckerberg’s Moscow visit has reminded me

that there is at least one thing that the billionaire Facebook founder clearly has going for him – and it’s just the sort of quality the local jet-set crowd would be wise to pick up.

I am talking, of course, about Zuckerberg’s abil-ity to do regular things and hang out like a regular guy. Like being a tourist in Red Square, for example, or even popping into McDonald’s.

In Russia, Facebook still trails behind the VKon-takte social network in terms of popularity. And, de-pressingly enough, it was VKontakte founder Pavel Durov who recently caused a stir when he tossed money out of the window of the company’s St. Pe-tersburg office, and then (with apparent delight) watched people fight over it on the sidewalk below. I wrote then that Durov was acting more like a reg-ular weirdo than an evil, rich overlord – he genuine-ly didn’t seem to understand why what he did was in such poor taste, and appeared to have a poor grasp of the wider implications of his stunt.

Yet Durov’s actions were also symbolic of a kind of culture, or lack thereof, among the young and wealthy in Russia. There is a special kind of cynicism that thrives within this milieu – cynicism that is only exacerbated by the polarized nature of Russian so-ciety. The “golden youth” know they’re hated. For them, rhetoric about “jealousy” among the lower classes is not something akin to an abstraction, like it is for many people in the United States. Instead, it’s a daily reality.

Russia has been through too much in the last hundred years. Scar tissue has built up on top of the collective memories of wars and revolutions – memories passed down to each new generation. The rich are not to be trusted, we believe. But nei-ther is anyone else.

And into all of that strolls Zuckerberg, the geek who has inherited the Earth (in its present incarna-tion, at least). Normal to the point of being boring – as some would argue. Engrossed in first-world problems – such as what to do about Facebook’s performance on the stock market – he is a regular billionaire, not beholden to any political regime, and not worried about landing in prison.

Of course, I am under no illusion that Zuckerberg represents the American dream. I remember what Facebook was like when it was only open to the students of several universities, including my alma mater. It was a virtual playground for the privileged – those are its roots – in a sense as privileged as Zuckerberg’s own roots.

Still, the most shocking thing about Zuckerberg, in the Russian context, is how low-key he is. And it is this comparative serenity, above all, that Russian businesspeople, and regular people, must achieve in order for this country to truly prosper.

Natalia Antonova is acting editor-in-chief of The Mos-cow News.

VIEWPOINT

The Tao of Mark Zuckerberg

Yandex has become an internation-ally recognized brand name, thanks in large part to its public offering on NASDAQ last year. Not only was it the fi rst Russian IPO on an Amer-ican exchange in fi ve years, but it was also the largest by an IT com-pany in 2011.

Yandex was valued at $8 billion. Investment banks bought 5,217,405 Class A shares at the placement price of $25, only to see the stock soar to $38.85 on the fi rst day of trading. On launch day, Yandex co-owner Ilya Segalovich, encouraged by investor support expressed in price rise and an oversubscribed book, said something he had not dared to say before: that Yandex, in his opinion, is better than Google.

Objectively, Google’s relevance and search speed are in a different league. Where Yandex excels is not in the quality of its searches. Its key strength lies in its completely Rus-

grew by 60%. This year, it expects 45% growth, said Volozh.

So Yandex has decided to expand in emerging web markets.

Long active within the Common-wealth of Independent States (CIS), a regional grouping of former So-viet countries, Yandex has now turned to Turkey as the fi rst step in its international expansion. It is a bold move as Google is Turkey’s most popular search engine.

“This is an experiment so far, but we don’t rule out the possibility that, if it’s successful, we will ex-plore other places too,” Volozh said.

Yandex is interested in countries where a single player dominates the market. “It’s wrong when the whole world is refl ected through a single window,” Volozh said.Experts be-lieve the strategy has potential.

“It’s too early to say whether Yan-dex’s technology will be able to de-feat Google globally, but the com-pany defi nitely has a shot at places like Turkey, where web search en-gines are underdeveloped,” said Vsevolod Topolyansky, managing partner at Aurora Venture Capital.

Turkey may be the right place to choose to test the waters.

First, it’s Europe’s largest and

fastest growing web market. Sec-ond, it’s a stand-alone, isolated lan-guage segment, which offers an op-portunity to develop indexingapproaches. Third, testing technol-ogy in an unassuming web marketmakes it possible to identify pit-falls.

Yandex will review the results ofits fi rst year of international oper-ations in December. The companyhasn’t disclosed any numbers, butVolozh says new users have wel-comed the company.

“Of course we had to modify theservices we offer in Russia, and addmany things Turkish users fi nd use-ful. For example, our Ramadan proj-ect offered the opportunity to ob-serve the time of sunset in variousregions,” adds Volozh.

Some experts have been skepti-cal of Yandex’s policies in “foreign”markets. Operating in an unchart-ed territory is risky and expensive,whereas they argue that rivalGoogle’s one-size-fi ts-all approachhas already been tried and testedmany times over.

Yandex’s performance abroadmay just depend on how fast itlearns to “recognize” and “index”the mentality of other countries.

In September, Yandex surpassed Google in Russia in terms of queries made on Google’s own Chrome web browser.

sian interface and services Russian users fi nd indispensable. Yandex.Market is an online catalog of con-sumer goods from all over RuNet (the Russian-language Internet), Yandex.Elektrichky serves up com-muter train schedules customized to the city where you live, and Yan-dex.Mail and Maps apps are used by nearly everyone with Internet access. Last month, Apple includ-ed Yandex’s map software in its iPad and iPhone as standard software.

Yandex’s strategy has allowed it to stay well ahead of Google on Rus-sian territory despite stiff compe-tition. Audience monitoring web-site liveinternet.ru says Yandex has 60.5% of the market, Google 26.6%, and Mail.ru Group subsidiary Search.mail.ru, 8.1%.

In September, Yandex surpassed Google in Russia in terms of que-ries made on Google’s own Chrome web browser. Yandex founder Arkady Volozh announced about a year ago that his company had out-grown the confines of Russia. A country’s web space is, basically, as big as its population. Sooner or later the number of users stops growing.

Last year, the company had rev-enues of about $600 million and

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05

Special Report

Social Networks Russia is one of the few markets where locals are ahead of Facebook

Facebook’s Friendly Eastern Competitors

In 2006, as Russia was in the throes of a decade-long economic boom, a young entrepreneur named Albert Popkov had a paradoxical idea: to capitalize on his countrymen’s nos-talgic tendencies in order to build a 21st century venture.

He founded Odnoklassniki (Rus-sian for “Classmates”) a website which combined reuniting old schoolmates and social networking. Within a year a million Russians fl ocked to the site, where they could reconnect with anyone from the kid they shared a tent with at summer camp 30 years ago, to their next door neighbor. The site won the country’s top web prizes, and in 2008 Popkov was named GQ magazine’s “busi-nessman of the year”.

Odnoklassniki fl ourished, rack-ing up almost 30 million visitors from Russian speaking countries by July 2008. Today the site boasts the same number of visitors – but each and every day. It’s the second most popular social network in Russia, vying to overtake the leader, Vkon-takte, which boasts 35 million vis-its a day.

As for Popkov, in early 2008 he was accused of pilfering crucial in-formation from a British company he had worked for before founding Odnoklassniki. He denied the alle-gations but was let go after selling his pet project for an estimated 10 to 20 million euros to DST, a hold-ings company later renamed Mail.ru Group.

Mail.ru now owns 100% of Od-noklassniki, controls Russia’s most popular mail service and has a 40% stake in the fi erce competitor Vkon-takte.

Meanwhile, Odnoklassniki con-tinued to thrive. The company earned $103 million (3.2 billion ru-bles) in the fi rst three quarters of 2011, securing a net profi t of $45 million (1.4 billion rubles).

German Klimenko, editor of au-dience monitoring website livein-ternet.ru says Odnoklassniki’s cur-rent success is fueled by the integration with services offered by mail.ru, its parent company.

VKontakte’s 27-year-old founder, Pavel Durov (left), told Jimmy Wales he would donate $1 million to Wikipedia

While the Facebook IPO grabbed

the headlines, Russian social

networks are quietly monetizing

traffic to beat the American giant

at its own game.

ILAN GORENSPECIAL TO RUSSIAN BUSINESS INSIGHT

Taking advantage of Rus-sia’s online tourism mar-ket (which is apparently growing at 70% annually) and catering to a boom-ing middle class that is in-creasingly connected to the Internet, OneTwoTrip has managed to raise $9 million from Phenomen Ventures only one year after launching its convenient website for booking cheap air tickets and comparing prices across carriers. Pro-jected total bookings are projected to stand at $400 million by the end of this year, of which OneTwo-Trip enjoys a 6-7% cut. › onetwotrip.com

LinguaLeo offers online English instruction via popular TV series, books and dialogues. After a rough start and a break of several months during which it was inactive, the site now has 1.5 million reg-istered users and enjoys 80 thousand daily visits, comparable with Western counterparts like LiveMocha and Busuu. In June 2012, LinguaLeo secured $3 million from the Runa Capital Venture Fund; it intends to use the money to go international and cash in on demand for Eng-lish all over the world. “Our first target will be Bra-zil, then Germany and finally Southeast Asia,” found-er Aynur Abdulnasyrov told East-West Digital News. › lingualeo.ru

ResumUp compiles the re-sumes and social network data of job candidates into an individualized portfolio that guides you through your professional career. The site can tell you what you need to know to achieve your career goals based on data from so-cial networks. The service has attracted 7.2 million active Russian-speaking users. › resumup.com

A digital assistant for your Smartphone, comparable to Siri, SpeakToIt was named among the Top 10 Android Apps of the Year by The New York Times. Since launching in May 2011, it has been downloaded over 2.5 million times and is currently available on iOS and Android. This year the company has received an undisclosed amount of funding from Intel Capital. › speaktoit.com

Ecwid enables users to set up an online store on their website or a social net-work within minutes. It currently supports 185,000 accounts in 174 countries and 43 languages. The founding team from Uly-anovsk was a finalist of the “Next Web 2010” con-test in Amsterdam. Last year, the project received $1.5 million from Runa Capital. › www.ecwid.com

Giants like Yandex have proven that Russian IT companies have what it takes to go global, but what comes next? Moscow’s leading tech entrepreneurship center offers investors six little-known companies to watch.

RealtimeBoard

OneTwoTrip

LinguaLeo

ResumUp

SpeakToIt

Ecwid

Start-Ups to Look Out For In the Next Few Years

Digital October is based in the building of the

former Red October chocolate factory.

Anastasia Demina

Digital October

Social Networks’ Share of

Internet Ad Market (%)

Size of Internet Advertising

Market ($ millions)

Average Daily Number of

Visits (millions)

Designed by a team from Russia’s industrial city of Perm, RealtimeBoard is a browser-based white-board that utilizes Massive Multiplayer Online (MMO) technology (similar to on-line games) to facilitate an easy exchange of ideas. It was created by Multivi-tamin, also responsible for the Art Multitouch proj-ect with artist Konstantin Khudyakov. › realtimeboard.com

RUSSIAN BUSINESS INSIGHTSECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA

WWW.RBTH.RU

“Users’ accounts combine both the email address and the social pro-fi le and you can cross link between them. This is a signifi cant incentive for advertisers.” Klimenko adds that “Moreover, Odnoklassniki offers video ads while competitors don’t. It’s a very strong selling point.”

Integration and cooperation, it seems, are the buzzwords.

Free Songs and Costly Smileys

However, complete assimilation by external investors is a fate that Pavel Durov, the founder of Vkontakte, has been keen to avoid.

When Durov launched Vkontak-te (meaning “in touch”) in late 2006, he was accused of brazenly cloning Facebook, ripping off even the color scheme.

Yet the English philology student who went to St Petersburg State University forged ahead with his brainchild, offering users free shar-ing of video and audio fi les. Accu-sations of intellectual property theft

were quick to fl y, but users loved the free content. They still do.

Vkontakte’s playlists are a hit, es-pecially with teenagers and 20 some-thing students. Not only because songs and clips entice users to check in, they may keep them in.

According to data collected by comscore.com, in 2011 the average visitor spent 490 minutes a month on Vkontakte, compared with 340 minutes for Odnoklassniki and a mere half hour for Facebook, which made its fi rst serious foray into the Russian market two years ago.

Facebook is now estimated to have 14 million registered users, and is popular among business owners who like to promote themselves on other media – particularly TV – as having a Facebook account.

A decision by a Russian appeal court earlier this year that free fi le sharing and downloading amount-ed to copyright infringement could have created problems for Vkontak-te, but the company adapted.

It drew on YouTube’s experience, and allowed copyright owners to de-

period ever, particularly since Face-book has built a 20% market share – which Klimenko describes as “an impressive foothold.”He predicts that the two big local players will be “pitched in a battle for every subscriber in order to continue thriving.”

Popkov, the man who brought Odnoklassniki to the world, now heads the price comparison site Sravni.ru which, he says, enjoys “only modest success.” He believes the Russian web “might remain a very good place for local players. Foreign projects rarely succeed here. It’s possible that in a few years there will be just one or two lead-ers and all the others will shrink and virtually disappear.”

Another frontier to push into might be outside of Russia. Odnok-lassniki and Vkontakte have both announced international expan-sion plans. In April Odnoklassniki let it be known it would offer lo-calized versions to its Uzbek, Ar-

menian, Georgian and Moldavian audiences and plans an English version to cater for its American based contingent, which it claims to be more than one-million strong. Vkontakte is already available in 70 languages, including English, and was recently rebranded as VK.com in a bid to become more appealing to audiences worldwide.

However, Popkov says, opportu-nities still abound inside the Rus-sian federation. The man, who was born in the Far Eastern island of Sakhalin before rising to entrepre-neurial stardom, sees networks ven-turing into remote regions to cap-italize on the growing popularity of mobile devices.

“Broadband was the last main drive for social networking,”he reminisces. “The same might hap-pen with mobile when access be-comes faster. Whoever’s smart and fast enough to offer top quality mo-bile services is likely to win. If I knew how to do that I wouldn’t be speaking to you right now: I’d prob-ably be writing the code.”

lete pirated content while offering help promoting owners’ pages. It also paid a fine of $6,780 (210,000 rubles). The fi ne was a punitive drop in a sea of revenue, which swelled in 2011 to $106 million (3.29 billion rubles) while net profi t rose to $16.6 million (516 million rubles), increas-es of 41.7% and 13.9% respectively from the year before.

The strong results can be partly explained by Russian marketers’ ap-preciation of the power of free, though pirated, content. Ten thou-sand advertisers are registered with the network, each paying in advance an average of $645 (20,000 rubles). Analysts estimate Vkontakte to be worth more than a billion dollars and Durov’s personal fortune at around $260 million.

Last May he spent a weekend throwing a multitude of paper air-planes from his St Petersburg office window. They were made of folded 5,000 ruble notes.

Durov’s company is not so gener-ous with all its services, however.

“Russian operators, and particu-larly Odnoklassniki, made clear to users from day one: ‘for some things, you have to pay’. You want to play online with your friends or share an emoticon? That game or that smiley will cost you,” says Ariel Weiss, a former executive with ICQ, an in-stant messaging program owned by mail.ru. “They understood they have to monetize and they know how to adapt western models to their au-dience’s needs.”

Paid services offered by Odnok-lassniki include anything from so-cial gaming, through the right to re-main anonymous while peaking at another user’s page, and all the way to sending virtual gifts like songs, which can cost up to $2.50 each.

Odnoklassniki now wants to take paid virtual revenue to the next level of pair virtual fi nancing. The com-pany intends to offer its clients the opportunity to borrow virtual money. It promises not to enforce the col-lection of debts.

According to J’son & Partners Consulting, fee-based services in Russia generated $514 million in 2011. Mail.ru Group reported that paid services helped it generate al-most $128 million last year.

The New Mobile Frontier

Russian-language social media may be entering its most competitive

Odnoklassniki and Vkontakte have both announced international expansion plans; for now to ex-Soviet states.

The average visitor spent 490 minutes a month on Vkontakte, 340 minutes on Odnoklassniki and a half-hour on Facebook.

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RUSSIAN BUSINESS INSIGHTSECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA

WWW.RBTH.RUMoney & Markets

Uncertainty quadrupled

Kicking off privatization

AHEAD OF THE CURVE

STATE MATTERS

Global economic uncertainty affects Russia in two ways. First, export prices for gas, oil and other exchange commodities are jeopardized due to uncertainty in economic growth glob-

ally. This not only affects the largest Russian companies - Gazprom, Rosneft, Evraz and others - but also the government, because royalties from oil and gas are im-portant for the budget.

And second, financial markets remain highly vola-tile - with investors ready to flee at the faintest sign of trouble.While multinationals such as Siemens and Gen-eral Electric with substantial investments cannot leave the country overnight, investors in financial markets can always retreat to their domestic markets.

Making things worse for Russia is its lack of large national institutional investors. Since the collapse of communism, it has not had the time to establish major pension funds or insurance companies.

The government is trying to fight the weaknesses of these institutions, but so far this task has proved too hard.

A similar story is unfolding with the declared strat-egy to turn Moscow into an “international finance cen-ter.” Many initiatives have been launched, and some, such as the setting up of the joint MICEX-RTS exchange and the Central Securities Depository, have been com-pleted.

As a result, within five years Moscow may become a financial centre for the CIS - Ukraine, Kazakhstan and other ex-Soviet states. But talk of turning Moscow into another London or New York remains fanciful.

Prospects look better for Russian banks. With loan portfolios growing on average 10-20% annually, asset growth is strong and yields are high.

The banks have also been more cautious since the onset of the global financial crisis in 2008, which is good as they were too aggressive earlier.

Their position, however, needs further strengthen-ing, particularly in areas such as risk, finance and bud-get management, and capital planning.

High yields for banks, however, mean that loans are expensive for companies as banks remain apprehen-sive about lending in today’s uncertain market condi-tions.

Nonetheless, expanding corporate credit and diver-sifying lending to more large, small and private busi-ness will be crucial for long-term development.

Two other challenges for banks are the dangers of currency risk for those that use dollar loans to lend in rubles and how best to lower the interest rates paid on deposits opened when inflation was high.

Offsetting both these problems is the fast rate of ruble-deposit growth - 22-23% annually for the last three years. This has strengthened the banks’ ruble holdings, so lowering demand for dollars, and reduced the proportion of high-interest deposits in their port-folios.

Geoffrey Nicholson is a partner at PricewaterhouseC-oopers.

It happened almost overnight, but with a simple share placement the largest bank in Eastern Eu-rope became the leader of Russia’s new privati-zation drive.

A few weeks ago, 7.58% of Sberbank’s shares held by Russia’s Central Bank were privatized. The shares were sold at about $3 each and the offering was over-subscribed twice over. Western funds bought most of them. The deal went through in just two days.

If the “positive investment climate” holds up a few more months, the Russian government could go ahead and privatize a bunch of other companies under a much-awaited plan announced several years ago.

The list of companies up for privatization in-cludes VTB Bank, Rosneft (Russia’s largest oil com-pany), InterRAO (a power generator), RusHydro (a hydroelectric power generator), Alrosa (the world’s 2nd largest diamond miner), RZD (a rail-road monopoly responsible for 3% of Russia’s GDP), Transneft (an oil shipper), Rosnano (a nanotech-nology giant), Sovkomflot (a shipping company), Moscow’s Sheremetyevo airport, Zarubezhneft (an oil exporter), United Grain Company, Rosselkhoz-bank and Rosagroleasing (a farm credits compa-ny). The total value of all these stakes is estimat-ed at almost $58 billion.

A final list of companies up for privatization should come out on Nov. 1.

One of the government’s goals is getting private investors involved in these companies, which it hopes will allow them to develop more dynamically. An-other is to fill the current budget gap, a result of the significant social transfers after the last crisis.

Relying on petrodollars can be precarious, and Russia’s leaders understand this.

Putin’s pre-election promises alone could cost some $28 billion per year or 1.5% of GDP. Other ways of raising this money, like raising taxes on business-es, are seen as unacceptable as they will also slow down economic growth.

At the same time, in today’s volatile global econ-omy, the chances that the government will embark on a massive privatization drive aren’t that great. Only a tenth of the privatization program will be ful-filled this year.

Different companies hold wildly different levels of attraction for investors.

BP, for example, has announced its interest in 25% of Rosneft. VTB, which announced a possible $2 billion share placement in 2013, is another matter. The shares may go up for sale, but whether anyone will buy them is still an open question.

Roman Tkachuk is an analyst at N Capital.

Geoffrey

NicholsonSPECIAL TO RUSSIAN BUSINESS INSIGHT

Roman

TkachukSPECIAL TO RUSSIAN BUSINESS INSIGHT

Kremlin Plans Twin Track Sell-Offs of State Stakes

President Vladimir Putin’s ambi-tious plans for selling stakes in state companies, set out in his pre-elec-tion program earlier this year, are now likely to be modifi ed, experts say – with a smaller list of assets in banking and transportation in-frastructure getting a quick green light, while sell-offs of energy stakes will likely end up being put on the back burner.

“What has actually happened over the past two months is that the privatization plan appears to have been split into two categories – stocks in the fast-track program and a second program with a much longer and vague time line for sale,” said Chris Weafer, chief strategist at Sberbank Investment Research.

The change comes after an extend-ed discussion within government circles, as conservatives around Igor Sechin, the infl uential chairman of state energy giant Rosneft, appeared to win the argument that strategy energy assets should remain under strong state control. Liberals in the Cabinet of Prime Minister Dmitry Medvedev, led by Deputy Prime Min-ister Arkady Dvorkovich, had called for energy assets to also be put on a fast track to privatization.

The Rosneftegaz holding, under Sechin’s leadership, currently con-trols the state’s stake in Rosneft, and 11% of the equity in Gazprom. It now seems increasingly likely that Rosneftegaz will extend its energy empire to include majority control over Gazprom, more than 75% of Rosneft and the Federal Grid Com-pany, a majority interest in Rus Hydro, and more control over oil pipeline monopoly Transneft, among others.

In the strategic energy sector, the government looks likely to take a step back toward “greater state con-trol and some sector consolidation before then proceeding with priva-tization at a later date,” Weafer said.

But the liberals could yet man-age to turn the tables and speed up the program.

“There remains a tension at the heart of government about the speed and nature of privatization, so the plans are always subject to change,”

said Kingsmill Bond, chief strate-gist for Citibank in Moscow.

Next up after Sberbank is likely to be Russia’s second-biggest bank, VTB, which aims to raise $2 billion in the spring of 2013, according to bank chairman Andrei Kostin.

Also in the fast-track program are likely to be stakes in the pub-licly listed companies Sovcomfl ot, the state shipping company, nation-al airline Aerofl ot, diamond monop-oly Alrosa and Federal Grid Com-pany, Weafer said.

Initial public offerings in Apatit,

RosAgroLeasing, Russian Agricul-ture Bank, Russian Railways, Sheremetyevo Airport, United Grain Company, and the ports of Murmansk, Arkhangelsk and Van-ino are also planned.

Analysts said the non-extractive industries were the best privatiza-tion prospects, with VTB a proxy for the domestic economy, and Rus-nano representing new technology.

“The most attractive companies will be those which offer exposure to consumer or infrastructure growth in new sectors,” said Bond,

of Citi Bank. “Sovcomfl ot therefore is especially interesting.”

The big question remaining is whether the Kremlin can fi nd theright windows of opportunity to getgood prices for its stakes.

Speaking at VTB’s “Russia Call-ing” investment forum in Moscowearlier this month, Putin said thatsell-offs would continue, “takinginto account market prices and themarket situation.”

Analysts reinforced this view, em-phasizing that the timing mainlydepended on external factors.

“The bottom line is that the gov-ernment will only be able to sellwhen there is investor appetite forrisk assets,” said Weafer, of Sber-bank Investment Research.

“It’s a case of waiting for likely short windows of opportunity inwhich to sell. But the handle to openor close those windows is in thehands of Europe’s politicians, theEuropean Central Bank and the U.S.Fed, rather than with the Kremlin.”

Sberbank, whose history dates back to 1841, is the largest bank in Russia and Eastern Europe.

Starting next month, Russia’s bank settlement and clearing system will be hooked up to Euroclear, the in-ternational settlement system, mak-ing it possible to buy Russian bonds and shares from anywhere in the world. Analysts expect demand for bonds and stocks to surge as large insti-tutional investors, who previously balked at the paperwork associat-ed with trading in Russia, gain un-fettered access to the market. The creation of a Central Securi-ties Depository (CSD), which is ex-pected to go online at the same time, will also boost markets. The CSD collects together all trades for settling in one place. Many institutional investors, includ-ing U.S. pension funds, are preclud-ed from investing in any market that doesn’t have such a system. The introduction of the CSD will also deepen the pool of capital available to Russian markets. This latest round of reforms fol-lows the merging of Russia’s two biggest stock exchanges – MICEX and the RTS – in December of last year. Since February, traders in Lon-don and New York have been able to buy Russian sovereign bonds in over-the-counter trading. This November’s reforms, how-ever, will have a far bigger impact. “Russia’s ruble bond market has traditionally been overlooked by

Stocks For the first time, it’s possible to buy Russian bonds and shares from anywhere in the world

Privatization While a smaller number of sales are to be fast-tracked, energy may have to wait

Russia’s settlement and clearing

system will be hooked up to

Euroclear next month, which the

state hopes will spark a rally in the

market.

The $5.3 billion Sberbank offering,

reducing the state’s share to 50%

plus one share, has set the scene for

a raft of privatizations planned for

the next few years.

foreign investment into its bond andstock markets of any major emerg-ing market. Non-residents hold just5.5% of government treasury bills– known as OFZ – compared to anaverage of 20% in other BRIC coun-tries. Analysts say November’s reformscould triple this share to 15% with-in a few months as traders readjusttheir portfolios to match Russia’sincreased weight in the internation-al indices. “This translates into potential ad-ditional demand of 500 to 800 bil-lion rubles ($14.7 to $23.5 billion)from non-residents, which coversup to 70% of the total OFZ net is-suance in 2010-11,” said NikolayPodguzov, head of fi xed income atVTB Capital. Russian bonds are currently veryattractive. The economy is growingat about 4%, one of the fastest ratesin Europe. Infl ation fell to 20-year lows at thestart of this year, and while a poorharvest is likely to cause prices torise this autumn, long-term core in-fl ation has been brought down tobetween 4.5% and 5.5% says Re-naissance’s Kolchina, adding Rus-sia’s debt to GDP ratio is a minis-cule 8% against the most of Europewhere debt is now closer to 100%.And finally Russia has about$620billion in its various reservefunds – enough to cover every dol-lar of debt with one in cash. Russia’s is one of the most robusteconomies in Europe, yet the healthof the economy is not refl ected inthe bond prices: OFZs currentlyyield over 5%, while semi-govern-ment and corporate bond returnsare in the teens; U.S. bonds in con-trast are close to zero, while Ger-man bonds are offered at negativereal interest rates.“Emerging market bonds have hada great year, but everything couldchange this autumn, turning Rus-sia’s capital market into a globalhot spot, as Russian ruble bondscome of age,” says Kolchina.

Clearing System Reform Opens Up Moscow Markets

BEN ARISSPECIAL TO RUSSIAN BUSINESS INSIGHT

TIM WALLRUSSIAN BUSINESS INSIGHT

$3,700is what each sharehold-er who invested $100 into Sberbank 10 years ago would receive today, Vladimir Putin estimated

$5.2 billionis the value of the Sber-bank stake that was sold to domestic and inter-national investors during last month’s SPO

46%of retail deposits in Rus-sia are controlled by Sber-bank. It benefits from be-ing the inheritor of the main Soviet savings bank

IN FIGURES

06

Joining Euroclear will bring Moscow closer to being a global finance center.

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foreign investors but this autumn’s capital market reforms could spark a rally,” said Elena Kolchina, head of fi xed income at Renaissance Asset Managers. Until now, with foreign funds barred from participating directly

in Russian bond auctions, they had to go through the costly and time consuming process of opening ac-counts with Russian brokers and clearing their trades in offshore ha-vens such as Cyprus. Russia attracts some of the least

07

Global demand for Russia’s mineral re-sources is huge. Exports of oil and oil products have risen from 120 million to 240 million tonnes in the past ten years

- from $50 billion to $390 billion. But at the same time, demand for manufactured products and other industries drawing on Russian know-how has weakened.

To some extent this is nothing surprising: as exports of commodities have grown, their role in the economy has increased too. But accept-ing this as the natural way of things is danger-ous. Russia’s federal budget is reliant on com-modities revenues - according to official data, commodities contribute around 60% of the fed-eral budget; in reality, that number is closer to 75–80% as much of the service sector depends on money from oil and gas.

We must make better use of the wealth our commodities have brought us. The issue is that we are wasting the money - spending it on non-productive services investments, for instance, rath-ert than invest it in the development of “real” economy sectors. This is because power in Rus-sia is held by a commodity-based bureaucracy, totally reliant on oil and gas revenues.

Some observers argue that developing the oil and gas industry will automatically lift other in-dustry sectors. This is a gross exaggeration.

Major companies such as Gazprom and Ros-neft spend only sparingly on research and devel-opment – only around 1% of their annual reve-nues. This is not the kind of money that can spur the development of accompanying industries.

What’s worse, we are often guilty of not trying to create something new ourselves. Instead, we prefer to buy from elsewhere.

RUSSIAN BUSINESS INSIGHTSECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA

WWW.RBTH.RU Comment & Analysis

IS IT TIME TO STOP TAXING OIL COMPANIES?

RUSSIA’S OIL: LUCK OR CURSE?

Pavel

FedorovDEPUTY MINISTER OF ENERGY

Sergei

Guriev ECONOMIST

Ivan

Grachev MEMBER OF PARLIAMENT

One of the key tasks facing the Russian government is the creation of a single set of economic incentives to ensure the cost-effective development of oil and

gas reserves.Tax revenues from the oil and gas industry,

which together account for more than half of the country’s budget revenue, have grown by an order of magnitude over the past decade to $100 bil-lion - a colossal fi gure.

The trick now is how to fi gure out a way of keeping both both that money coming in while ensuring the oil and gas industry remain in ro-bust health.

So how can we balance the distribution of rev-enue from Russia’s natural wealth between re-source companies and the state?

There are a number of ways, such as granting investors an internal rate of return, on top of other guarantees.

Reliance on natural resources as the prin-cipal source of its wealth does not nec-essarily result in a country falling prey to the “resource curse”.

For decades, Norway, Canada and Australia have all combined abundant commodity produc-tion with democracy and shared prosperity. More recently, Chile has also demonstrated how a de-veloping economy with abundant natural resourc-es can develop into a stable democracy.

Of course, economies that rely on minerals also see their fortunes rise and fall with commodity prices. But the peaks and troughs can be smoothed through the accumulation of relief funds and de-veloping sophisticated fi nancial markets.

The oil sector in particular is also a potential source of high-tech development, capable of pull-ing other industries along with it.

But if this can happen in the West, why is it not also taking place in Russia?

The essential reasons are ownership and com-petition. Russia’s privately owned Novatek is far more efficient than state-run Gazprom. R&D in-vestments in the monopolized gas industry lag far behind those of the far more competitive oil industry. Moreover, Russia is not alone in being a country where an abundance of resources dis-courages market reform and democratization.

There is no denying that Russia relies heavily on oil, and any strategy for change will have to bear this in mind. A 10% change in the price of oil results in a 1% fl uctuation in GDP, more or less. And the state budget depends on oil prices.

What can we do to reduce Russia’s dependence on oil and gas?

Above all, we must think beyond this indus-try. We need to facilitate investment infl ows in

However, I believe we should commit to allow-ing a healthy return on capital investments and provide an effective tax and fi scal framework for companies to operate in. Such an approach would both encourage economic development and allow the country to fulfi ll its technological potential.

As Russia is the world’s leading oil producer and the largest supplier of gas, encouraging ex-pansion of this sector should have a positive knock-on effect across the rest of the Russian economy.

A decade ago, Russia introduced a new sys-tem for the oil and gas sector that facilitated tax administration and collection, and ensured a sta-bility cushion for the country’s macroeconomic development.

After that reform, the tax burden on compa-nies in the oil sector rose from 25.1% of total revenues in 1999 to 41.5% in 2003, increasing state budget revenues by the equivalent of 2.7% of GDP.

At the time, the tax hikes were entirely justi-fi ed. But one of their consequences was that the oil industry decided not to follow up on a num-

ber of promising potential production technol-ogy advances. In particular, plans were shelved for the development of hard-to-reach off-shore oil reserves because they were no longer eco-nomically viable.

Now, aware as we are that the existing boun-

ty of Western Siberia is drying up, it makes sense to think about bringing on a stream of new sites, such as the East Prinovozemelsk fi eld with its around 5 billion metric tons of oil and 10 tril-lion cubic meters of gas.

We know that other relatively unexplored parts of Western Siberia contain at least 2 billion met-ric tons of oil, and that there is a real possibility that the true fi gure could be yet ten times higher.

Whereas 50 years ago there was no way of get-ting to such reserves, nowadays almost anything is possible. Oil production from underneath salt deposits in deep water is no longer a dream.

Since operations in deep water or under ice require radically new hi-tech equipment, the cost of developing remote fi elds runs to tens of bil-lions of dollars.

The cost of a single offshore platform, for ex-ample, can be as high as $15 billion.

Such costs cannot be tackled alone. That is why in summer 2011, Rosneft signed an agree-ment with the world’s largest private oil com-pany, ExxonMobil, to work together on the Arc-tic shelf. (Investments in the project are slated at around $500 billion — RBI).

To be able to carry on negotiating such deals, and to keep state revenues fl owing in strongly, let’s hope that we continue to be blessed with a favorable market climate.

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REINVESTING THE WEALTH INTO TECH

non-resource sectors. And this can be done by complying with President Putin’s decree of May 7, 2012 on long-term state economic policy.

This document envisions privatization of all non-resource industries by 2016 - which by it-self will improve Russia’s business climate. Some analysts have suggested this could move Russia up to number 50 in the World Bank’s Doing Busi-ness rankings from its current standing of 120, and add two points to Russia’s GDP growth rate, all from expansion in the non-resource sector.

What about the other approach to diversifi -cation - building a top-down non-oil and gas production? Reliance on such a method would be misplaced. In his book, Boulevard of Broken Dreams, leading venture business researcher and

A government that genuinely understands de-velopment would know that change cannot come unaided. If we want to reduce the dominant role commodities play in the Russian economy we must adopt new policies and direct investment to sec-tors with the highest potential.

I believe Russia has four areas where we could be global leaders. The fi rst is energy, but instead of simply sending oil abroad we need to sell prod-ucts made out of it. Second is applied mathemat-ics, where we have a long-established reputation. Third is aerospace, and fourth is biotechnology.

The essential step needed to drive these sec-tors forward is the introduction of tax breaks for innovative companies.

Companies in the Skolkovo Innovation Cen-

The resource curse can’t be broken by a top-down approach of setting up a state corporation.

If we want to reduce the share of commodities in the economy, we need to redistribute money.

50 years ago there was no way of getting to the unexplored depths of Siberia; now anything is possible. Oil production from underneath salt deposits in deep water is no longer a dream.

IT’S ALL ABOUT THE INSTITUTIONS

Harvard Business School professor Joshua Le-rner shows that even in America, with its pro-fessional and non-corrupt bureaucrats, such at-tempts failed.

Of course, we shouldn’t think that the “re-source curse” can be broken through a program of privatization alone. We must also take up the struggle against corruption and fi ght for the pro-tection of property rights, demonopolization and economic deregulation. If we can break free from these traps, then one can expect growth and di-versifi cation, as well as transparency and ac-countability of the authorities.

Sergei Guriev is Dean of the New Economic School in Moscow.

ter area just outside Moscow already benefi t from this. Every entrepreneur in Russia whose activi-ties fall within the scope of the law on innova-tion should have the same support, then in fi ve years a good number of small businesses would grow into medium-sized enterprises, and we would have a strong infl ow of foreign investment.

Today, small businesses account for just 10% of GDP. By taking the right steps now, in ten years’ time our knowledge-based economy could account for 50% of federal revenues. This doesn’t mean that the oil and gas sector will shrink – only that revenues from other sectors will rise.

Ivan Grachev is chairman of the Energy Committee in the State Duma.

NATALIA MIKHAYLENKO

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WWW.RBTH.RUFeature

Bear, Boar and Some Vodka:A Taste of Old Siberia

TIM WALLRUSSIAN BUSINESS INSIGHT

Dining out in Moscow is a lot swankier than

before, but looking for an authentic Russian

restaurant with great food, ambience and

service can still feel like a trip across the taiga.

Chemodan (Suitcase), a restaurant literally transported from the wilds of Siberia, goes be-yond the stereotypes and delivers something that you won’t fi nd at Moscow’s showier Rus-sian-style eateries, Cafe Pushkin and Turandot: a taste of the real 19th century frontier Russia, replete with generous portions of venison, boar and whitefi sh – not to mention bear cutlets, dumplings and old-style Siberian vodka.

Chemodan is a short walk from Moscow’s Christ the Savior Cathedral, where the Pussy Riot girls’ controversial “punk prayer” landed them a jail term (most probably in Siberia). But walking into the wooden-fl oored, quaintly fur-nished restaurant, you can take a culinary trip to Siberia without leaving Moscow.

The ‘gastronomic theater’ came into being through a trip to Krasnoyarsk in eastern Sibe-ria by actor Oleg Menshikov, one of only a hand-ful of Russian fi lm stars who are also famous in the West. Menshikov, best known for his bra-vura performances in Nikita Mikhalkov’s Os-

car-winning “Burnt by the Sun” and the U.S.-Russian hit “The Barber of Siberia,” found the original Chemodan there, and proposed to its owner to recreate it in Moscow.

In Russia, chemodan (derived from the ancient Tatar for ‘clothes store’) is an evocative word, associated with long journeys – both wished-for and involuntary. Even today, “sitting on your suit-case” is a favorite Russian saying, bringing to mind both the wait for Jewish emigration in the 1970s and the more sinister night-time knock on the door from Stalin’s secret police in the 1930s purges. It can also signify a “suitcase mood,” of wishing oneself far, far away.

A meal in Chemodan starts with Russian sta-ples such as cabbage soup (“shchi”) with mush-rooms and Olivier salad, but Siberian game, sourced directly from Siberian huntsmen, is the star attraction. From rabbit pate and venison carpaccio, graduate to Siberian whitefi sh and the ubiquitous venison (also delicious in Sibe-rian “pelmeni” or dumplings), while the more adventurous can try the gamey boar with mush-room cream sauce and bear cutlets.

The best accompaniment to the wild things that could be stuffed on your wall is the clean-tasting “yerofeich,” a traditional Russian vodka with cumin, aniseed and other herbs and spic-es. It comes in several fruity varieties, and is

the genuine way to recreate the Siberian merchant experience. Desserts, too, come in a pure Si-berian form: varieties of jams and specialty teas, such as the “Sibe-rian honeysuckle.”

Chemodan’s service, like the nos-talgic black-and-white photos on the wall, and the attentive, plain-dressed staff, speaks to a serious, understated attitude to fi ne dining. The menu comes in Russian and English, and prices are in the upper medium range for Moscow, with starters, mains and vodka coming to $75-$100 per head. Oleg Menshikov co-starred in Oscar-winning Burnt by the Sun.

Travel What you can’t miss even if your time in Russia’s capital is limited to a few brief stops

Restaurant Review A film star’s place offers diners a journey to 19th century frontier cuisine

The starting point of this walk is the Za-moskvorechye district (literally, “beyond the Moscow River”) [1], one of the city’s loveli-est central sights and viewpoints. This area, once the headquarters of the invading Gold-en Horde, is packed with churches, cafes, restaurants and galleries.

The Tretyakov Gallery [2] is Moscow’s na-tional collection of pre-20th century Rus-sian art. Not only is it a fabulous museum, but it provides a crash-course in Russian history and culture. Note in particular how the gold-backed icons and stiff portraits of tsars gave way to landscapes and historical epics as the country’s art fl owered in the 18th and 19th centuries.

From the gallery, walk to the end of the lane and cross a little footbridge whose iron trees are adorned with padlocks put there by romantic couples. On the far side is a stat-ue of the painter Ilya Repin and the gardens known as Bolotnaya Ploschad (Marshy Square) [3].

Turn left past the fountain and then right to cross a huge road bridge over the river. The traffic is noisy, but the views toward the Kremlin [4] - with its red brick walls and gold-domed cathedrals - are stunning. On the other side of the bridge, go on through the Alexandrovsky Gardens [5], beneath the Kremlin walls. Red Square [6] and the Bol-shoi Theater [7] are beyond the gates at the far end.

To get a little off the beaten track, turn left through the tunnel behind the statue of galloping horses. This popular bronze foun-tain is a reminder of the horse guards who used to ride in the huge Manezh [8] building nearby, once an imperial parade ground, now an exhibition hall.

The elegant, neoclassical mansions across the road are part of Moscow State University [9], founded in 1755. Cross under the road and walk up Bolshaya Nikitskaya Ulitsa to reach the Con-servatory [10], heart of many of the city’s musi-cal traditions; concert tickets are often available for sale inside. The statue outside is composer Pyotr Tchaikovsky, who taught at the new con-servatoire from 1866 and wrote Swan Lake while he worked here; notes from six of his works are wrought into the fence around the monument.

Turn left at the big crossroads to stroll along one of the green alleyways of the busy boule-vard ring, a chain of narrow parks along the line of the old city walls. On the left side of this short stretch, you will fi nd the wonderful “Theater at Nikitsky Gate” [11], where you can listen to Rus-sian songs and drink vodka in the courtyard on summer evenings.

Also nearby are the Museum of Eastern Arts [12], packed with lilac silk and turquoise ceram-ics, the popular John Donne pub [13] and the Confael chocolate shop [14], where you can buy an edible postcard of St. Basil’s Cathedral.

The following section of the boulevard starts with a statue of 19th century satirist Nikolai Gogol [15], who lived nearby, and ends at the white and gold Christ the Savior Cathedral [16], the tallest Orthodox church in the world. Built to commemorate the 1812 victory over Napo-leon, the cathedral was demolished by Josef Sta-

lin in the 1930s, but reconstructed 60 years later. The elegant Akademia restaurant [17], whose

plate glass windows overlook the cathedral, serves up classic Russian dishes such as home-made borsch or sorrel soup with quails’ eggs.

For an old-fashioned dining alternative, the 19th-century style Chemodan restaurant, along Gogolevsky Boulevard (see Review, below) of-fers a great range of Siberian game, fi sh and tra-ditional herb and spice “yerofeich” vodkas.

Going around the back of the Christ the Sav-ior Cathedral, there are more great views from

the wide pedestrian bridge over the Moscow River. Just across the bridgr, the trendy Strelka Bar [18] is just the place for sunset waterside cocktails and watching the sun set.

Going over the bridge, into Zamoskvorechye again, you can see Zurab Tsereteli’s statue of a nautical Peter the Great [19]. You can stroll through the garden on the left and on into re-furbished Gorky Park [20], now a riverside Wi-Fi paradise of outdoor art and yoga classes, fre-quented by everyone from grannies and hipsters to young families with strollers.

A Stroll Around the KremlinIf you have some free time during your trip to

Moscow, a picturesque walk around the Kremlin

is a great way to soak up Russian history and

culture while enjoying the capital’s vibrant

downtown scene.

PHOEBE TAPLINSPECIAL TO RUSSIAN BUSINESS INSIGHT

Churches, Courtyards and Composers in Historic Moscow

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08

Chemodan

ADDRESS: 25 GOGOLEVSKY BOULEVARD (M. KROPOTKINSKAYA)

OPEN: DAILY, 12:00-24:00

AVERAGE DINNER: $75-$100/HEAD

WEB: WWW.CHEMODAN-MSK.RU

WHERE TO GO

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Nikolai Gogol Monument St. Basil’s Cathedral

Peter the Great Monument

Chemodan (see Review below)

Kremlin

Tretyakov Gallery

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