in this issue

pages 4-5

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Business & politics

special RepoRt

FeatuRe

Ford revs up GM and Ford take different roads in Russia.

the future of BRics From banking catchphrase to political alliance

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Russian retail attracts foreign investors, defying recession

Money & MaRkets

Russian equities gain Stocks stage relief rally after disastrous 2014

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Russian scientists gear up to implant the first 3D printed thyroid into mice. Could humans be next?

page 6

Russian oil output hits a record highFirms keep pumping despite U.S. and EU sanctions

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, June 20, 2015Distributed with The Wall Street Journal

RTSI ‘The advice not to participate in the St. Petersburg Forum gave us certain publicity.’

SeRGei belyakov, heaD of ST. peTeRSbuRG economic foRum

Dollar/Ruble

RbTh.com SpECial aDvERtiSinG SECtion FoR Business

‘Ukraine will clearly not be admitted to the North Atlantic Treaty organization for the foreseeable future.’SiR Tony bRenTon, foRmeR uk ambaSSaDoR To RuSSia

the Moscow-city commercial district aims to attract foreign investors as Russia seeks new trade partners

gDp fell 1.9% in the first quarter

Amid faltering relations with the U.S. and Europe, Russia is turning east to build new trade and eco-nomic alliances with countries in Asia and Latin America.

But Moscow’s approach comes with a twist: beyond simply boost-ing bilateral relationships, Krem-lin leaders hope to promote new multilateral organizations as alter-natives to established, Western-led financial and economic institutions.

If Moscow’s dream is realized, these bodies will eventually devel-op into emerging market versions of organizations like the World Bank, the International Monetary Fund and the SWIFT internation-al payments system. Russia aims to form a free trade zone with its Cen-tral Asian neighbors and select East Asian countries, and limit the use of U.S. dollars for international transactions in favor of its own ruble or China’s yuan.

Russia was expelled from the G8 last year after annexing the penin-sula of Crimea following unrest in Ukraine. The G7, as the group is now known following Russia’s de-parture, is an association of devel-oped countries that includes the U.S., Germany, Canada and Japan. The group meets regularly to coor-dinate economic policies.

Although Germany’s foreign min-ister said in early June that Russia may one day be readmitted to the G8, a senior Russian official re-buffed the idea, saying Russia isn’t seeking re-entry.

Instead, Russia will focus on the BRICS group, an association of five major emerging economies, as well as the G20. The G20 is an interna-tional forum consisting of the G7 countries plus Russia and 12 other nations that aims to promote in-ternational financial stability.

“The G8 format wasn’t always that productive,” Russian Deputy Foreign Minister Sergei Ryabkov said in comments carried by news

Russia is turning to new partnerships in asia and latin america to negate Western sanctions

agency RIA Novosti. “Working with the BRICS and the G20 is more in-teresting for us.”

Russia is also actively courting Asian investment after the U.S. and European countries placed sanc-tions on its energy and financial sectors following the intervention in Crimea.

“We welcome all investors,” said Russian Deputy Prime Minister Arkady Dvorkovich, addressing representatives from Asian coun-tries at the Krasnoyarsk Econom-ic Forum in Siberia in February.

BRics and the eeu While skeptics of Moscow’s plans say it can only achieve limited suc-cess at best, Kremlin officials are beavering away at the new proj-ects, with some substantive devel-opments to show for their efforts.

The BRICS group — consisting of Brazil, Russia, India, China and South Africa — has pledged $100 billion for a multilateral currency reserve to stabilize members in

emergencies as a kind of alterna-tive International Monetary Fund, or IMF. The BRICS have also pledged $100 billion for a new de-velopment bank to fund infrastruc-tural and institutional projects with loans.

Another focus for Moscow is the Eurasian Economic Union, or EEU, consisting of Russia, Kazakhstan, Belarus, Armenia and Kyrgyzstan. The bloc aims to establish a com-mon market for goods, services, capital and labor, modeled loosely on the European Union’s structure as a group of sovereign countries with reduced economic barriers.

In a 2011 article for Russia’s Iz-vestia newspaper, Russian President Vladimir Putin proposed a “Eur-asian union” that would become “a model of powerful, supranational union, capable of becoming one of the poles of the modern world.”

In May, the EEU signed its first free trade pact with an outside na-tion, Vietnam, and began develop-ing an agreement on trade and eco-

Moscow promotes new trade allianceskicked out of the g8, Russia is seeking to foster new trade and economic ties with a focus on two organizations: BRics and the eurasian economic union.

alexey lossanRbTh

nomic cooperation with China. The negotiations with China are

geared towards creating a full-fledged union that offers joint in-vestments in the development of infrastructure, said Andrei Slepnev, Minister of Trade in the Eurasian Economic Committee, the EEU’s executive body. The two countries aim to coordinate the EEU with the Chinese Silk Road Economic Belt framework project, a trade ini-tiative aimed at securing future trade partners for China.

Russia’s moves come as U.S. Pres-ident Barack Obama runs into pushback from his own Democrat-ic Party as he attempts to bring the U.S. into the Trans-Pacific Trade Partnership, a treaty between 12 Asian countries including Japan and Vietnam.

The initiative, which does not in-clude China, is being seen as an attempt by the U.S. to preserve its own dominance in the sphere of global trade in the face of China’s rising power.

Fears of a punishing economic downturn in Russia are easing after better-than-expected economic data led many observers to suggest the country may have already passed through the most difficult phase of the slowdown.

The country’s economy contract-ed 1.9% during the first quarter, Russia’s Federal State Statistics

numbers new economic data suggests recession may not be as deep as feared

Service said, surprising observers who expected a more dramatic de-cline. Economists had predicted a drop of 2.6% during the period, ac-cording to a poll of 24 economists conducted by the Bloomberg news agency.

Russia, the world’s biggest energy exporter, benefited from a bounce in oil prices and a firming-up of its na-tional currency, the ruble, against the dollar and the euro.

Russian leaders were quick to an-nounce the economy had turned the corner.

“It is clear to everyone — the basic foundations of the Russian economy have become stronger, and stability

Russia’s Economy: Signs of Life analysts say they see fresh hope for Russia’s battered economy as better-than-expected gDp data and firmer oil prices lift the country’s prospects.

DaviD MilleRRbTh

cannot be totally destroyed,” Russian President Vladimir Putin announced during a trip to St. Petersburg. “Over-all, we have passed the peak” of the difficulties, he said.

Nevertheless, the data did indi-cate a decidedly downward trend, coming after a 0.4% economic ex-pansion during the final three months of 2014. Independent economic an-alysts said that while the country’s prospects appear to have improved, the economy is still forecast to con-tract in 2015 overall and remains vulnerable to external shocks, such as another drop in energy prices.

continueD on page 2

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02

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Politics & BusinessNews iN Brief

• Russia started grain deliveries to Iran, send-ing 100,000 tons, RIA news agency quoted Rus-sia’s food safety regulator, Rosselkhoznadzor, as saying. Russian officials said in April that Russia was sending grain, equipment and construction materials to Iran in an oil-for-goods exchange, the first step in securing a foothold in a new market since the West imposed sanctions on Russia over Ukraine. But traders, analysts and industry players questioned whether the long-heralded barter deal had got under way, saying they had seen no signs of extra trade.

• Steelmaker Evraz said it had temporarily halted work at its North American Pueblo pro-duction plant due to weaker demand. “We have temporarily curtailed steelmaking production at our Pueblo facility for one week to align produc-tion with decreased demand,” a company spokes-man said. Around 100 employees will be tempo-rarily laid off until the plant reopens, he added. Evraz and other steelmakers that produce metal pipes for the oil and gas industry have been hit by a 40% drop in oil prices since June last year.

• Deutsche Bank AG is looking into possible money laundering transactions by some of its clients in Russia which could exceed $6 billion, Reuters reported, citing a source familiar with the matter. Transactions conducted over a period of years are being investigated, and the sum could exceed $6 billion, the source said, adding that the internal probe of the possible abuse being con-ducted by Deutsche Bank is in its initial stages.

• Inflation slowed in May for the second month and the price of key foodstuffs began to fall, offi-cial data showed, signaling that the worst of a pain-ful inflation spike may have passed. Consumer pric-es were 15.8% higher in May than in the same month a year earlier, down from the 16.4% annual infla-tion rate in April, according to data published by the Rosstat state statistics agency. Prices rose by 0.4% over the month.

• Central Bank intends to keep accumulating reserves for years to come, until they reach a “com-fortable” level of $500 billion, bank Governor El-vira Nabiullina said, as an economic crisis facing the country is far from over. Her comments signal the bank will continue regular purchases of for-eign exchange, a policy likely to weigh on the ruble as the bank would need to buy some $140 billion to restore reserves — now worth $360.5 billion — to the indicated pre-crisis level.

• Truck maker GAZ will soon receive state guarantees worth 16 billion rubles ($290 million), Trade Minister Denis Manturov said. “All the nec-essary measures... have been taken,” Manturov told reporters. “The company will receive these guar-antees soon.”

Russia traditionally uses econom-ic forums to attract foreign inves-tors: in Vladimir Putin’s hometown of St. Petersburg, in Krasnoyarsk, the center of Siberia, and in the former Olympics capital of Sochi. The forum in St. Petersburg is con-sidered the most important one, and is personally opened by the Russian President. RBTH spoke with Sergei Belyakov, Chairman of the St. Petersburg Economic Forum Foundation and former Deputy Minister of Economic Development, about how to attract foreign inves-tors to the Russian market in times of sanctions.

It’s no secret that in 2014 during the St. Petersburg Forum there were very few participants from Europe and the U.S. Moreover, the U.S. administration advised heads of American corpora-tions, including the head of ExxonMo-bil, not to attend the forum. How is it possible to attract investment in such conditions?There weren’t fewer participants, but the largest international cor-porations were indeed not repre-sented at the St. Petersburg Forum at the highest level. However, it’s not that companies that operate in the Russian market didn’t send rep-resentatives. Furthermore, we were

able to gather quality participants: often vice presidents were better speakers than the company presi-dents, since they have a deeper knowledge of the financial sector and business development in Rus-sia. Also, the advice not to partic-ipate in the St. Petersburg Forum gave us a certain amount of pub-licity. This year we’re creating the forum’s program in a similar man-ner, and we hope that the top rep-resentatives of the largest interna-tional companies will visit us, despite the pressure being put on them. In general, our forums are not witnessing a significant decline in the level of speakers. All com-panies that are represented in the Russian market, or who are plan-ning to enter the market, are com-ing to us since experts are also in-terested in participating in discussions on a high level.

You say that the forums continue at-tracting investors from Europe and the U.S., but in 2015 your other forum, the Krasnoyarsk Forum, was almost entirely dedicated to work with Asia. Isn’t this a contradiction?Not exactly. The Krasnoyarsk Forum lasted for three days and each day had its own theme. The first day was dedicated to youth, the second to work with Asia. It is all related to where the forum takes place.

Courting investorsAlExEY loSSAnRBTH

InTERvIEw SERGEy BElyAkov

THE HEAD of THE SAINT-PETERSBURG ECoNoMIC foRUM SPEAkS To RBTH

Cooperation with Asian coun-tries is one of the priorities for the development of Russia’s economy and the economy of the Kras-noyarsk Territory, where the forum is held. The third day was dedicat-ed to the agenda of the Russian

government, to discussing anticri-sis measures, to brainstorming. Therefore the forum isn’t only about discussing cooperation with Asia.

This has led to rumors that next year the Krasnoyarsk Forum will be held in Shanghai. Is this true? No. The Krasnoyarsk Forum is tra-ditionally ours and it is held in Krasnoyarsk.

If there is something in Shang-hai, then it will be a different forum, a Shanghai Forum.

In Asian countries we just carry out work with foreign partners, a sort of roadshow.

The same thing can happen here, but it will be one of the events ded-icated to the expansion of our co-operation with the Asian countries.

These economic forums, are they a do-mestic Russian event, or did you have the objective of attracting foreign in-vestors?I would say that we have the ob-jective of attracting investors. We are trying to look at our country’s economy from the viewpoint of for-eign experts. By interacting with them, we expand our worldview.

Money is still coming into the Russian economy, though not in the amount that we would like. The world economy is not at its peak currently. But Russia still remains an interesting market for investors.

HIS SToRY

Sergey Belyakov

A native of Moscow, Sergei Belyakov holds a degree in law from Academy of the Federal Security Ser-vice. He was an advisor to the Minister of Eco-nomic Development and Trade, then deputy minister. In August 2014 Be-lyakov was fired by Prime Minister Dmitri Medvedev following his criti-cism in a Facebook post of a govern-ment decision to keep pension sav-ings for the budget for a second year. Belyakov is responsible for all Russian state-sponsored economic forums, in-cluding in Sochi and Krasnoyarsk.

head of saint petersburg economic forum

The ruble rose from almost 80 per dollar to 56 per dollar by early June.

improved, the economy is still fore-cast to contract in 2015 overall and remains vulnerable to external shocks, such as another drop in en-ergy prices.

The recession “may not be as bad as expected,” economic analysts Alexei Devyatov and Olga Sterina at the UralSib brokerage in Mos-cow wrote in a note to investors on May 13.

“It looks as if Russia’s economy has reached a crossroads,” they wrote. “It may bottom out in May-June and start to improve” in the second half of the year, or it “may slide into a deeper recession in the event of self-supported deteriora-tion in sentiment or new external shocks.”

The International Monetary Fund revised upward its prognosis for Russia’s economy in 2015, saying GDP will shrink by 3.4% this year instead of 3.8% as predicted ear-lier.

UralSib maintained a gloomier forecast, however, predicting a 6.8% economic contraction this year. Mr. Devyatov and Ms. Sterina added a note of cautious optimism, say-ing “we see moderate upside to our forecast.”

oil and the rubleRussia’s economic troubles kicked off during a tumultuous 2014, as the U.S. and Europe slapped the country with economic sanctions over its role in neighboring Ukraine’s civil unrest and the price of crude oil, Russia’s key export, collapsed. In late 2014, Brent crude

plummeted from over $100 a bar-rel to roughly half that value in just a few months, prompting a selloff in Russia’s national curren-cy, the ruble, which also lost about half of its value.

Yet oil bounced off its lows and stabilized in a range roughly be-

tween $60 and $65 per barrel in the first half of 2015. That fueled a revival in both Russia’s stock mar-ket [see article page 6] as well as the ruble, which rose from over 70 to the U.S. dollar in February to about 50 per dollar by early June.

“Thus far, the resilience of the Russian economy appears to be no-tably higher than during the crisis of 2008-2009,” Yaroslav Lissovolik and Artem Zaigrin, economists at Deutsche Bank, wrote in a research note to investors on May 18.

The economists noted that Rus-sia’s economy had contracted much more sharply during that earlier downturn, when it fell by 9.2% dur-ing the first quarter of 2009 and by 11.2% in the second quarter of that year.

Russia’s Economy: Turning the Corner?

Messrs. Lissovolik and Zaigrin said they expect a contraction of 3.2% in 2015.

Deputy Prime Minister Arkady Dvorkovich said Russia’s economy appears to be reducing its depen-dency on oil prices.

“Oil prices are not as important to the Russian economy as before,” Mr. Dvorkovich said in a televi-sion interview during the World Economic Forum on East Asia, in Jakarta, in late April. “As far as oil prices are concerned, we can live with different prices and still grow.”

The Russian Central Bank cut its key rate from 17% to 12.5% in April as optimism grew that au-thorities were making progress tackling runaway inflation, which has raised the cost of living for av-erage Russians.

Inflation in Russia declined in April for the first time in months, falling to 16.4% year-on-year, or 0.5% compared to the previous month.

In March, inflation had been 16.9% year-on-year, or 1.2% com-pared to the previous month.

On April 30, the Central Bank of Russia issued a statement say-ing “consumer price growth will slow down faster than expected,” and forecast that by April 2016, inflation will fall to 8% year-on-year. The Central Bank is target-ing 4% inflation by 2017.

Kudrin’s storm cloudsNot all observers, however, agree that the worst is over for Russia’s economy.

Former Finance Minister Alexei Kudrin, who frequently criticizes the administration to which he used to belong, said he believes the econ-omy will not begin to seriously re-cover from the crisis for another year.

“The situation is not getting bet-ter, but is only getting worse in the second quarter,” Kudrin told jour-nalists in Moscow.

ConTInUED FRoM PAGE 1

was Russia’s annualized rate of infla-tion in April, which represented a de-cline from 16.9% in March. Authorities are targeting 8% by April 2016.

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03

SPECIAL ADVERTISING SECTION

Business & PoliticsNEWS IN BRIEF

• Russia’s federal tourism agency will partner with private firms to establish national tourism offices in a number of foreign cities, news agency TASS reported, as political tensions over the Ukraine crisis see the number of Western tourists decline. Tourism from most Western countries to Russia sank between 15-20% in 2014 compared to 2013, news-paper Kommersant reported in April, citing data from Rosturism. The number of tourists overall to Russia fell 3%.

•Second largest Russia’s gas producer, No-vatek, says that it has signed a long-term con-tract with Royal Dutch Shell to supply about 900,000 tons of LNG annually for more than 20 years. “We are currently finalizing Novatek’s con-tract portfolio for the supply of LNG from the Yamal LNG project. Considering the extensive expertise of Shell, we are planning to further develop our co-operation in the LNG sector,” Leonid Mikhelson, No-vatek’s CEO and co-owner, said in a statement.

• Diamond mining company Alrosa said its net profit rose to 22.2 billion rubles ($398 mil-lion) in the first quarter of 2015, up almost fourfold year-on-year because of higher diamond prices and a weaker ruble. Alrosa, the world’s top producer by output in carats, recorded a 16.8 billion ruble loss last year, as the tumbling value of the ruble prompt-ed a revaluation of the dollar-denominated part of its debt.

• Russia’s Finance Ministry rejected an appli-cation by oil giant Rosneft for a multibillion-dol-lar cash injection from one of the country’s reserve funds, the Vedomosti newspaper reported, citing a ministry document. Rosneft, the world’s biggest publicly listed oil firm by production volume, is strug-gling to finance its debt and investment programs after U.S. and European Union sanctions curbed the state-controlled company’s access to interna-tional capital markets.

• The chief executive of Russian budget hy-permarket chain Lenta said the trading environ-ment was getting tougher as high inflation forc-es consumers to cut back spending. Inflation has been fueled by a drop in the ruble against the dol-lar in an economy weakened by Western sanctions over Russia’s role in Ukraine and tumbling oil pric-es. Lenta, backed by U.S. private equity fund TPG and Russian bank VTB, has fared well in the current crisis because of its low-cost and low-price focus.

• China has begun construction of a pipeline to receive Russian gas, Russian state gas compa-ny Gazprom said. Russia and China agreed to a long-term, $400 billion gas deal last year. The move is part of a Russian plan to diversify sales away from its main natural gas export market, Europe, but will require extensive new pipeline systems.

The Russians aren’t coming after all.

Or at least, they’re not coming to Europe or the U.S. for their va-cations.

International airlines are cancel-ing or downsizing service to Mos-cow as the country’s slowing econ-omy causes millions of Russians to rethink travel plans and fewer for-eign tourists and business travel-ers to visit the country from abroad.

Overall demand for � ights to and from Russia fell as much as 40% in late 2014 and early 2015 com-pared to a year earlier, according to Martin Riecken, Lufthansa’s di-rector of corporate communications for Europe. Routes to Western Eu-rope and across the Atlantic were hit especially hard, he added.

Russian tourism to Europe fell

Airlines Options for travel decrease

by 30% in the � rst quarter of 2015, according to a report by the Euro-pean Travel Commission.

The decline comes after Moscow’s three major airports spent hun-dreds of millions of dollars on mas-sive upgrades, including shiny new terminals, and after express trains have been built to the city center.

Delta Air Lines, the only U.S. carrier currently offering � ights di-rectly to Russia, plans to halt its longstanding New York-Moscow service in December, the company said. In the mid-2000s, the com-pany � ew two � ights a day to Mos-cow. EasyJet, which was the � rst major budget airline to launch ser-vice between Moscow and western Europe in 2012, said this spring it will drop service between Man-chester and Moscow in October.

Niki, AirBerlin’s subsidiary which operated � ights from Mos-cow to Vienna, has also announced its exit from the Russian market, along with France’s Aigle Azur, which offered � ights from Paris.

“On some � ights, large airliners were replaced by aircraft of lesser

capacity,” Lufthansa’s Mr. Riecken said. “On high-frequency routes… [the] number of flights has been reduced on days with low demand,” he said, including the Frankfurt-Moscow route.

Many observers called the ruble one of the main culprits behind falling demand. The Russian cur-

Air Carriers Cut Flights to Moscow Amid Downturn

Falling demand for air travel in Russia comes on the heels of massive airport upgrades in Moscow.

Airlines are reducing flights to Moscow as Russia’s economic downturn keeps Russian vacationers and foreign business travelers grounded.

KIRA EGOROVARBTH

rency went into a meltdown in late 2014, losing about half its value in a matter of months and making foreign trips much pricier for Rus-sians.

Although the ruble has recov-ered some lost territory in 2015, it is still down by about a third against the dollar and the euro compared to a year ago.

Room for Optimism? Some observers, however, said the ruble’s recent upward trend may be a light in the tunnel that helps Russian travel spending recover.

Interest is indeed beginning to revive among Russians for some European destinations, said Alex-ander Burtin, commercial director of tour operator Tez Tour.

“Tourists are beginning to look toward Europe,” Mr. Burtin said, especially “Greece, Cyprus and Italy. Spain is so far a bit weaker.”

Lufthansa’s Mr. Riecken agreed that interest has recently been tick-ing back up.

“We have noted an increase in demand for popular dates, such as the May holidays,” he said. “But the volume of purchased tickets did not reach last year’s level.”

A stronger currency should even-tually help coax some airlines back into renewing their service to Mos-cow, said Oleg Panteleyev, head of analytical services of the agency Aviaport, by translating into re-duced ticket prices for Russians.

Indeed, by late April this year, ticket prices for � ights to Europe and Asia were already back to roughly the same level as in Sep-tember 2014, according to Janis Dzenis, PR director of JetRadar travel search service. Routes to the U.S. and London remain about 10% higher than before in ruble terms, Mr. Dzenis said.

Russia’s Onetime Travel BoomOnly a few years ago, Russian spending on tourism and travel was cresting at the top of a massive wave that had been building for two-and-a-half decades.

Foreign travel was once highly restricted under the Soviet Union. The fall of the Iron Curtain gave Russians the freedom to travel, and skyrocketing earnings from oil ex-ports in the new millennium gave them a newfound wealth that al-lowed them to indulge. The result was a boom in air travel demand and tourist spending as millions of Russians took to the skies to go globe-trotting for the � rst time.

The number of tourist trips by Russian citizens to destinations be-yond the boundaries of the former Soviet Union almost tripled be-tween 2000 and 2010, from about 4.3 million to 12.2 million trips, ac-cording to a study by Moscow’s Na-tional Research University-Higher School of Economics.

is how much Russian tourism outside the country grew during the period from 2000 to 2010.

is how much Russian tourism to Eu-rope fell in the first quarter of 2015 compared to a year earlier.

289%

30%

IN FIGURES

Ford is stepping on the gas in Russia despite an economic slowdown

Not long ago, Russia was poised to overtake Germany as Europe’s biggest auto market. Those days are increasingly in the rear view mirror.

Car sales in Russia fell 10% last year in unit terms as the country teetered on the brink of recession, and the downturn may accelerate to 35% this year overall, accord-ing to consultancy Pricewater-houseCoopers. In April alone, car sales were down 41.5% year-on-year, according to the Association of European Businesses (AEB).

While the crash has forced some players to abandon the market, others are digging in and betting on a recovery. Two of the biggest U.S. players, Ford and General Mo-tors, are on different tracks in Rus-sia, with GM cutting its losses and pulling up stakes while Ford hun-kers down to chase market share.

“We still hold the view that when the market stabilizes and ultimately recovers… this could be one of the biggest, if not the biggest market in Europe,” Ford CEO Mark Fields told investors during a phone conference on quarterly earnings in late April.

“Unlike GM, Ford has more in-vestment [in Russia], including in launching new models and in the localization of production here,” said Vladimir Bespalov, an indus-try analyst at investment group VTB Capital. Ford “is ready to take a part of the losses that are un-avoidable.”

It’s an open question how long Ford’s gamble will take to pay off.

Automobiles Despite the downturn, Ford is doubling down in Russia to gain market share

While Russia’s domestic car mar-ket is showing some early signs of a recovery, analysts say that Russia’s longterm economic mal-adies — including an over-depen-dence on oil exports and double-digit in� ation — may be tough to beat.

Market Crash Almost all car makers have had to drastically raise prices in Rus-sia to compensate for the devalu-ation of Russia’s currency, the ruble. Even Ford still only obtains about 40% of its parts domesti-cally; buying-in foreign parts costs dearly.

The ruble has fallen around 30% to the U.S. dollar since the start of last year as low oil prices and Western sanctions over the Ukraine crisis choke off invest-ment.

The crunch has already seen a number of companies announce production cutbacks or market exits. U.S. auto giant General Mo-tors announced in March it would

wind down its Opel and Chevro-let lines after suffering a more-than-70% dip in sales in the � rst two months of the year.

GM will still keep a hand in the market though — the company in May launched an Opel production line in neighboring Belarus in the hope of keeping consumer appe-tite alive through export sales, ac-cording to Russian newspaper RBK.

Ford Bets On Russia In April, Ford took a majority share of its joint venture with local part-ner Sollers in a move Mr. Fields said would help streamline oper-ations, and in early June appoint-ed ex-Russia hand Mark Ovenden to head up the Ford-Sollers part-nership. In May, Ford also moved to permanently cut prices on cars by 4-5% in a long-term bet on ruble stability that other compa-nies have so far balked at, accord-ing to Russian daily Vedomosti.

Lower prices will be more sus-tainable, however, under the com-

Ford Seeks to Rev Up Russia SalesU.S. automakers Ford and GM are taking different roads in Russia as the country’s economic crisis throws a once-accelerating car market into reverse.

SAM SKOVESPECIAL TO RBTH

pany’s ambitious drive to raise lo-calization to 85% by 2019.

“Ford is currently negotiating with all its suppliers, with � rst tier and second tier suppliers in order … to lower as much as possible the cost of components,” said An-drei Toptun, chief analyst at car market research agency Autostat.

In early June, Ford spent $150 million on launching production of its budget Fiesta brand at one of its three plants in Russia, and is set to spend $274 million by 2016 on building a factory to produce the Fiesta’s engines domestically.

Ford’s strategy may already be showing some early signs of pay-ing off. Car loans, which account-ed for 40.5% of car sales last year, rose to 35% of all sales in April from just 20.1% in the � rst quar-ter of the year.

Economic data in the � rst quar-ter did not prove as painful as pre-viously forecast.

“In 2016 I think that there will be some stabilization, maybe even a little growth,” said VTB’s Mr. Be-spalov, “as long as the economic situation stabilizes and long as no new political risks pop up.”

Still, even if Russia’s economy is on the road to recovery, it’s un-likely to return to boom times un-less the government addresses key issues to growth. Critics, includ-ing former Finance Minister Alex-ei Kudrin, say drastic reforms are needed, given that Russia’s econ-omy was growing anemically even before oil prices fell.

The appetite for that reform — which would include unpopular pension changes — is question-able, however, at a moment of in-tense political confrontation with the West over the Ukraine crisis. Ford’s bet on the market may bear fruit, but so far it remains a roll of the dice.

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IN FIGURES

$75 billion is how much the BRICS countries offered to add to the IMF’s capital reserves in 2012

— on the condition that significant changes be made to the IMF voting system.

$41 billion is China’s share of the BRICS’ $100 billion currency re-serve pool established in Bra-

zil’s Fortaleza in July last year.

nization is facing signi� cant chal-lenges.

Originally linked by the size of their economies and high growth rates, today, two of the group’s members — Russia and Brazil — are stagnating. The � fth member, South Africa, is signi� cantly small-er than the others.

Even the man responsible for the term in the first place, former Goldman Sachs chief economist Jim O’Neill, has quipped that Rus-sia and Brazil may get left behind if they don’t revive their economies, paring the group down to “just ‘IC’.”

Birth of BRICSO’Neill � rst penned the term in a research note in November 2001 titled “Building Better Global Eco-nomic BRICs.”

In his paper, O’Neill argued for the inclusion of “China and prob-ably Brazil and Russia and pos-sibly India” into the Group of Seven, or G7, organization, a group of advanced economies including the U.S., Canada, Germany and Japan that meets every year to co-ordinate macroeconomic policies.

“Representation at global eco-nomic policy meetings might need to be signi� cantly changed” to ac-count for these fast-rising econo-mies, O’Neill wrote.

In his book, The Growth Map, O’Neill later forecast that the BRIC countries would overtake G7 in terms of combined econom-ic size by 2035.

In 2006, the foreign ministers of the original four BRIC coun-tries met at the United Nations. That began as a series of infor-mal meetings, and eventually re-sulted in the � rst formal summit in the Russian city of Yekaterin-burg in 2009.

The BRICS members, however, are at different stages in terms of economic structure and levels of socio-economic development, says Valery Abramov, a professor at the Russian Presidential Academy of National Economy and Public Ad-ministration.

Despite its current slower rate of growth, Russia’s Gross Domes-tic Product per person is higher

ly in an interview with the Bloom-berg agency. “This might take a year or two, but this is an absolutely unavoidable process.”

Mexico and South Korea have also been eyed as candidates.

For now, though, the group has a moratorium on new members, and is focused internally on devel-oping cooperation in global bank-ing and � nance, including joint � -nancial institutions.

Yet even bringing the current � ve members together into meaning-ful coordination will be no easy task for the BRICS, and the orga-

At � rst, BRICS was nothing more than a catchphrase dreamed up by an investment banker: an acronym grouping four large countries with emerging economies at similar stag-es of development.

But today, the group’s members — Brazil, Russia, India, China, and late-comer South Africa — have an agenda. The � ve countries have banded together to form a loose international political organization that aims to combine their politi-cal and economic heft for increased global impact. The group has agreed to invest hundreds of billions of dollars setting up new internation-al � nancial institutions as alterna-tives to the World Bank and Inter-national Monetary Fund, or IMF.

The emergence of the BRICS as a cohesive group, if fully realized, would pose a challenge to the American and European domi-nance of recent decades.

What’s more, the group is eyeing expansion — with Greece being tipped as a potential future mem-ber, despite the awkwardness of po-tentially adding a “G” to the name.

“There are a whole number of countries that want to join BRICS, major developing economies,” Vadim Lukov, Russia’s deputy rep-resentative to BRICS, said recent-

BRICS FIVE COUNTRIES PUSH FOR CHANGE

FROM ACRONYM TO ALLIANCE: BRICS

BRAZIL, RUSSIA, INDIA, CHINA AND SOUTH AFRICA AIM TO COORDINATE POLICIES

Comparing the BRICS member states

The move by BRICS member coun-tries to allocate hundreds of bil-lions of dollars for a new interna-tional developmental lending bank and currency reserve fund is being seen by outsiders as a challenge to the World Bank and Interna-tional Monetary Fund, or IMF.

For years, the � ve BRICS mem-bers — Brazil, Russia, India, China and South Africa — have been critical of those international in-stitutions, alternately pushing for change from inside or grumbling from the sidelines.

For example, in 2012, the BRICS countries offered to add $75 bil-lion to the IMF’s capital reserves — but only on the condition that signi� cant changes be made to the IMF voting system that would have given the BRICS a louder voice.

The move followed years of crit-icism that the IMF’s decision-mak-ing process is too heavily domi-nated by the U.S. and western European countries.

The World Bank and IMF were established in the wake of World War II as key components of the Bretton Woods system, an attempt by the victorious Allied powers to establish a negotiated frame-work for global economic and � -nancial stability during peacetime.

The two groups appear some-what similar but are highly dis-tinct. The World Bank issues de-velopment loans to impoverished countries with the goal of ending poverty, while the IMF focuses on ensuring an orderly system of � -nancial transactions between na-tions. Both the IMF and World Bank are headquartered in Wash-ington, D.C., and virtually every

BRICS Take Aim at The World Bank and IMFThe world’s most important multilateral lenders, the World Bank and IMF, have long been subject to criticism from both outsiders and member states alike.

Conceived as an abstract idea in a research note penned by Goldman Sachs, today the BRICS countries are out to prove they can change the world.

SERGEY STROKAN, VLADIMIR MIKHEEV SPECIAL TO RBTH

ALEXEY LOSSANRBTH

The BRICS group has pledged billions to create new multilateral lenders

country on earth is a member of both institutions.

Yet their policies are often criti-cized as serving the interests of the “lending” states — especially the U.S. and Europe — over the “bor-rowing” states, or emerging econ-omies. Both issue loans to poor countries that typically come with conditions, such as the requirement to privatize government-owned en-terprises or to institute free-mar-ket reforms.

Critics of the groups’ lending practices say they often do more harm than good, disrupting local economies or funding projects that cause disruptive change to impov-erished communities.

Attaching conditions to loans that require countries to open up their economies to global capital has led to criticism from the left that both groups actually end up serving the interests of big corpo-rations.

Some observers, therefore, her-alded the arrival of the BRICS in-stitutions as an alternative to the World Bank and IMF.

“The BRICS have a chance to succeed where the World Bank has failed,” wrote Jessica Evans, the se-nior advocate and researcher for international � nancial institutions at Human Rights Watch, in a col-umn for the U.K’s The Guardian newspaper. “The [BRICS] bank should include policies on indig-enous people, involuntary resettle-ment and labour standards that meet the norms provided for in in-ternational law, and prohibit dis-crimination. The absence of such rules has come back to haunt the World Bank.”

Other observers said the BRICS currency reserve pool, which aims to preserve financial stability among its members, may actually end up working in tandem with the IMF.

“The pool also operates in ac-cordance with international rules,” said Georgy Toloraya, executive di-rector of the Russian National Committee of the BRICS research center. “If a country receives more than 30% of its quota, it has to present some kind of stabilization plan agreed with the IMF and made up in accordance with IMF rules. This means that it is not a substi-tute for the IMF, as some critics claim, but a good addition to it. Yet it also has a competitive edge to provide aid to countries not de-pendent on the IMF and U.S. dol-lar-pegged systems.”

Toloraya said the pace of the es-tablishment of the BRICS curren-cy reserve and the development bank show momentum behind the new institutions.

“I think this measure has both symbolic and practical value. The currency reserve pool was agreed in Fortaleza in July last year. So the BRICS countries are moving on quite steadily, increasing their consolidation, especially in eco-nomic and financial affairs. The planned reserve pool will help

countries to stabilize their curren-cies in case of crisis, which is quite relevant, without addressing the International Monetary Fund,” he said.

“For example, South Africa can get twice as much money as it has reserved for the pool. Russia, Bra-zil and India can receive the same amount they have allocated, while China has access to half the amount it invested. This is logical since the Chinese share is the biggest one: $41 billion. This gives China, nat-urally, the leading role in the in-stitution but the principle of equal-ity is unchallenged,” Toloraya said.

QUOTES

JimO’Neill

NourielRoubini

Vladimir Putin

" The BRICS’ role in world trade is expanding faster than we first thought and certainly much faster than world trade overall. Trade

within the BRICS has accelerated sharply, largely because Brazil and Russia supply so many of the commodities needed by China and India. This pat-tern looks set to continue in the next decade and beyond, forcing adjustments to these countries’ foreign exchange policies. BRICS leaders are already discussing alternatives to using the U.S. dollar as their main trading currency. The BRICS, notably China and Brazil, have become powerful magnets for foreign direct investment. Simply ap-plying the most credible estimates of long-term demographic trends ... is the intellectual corner-stone of the argument for the BRICS’ potential.

" One should not be too pessimistic about the prospects of the BRICS. Future success will depend on fixing macro-imbalances;

implementing appropriate structural reforms; strengthening weak political and other institutions; shedding state capitalism; and opening up further their economies to global trade and investment. If such policies are put in place, the risk of hitting a thick brick wall of low growth will be avoided and the future of the BRICS could be bright again.

" The number five has a special ring here in general. Our summit is taking place in Africa, with its rich nature and very diverse

fauna. In Africa people talk about the ‘big five’ – the five biggest animals on the African continent. BRICS is also made up of five countries, and as I just said, we make a very visible contribution to the global economy.

CONTRIBUTION FOR BRITISH NEWSPAPER THE TELEGRAPH, NOVEMBER 2011

WORLD ECONOMIC FORUM IN DAVOS, SWITZERLAND, JAN. 24, 2014

5TH BRICS SUMMIT IN DURBAN, SOUTH AFRICA, MARCH 23, 2013

ONE WAR. FOUR MEN. THE PEACE FORGED BY THEIR ARMS.

Read more untold stories of a world at war at unknownwar.rbth.com

THE UNTOLD STORY OF JEWISH SOVIET SOLDIERSVIEWS OF THE WAR FROM HOLLYWOOD AND MOSFILM “BRICS have a chance to

succeed where The World Bank has failed,” wrote Jessica Evans of Human Rights Watch.

New BRICS AgencyIn April 2014, Russia proposed estab-lishing a new, single common cred-it rating agency to compete with the Big Three – Standard & Poor’s, Moody’s and Fitch. While the BRICS nations already have their own na-tional rating agencies, the countries may start working towards setting common standards and integrating their ratings systems. The new com-mon agency may be established via a partnership between the Russian rat-ing agency RusRating and the Chi-nese agency Dagong Global.

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Special Report

Yakov MirkinExpErt

the International Monetary Fund and World Bank are important parts of the interna-tional financial system, providing loans to developing countries and working to pre-

serve stability, promote growth and fight poverty. Yet in the decades since they were established in 1945, global finance has become considerably more complex. In order to maintain stable development and minimize risk in the world economy, the IMF and the World Bank aren’t sufficient by themselves. Financial institutions of a second level are needed. thus, the BrICS countries created their own ver-sions of these institutions: a $100 billion currency reserve pool, and the New Development Bank.

BrICS member countries hold enormous for-eign currency and gold reserves, totaling about $5 trillion. China ranks first in the world in terms of reserves. Brazil, russia and India rank 7th, 8th and 9th, respectively.

So, competition for the IMF and World Bank? Yes, sure: in ideas, and in their outlook on the world. these new institutions represent an alter-native source of liquidity during turbulent times, and of funding for new projects. But it’s not just competition. It’s also about cooperation for the most difficult cases. For one example, look no far-ther than russia’s recent invitation for Greece to join the BrICS bank.

Yakov Mirkin is Director of the Department of Inter-national Capital Markets at the RAS Institute of World Economy and International Relations.

viewpoint

Complementing, Not Competing With World Bank

BrICS: How the Group Emergedthe idea of the bRicS gRoup of countRieS waS boRn in a goldMan SachS ReSeaRch note in 2001 and evolved oveR the YeaRS into a bloc of nationS Seeking to cooRdinate econoMic policY.

infogRaphicS

than that of its partners, in terms of purchasing power parity, which incorporates the relative value be-tween currencies.

According to the International Monetary Fund, GDP per capita on a purchasing power parity basis in Russia in 2014 was $24,800, sig-nificantly more than Brazil ($16,096), South Africa ($13,050), China ($12,880), or India ($5,850).

“Russia is at a higher stage of economic competitiveness, having the highest scientific and techno-logical potential,” Abramov says.

Russia takes the chairOn April 1, 2015, Russia became the chairman of the BRICS ahead

the combined economies of the bRicS countries represent one-fifth of world gdp

of the group’s key annual sum-mit, this year being held in the Russian city of Ufa from July 8 to 10.

Besides new proposals, Russia will oversee the further develop-ment of two key ideas reached ear-lier by the group: the establish-ment of a $100 billion currency pool and a development bank.

The joint currency reserve pool, agreed during last year’s summit in Brazil, is intended to be an emergency fund for BRICS coun-tries that experience balance of payments difficulties. The pool is being seen as an alternative to the International Monetary Fund, or IMF, which BRICS members have criticized as being too heavily in-fluenced by the U.S. and Western Europe. China is to contribute $41 billion. Russia, Brazil and India are to contribute $18 billion. South Africa’s share is $5 billion.

Another key project is the New Development Bank, which will provide loans to invest for a va-riety of developmental projects

in other countries. The BRICS bank will start with $100 billion in charter capital, and be head-quartered in Shanghai, China. India nominated K. V. Kamath, chairman of India’s largest pri-vate lender ICICI, as the bank’s first head.

In early May, Russian Deputy Finance Minister Sergei Storchak named Greece as one of the first potential recipients of aid from the BRICS bank.

Establishing the BRICS devel-opment bank “is one of the many steps toward the gradual de-dol-larization of the world economy,” says Anton Soroko, an analyst at the investment holding Finam.

Russia and China have said they will seek cooperation rather than competition for two large, inter-national initiatives aimed at ex-panding trade opportunities throughout the Eurasian continent.

Before a May 8 summit between Russian President Vladimir Putin and Chinese leader Xi Jinping, po-litical analysts had expected the two programs — Russia’s Eurasian Economic Union, or EEU, and Chi-na’s Silk Road Economic Belt ini-tiative — to come into conflict with one another as Moscow and Bei-jing compete for influence in the countries of Central Asia.

“We seek ultimately to reach a new level of partnership that will create a common economic space across the entire Eurasian conti-nent,” Putin told reporters after the meeting in Moscow. “We think that the Eurasian integration project and the Silk Road Economic Belt project complement each other very harmoniously.”

The Eurasian Economic Union aims to create a free trade zone among countries that previously belonged to the Soviet Union. Chi-na’s Silk Road Economic Belt ini-tiative is geared towards estab-lishimg a string of trade deals and infrastructure projects that facili-tate commerce across Central Asia towards Europe.

“Previously, most observers as-sumed that these two projects would be competing with each other. Now, everything is exactly the opposite,” Sergei Karaganov, Dean of the Faculty of World Eco-nomics and Politics of the Higher School of Economics, told Russian newspaper Rossiyskaya Gazeta after the summit. “It is very likely that a new area of economic de-velopment will be formed in the center of Eurasia that will benefit all, and probably become the cen-

ter of the new community of Grand Eurasia.”

new Silk RoadBeijing’s Silk Road project aspires to revive a series of ancient trade routes that once linked China to the Mediterranean region.

The initiative, unveiled by Chi-nese President Xi two years ago, is designed to secure access to nat-ural resources for China’s fast-growing economy, which is a top global market for energy, metals, gold and other commodities.

China has so far allocated $40 billion for spending on roads, rail-ways, electricity facilities, telecom-munications and other infrastruc-ture to support the development along the new Silk Road.

China’s trade turnover with countries involved in the program may reach $2.5 trillion in 10 years, according to Yao Gang of the China Securities Regulation Commission, which regulates the country’s de-rivatives and commodities trading.

“Countries along the belt and road have great resources, while China is faced with environmen-tal pressure and increasing depen-dence on foreign supplies,” Yao told

a conference in Shanghai in May, according to Bloomberg.

The Russia-backed Eurasian Economic Union, which officially came into existence on Jan. 1, 2015, currently links five countries that formerly belonged to the Soviet Union: Russia, Kazakhstan, Belar-us, Kyrgyzstan and Armenia.

The EEU aims to promote the free movement of goods, services, labor and capital throughout mem-ber states. The group is actively pur-suing new members, and seeking to open trade ties with east Asian countries including China and South Korea. The organization agreed on a free trade agreement with Vietnam in May.

The extent of the future collab-oration between the EEU and the Silk Road initiative remains to be seen. But observers said the agree-ment on May 8 is at least a nomi-

russia, China agree to pursue ‘common economic space’ in Eurasia Russia and china will coordinate their efforts to open up trade networks in eurasia, bringing two separate initiatives into line where analysts had expected competition.

david MilleRSpECIal to rBtH

nal victory fo Russia’s so-called “Pivot to Asia,” a policy that aims to expand trade and economic op-portunities for Russia with Pacific Rim countries after Europe and the United States hit Russian firms with sanctions over the conflict in Ukraine.

Russia achieved an earlier break-through in trade talks with China in May 2014, when the two sides signed a deal worth $400 billion at the time for Russia to supply China with natural gas for 30 years, following a decade of deadlocked talks. Mr. Putin later expanded that agreement with a new memoran-dum that foresaw Russia shipping an additional 30 billion cubic me-ters of gas to China a year, on top of the 38 BCM per year agreed in May, along a second pipeline route.

Skeptics have pointed out that the gas deals are still non-binding, and that years of difficult negoti-ations in the past suggest future haggling over the final terms.

Disagreements between the two sides have indeed arisen, includ-ing over the exact route the pipe-lines will take and a proposed $25 billion Chinese loan to help Rus-sia build the links.

Russian president vladimir putin greets chinese president Xi Jinping during a summit in Moscow in May.

the BrICS bank is a step towards the “de-dollarization of the world economy,” said anton Soroko of Finam.

“We seek ultimately... a common economic space across the entire Eurasian continent,” president putin said.

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Money & Markets

Alexey Lossan

RBTH

Despite its geographical position spanning Eu-rope and Asia, Russia has traditionally per-ceived itself as being at the frontier of West-ern civilization. Its main trade relationships

have always been with Western partners. However, sanctions introduced in 2014 against Russia by Eu-rope and the U.S. have forced the country to con-sider an eastward turn. Chinese leader Xi Jinping be-came Moscow’s most welcome visitor. Russia’s top foreign policy objectives now include fostering part-nerships with the Asian region and other emerging countries, including those in the BRICS association.

The cooling of political relations between Russia and the West led not only to a change in the geo-graphical focus of its trade policy, but also to chang-es in Moscow’s bureaucratic language. Before 2014, Russian officials traditionally counted the EU as Rus-sia’s single largest trade partner, lumping all EU coun-tries together. China occupied an honorable second place in the annals of official Russian trade statis-tics. However, after the introduction of sanctions against Russia, the reference to the European Union as a single partner disappeared from the official statistics. Now, all European countries are counted individually. As a result, China moved up to first place among Russia’s partners in the official tally.

Of course, Russia’s dependence on its tradition-al partners hasn’t disappeared. In January-April 2015, 46% of Russia’s commodity turnover went to the EU. While that figure represents a slight decrease from 50% during the same period a year earlier, it is still substantial. If one includes the U.S.’contribution, almost half of all of Russia’s foreign trade activity is done with Western countries. By comparison, only 28% of Russia’s commodity turnover goes to Asia-Pacific countries, even though this share is growing steadily.

If we look at the data on Russian trade flows overall, we see that Russia’s interconnection with its traditional partners still exists, despite the de-clared political course. At the beginning of June 2015 data for the January-April period showed that trade with only Germany and the Netherlands was greater than that with China. Trade with China was $20.6 billion (29% less than in the same period last year). With Germany it was $15.4 billion (down 35%) and with the Netherlands it was $15 billion (down 38%). By comparison, Russia’s trade with the U.S. amounted to $7.1 billion (down 20.2%). Trade with France accounted for $3.8 billion (down 43.2%). Germany and the Netherlands key role in Russia’s economy can be explained by the fact that they are the destination of Russia’s main flow of hydrocarbons, which make up more than half of the country’s exports. In particular, oil is sup-plied through Dutch ports, while one of the gas supply routes to Europe is the North Stream pipe-line, which runs along the Baltic seabed from Rus-sia to Germany.

Alexey Lossan is executive editor at Russia Beyond the Headlines for Business

VIEWPOINT

Has Russia pivoted to Asia? Statistics say: Not yet

Moscow stocks rose as much as 42% by May before giving up some gains.

When it comes to the stock mar-ket, sometimes what goes down, must come back up.

Case in point: Russia. The coun-try’s RTS stock index tumbled 45% in 2014. A devastating crash in oil markets combined with sanctions from the United States and Eu-rope to pummel Russian stocks and make Moscow’s RTS the worst-per-forming major equity index in the world.

But in 2015, Russian markets staged a recovery rally that made Russia one of the best-performing major stock markets in the world during the first half of the year, with the RTS index rising 25% as of June 1. Before losing steam in May, the rally had chalked up gains as high as 42% for the year.

That compares to a 3% increase for the U.S. S&P 500 Index in the � rst six months.

Relative calm in war-ravaged Ukraine, � rmer oil prices and a re-bounding national currency helped Russian stocks. Even though the country’s economy appears to be entering its first recession since 2009, better-than-expected eco-nomic data in the � rst half prompt-ed hopes that the downturn might not be as bad as feared.

“Oil is rising, the ruble is strengthening, the central bank is lowering interest rates and all that helps sustain companies focused on domestic demand, while oil pro-ducers also look attractive,” Mat-tias Westman, the London-based founder of Prosperity Capital Man-agement, which manages about $2 billion in Russian assets, told the Bloomberg news agency as the rally crested in through May. “The in-tensity of the Ukraine crisis has decreased. The truth is that people are becoming less pessimistic as the bad things they had feared last year have not materialized.”

Stocks Russian equities staged a relief rally in 2015 after last year’s historic meltdown

Capital � ight from Russia fell as the panic eased and investors began cautiously stepping back into Rus-sian assets. Net private capital out-� ows fell to $33 billion in the � rst quarter of the year, down from $73 billion in the fourth quarter of 2014, according to the Russian Central Bank.

One of the biggest winners in 2015 so far has been Siberian oil producer Surgutneftegas, whose London-listed shares almost dou-bled in value, signi� cantly outper-forming the market. In March, the � rm announced that net pro� t in 2014 had tripled according to Rus-sian Accounting Standards, the metric used to tabulate dividends. That prompted the company to de-clare a dividend worth almost 20% of the value of its preferred shares at the time of the announcement in mid-May.

Gazprom Tipped for Gains? Brokerage analysts say one of Rus-sia’s biggest companies, natural gas exporting giant Gazprom, may be set to pick up steam in the second half of the year. The � rm supplies Europe with about a third of its gas supplies.

Analysts at Bank of America Merrill Lynch recommended buy-ing Gazprom shares in a note to investors in April, citing the com-pany’s stated commitment to keep-ing spending in check, and upgrad-ing their assumptions about gas demand in Europe. Analysts Karen Konstanian, Andon Fedotov and Denis Derushkin said the � rm is trading at a 40% discount to its emerging market peers.

“We expect Gazprom’s export sales to continue gradual recovery into the second half of the year on the back of depleted European storage and lower pricing,” the an-alysts wrote, raising their estimate for European sales to 160 Billion Cubic Meters (BCM) of natural gas from 150 BCM.

Investment bank Renaissance Capital also recommended buying Gazprom shares in May, raising its target price to $9.00 from $7.10 per share following better cost controls

at the company as demonstrated in the � rm’s 2014 � nancial results.

A weaker ruble will help Gaz-prom cut costs, while the company will also benefit “from stronger sales, as EU demand recovers and China starts importing Russian gas

from 2019,” analysts Ildar Davlet-shin and Evegeny Stroinov wrote in a note to investors on May 6.

Gazprom shares traded at about $5.40 at the end of May, indicating a more than 50% upside to the Re-naissance Capital price target.

The analysts said they preferred Gazprom to Russia’s other large energy � rms, Rosneft and Lukoil.

Gazprom is also among the big-gest components in one of the most

accessible vehicles for western re-tail investors to purchase Russian stocks, the Market Vectors Russia ETF.

The Market Vectors Russia ETF is an exchange-traded fund that bundles together shares of 50 com-panies and trades on the New York Stock Exchange.

Where To Next?Some investors said sanctions im-posed on Russia would limit Rus-sian stocks’ room to grow.

“In the current scenario, it will be difficult for the rally in Russian equities to last,” wrote Mark Mo-bius, executive chairman of Tem-pleton Emerging Markets Group, in comments published by Bloom-berg.

“The problem is the sanctions, which will put a lid on the amount that investors are willing to put into the market,” Mobius wrote. “Once there is a sign that sanc-tions will be lifted, then the oppor-tunities will be better.”

Russian Stocks Stage a ComebackRussian stocks ranked among the best in the world in the first half of 2015 after a disastrous rout in 2014. Analysts said gas giant Gazprom may see gains in the second half.

DAVID MILLERRBTH

S&P 500 vs. Russia’s RTS Index in 2015

Russia raised oil output to record levels as a cheaper ruble cuts costs.

Six months ago, many analysts be-lieved 2015 would be the year that oil production in Russia, the world’s biggest enegy supplier, would � -nally reverse course and start to decline.

Russia’s most important export industry faced dark omens: as oil fields in the country’s traditional production region of western Sibe-ria show their age, Western sanc-tions cut off access to key technol-ogies and expertise needed to develop new areas. Meanwhile, the price of Brent crude plummeted from a high of $115 per barrel in June last year to less than $55 in January.

But now, Russia is pumping more oil than ever as a devaluation in the country’s currency helps companies manage investment costs.

Oil and gas condensate produc-tion soared to a post-Soviet high of 10.71 million barrels per day in March, according to the Energy Min-istry, and rose a total of 1.2% year-on-year between January and May, according to Russian news agency Interfax, citing data from the Cen-tral Dispatching Department of Fuel and Energy Complex (CDU TEK).

In May, Russia passed Saudi Ara-

Energy Russian oil firms raise production despite gathering stormclouds

on investment for Russian oil com-panies were little changed in ruble terms.

As companies’ dollar-denominat-ed revenues dropped, so too did their ruble-denominated production costs.

At the same time, Russian taxes on oil production are structured to fall along with the price of oil, cush-ioning the blow.

“At $100, companies were spend-ing almost 75% of their revenues on taxes to the government. At $60, this ratio is closer to 65%,” Davlet-shin said.

Production at legacy � elds is prov-ing resilient even as oil � rms ramp up production at sites launched within the last 18 months, Davlet-shin said.

Also boosting output is the fast-rising production of gas condensate, a light and highly valued form of

Oil Output Surges Despite SanctionsRussia is pumping more oil than ever and output continues to rise in spite of Western sanctions on the country’s energy industry as a falling ruble reduces costs for producers.

DELPHINE D’AMORASPECIAL TO RBTH

crude oil that is commonly found in natural gas � elds.

“The slowly shrinking oil produc-tion at Russian brown� elds is being increasingly offset by burgeoning output of gas condensate,” Sberbank analysts wrote in a research note in June.

Russia’s condensate production surged 49% between 2009 and 2014, reaching a high of 26.2 million tons, according to Sberbank. The growth has been driven not only by state gas giant Gazprom — Russia’s lead-ing condensate producer — but also by smaller gas firms such as Se-verEnergia, which is forecast to pro-duce up to 7 million tons this year, the analysts said.

All of these forces have kept Rus-sian oil production rising.

But the question is: for how long?Oil � elds in western Siberia, the

foundation of Russia’s energy indus-try, are gradually running dry as Rus-sia faces the need to push into new, more costly production regions for growth.

The Russian government has laid out tax-breaks and other perks for companies that invest in unconven-tional production.

But sanctions imposed by the U.S. and EU last September barred West-ern companies from participating in Russian deepwater, Arctic and shale oil projects in Russia — es-sentially depriving the industry of the expertise needed to develop un-conventional projects.

In May, Russia’s Economic Devel-opment Ministry said oil produc-tion would drop from a projected 526.5 million tons this year to 521 million tons a year by 2018.

Output will likely level off toward the end of this year and then dip by about 0.5% in the � rst two quarters of next year, only to rise again when new projects come online, Renais-sance Capital’s Mr. Davletshin said.

was Russia’s oil output in March, in barrels of crude per day, a post-Soviet record.

10.7 mlnIN FIGURES

bia to claim the position of the world’s largest oil producer.

Ildar Davletshin, oil and gas an-alyst at Renaissance Capital in Mos-cow, said the ruble’s precipitous fall against the U.S. dollar supported the industry.

The ruble’s devaluation of about 40% against the U.S. dollar since the start of 2014 meant that, even as the price of oil collapsed, returns

“We expect Gazprom’s export sales to continue gradual recovery,” Bank of America analysts wrote in a research note.

Russia’s dependence on its traditional allies hasn’t disappeared, in spite of Moscow’s attempts at a diplomatic and economic “pivot to Asia.”

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07Russia beyond the headlines foR businessADVERTISING SEcTIoN SpoNSoRED by RoSSIySkAyA GAzETA, RuSSIA www.RbTh.com

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Opinion

After the UkrAine crisis, the West shoUld open its doors to rUssiA

UfA sUmmit: time to shoW leAdership

A brics fUtUre

Despite odd renewed outbursts of fighting, the acute phase of the Ukraine crisis may be ending. Violence is significantly down and there have been prisoner exchanges

and some withdrawal of heavy weapons. On two of the major points of contention, Ukraine will clearly not be admitted to the North Atlantic Treaty Organization for the foreseeable future, and Kiev has begun working on autonomy ar-rangements for the rebel regions. Moscow and Kiev, knowing their economic fragility, also know the costs of resumed hostilities could far exceed any likely benefits.

We are not out of the woods yet. Neither side has its zealots completely under control. Each regularly accuses the other of infractions. There are outside forces, notably in Washington, who are looking for a pretext to “put the Russians in their place” (Berlin and Paris have questioned U.S. estimates of the “threatening” build-up of Russian forces in Ukraine). And the Minsk agree-ment is unlikely to be implemented in full. It stipulates that the Russian border, through which support to the rebels flows, will be closed only when the rebels reach agreement with Kiev on autonomy. This will not happen quickly. The rebels are not part of the autonomy discussions. So for the immediate future, the Donbass is likely to remain an unresolved conflict, like those in Georgia, with every possibility (as in Geor-gia) of a renewed explosion later.

But with peace perhaps in prospect, what do we do about Russia? The first action point is Western sanctions. These were always a misbe-gotten policy, pursued more in the absence of a feasible alternative than to achieve results. Their central effect has been to unite Russians behind their president and his policies – the reverse of what was intended. President Obama still argues that they will “change President Putin’s calculus”. But no Russian I know (in-cluding leading members of the opposition) be-

This year’s BRICS Summit, which will be hosted by the central Russian city of Ufa from July 8-10, will be the seventh mee-ting of the organization since its establish-

ment and the fifth since the four BRIC countries were joined by the Republic of South Africa.

In Ufa, Russia will have an opportunity to show itself as a leader of the non-Western world. Holding the presidency of the BRICS will allow Moscow to position itself as a key player in an association that offers an alternative to the glob-al world order.

Until recently, the original BRIC countries were united only in the imagination of former Goldman Sachs economist Jim O’Neill, who

When the BRICS concept was first in-vented, perhaps no one expected the group of countries to set about acti-vely establishing an economic union.

Yet today, the BRICS nations — Brazil, Rus-sia, India, China and South Africa — are work-ing towards forming a powerful economic bloc that, with time, has the potential to become an important international mechanism for decid-ing questions of global finance, policy and econ-omy.

The collective indicators of the five countries are already impressive.

According to the World Bank, the BRICS total Gross Domestic Product in 2014 was $16.5 tril-lion, or roughly a fifth of the global economy. The group’s combined currency reserves stand at about $4 trillion, representing an eye-pop-ping 75% of global currency reserves.

Membership may continue to expand beyond the current group of five. Countries like Argen-tina, Indonesia, Mexico, Greece and South Korea are actively being discussed as potential future members.

The union of the world’s five largest devel-oping economies has good potential for growth, with some of the most valuable resource bases to be found in the global economy.

Brazil is rich in agricultural production. Rus-sia is currently the world’s biggest producer and exporter of energy. South Africa likewise boasts significant mineral and natural reserves. India has inexpensive intellectual resources. China boasts a staggeringly powerful produc-tion and manufacturing base.

Yet despite the many positive steps being taken towards bringing the BRICS countries closer together, deep economic integration will take a considerable period of time to develop. Its achievement may take another 15-20 years to reach its full potential.

The main deterrent to a more active interac-tion between BRICS member countries is the difference in their political-economic systems.

However, it is becoming clear that the poli-cies being enacted by the BRICS countries’ lead-ers may provide a free trade market within the group, despite their different forms of govern-ment. For example, in the last 10 years, Rus-sia’s commodity turnover with its BRICS part-ners increased by almost nine times: from $14 million to $121 million.

Given these statistics, the BRICS group cer-tainly seems primed for a bigger role in world affairs.

Alisen Alisenov is Professor of Economy and Finance at the RANEPA Faculty of Economic and Social Sciences.

lieves this will happen. For Mr. Putin, the crisis is about national security, not money. Nor does any Russian believe there is the slightest pros-pect of bringing Mr. Putin down.

Recent hints of squabbles within the Russian ruling apparatus have been a sharp reminder of how irreplaceable Mr. Putin is as the equil-ibrator of the system. Unless hostilities resume, sanctions are not sustainable. The European consensus on which they depend is visibly erod-ing. The West needs to find an elegant way to back out of the sanctions cul-de-sac, in paral-lel with Russian delivery on the peace process.

Second, while the much-touted narrative of a “revanchist Russia” with designs on Ukraine, Estonia, Poland, etc, has virtually no evidence to support it, the Ukraine crisis does raise se-rious questions about European security. The annexation of Crimea was exceptional and is

plainly irreversible; the vast majority of Crime-ans now see Crimea as an inalienable part of Russia. But Crimea is also a sharp reminder that the world is still ultimately governed by power, not law. NATO needs to arm itself for such a world. The decision last summer to cre-ate a “Spearhead Force” for NATO’s most ex-posed members was right, but was undermined by the unwillingness of NATO’s major Euro-pean members to spend more on defence.

Finally there is the question of how we relate to Russia. The predominant Western view is that we are now in a “new Cold War” requiring an extended period of isolation and containment. This would be a blunder, for three reasons. First, pragmatism. Trust between Russia and the West is at an absolute low. Meanwhile, the Russians are engaged in demonstrative military activity to discourage what they see as a Western threat.

created the abbreviation in 2001 to define the world’s fastest-growing developing economies and to offer his clients new investment oppor-tunities.

But BRICS has always meant more for Rus-sia. Moscow breathed political life into the BRIC stock exchange chimera. Back in 2006, on the initiative of Russian President Vladimir Putin, the first ministerial meeting of the BRIC coun-tries was held in New York. Then in May 2009, in Ekaterinburg, Mr. Putin’s successor, Dmitry Medvedev, hosted the bloc’s first summit.

Even though there were no concrete results from that event, it had an important propagan-da effect for Russia: relations with the West at the time were at a low following the August 2008 Five-Day War with Georgia, and Moscow used the BRICS summit to demonstrate to the West that it had other influential partners.

Alexander Gabuev

experT

Alisen Alisenov

experT

In recent years, the organization has expand-ed its field of activity. Besides the political image, it also began creating new international regu-latory agreements. For now, BRICS is most fa-mous for its attempt to create an alternative to the IMF and the World Bank, which are domi-nated by the West.

When, in 2014, it finally became clear that the U.S. Congress would block the IMF reform approved by the G20 concerning the redistri-bution of votes in favor of developing countries, BRICS participants agreed to create their own bank and a pool of national currencies. In the future, this should help reduce the dependence of international finance on the dollar-euro du-opoly. So far this has been the BRICS’ main achievement.

A key challenge to BRICS’ effectiveness is the international structure and the specifics of its bureaucratic system. BRICS is perhaps the only association in which the summits of the lead-ers take place at the beginning of a country’s presidency rather than its end. As a result, one country prepares the group’s agenda through-out the year while another country makes the decisions. This has led to a lack of synchroni-zation, and many initiatives have remained poor-ly developed.

Russia decided to try and change this system a little. Russia’s BRICS presidency formally began in May, so the country will have already had a chance to show that it is acting on an agenda by the time of the Ufa summit. How-ever, the results of Russia’s leadership will only be clear at the 2016 summit in China.

Already within the framework of its presi-dency, Russia is doing its best to expand the BRICS agenda: the Kremlin has asked all fed-eral agencies to present their proposals con-cerning co-operation with BRICS. As a result, the Ufa summit’s agenda has a total of 130 points.

But any concerns about coping with such a large agenda have been glossed over by the Rus-sian leadership. This year’s summit, like the one in 2009, is more about symbolism than prag-matism. Since the annexation of Crimea and the start of the war in eastern Ukraine, the West has actively tried to isolate Russia. Sanctions have been introduced, Moscow was formally excluded from the G8 and leaders from the U.S., EU and their allies have tried their best to avoid personal contact with Vladimir Putin during all international events.

The refusal of Western leaders to attend the May 9 Victory Day Parade on Red Square cel-ebrating the allied victory over Nazi Germany in World War II was another important symbol of Russia’s international isolation.

In Ufa, Russia hopes that by standing in the company of China — the largest economy in the world in terms of GDP in relation to pur-chasing power parity — and the dynamic lead-ers of South Asia, Latin America and Africa, it will thumb its nose at the West, saying ef-fectively that Moscow does not intend to re-turn to the G8, even if it is suddenly invited back.

Alexander Gabuev is director of the Russia in the Pa-cific Rim Region program at the Moscow Carnegie Center.

Sir Tony Brenton DiplomaT

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It is extraordinarily dangerous that at this tense time we have fewer military and other links with the Russians than we had at the height of the Cold War. There is every possibility of chance confrontation or catastrophic accident. Links need urgently to be rebuilt to diminish that possibility.

Second, there is the geopolitics. China has managed its relationship with Russia much better than the West. Xi Jinping is a regular visitor to Moscow and, unlike Western lead-ers, was in Moscow for this year’s anniversary of the end of the Second World War in Europe. Despite long-standing historical tensions be-tween them, China and Russia both now have strong reasons to strengthen their links, and are doing so. Last summer’s $400 billion gas contract and the recent joint military exercise in the Mediterranean are the most eye-catch-ing examples. Meanwhile, U.S.-China geopo-litical competition intensifies – as underlined by the recent argument over the Asia Infra-structure Investment Bank. Russia is by cul-ture and inclination a European country. Does it really make sense for the West to push it into China’s arms?

And third, there is the trajectory of Russia. Until a year ago the Russian middle class was the fastest growing in Europe. That class is hun-gry for European standards of prosperity, gov-ernance and rights – as became clear in the demonstrations of 2011/12. The regime is de-termined to maintain political control but has been keen to foster the economic openness on which Russian development depends. In a wide range of other countries, from South Korea to Indonesia, the same politico/economic confron-tation has produced the triumph of democracy and open markets. Russia was on the same route. The Ukraine crisis stopped that. We need to get back to the business of helping Russia become a normal European state. The way to reform Russia is to open doors, not close them.

Sir Tony Brenton is a writer and diplomat. He served as UK ambassador to Russia 2004-08.

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Feature

Russia’s 3D Bioprinting Solutions laboratory, the first facility to successfully print a mouse thyroid gland, is getting ready to transplant artificial organs to living mice. If successful, the experiment could pave the way for the production of 3D-printed human glands.

2013 ● In 2013 a team led by Takanori Takebe, a stem-cell biologist at Yokohama City University in Japan, successfully transplanted tiny “liver buds” constructed from human stem cells to mice. The scientists have promised to create a fully functional human liver by 2019.

2014 ● In 2014 Sabine Costagliola, a researcher at the Free University of Brussels, regenerated thyroid tissue using the embryonic stem cells of mice. The tissue was later transplanted to a mouse and started producing thyroxine. Dr. Ter-ry Davies, an endocrinologist from New York City, has recently managed to do the same – re-generate thyroid tissue – with human embryonic stem cells.

2015 ● Researchers at 3D Bioprinting Solutions are currently waiting for the results of research involving the regeneration of thyroid tissue from induced pluripotent stem cells – i.e. adult cells that have been genetically reprogrammed to an embryonic stem-cell state.

To anyone looking for evidence that the tech-nology of 3D printing will change the world around us, behold the printed thyroid gland. In March this year, Moscow’s 3D Bioprinting Solutions became the � rst laboratory in the world to successfully bioprint what appears to be a functioning thyroid. Now, researchers are preparing for the next step: to test their work by transplanting several of these glands into living mice. The hotly awaited results of the ex-periment will be made public in July 2015 at the Second International Congress on Bioprint-ing in Singapore, and may be a key step to-wards a new era of unlimited, 3D-printed re-placement body parts.

Scientists at the lab say they are ready to start 3D printing human thyroid glands just as soon as they receive a batch of follicular cells, which are responsible for the production and secretion of thyroid hormones.

The art of 3D printing, � rst conceived in the 1980s, typically involves scanning an object or designing a model of one using software, and then using a computer-controlled syringe to lay down precise dabs of matter until the three-dimensional object appears.

Since the idea emerged, the race to adapt the technology to medical science has been under-way. While simple organs like skin and bone have already been successfully printed and trans-planted into laboratory animals, more compli-cated organs, like the liver or the thyroid, have presented a challenge.

According to the World Health Organization (WHO), 665 million people in the world are af-fected by thyroid diseases. In Russia alone, 10,000 people undergo a thyroidectomy, or the surgi-cal removal of the gland, every year.

Thyroid dysfunction caused by cancer can-not be treated with pharmacological therapy, and not even a donor organ transplant can help, says Andrey Polyakov, the head of the micro-surgery department at the Moscow Oncology Research Institute.

“The reason for this is that the patients who receive organ transplants have to undergo im-munosuppression therapy that can in turn speed up the development of cancer cells,” Dr. Polyakov explains. But transplanting of 3D printed or-gans and tissues may be conducted without im-munosuppression, Dr. Polyakov says.

One Thyroid Gland, PleaseThe scientists in Moscow chose to focus on the thyroid gland due to its relative simplicity, a fact that also made the organ the � rst one to ever be transplanted from one human being to another.

The researchers at 3D Bioprinting Solutions took the existing technology of 3D printing cur-rently used to work with diverse materials like plastic, ceramics and metal, and adapted it to work with living cells. The process itself is called ‘layer-by-layer production.’

Medicine A group of Russian scientists is working towards 3D printing human organs

A bioprinter is essentially a simple robot that can move in three directions and dispense layers of gel or tissue with great precision. The original bioprinter created by 3D Bioprinting Solutions consists of three basic elements: a mechanical positioning device, a dispenser and a computer to guide the process. It is equipped with an automated syringe that can dispense either � brin gel or tissue spheroids.

The dispenser sprays out a thin layer of gel made of � brin, a protein involved in the clot-ting of blood. Embedded in the gel are micro-scopic spheres consisting of tissue, which sub-sequently form a three-dimensional structure.

Lead researcher, Vladimir Mironov came up with the lab’s bioprinting design when he dis-covered that separate ring moieties (molecular compounds) in a chicken embryo’s heart were able to merge and form a tube. He understood that it would be possible to form living tissues out of separate cells and groups of cells.

There are, of course, other companies in the world aiming to commercialize 3D bioprint-

ing technology, such as Organovo in the Unit-ed States, Cyfuse in Japan and Regenhu in Switzerland. The technology offered by 3D Bio-printing Solutions is unique because aside from the cell-based gel, the Russian lab uses the

tissue spheroids mentioned above as “build-ing blocks.” “Last year we � led a patent for our bioprint-er design and for the methods of printing we invented,” Dr. Mironov told RBTH.

Mice PioneersThe printed “organ constructs” will soon be transplanted to mice using essentially the same

Honey, I Printed a Thyroid Gland: Creating Organs on Demand

Russian scientists plan to conduct the first transplant of a 3D-printed thyroid gland into a mouse. Humans could be next.

VICTORIA ZAVYALOVARBTH

The art of 3D printing involves scanning an object then using a computer-controlled syringe to lay down precise dabs of matter until the object appears.

Q&A

Printed organs will become affordable with time

Which organs do you expect to be printed in the next two or three years? Thyroid glands, blood vessels, skin and hair, as well as cartilage, bone and adipose tissue. Some organs from this list have in fact already been printed.

By your estimates, a printed organ will cost be-tween $200,000 and $250,000. Does this mean that only the wealthy will be able to afford them? The history of technological progress shows that once a hi-tech product enters mass production by automat-ed means and starts to be widely used on the mar-ket, it becomes tens, scratch that, thousands of times cheaper. So there is no doubt that 3D-printed organs will become more affordable with time.

VLADIMIR MIRONOVTISSUE ENGINEERING SPECIALIST, INVENTOR OF A NEW 3D ORGAN PRINTING TECHNOLOGY

Do you expect foreign clients? Yes, our product is capable of entering the global market. In China alone there are 1.5 million people in need of an organ transplant.

Do you think Russia will be able to create an infra-structure for printed organ transplants? It is possible, yes. But the government will need to co-operate with private businesses. This will require mil-lions of dollars of investment, but will in time allow the healthcare system to save a lot of money on the treatment of patients. Besides, a country that does not invest in the development of such technologies today will later have to buy it from others, which will be much more expensive.

Short history of bioprintingTIMELINE

procedure as with a regular organ transplant. The mice used in the experiment have already been subjected to a treatment of radioactive iodine that shut down their thyroid glands, causing hormone de� ciency.

Scientists will monitor the mice over the course of a month to determine if their thy-roid glands cease functioning. “The levels of thyroxine should fall signi� cant-ly with the suppression of thyroid activity,” says Elena Bulanova of 3D Bioprinting Solutions.

The researchers will transplant the printed glands to the mice and observe them to see if the hormone levels are restored. If they are, that means the arti� cial organs actually work. It will take a month for the grafts to be inte-grated completely into the bodies of the mice.

The experiment involves a special kind of mouse: the so-called CD1 strain. “Those mice have minimal variations in morphology and behavior,” says Dr. Bulanova. “Twelve animals will be used in total. Six of them will form the control group, which will not receive the trans-plant, and the other six will get the grafts.”

Chances of Success“We are certain that the gland is functional,” says Dr. Mironov. “In fact, we are mostly con-cerned by the possibility of graft hyperactiv-ity, which can cause hyperthyroidism.”

According to Dr. Mironov, the laboratory concluded all necessary theoretical calcula-tions and preparations before beginning the experiment.

Printed organ constructs are already wide-ly used by pharmaceutical companies for tox-icological studies, according to Youssef Hesu-ani, the executive director of 3D Printing Solutions. For instance, California-based Or-ganovo cooperated with the international healthcare company F. Hoffmann-La Roche AG to test an unnamed medication. “We know that while the drug showed no toxicity dur-ing the tests involving a monolayer of cells, the experiments on a 3D liver construct pro-vided the opposite results,” Mr. Hesouani told RBTH.

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