IN THIS ISSUE

* Davos reveals Moscow’s avoidance of economic lessons
* …while Sukhoi tests new fifth generation fighter
* Gazprom, Hungary establish South Stream project company
* Political tension deepens in Dagestan
** New in the Jamestown blog on Russia and Eurasia (http://www.jamestown.org/blog):
- Russia’s Efforts to Sell Its Military Aggression against Georgia as“Humanitarian Intervention”

Russia Cannot Learn Any Crisis Lessons and Lapses Into Putinism

Pavel K. Baev

During the annual World Economic Forum in Davos, delegates are not asking questions such as “who is Mr. Medvedev?” Or, “is it really the same Mr. Putin?” In fact, they are not asking any questions about Russia. Participants in expensive debates focus on lessons learned in the shockingly deep crisis and on problems hampering recovery, but the Russian delegation headed by the Finance Minister Aleksei Kudrin has nothing to contribute (Kommersant, www.newsru.com, January 25). China can boast about the invincibility of its economic model, but Russia is one of the worst losers in the crisis –and remains in denial of the deficiency of its state-controlled petro-economy. This politically enforced ban on thinking about causes and consequences determines the continuity of the economic disaster, and consequently up to 75 percent of Russian “business captains,” who habitually gather in Davos, anticipates further decline or stagnation (Vedomosti, January 29).

The official discourse, to the contrary, is increasingly upbeat, and Prime Minister Vladimir Putin stays on the message that the “Russian economy and finances have demonstrated their viability and, most importantly, the ability to recover rapidly.” Putin is particularly pleased with the stock exchange rally, omitting the inconvenient fact that the recent climb has brought the stocks to 40 percent lower than their peak in May 2008. Even the experts who discovered the “economic boom” in the second half of 2009, like Andrei Illarionov, now argue about weakening recovery and the exhaustion of its main drivers (Ekho Moskvy, January 29). It is the severely depressed investment activity, which started to fall in March 2008 and reached the deepest extreme of –30 percent in November 2009, that determines the slackening of the cyclical growth, but this lack of money is caused not by problems with credit but by strong business disincentives to invest, created primarily by administrative corruption (RBC Daily, January 28).

Mikhail Khodorkovsky, the persecuted entrepreneur who now sits in the tenth month of his second trial, wrote in a recent article that Russia’s international profile is shaped by its export orientation on two dissimilar commodities –energy and corruption (Nezavisimaya Gazeta, January 29). The latter grows unchecked, but the former is encountering difficulties despite the relatively stable price trajectory on the oil market. Russian “champion” Gazprom has started to re-evaluate its prospects on the European market, admitting grudgingly that the mistrust of consumers is not a temporary mood swing caused by the Ukrainian “wars” but a serious limitation for the planned expansion. Its board of directors has also acknowledged that the expectations for capturing a share of the US market must be aborted, and that involves another postponement –or possibly cancellation– of the giant off-shore Shtokman project, in which French Total and Norwegian Statoil are minor and increasingly doubtful partners (Kommersant, January 26).

Despite the demonstrated risk of high dependency upon oil and gas export, Russia in its uncertain recovery has become a more lopsided petro-state because its machine-building industry and construction sector have suffered greater damage (www.gazeta.ru, January 27). President Dmitry Medvedev trumpets the idea of “innovations” and tries to stimulate the development of high-technology sectors from nuclear and space programs to software and pharmaceuticals. His stimuli, however, remain ineffectual primarily because too many resources are directed to rescuing rusting industrial giants of the Soviet era, some of which Putin has chosen for exercising “manual management.”

This dominance of old structures over new priorities sparks a debate among economists, like Evgeny Gontmakher, and reformers-practitioners, such as Anatoly Chubais, over whether the modernization of the Russian economy is feasible without breaking the fusion of bureaucracy and wealth (Ekho Moskvy, January 25). The bottom line emerging from these blog-exchanges (mainstream media has no space for such extremism) is that real modernization –and not merely the application of some nanotechnologies– requires a profound reform of institutions, while cosmetic beatification of the ruling bureaucracy and exploitation of modernization discourse only weaken Putin’s system of power (Ekho Moskvy, January 28).

Medvedev’s experiments with small improvements in electoral procedures and minor liberalization of control over the media indeed pay few dividends in boosting his authority, but they erode the image of the Kremlin as supreme power that always knows what it is doing. Putin, therefore, becomes increasingly uncivil in cutting these experiments short, but –as Khodorkovsky reminds everyone– the issue fundamentally is not about Putin’s preferences but concerns risk assessment by the key groups of political and business elites. The plain fact of fin de siècle of petro-prosperity is gradually internalized by entrepreneurs (while bureaucrats are typically clinging to the status quo), so Putin’s PR game about making up his mind on reclaiming the presidential job and elbowing the hapless Medvedev aside is increasingly irrelevant. Far more relevant are Davos-type questions like “who is Mr. Khloponin?” Or perhaps, “what about Mr. Kozak?”

Khodorkovsky’s warning that shrugging off such questions and keeping wisely with “business-as-usual” leads very quickly to a breakdown, after which “Russia in its current form simply ceases to exist,” might seem an exaggeration. The shockingly painful recession has indeed produced surprisingly little public protest, but the accumulated anger is breaking the ice of Putin’s “stability” in various local explosions, from the rally in Kaliningrad against increased communal tariffs to resistance against police brutality and the escalating violence in Dagestan and Ingushetia (www.gazeta.ru, January 29). This anger is not necessarily a force pushing for democratic reforms, so the emboldened communists now claim that it would take one 100,000 strong rally in Moscow to kick Chubais out of the country and one three times its size to take control of the government (www.newsru.com, January 30).

Putin is determined to extinguish such “Ukrainization” of political life in Russia, but the “power structures” on which he used to rely have grown rotten from corruption. Medvedev seeks to let the steam out by opening some small channels for expressing the desire for change, but the laws of politics are different from physics and the steam pressure is only growing through such pseudo-liberalization. It appears probable that the next Davos forum will have to grant more attention to the giant-in-distress.

Russian Fifth Generation Fighter Takes to the Sky

Roger McDermott

On January 29, the prototype Russian fifth generation Prospective Aircraft Complex of Frontline Aviation (PAK FA) “T-50” finally completed a successful 45 minute test flight in Komsomolsk-na-Amurye. The stealth multirole fighter was developed by OKB Sukhoi (experimental design bureau) to replace MiG-29 and Su-27’s and is reportedly analogous to the US F-22 (Raptor). Mikhail Pogosyan, Sukhoi’s Director-General, praised the aircraft’s maiden flight, saying that it marked a breakthrough for the Russian aviation industry (Rossiya 24, January 29).

Indeed, the reported technical specifications of the aircraft are impressive. It has a maximum supersonic cruising speed of 2,100 kilometers (km) per hour, and a flight range of 5,500 km. It employs stealth technologies to significantly reduce its signature in all fields, uses modern smart avionics, flies in all-weather conditions day and night, and is highly maneuverable even with heavy loads. The fighter can conduct simultaneous attacks on air targets and ground facilities with precision weapons. The PAK FA can take off and land using short runways, only 300 to 400 meters in length, while its powerful onboard computing system, when completed, will maximize automation and provide the pilot with several options in performing his combat mission. The most sensitive issue relates to its ordinance, which has been rumored to include using missiles stored within its hull (similar to the Tu-160 strategic bomber) in order to maximize its stealth capabilities (www.gazeta.ru, December 11, 2009; Nezavisimoye Voyennoye Obozreniye, www.deyta.ru, January 29).

This latter feature, closely protected from prematurely entering the public domain, seems consistent with the aircraft’s appearance. Images of its test flight broadcast on Rossiya 1 and Rossiya 24 reveal a flatter and wider frame than the F-22 (Rossiya 1, Rossiya 24, January 29). It also has eight suspension points under the wings and fuselage for missiles.

While, the test flight, and its surrounding publicity, will provide a welcome boost for the Russian air force (Voyenno Vozdushnye Sily –VVS), after numerous delays and design setbacks, it still remains some years away from procurement. Prime Minister Vladimir Putin lost no time in demanding that it must reach the air force by 2013, however, it is unlikely that he appreciates the technical issues involved. Army-General Vladimir Popovkin, the Chief of Armaments and Deputy Defense Minister, considers that given favorable conditions it might enter service within five to seven years. Defense experts, such as Anatoliy Tsyganok, the Director of the Center for Military Forecasting, believe that this is unrealistic. In December 2009, Tsyganok suggested that only the wings and engine were ready, and if that was correct, the test flight was essentially a publicity stunt to display progress on the frame of the aircraft, while much work remains in terms of its avionics and other technical features. Moreover, the engine in use on the PAK FA was most likely previous generation, which follows earlier Russian prototype design patterns; though this will be resolved it is another factor slowing its introduction into service (RIA Novosti, January 29; www.gazeta.ru, December 11, 2009).

One notable aspect relates to the radar complex, which although at an advanced stage, is still undergoing trials on a different platform: the Su-35S. The active phased antenna array radar complex will require further refinement, planning five embedded antennas, and while these development issues are ongoing, the estimated cost is spiraling, already reaching $10 billion (Nezavisimoye Voyennoye Obozreniye, January 29).

Konstantin Makiyenko, a member of the State Duma Defense Council’s Scientific Expert Council and an analyst at the Moscow-based Center of Analysis of Strategy and Technologies (CAST) estimated that 150 to 200 fifth generation fighters might be purchased in the period 2025 to 2030, depending on the future performance of the Russian economy. Many of the new fighters will enter service in the Indian air force, and the test flight was most likely also geared toward the export market, while forming the backbone of Russian fighter technology for the next forty years. According to Makiyenko a “normal” level of budget funding only reached the fifth generation fighter project in 2005, facilitating measurable progress. The project has nevertheless, enabled the domestic aviation design capacity to survive (Moskovskiy Komsomolets, January 27).

While the development of the new fighter may have economic justifications, including export potential, the basic question is why does the Russian state require such advanced platforms? Makiyenko, links this to the uncertain future facing the country, as well as the unpredictable nature of emerging threats. He also implied that it serves as a warning to states pursuing anti-Russian foreign policies, asserting:

“Our country borders a number of states that are pursuing a demonstrably Russophobe foreign policy. F-35 fighters may well turn up in the inventories of some of these states during the coming 15 to 20 years. While in the Far East certain neighbors have territorial claims on Russia, and it is entirely probable that these states will also possess fifth-generation fighters, including those in the heavy class” (Moskovskiy Komsomolets, January 27).

Despite the design of fifth generation fighters being plagued with many delays, it is a sign of the growing confidence of the Russian political leadership that such ventures are becoming more realistic. Equally, following Carl Von Clausewitz’s famous dictum, “war is nothing but the continuation of policy by other means,” neighboring states pursuing “Russophobic” policies are being publicly warned about the possible future consequences. Its sense of urgency, however, might also be driven by the poor performance of the VVS during the Russia-Georgia war in August 2008, when a large proportion of the dumb bombs it dropped did not explode, as well as bombing disused Georgian airfields (Vaziani and Kopitnari).

However, as the ongoing Russian military reform forges ahead relentlessly, the VVS has been buoyed by its recent inter-service victory at the expense of the airborne forces (Vozdushno Desantnye Voiska –VDV). On January 28, the defense ministry announced that air components of the VDV as well as the Space Forces and the Radiation, Chemical and Bacteriological Protection Forces have been subordinated to the VVS. Lieutenant-General Vladimir Shamanov, the commander of the VDV was known to advocate the airborne forces retaining and strengthening its transport aviation, and the decision is arguably a setback for the VDV (Interfax, January 28).

Hungary Signs South Stream Project Agreement

Vladimir Socor

On January 31 in Budapest, Russian and Hungarian officials signed the project agreement for the construction of Gazprom’s South Stream pipeline on Hungarian territory. Hungary’s privately-owned MOL Company, a member of the Nabucco consortium, is not a party to the South Stream agreement. Hungary participates in South Stream on the state level through the Hungarian Development Bank (HDB: Hungarian acronym MFB), 100 percent in state ownership. The signing of the project agreement was expected, although delayed by almost one year since the signing of the framework agreement in March 2009 under the previous Hungarian government.

Gazprom Vice-President Aleksandr Medvedev and HDB president Janos Eros signed the project agreement in Budapest, witnessed by Russian First Deputy Prime Minister Viktor Zubkov and Hungarian Prime Minister Gordon Bajnai, who heads a non-political caretaker government, pending new elections in Hungary. The agreement establishes the project company South Stream Hungary, which is authorized to commission the feasibility study, raise the financing, build, and operate the South Stream pipeline’s section on Hungarian territory, with a throughput capacity of no less than 10 billion cubic meters (bcm) per year.

The project company is being incorporated on a 50-50 parity basis, with its headquarters in Hungary, and a four member board composed of two representatives for each side, and a rotating chairmanship. Gazprom and HDB pledge not to participate in any other project that aims to transmit natural gas via Hungary to markets in southern Europe. The project company’s registered capital is a mere 50 million Forints (MTI, Interfax, January 29).

The feasibility study is being commissioned to a joint company created by Gazprom and MOL for this purpose. While MOL is not involved in South Stream as such, the company participates in the feasibility study in a technical role. At the South Stream signing ceremony, Bajnai declared that “Hungary must seize every concrete opportunity to diversify its energy supplies” (MTI, January 29). Given Hungary’s total dependence on Russian-delivered gas, Bajnai’s statement can only be understood as referring to projects other than South Stream.

The European Union-backed Nabucco project holds first place among the Hungarian government’s declared priorities on energy policy. The Hungarian government’s Nabucco coordinator, Mihaly Bayer, has stepped into the leadership vacuum that the EU has allowed to develop on Nabucco during the transition from the old commission to the new. The Hungarian parliament is the first (and, thus far, only) to have ratified the Nabucco inter-governmental agreement among five Nabucco participant countries.

Liquefied natural gas (LNG) from the planned Adriatic LNG terminal via Croatia holds second place among Hungary’s declared energy policy priorities. South Stream ranks only third. Nevertheless, it is moving ahead with strong political support from the Kremlin, amid international procrastination on Nabucco and the LNG project.

The Kremlin and Gazprom have negotiated agreements with six or seven countries for South Stream (and are now inviting more countries) but have never identified gas reserves in Russia or elsewhere for supplying this project. The January 29 signing event in Budapest was no exception in this regard.

In the short time span from late 2008 and mid-2009, Moscow increased South Stream’s aggregate gas offer from 31 to 63 bcm, and its cost estimate from $9 billion to more than $25 billion. It conducted no feasibility studies to substantiate such an offer, never showed gas earmarks for it, and had no answer about financing such costs.

Meanwhile, Gazprom itself anticipated a gas shortfall (stagnant production versus growing supply commitments) in 2008, temporarily reprieved by falling demand during the recession, but looming in the post-recession period. Gazprom’s latest board meeting half-admitted this situation. Nevertheless, it scheduled continuing expansion of pipeline projects, without financing new field development to fill the pipelines (EDM, January 29).

Moscow proposes to build pipeline capacities far exceeding Russia’s own export potential in the years ahead. South Stream is a centerpiece of this declared policy. Given its lack of identified gas reserves and financing, this project may be assessed as a political bluff, as well as an anti-diversification project. It seems mainly intended to discourage investment in Nabucco (and the overall Southern Corridor) and introduce new political complications to the EU’s energy policy.

Yet, governments are signing up to South Stream as the EU-backed alternatives have yet to materialize, US leadership is fading, and national electorates expect their governments to demonstrate a proactive approach to energy security. Thus, Russia has generated a band-wagon effect for South Stream in south-eastern and central Europe (Romania excepted).

South Stream and Nabucco cannot be described as competing projects, if only because Nabucco does have gas reserves earmarked for it (pending the transport solution), whereas South Stream does not. Thus, countries that sign up to South Stream do not thereby jeopardize Nabucco, which (as in Hungary’s case) they strongly prefer and support. What does jeopardize Nabucco is the current lack of coordination from Brussels. Governments in the Nabucco supplier and transit countries expect the new EU Energy Commissioner, Guenther Oettinger, to address this issue urgently as he takes office this month.

Dagestan’s Political Uncertainty Joined by Turmoil, Technological and Social Failures

Valery Dzutsev

As of January 29, an estimated 50,000 inhabitants of Dagestan’s capital Makhachkala remained without central heating, water and stable electricity supply for several days. Officials said that cold weather was causing the disruption and they would attend to the problem. Over 100 protestors blocked railways in Makhachkala that connect Russia and Azerbaijan for an hour on January 29, demanding a restoration of the utilities supplies. The police managed to restore the order after negotiations with the protestors (www.kavkaz-uzel.ru, January 29).

In 2009, various Dagestani cities experienced blackouts as the electricity supplier cut electricity because of payment arrears. In response, protestors blocked highways and occasionally illegally restored power supplies. Technological failure is at least part of the problem, as Makhachkala’s official population grew more than two-fold in the past twenty years, up to 700,000, while unofficial estimates put the figure even at one million. The city stretches from south to north along the Caspian Sea coast for over 70 kilometers. The abundant growth was not accompanied by corresponding investments in the city’s infrastructure.

The mass protests coincide with uncertainty over the future of Dagestan’s leadership. The republic’s current president, Mukhu Aliev, is widely believed to be stepping down by the time his first presidential term expires on February 20. There has been no official confirmation of this, however. Several contenders are competing to succeed Aliev. Most experts and media reports suggest Dagestani Deputy Prime Minister Magomed Abdulaev would replace Aliev, while Magomedsalam Magomedov, a former speaker and now member of the republican parliament, would become Dagestan’s prime minister. In a report on January 27, Gazeta.ru referred to sources in the Russian presidential administration and the State Duma asserting that a change of leadership in Dagestan was imminent. Abdulaev is reportedly close to State Duma Speaker Boris Gryzlov and Nikolai Patrushev, the Secretary of the Russian Security Council and former head of the Federal Security Service (FSB).

The ethnicity of leaders is an important consideration in Dagestan, the most ethnically diverse republic in the North Caucasus. Abdulaev, an Avar, would replace Aliev, also an Avar, as president of republic, while Magomedov is a Dargin, the second largest ethnic group in Dagestan after the Avars. Besides, Magomedsalam Magomedov is the son of Magomedali Magomedov, who preceded Mukhu Aliev as the republic’s leader.

The republic is rife with speculation about who will succeed the current president, and the nervousness is growing. On January 27, the Vice-Speaker of Dagestan’s parliament, Nikolai Alchiev, reportedly survived an attempt on his life when an unknown attacker driving in a car shot at his vehicle near Makhachkala (www.kavkaz-uzel.ru, January 27). Later, some of Alchiev’s colleagues in the parliament expressed their doubts about whether the assassination attempt actually occurred (www.kavkaz-uzel.ru, January 28).

The issue of last year’s fraudulent mayoral elections in the large southern Dagestani city of Derbent, which is connected to the republican leadership succession issue, also remains in an ambiguous state. On January 28, Dagestan’s Supreme Court turned down an appeal by pro-opposition voters to hold mayoral elections on March 14 –the next regularly scheduled election day in Russia. Instead, the electoral commission said they would hold the elections in October 2010 and the Dagestani Supreme Court agreed with this proposal.

According to opposition supporters, President Aliev put pressure on the court to make this ruling. “There is a legal vacuum in Derbent,” one of the court applicants Shakhban Gapizov said, explaining their motives for appealing to the court to have the elections as soon as possible. “An illegitimate mayor, Felix Kaziahmedov, disrupts all work. There has been no heating [or] water supply in the city for the past four months; teachers and medical staff have not received wages for the past three and a half months; people are suffering,” Gapizov noted. The applicants said they would appeal to the Russian Supreme Court to allow them to have earlier elections (www.kavkaz-uzel.ru, January 28).

The court’s ruling added to the state of limbo in Dagestan, as President Aliev is known to support Kaziahmedov, Derbent’s de facto mayor. The elections in the city that took place in October 2009 were so manifestly rigged and voters there so agitated that they riveted the attention of the Russian president and press, resulting in the elections’ results being overturned in December. The scandalous elections may have added to Moscow’s dissatisfaction with President Aliev’s conduct and the impression he was losing control over the republic.

Meanwhile, the ongoing problem of extra-judicial reprisals by law enforcement agents against suspected Islamic insurgents took an unexpected turn. On January 22, the police in Makhachkala tried to arrest Rumil Begeyev, a 27-year-old Salafi Muslim and Derbent resident who the police had registered as a suspicious character. Police say that after Begeyev was apprehended, he managed to kill a policeman and escaped from their car. However, the witnesses told the Dagestani paper Chernovik that Begeyev was crying out for help when four armed men in plain clothes suddenly approached, beat him with a handgun and dragged him into their car. While the police tried to take him away, their car collided with two other cars and Begeyev escaped from the police as one policeman accidentally shot another colleague. The escapee’s relatives are now trying to secure a just hearing on his case and make him surrender under certain guarantees from the authorities (Chernovik, January 29).

“Economic problems are not the most pressing issues for Dagestan, but rather the death squads [of the security services], that kidnap and shoot young people without investigating and trying them in the court,” said Adallo Aliev, a well known Avar poet and an outspoken critic of the Dagestani authorities, in a recent interview (Novoe Delo, January 29).

For the next president of Dagestan, dealing with the issue of transparency in the police force will be one of many problems to reckon with in this complex North Caucasian republic.

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